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Accounting for Amalgamation of companies

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Presentation on Accounting for Amalgamation of Companies

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Accounting for Amalgamation of companies

  1. 1. Amalgamation of Companies M. C. Sharma Associate Professor, Deptt. Of Commerce Shaheed Bhagat Singh Evening College (University of Delhi), Delhi M: 9717415641; Email:m_c_sharma@yahoo.com
  2. 2. Traditional Concepts  Amalgamation: When two existing companies are liquidated and a new Co. is formed to purchase them. Example: A Ltd. & B Ltd. are liquidated and AB Ltd. is formed to purchase them.  Absorption: When an existing company is purchased another existing company. Example: A Ltd. is liquidated and an existing company B Ltd. purchases it. Prof. M. C. Sharma M: 9717415641 2
  3. 3. Reconstruction  Reconstruction of an existing loss making company is done through a reconstruction scheme to revive it. It is two types:  External Reconstruction: When an existing loss making is liquidated and a new company is formed to purchase it. Example: ABC Ltd. Is liquidated and ABC (2013) Ltd. is formed to purchase it. Prof. M. C. Sharma M: 9717415641 3
  4. 4. Internal Reconstruction  When an existing loss making company is restructured through reduction in capital to revive it. Under the scheme of reconstruction, sacrifice is made by shareholders, debentureholders and creditors to write off accumulated losses, fictitious assets and overvalued assets. Prof. M. C. Sharma M: 9717415641 4
  5. 5. AS – 14: Amalgamation of Companies  As per AS-14, for the purpose of accounting, there are two types of amalgamation: 1. Amalgamation in the nature of merger 2. Amalgamation in the nature of purchase Prof. M. C. Sharma M: 9717415641 5
  6. 6. Amalgamation in the nature of Merger - Conditions 1. Assets and Liabilities: All the assets and liabilities of the transferor (vendor) company become the assets and liabilities of the transferee (purchasing) company. 2. Equity Share Capital: Shareholders holding at least 90% or more of the face value of equity shares of the vendor company become equity Shareholders of the transferee (purchasing) company. Prof. M. C. Sharma M: 9717415641 6
  7. 7. Amalgamation in the nature of merger - Conditions 3. Purchase consideration: Purchase consideration due to the Shareholders of the transferor (vendor) company is discharged by the transferee company wholly by the issue of equity shares (except that cash may be paid in respect of fractional shares or payment to dissenting shareholders). Prof. M. C. Sharma M: 9717415641 7
  8. 8. Amalgamation in the nature of merger - Conditions 4. Business: The business of the transferor (vendor) company is intended to be carried on by the purchasing company. 5. Book Values: No adjustment is to be made to the book values of assets (by revaluation or otherwise) of the vendor company when they are incorporated in the financial statements of the purchasing company. Prof. M. C. Sharma M: 9717415641 8
  9. 9. Amalgamation in the nature of Purchase If any of the five conditions applicable to amalgamation in the nature of merger is not satisfied, it will be considered “Amalgamation in the nature of Purchase” Prof. M. C. Sharma M: 9717415641 9
  10. 10. Some Technical Terms  Business: Taking over the business means taking all the assets and all liabilities.  All Assets: The term ‘all assets’ includes all assets including cash, bank, goodwill, but excluding fictitious assets.  Liabilities: The term ‘Liabilities’ is wider term and include all outside liabilities (payable to third parties). Prof. M. C. Sharma M: 9717415641 10
