Accounting Standard (AS) – 14 Accounting for Amalgamation. This standard deals with accounting for amalgamations and the treatment of any resultant goodwill or reserves. This Standard is directed principally to companies although some of its requirements also apply to financial statements of other enterprises.
This standard does not deal with cases of acquisitions which arise when there is a purchase by one company (referred to as the acquiring company) of the whole or part of the shares, or the whole or part of the assets, of another company (referred to as the acquired company) in consideration for payment in cash or by issue of shares or other securities in the acquiring company or partly in one form and partly in the other. The distinguishing feature of an acquisition is that the acquired company is not dissolved and its separate entity continues to exist.
AS – 14 Accounting for Amalgamation
The following terms are used in this standard with the meanings specified:
(a) Amalgamation means an amalgamation pursuant to the provisions of the Companies Act, 1956 or any other statute which may be applicable to companies.
(b) Transferor company means the company which is amalgamated into another company.
(c) Transferee company means the company into which a transferor company is amalgamated.
(d) Reserve means the portion of earnings, receipts or other surplus of an enterprise (whether capital or revenue) appropriated by the management for a general or a specific purpose other than a provision for depreciation or diminution in the value of assets or for a known liability.
Types and Method of Accounting
In general, there are two types of amalgamation and method of accounting, they are:
|Sl. No.||Nature of Amalgamation||Method of Accounting|
|1.||Merger||Pooling of Interest method|
1) Amalgamation in nature of merger:
In the event of two entities coming together. If all five conditions stated in AS 14 are fulfilled it is treated as amalgamation in nature of merger. The conditions are as follows:
- All the assets and liabilities of the transferor company become the assets and liabilities of the transferee company.
- Shareholders of the transferor company holding not less than 90% of the face value of equity shares become the shareholders of transferee company by virtue of amalgamation.
- Consideration made to equity shareholders of transferor company is in the form of equity shares in the transferee company, except in case of fractional shares cash can be paid.
- The business of the transferor company is intended to be carried on by the transferee company even after amalgamation.
- Assets and liabilities of the transferor company are incorporated in the books of the transferee company at book value except to ensure uniform accounting policies.
Pooling of Interest method
a) In preparing financial statements of the transferee company, assets, liabilities and reserves of the transferor company should be recorded as existing carrying amounts and in the same form at the date of amalgamation, balance of the profit and loss account of the transferor company should be aggregated with the corresponding balance of the transferee company or transferred to general reserve if any.
b) If at the time of amalgamation the accounting policies followed by the transferor company and transferee company are in conflict, it should be resolved, and brought in line with the policies of the transferee company.
c) The difference between the amount recorded in share capital issued and the amount of share capital issued by the transferor company should be adjusted in reserves, however in some cases courts may stipulate the manner in which the reserves should be adjusted.
Amalgamation in nature of purchase
What is not a merger is a purchase.
In purchase method accounting for amalgamation is done by applying same principles used in accounting for normal purchase of assets. Some of the rules adopted are the following.
- The Assets and liabilities (not reserves) of the transferor company are incorporated in the books of transferee company at the existing amounts. Alternatively, the purchase consideration should be allocated individual identified Assets and liabilities on the basis of their fair values at the date of amalgamation.
- Non-statutory reserves of the transferor company are not included in the financial statements of the transferee company.
- If purchase consideration > net assets, the difference is debited to the good will account. If purchase consideration < net assets, the difference is credited to the capital reserve account.
- The goodwill arising on amalgamation should be amortized to income over the five useful life. however if some what a longer period is justifiable the period of amortization can be extended.
- Where the requirements of the relevant statute so demands, statutory reserves should be recorded in the financial statement of the transferee company.(credit statutory reserves, debit „Amalgamation adjustment account‟). When legal requirements no longer warrants maintenance of such reserve a reverse entry is passed. The Amalgamation adjustment account should be disclosed in the bal-ance sheet under the heading „Miscellaneous Expenditure‟.
Treatment of reserves if specified in the scheme of amalgamation
In some cases, the court may specify certain conditions pertaining to “treatment of reserves” of transferor company, then such conditions should be followed. If such conditions as laid down by the court is different from those of AS 14, then the following additional disclosures is to be made.
- Description of accounting treatment given.
- Reasons for following such treatment.
- Deviations in accounting treatment given to reserves sanctioned under the statue as compared to AS 14 that would have been followed, had no treatment been prescribed by the court.
If the amalgamation is an ‘amalgamation in the nature of merger’, the identity of the reserves is preserved and they appear in the financial statements of the transferee company in the same form in which they appeared in the financial statements of the transferor company. Thus, for example, the General Reserve of the transferor company becomes the General Reserve of the transferee company, the Capital Reserve of the transferor company becomes the Capital Reserve of the transferee company and the Revaluation Reserve of the transferor company becomes the Revaluation Reserve of the transferee company. The difference between the amount recorded as share capital issued (plus any additional consideration in the form of cash or other assets) and the amount of share capital of the transferor company is adjusted in reserves in the financial statements of the transferee company.
If the amalgamation is an ‘amalgamation in the nature of purchase’, the identity of the reserves, other than the statutory reserves dealt with is not preserved.
Treatment of Goodwill Arising on Amalgamation
Goodwill arising on amalgamation represents a payment made in anticipation of future income and it is appropriate to treat it as an asset to be amortised to income on a systematic basis over its useful life. Due to the nature of goodwill, it is frequently difficult to estimate its useful life with reasonable certainty. Such estimation is, therefore, made on a prudent basis. Accordingly, it is considered appropriate to amortise goodwill over a period not exceeding five years unless a somewhat longer period can be justified.
1. For all amalgamations
- Names, nature of business of amalgamating companies and Effective date of amalgamation.
- Method of accounting
- Particulars of scheme –statutorily sanctioned
- Amalgamation after B/S date but before issue of financial statements disclose as per AS 4 – but not be incorporated in financial statements.
2. For Pooling of interest -1st Financial Statement
- Description and nature of shares issued.
- Percentage of equity shares exchanged to give effect to amalgamation.
- Difference between consideration and NAV treatment.
3. For Purchase method-1st Financial Statement
- Consideration paid and contingently payable.
- Difference between consideration and NAV treatment.
- Amortization period of goodwill if any.
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