Amalgamation: In the Nature of Merger and Purchase – BMS NOTES

Amalgamation: In the Nature of Merger and Purchase

1. Amalgamation, as the name itself suggest, is a form of external reconstruction, in It involves the merger or acquisition of two or more enterprises. It identifies two activities:
2. There is a true pooling of not just the assets and liabilities of the amalgamating corporations, but also the shareholder interest and excess of the two companies’ businesses. After merger, the transferee firm inherits all of the transferor company’s assets and obligations, including reserves and excess. The merging entities’ equity owners retain a proportionate stake of the resulting entity.
3. The transferor firm’s business is intended to be continued by the transferee company after merger.
4. The Pooling of Interest Method is utilized for accounting in the transferee company’s books.
5. Amalgamation’s purpose
6. Companies choose amalgamation for a variety of reasons, including:
7. Gaining Synergy
8. Avoiding competition.
9. Increasing efficiency
10. Business expansion
11. Benefiting from economies of scale in manufacturing
12. The excess of the purchase price over the transferor company’s share capital is deducted from the reserve, while the excess of share capital over purchase consideration is credited to the reserve.
13. Amalgamation of Merger
14. This sort of amalgamation involves the pooling of not just assets and liabilities, but also the shareholders’ interests and the enterprises of these firms. In other words, the transferor firm’s assets and liabilities become those of the transfer company. In this situation, the transfer or company’s business is meant to continue after the merger. There are no planned changes to the book values. Other requirements must be met, such as the vendor business’s shareholders owning at least 90% face value of equity shares becoming shareholders of the vendee company.
15. According to AS-14 on Accounting for Amalgamation, the following requirements must be met for an amalgamation in the form of a merger:
16. All of the assets and liabilities of the transferor firm are transferred to the transferee company upon merger.
17. owners who own at least 90% of the face value of the transferor firm’s equity shares become equity owners of the transferee business as a result of merger.
18. The transferor firm’s business is expected to be continued by the transferee company after the merger.
19. Purchase consideration shall only be discharged by the issuance of equity shares in the transferee firm, with the exception of cash payments for fractional shares.
20. When the transferor company’s assets and liabilities are included into the transferee company’s financial statements, no revisions to their book values are necessary. If any of the prerequisites are not met throughout the amalgamation process, it will not be deemed a merger.
21. Purchase-based amalgamation
22. If any of the aforementioned requirements are not met, the amalgamation will be viewed as “Amalgamation in the nature of purchase”.
23. This procedure is used when the prerequisites for amalgamation in the form of merger are not fulfilled. Through this method, one company acquires another, and the shareholders of the acquired company typically do not retain a proportionate share in the equity of the combined company, or the acquired company’s business is generally not intended to be continued.
24. It is a transaction in which one firm buys another, and equity owners of the combining companies do not continue to value their proportional part in the combining entity. The purchased company’s business may not be intended to continue. The Purchase Method is used to record transactions in the transferee company’s records.
25. The excess of purchase consideration over net assets is classified as goodwill, whereas the excess of net assets over purchase consideration is handled as capital reserves. In this instance, the Amalgamation Adjust-went A/c will not be opened for the purpose of taking over the statutory reserve.
26. Procedure for Amalgamation
27. The amalgamating firms’ boards of directors decide the conditions of the merger.
28. A plan of amalgamation is developed and presented for permission to the appropriate High Court.
29. The component firms’ shareholders provide their consent, followed by SEBI’s approval.
30. The transferor firm’s shareholders get shares in the newly established business.
31. The transferor firm is subsequently liquidated, and the transferee corporation assumes all of its assets and obligations.
32. Accounting for amalgamation
33. The Pooling of Interests Method:
34. This accounting technique records the transferee company’s assets, liabilities, and reserves at their current carrying values.
35. Purchasing Method:
36. In this method, the transfer company accounts for the amalgamation by either incorporating the assets and liabilities at their current carrying amounts or allocating the consideration to individual assets and liabilities of the transferor or company based on their fair values at the time of amalgamation.
37. Computation of Purchase Consideration:In general, two approaches are employed to calculate purchase consideration.
38. Purchase consideration using the net asset method: Total of assets taken over, which should be at fair value, less liabilities taken over at the agreed amounts.

1. Agreed value means the amount at which the transfer or company has agreed to sell and the transferee company has agreed to take over a particular asset or liability.

Purchase consideration using payments method: Total of consideration paid to both equity and preference shareholders in various forms.

Disadvantages of Amalgamation

• Amalgamation may lead to elimination of healthy competition
• Reduction of employees may take place
• There could be additional debt to pay
• Business combination could lead to monopoly in the market, which is not always positive
• The goodwill and identity of the old company is lost