  11. 11. Purchase Consideration As per AS-14, “Purchase consideration is the aggregate of shares and other securities issued and the payment made in the form of cash or other assets by the transferee company to the shareholders of the transferor company.” It means any payment made by the transferee company for the denture holders or creditors or any other outside liabilities of the transferor company shall not be included in the purchase consideration. Prof. M. C. Sharma M: 9717415641 11
  12. 12. Calculation of Purchase Consideration  Lump-sum payment method: The amount of purchase consideration is given.  Net assets method  Purchase consideration = Value of assets taken over – Value of liabilities undertaken  Value of assets shall be taken at (a) agreed value of asset (if given), otherwise (b) book value of assets. Prof. M. C. Sharma M: 9717415641 12
  13. 13. Calculation of Purchase Consideration  Net Payment Method Rs. (a) Amount of Equity Shares (No. of shares X Issue Price) x x (b) Amount of Preference Shares (No. of shares X Issue Price) x x (c) Amount of Debentures (No. of debentures X Issue Price) x x (d) Cash paid for dissenting shareholders or fractional shares x x Purchase Consideration (Total) x x Prof. M. C. Sharma M: 9717415641 13
  14. 14.  Exchange Method or Swap Method  Under this method, the purchase consideration is paid by the transferee company to the shareholders of the transferor company in the form of shares. No. of shares are calculated on the basis of exchange ratio between the shares of the transferor company and transferee company. It is usually based on the intrinsic value of the shares of the companies.  Example: A Ltd. Purchases B Ltd. And agrees to issue 2 equity shares of Rs. 10 each for every 3 shares of B Ltd. Equity Share Capital of B Ltd. Consists of 1,50,000 shares of Rs. 10 each.  No. of shares issued = 1,50,000* 2/3 = 1,00,000 shares.  Purchase Consideration = 1,00,000 x 10 = Rs. 10,00,000 Prof. M. C. Sharma M: 9717415641 14
  15. 15.  1,50,000 X 15 = Rs. 22,50,000  No. of shares to be issued = 22,50,000/25  = 90,000 Prof. M. C. Sharma M: 9717415641 15
  16. 16. Books of the Transferor Company (1) Transfer of assets to the Realisation Account Realisation Account Dr. [With the total] To Sundry (individual) Assets A/cs [With their respective book values] Notes: (i) The assets are transferred to Realisation A/c at their gross book values. Provisions, if any, are transferred to the Credit side of Realisation A/c. Prof. M. C. Sharma M: 9717415641 16
  17. 17. (ii) Factitious assets like Preliminary expenses, discount on the issue of the shares/debentures, underwriting commission, Dr. balance of Profit and Loss Account, etc. are never transferred to Realisation A/c. (iii) Cash in hand and cash at bank are transferred to the Realisation A/c only when these are taken over by the transferee company. (iv) Goodwill and other intangible assets like trademarks, patent rights etc., are also transferred to Realisation A/c. Prof. M. C. Sharma M: 9717415641 17
  18. 18. (2) Transfer of outside liabilities to the Realisation A/c Sundry (Individual) Liabilities A/c Dr. To Realisation A/c Prof. M. C. Sharma M: 9717415641 18 Notes: Accumulated or undistributed profits (i.e. credit balance in the Profit and Loss A/c), general reserve, capital reserve and other reserves in the form of profits are not transferred. (3) On purchase consideration becoming due Transferee Company’s A/c Dr. To Realisation Account (4) On sale of assets not taken over by the transferee company Bank Account Dr. To Realisation A/c
  19. 19. (5) On payment of a liability not taken over by the transferee company Realisation A/c Dr. Prof. M. C. Sharma M: 9717415641 19 To Bank A/c (6) For Premium or Discount on Redemption of Preference Shares: (i) For premium Realisation Account Dr. To Preference Shareholders’ Account (ii) For discount Preference Shareholders’ Account Dr. To Realisation Account
