AS 14 Accounting For Amalgamation Revised Summary PDF. In the previous articles, we have given AS 6 (Depreciation) and AS 26 (Intangible Assets). Today we are providing the complete details of AS 14 Accounting For Amalgamation I;e types of amalgamation, treatment of goodwill arising on amalgamation, Treatment of reserves if specified in the scheme of amalgamation,methods of calculating purchase consideration and disclosure. You can also download AS 14 accounting for amalgamation notes by ICAI at the end of this article.
AS 14 Accounting For Amalgamations Revised Summary Notes
The accounting terminology of “Amalgamation” is derived from the term “Amalgam” which means to unite. In corporate environments also two entities unite and form a single entity.
- Transferor Company: Company which is amalgamated into another company
- Transferee Company: Company into which Transferor Company would amalgam.
AS-14 specifically deals with the accounting for amalgamations and the treatment of any resultant difference arising on amalgamation in the books of Transferee Company. Based on the proprietary of the transaction, the standard classifies an amalgamation as either–
- An amalgamation in the nature of merger, or
- An amalgamation in the nature of the purchase.
As per standard, an amalgamation should be considered to be an “amalgamation in the nature of merger” when all the following conditions are satisfied:
- All assets and liabilities of the transferor company become, after amalgamation, the assets, and liabilities of the transferee company.
- Shareholders holding not less than 90% of the face value of the equity shares of the transferor company (other than the equity shares already held therein, immediately before amalgamation by the transferee company or its subsidiaries or their nominees) become equity shareholders of the transferee company by virtue of amalgamation.
- The consideration is discharged by the transferee company wholly by the issue of equity shares only, except that cash may be paid in respect of any fractional shares.
- The business of the transferor company is intended to be carried on, after the amalgamation, by the transferee company.
- No adjustment is intended to be made to the book value of the assets and liabilities of the transferor company when they are incorporated in the financial statements of the transferee company except to ensure uniformity of accounting policies.
The following terms are used in this statement 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.
Methods of Accounting For Amalgamations
There are two main methods of accounting for amalgamations:
(a) the pooling of interests method; and
(b) the purchase method.
*Amalgamation in the nature of purchase is an amalgamation which does not satisfy any one or more of the conditions specified above.
*Consideration for the amalgamation means the aggregate of the 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.
*Fair value is the amount for which an asset could be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing seller in an arm’s length transaction.
Pooling of Interest method
1. 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.
2. 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.
3. 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.
The consideration for the amalgamation may consist of securities, cash or other assets. In determining the value of the consideration, an assessment is made of the fair value of its elements. A variety of techniques is applied in arriving at fair value. For example, when the consideration includes securities, the value fixed by the statutory authorities may be taken to be the fair value. In case of other assets, the fair value may be determined by reference to the market value of the assets given up. Where the market value of the assets given up cannot be reliably assessed, such assets may be valued at their respective net book values.
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 amortized 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 amortize goodwill over a period not exceeding five years unless a somewhat longer period can be justified.
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.
Method of Calculating Purchase Consideration:
There are two methods of calculating the purchase consideration:
- Net Payment Method
- Net Assets Method
Net Payment Method:
‘Purchase Consideration’ under this method is taken as the aggregate of all payments made in the form of shares, debentures, other securities and cash to the shareholders of the transferor company.
Net Assets Method:
Net Assets Method is used when all the modes of discharging the purchase consideration (e.g. Pref. Shares, Equity shares or cash payable to shareholders of transferor company) are not given and hence where Net Payment Method cannot be adopted. Under this Method, purchase consideration is ascertained by aggregating the agreed values of only those assets which have been taken over by the transferee company and deducting it from the agreed value of liabilities taken over.
For all amalgamations, the following disclosures are considered appropriate in the first financial statements following the amalgamation:
(a) names and general nature of business of the amalgamating companies;
(b) effective date of amalgamation for accounting purposes.
Click Here to download AS 14 Accounting For Amalgamation notes by ICAI.
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