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Amalgamation of Companies M. C. Sharma Associate Professor, Deptt. Of Commerce Shaheed Bhagat Singh Evening College (University of Delhi), Delhi M: 9717415641; Email:[email protected]

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Page 1: Accounting for Amalgamation of companies

Amalgamation of Companies

M. C. SharmaAssociate Professor, Deptt. Of Commerce

Shaheed Bhagat Singh Evening College

(University of Delhi), Delhi

M: 9717415641; Email:[email protected]

Page 2: Accounting for Amalgamation of companies

Prof. M. C. Sharma M: 9717415641 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.

Page 3: Accounting for Amalgamation of companies

Prof. M. C. Sharma M: 9717415641 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.

Page 4: Accounting for Amalgamation of companies

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

Page 5: Accounting for Amalgamation of companies

Prof. M. C. Sharma M: 9717415641 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

Page 6: Accounting for Amalgamation of companies

Prof. M. C. Sharma M: 9717415641 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.

Page 7: Accounting for Amalgamation of companies

Prof. M. C. Sharma M: 9717415641 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).

Page 8: Accounting for Amalgamation of companies

Prof. M. C. Sharma M: 9717415641 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.

Page 9: Accounting for Amalgamation of companies

Prof. M. C. Sharma M: 9717415641 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”

Page 10: Accounting for Amalgamation of companies

Prof. M. C. Sharma M: 9717415641 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).

Page 11: Accounting for Amalgamation of companies

Prof. M. C. Sharma M: 9717415641 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.

Page 12: Accounting for Amalgamation of companies

Prof. M. C. Sharma M: 9717415641 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.

Page 13: Accounting for Amalgamation of companies

Prof. M. C. Sharma M: 9717415641 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

Page 14: Accounting for Amalgamation of companies

Prof. M. C. Sharma M: 9717415641 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

Page 15: Accounting for Amalgamation of companies

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

Page 16: Accounting for Amalgamation of companies

Prof. M. C. Sharma M: 9717415641 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.

Page 17: Accounting for Amalgamation of companies

(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

Page 18: Accounting for Amalgamation of companies

Prof. M. C. Sharma M: 9717415641 18

(2) Transfer of outside liabilities to the Realisation A/c

Sundry (Individual) Liabilities A/c Dr.

To Realisation A/c

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

Page 19: Accounting for Amalgamation of companies

Prof. M. C. Sharma M: 9717415641 19

(5) On payment of a liability not taken over by the

transferee company

Realisation A/c Dr.

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

Page 20: Accounting for Amalgamation of companies

(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

Page 21: Accounting for Amalgamation of companies

Prof. M. C. Sharma M: 9717415641 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

Page 22: Accounting for Amalgamation of companies

Prof. M. C. Sharma M: 9717415641 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

(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

Page 23: Accounting for Amalgamation of companies

Prof. M. C. Sharma M: 9717415641 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.

Page 24: Accounting for Amalgamation of companies

Prof. M. C. Sharma M: 9717415641 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

Page 25: Accounting for Amalgamation of companies

Prof. M. C. Sharma M: 9717415641 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 ShareholdersEquity Shareholders’ Account Dr.

To Equity Shares in Transferee Co.

To Preference Shares in transferee Co.

To Debentures in Transferee Co.

To Bank Account

Page 26: Accounting for Amalgamation of companies

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

Page 27: Accounting for Amalgamation of companies

Prof. M. C. Sharma M: 9717415641 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

Page 28: Accounting for Amalgamation of companies

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.

Page 29: Accounting for Amalgamation of companies

Prof. M. C. Sharma M: 9717415641 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

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.

Page 30: Accounting for Amalgamation of companies

Prof. M. C. Sharma M: 9717415641 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

Note:

1. When these reserves are not required,

the above entry is reversed.

Page 31: Accounting for Amalgamation of companies

Prof. M. C. Sharma M: 9717415641 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

Page 32: Accounting for Amalgamation of companies

Prof. M. C. Sharma M: 9717415641 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

Page 33: Accounting for Amalgamation of companies

Prof. M. C. Sharma M: 9717415641 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)

Page 34: Accounting for Amalgamation of companies

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.

Page 35: Accounting for Amalgamation of companies

Prof. M. C. Sharma M: 9717415641 35

(8) For profit or loss on realisation: the accounting

treatment is as under:

(i) For profit

Realization Account Dr.

To Equity Shareholders Account

(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

Page 36: Accounting for Amalgamation of companies

Prof. M. C. Sharma M: 9717415641 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

Page 37: Accounting for Amalgamation of companies

Prof. M. C. Sharma M: 9717415641 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

Page 38: Accounting for Amalgamation of companies

Prof. M. C. Sharma M: 9717415641 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 ShareholdersEquity Shareholders Account Dr.

To Equity Shares in Transferee Co.

To Debentures in Transferee Co.

To Bank Account

Page 39: Accounting for Amalgamation of companies

Prof. M. C. Sharma M: 9717415641 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

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

Page 40: Accounting for Amalgamation of companies

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.

Page 41: Accounting for Amalgamation of companies

Prof. M. C. Sharma M: 9717415641 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

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.

Page 42: Accounting for Amalgamation of companies

Prof. M. C. Sharma M: 9717415641 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

Note:

1. When these reserve are not required,

the above entry is reversed.

Page 43: Accounting for Amalgamation of companies

Prof. M. C. Sharma M: 9717415641 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

Page 44: Accounting for Amalgamation of companies

Prof. M. C. Sharma M: 9717415641 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

Page 45: Accounting for Amalgamation of companies

Prof. M. C. Sharma M: 9717415641 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)

Page 46: Accounting for Amalgamation of companies

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.

Page 47: Accounting for Amalgamation of companies

Prof. M. C. Sharma M: 9717415641 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

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.

Page 48: Accounting for Amalgamation of companies

Prof. M. C. Sharma M: 9717415641 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

Page 49: Accounting for Amalgamation of companies

Prof. M. C. Sharma M: 9717415641 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