  20. 20. (6) For Redemption of Preference Shares: (i) At premium Pref. Share Capital A/c Dr. Realisation A/c (Prem. On Red.) Dr. To Preference Shareholders’ Account (ii) At discount Pref. Share Capital A/c Dr. To Preference Shareholders’ A/c To Realisation A/c (Discount on Red.) Prof. M. C. Sharma M: 9717415641 20
  21. 21. (7) For liquidation expenses (i) When the liquidation expenses are paid by the transferor company itself: Realisation Account Dr. To Bank A/c (ii) When the liquidation expenses are paid by the transferee company, No Entry Prof. M. C. Sharma M: 9717415641 21
  22. 22. (8) For profit or loss on realisation: the accounting treatment is as under: (i) For profit Realization A/c Dr. To Equity Shareholders’ A/c Prof. M. C. Sharma M: 9717415641 22 (ii) For loss Equity Shareholders’ A/c Dr. To Realisation Account (9) On receiving the purchase consideration Bank Account Dr. Shares in Transferee Co. Dr. Debentures in Transferee Co. Dr. To Transferee Company’s Account
  23. 23. (11) For redemption of Preference Share Capital, if any (i) Preference Share Capital A/c Dr. * Premium on Redemption A/c Dr. To Preference Shareholders’ Account *To Discount on Redemption A/c (ii) Preference Shareholders’ A/c Dr. To Bank A/c To Preference Shares in Transferee Co. To Equity Shares in Transferee Co. To Debentures in Transferee Co. Prof. M. C. Sharma M: 9717415641 23
  24. 24. (12) Transfer of Equity Share Capital, Accumulated profits & Reserves to Equity Shareholders’ A/c. Equity Share Capital A/c Dr. General Reserve A/c Dr. Reserve Fund A/c Dr. Capital Reserve A/c Dr. P & L Appropriation (Surplus) A/c Dr. To Equity Shareholders’ A/c Prof. M. C. Sharma M: 9717415641 24
  25. 25. (13) Transfer of accumulated losses to Equity Shareholders’ A/c. Equity Shareholders’ A/c Dr. To P & L Appropriation (Surplus) A/c To Discount on Issue of Shares/Debentures A/c To Preliminary Expenses A/c To Share Issue Expenses A/c To Underwriting Commission A/c (14) On payment to Equity Shareholders Equity Shareholders’ Account Dr. To Equity Shares in Transferee Co. To Preference Shares in transferee Co. To Debentures in Transferee Co. To Bank Account Prof. M. C. Sharma M: 9717415641 25
  26. 26. Ledger Accounts in The Books of Transferor Co.  Realisation A/c  Transferee Company’s A/c  Equity Shareholders’ A/c  Equity Shares in Transferee Company’s A/c Prof. M. C. Sharma M: 9717415641 26
  27. 27. Books of Transferee Company – Purchase Method (Amalgamation in the nature of Purchase) 1. For purchase consideration due Business Purchase Account Dr. To Liquidators of the Transferor Co. PC PC 2. For recording assets and liabilities taken over Sundry Assets (Individual) A/c Dr. * Goodwill A/c Dr. To Sundry Liabilities (Individual ) To Business Purchase Account * To Capital Reserve A/c B/F PC B/F Prof. M. C. Sharma M: 9717415641 27
  28. 28. Prof. M. C. Sharma M: 9717415641 28  Notes:  Assets and Liabilities acquired are recorded are recorded at ‘agreed value’ otherwise at book value.  If purchase consideration is more than net assets, then the difference shall be debited to Goodwill A/c.  If purchase consideration less than net assets, then the difference shall be credited to Capital Reserve A/c.
  29. 29. 1. For payment of purchase consideration Liquidators of the Transferor Co. Dr. To Equity Share Capital A/c To Pref. Share Capital A/c To Debentures A/c To Bank A/c PC Prof. M. C. Sharma M: 9717415641 29 Note: 1. If Shares/Debentures are issued at discount, ‘Discount on Issue of Shares/ Debentures A/c’ shall be debited. 2. If Shares/Debentures are issued at Premium, ‘Securities Premium A/c’ shall be credited.
  30. 30. 4. When statutory reserves such as Development Rebate Reserve, Investment Allowance Reserve etc. are maintained. Amalgamation Adjustment A/c Dr. To Development Rebate Reserve A/c To Investment Allowance Reserve A/c Prof. M. C. Sharma M: 9717415641 30 Note: 1. When these reserves are not required, the above entry is reversed.
  31. 31. 5. When liquidation expenses of the transferor company are borne by the transferee company, following entry is passed: Goodwill Account Dr. To Bank Account 6. If a transferee company is newly formed, for the payment of company formation expenses: Preliminary Expenses A/c Dr. To Bank Account Prof. M. C. Sharma M: 9717415641 31
  32. 32. 7. In case, there are both Goodwill and Capital Reserve Account, Goodwill should be written off by debiting to capital reserve. (amount – lower of the two) Capital Reserve Dr. To Goodwill Account 8. On payment of a liability by the transferee company Liability Account Dr. To Share Capital Account To Debentures Account To Bank Account Prof. M. C. Sharma M: 9717415641 32
  33. 33. Books of Transferee Company – Purchase Method (Amalgamation in the nature of Merger) 1. For purchase consideration due Business Purchase Account Dr. To Liquidator of the Transferor Co. PC PC 2. For recording assets, liabilities, Reserves and Surplus Sundry Assets (Individual) A/c Dr. To Sundry Liabilities (Individual ) To Business Purchase Account To ………….. Reserve A/c To Profit and Loss A/c (Surplus) Prof. M. C. Sharma M: 9717415641 33
  34. 34. Prof. M. C. Sharma M: 9717415641 34  Notes:  Assets and Liabilities acquired are recorded are recorded at ‘agreed value’ otherwise at book value.  If purchase consideration is more than net assets, then the difference shall be debited to Goodwill A/c.  If purchase consideration less than net assets, then the difference shall be credited to Capital Reserve A/c.
  35. 35. (8) For profit or loss on realisation: the accounting treatment is as under: (i) For profit Realization Account Dr. To Equity Shareholders Account Prof. M. C. Sharma M: 9717415641 35 (ii) For loss Equity Shareholders Account Dr. To Realisation Account (9) On receiving the purchase consideration Bank Account Dr. Shares in Transferee Co. Dr. Debentures in Transferee Co. Dr. To Transferee Company’s Account
  36. 36. (11) For redemption of Preference Share Capital, if any (i) Preference Share Capital A/c Dr. * Premium on Redemption A/c Dr. To Preference Shareholders Account To Discount on Redemption A/c (ii) Preference Shareholders Account Dr. To Bank Account To Preference Shares in Transferee Co. To Equity Shares in Transferee Co. To Debentures in Transferee Co. To Bank A/c Prof. M. C. Sharma M: 9717415641 36
  37. 37. (12) Transfer of Equity Share Capital, Accumulated profits & Reserves to Equity Shareholders’ A/c. Equity Share Capital and the accumulated profits and reserves are transferred to Equity Shareholders’ A/c: Equity Share Capital A/c Dr. General Reserve A/c Dr. Reserve Fund A/c Dr. Capital Reserve A/c Dr. P & L Appropriation (Surplus) A/c Dr. To Equity Shareholders’ A/c Prof. M. C. Sharma M: 9717415641 37
  38. 38. (13) Transfer of accumulated losses to Equity Shareholders’ A/c. Equity Shareholders’ A/c Dr. To P & L Appropriation (Surplus) A/c To Discount on Issue of Shares/Debentures A/c To Preliminary Expenses A/c To Share Issue Expenses A/c To Underwriting Commission A/c (14) On payment to Equity Shareholders Equity Shareholders Account Dr. To Equity Shares in Transferee Co. To Debentures in Transferee Co. To Bank Account Prof. M. C. Sharma M: 9717415641 38
  39. 39. Books of Transferee Company – Purchase Method (Amalgamation in the nature of Purchase) 1. For purchase consideration due Business Purchase Account Dr. To Liquidator of the Transferor Prof. M. C. Sharma M: 9717415641 39 Co. PC PC 2. For recording assets and liabilities taken over Sundry Assets (Individual) A/c Dr. * Goodwill A/c Dr. To Sundry Liabilities (Individual ) To Business Purchase Account * To Capital Reserve A/c B/F PC B/F
  40. 40. Prof. M. C. Sharma M: 9717415641 40  Notes:  Assets and Liabilities acquired are recorded are recorded at ‘agreed value’ otherwise at book value.  If purchase consideration is more than net assets, then the difference shall be debited to Goodwill A/c.  If purchase consideration less than net assets, then the difference shall be credited to Capital Reserve A/c.
  41. 41. 1. For payment of purchase consideration Liquidator of the Transferor Co. Dr. To Equity Share Capital A/c To Pref. Share Capital A/c To Debentures A/c To Bank A/c PC Prof. M. C. Sharma M: 9717415641 41 Note: 1. If Shares/Debentures are issued at discount, ‘Discount on Issue of Shares/ Debentures A/c’ shall be debited. 2. If Shares/Debentures are issued at Premium, ‘Securities Premium A/c’ shall be credited.
  42. 42. 4. When statutory reserves such as Development Rebate Reserve, Investment Allowance Reserve etc. are maintained. Amalgamation Adjustment A/c Dr. To Development Rebate Reserve A/c To Investment Allowance Reserve A/c Prof. M. C. Sharma M: 9717415641 42 Note: 1. When these reserve are not required, the above entry is reversed.
  43. 43. 5. When liquidation expenses of the transferor company are borne by the transferee company, following entry is passed: Goodwill Account Dr. To Bank Account 6. If a transferee company is newly formed, for the payment of company formation expenses: Preliminary Expenses A/c Dr. To Bank Account Prof. M. C. Sharma M: 9717415641 43
  44. 44. 7. In case, there are both Goodwill and Capital Reserve Account, Goodwill should be written off by debiting to capital reserve. Capital Reserve Dr. To Goodwill Account 8. On payment of a liability by the transferee company Liability Account Dr. To Share Capital Account To Debentures Account To Bank Account Prof. M. C. Sharma M: 9717415641 44
  45. 45. Books of Transferee Company – Purchase Method (Amalgamation in the nature of Merger) 1. For purchase consideration due Business Purchase Account Dr. To Liquidator of the Transferor Co. PC PC 2. For recording assets, liabilities, Reserves and Surplus Sundry Assets (Individual) A/c Dr. To Sundry Liabilities (Individual ) To Business Purchase Account To ………….. Reserve A/c To Profit and Loss A/c (Surplus) Prof. M. C. Sharma M: 9717415641 45
  46. 46. Prof. M. C. Sharma M: 9717415641 46  Notes:  Assets and Liabilities acquired are recorded are recorded at book value.  If purchase consideration is more than the Share Capital of the Transferor Co., the difference being Capital Loss shall be first adjusted against Capital Reserve, then against the Revenue Reserve of the Transferor Co.  If purchase consideration less than the Share Capital of the Transferor Co., the difference being Capital Profit, shall be credited to Capital Reserve A/c.
  47. 47. 1. For payment of purchase consideration Liquidator of the Transferor Co. Dr. To Equity Share Capital A/c To Pref. Share Capital A/c To Debentures A/c To Bank A/c PC Prof. M. C. Sharma M: 9717415641 47 Note: 1. If Shares/Debentures are issued at discount, ‘Discount on Issue of Shares/ Debentures A/c’ shall be debited. 2. If Shares/Debentures are issued at Premium, ‘Securities Premium A/c’ shall be credited.
  48. 48. 5. When liquidation expenses of the transferor company are borne by the transferee company, following entry is passed: Goodwill Account Dr. To Bank Account 6. If a transferee company is newly formed, for the payment of company formation expenses: Preliminary Expenses A/c Dr. To Bank Account Prof. M. C. Sharma M: 9717415641 48
  49. 49. 7. In case, there are both Goodwill and Capital Reserve Account, Goodwill should be written off by debiting to capital reserve. Capital Reserve Dr. To Goodwill Account 8. On payment of a liability by the transferee company Liability Account Dr. To Share Capital Account To Debentures Account To Bank Account Prof. M. C. Sharma M: 9717415641 49

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