Amalgamation: Costs

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In accounting parlance, amalgamation means merger of two or more companies into one new or existing company. Absorption, on the other hand, refers to acquisition of business of one company by another company. But it may be noted that the Companies Act, 1956 does not make any distinction between amalgamation and absorption. Infact, the Companies Act, 1956 does not properly define the terms amalgamation and absorption. But Sections 394 and 396 of the Act prescribe the procedure for amalgamation. The Income-tax Act, 1961, however, defines the term amalgamation to mean “the merger of one or more companies with another company or the merger of two or more companies to form one company”. Therefore, it seems that legally there is no difference between amalgamation and absorption of companies.

According to the Accounting Standard 14, “Accounting for Amalgamations”, amalgamations fall into two broad categories. i. In the first category are those amalgamations where there is a genuine pooling not merely of the assets and liabilities of the two companies but also of the shareholders’ interests and of the businesses of these companies. Such amalgamations are known as “amalgamation in the nature of merger”. ii. The second type of amalgamations are those which are in effect a mode by which one company acquires another company and as a consequence the shareholders of the company which is acquired normally do not continue to have a proportionate share in the equity of the combined company or the business of the company which is acquired is not intended to be continued. Such amalgamations are known as “amalgamation in the nature of purchase.” Therefore, it can be said that amalgamations include absorption.

Pooling of interests method of amalgamation.
Pooling of interests method of accounting for amalgamation records amalgamation transactions as if the separate businesses of the amalgamating companies were intended to be continued by the transferee company. Accordingly, only the minimal changes are made in aggregating the individual financial statements of the amalgamating companies.

Under the pooling of interests’ methods the assets, liabilities and reserves of the transferor company will be taken over by the transferee company at existing carrying amounts unless any adjustment is required due to difference in accounting policies. As a result, the difference between the amount recorded as share capital issued (plus any additional consideration in the form of cash or other assets) by the transferee company and the amount of share capital of transferor company should be adjusted in reserves. At the time of amalgamation, if the transferor and the transferee companies have conflicting accounting policies, a uniform set of accounting policies is adopted following the amalgamation.

According to AS 14 on Accounting for Amalgamations; the following conditions must be satisfied for an amalgamation in the nature of merger:
(i)All the assets and liabilties of the transferor company become, after amalgamation, the assets and liabilities of the transferee company.
(ii)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 the amalgamation, by the transferee company or its subsidiaries or their nominees) become equity shareholders of the transferee by virtue of the amalgamation.

(iii)The consideration for the amalgamation receivable by those equity shareholders of the transferor company who agree to become equity shareholders of the transferee company is discharged by the transferee company wholly by the issue of equity shares in the transferee company, except that cash may be paid in respect of any fractional shares.

(iv)The business of the transferor company is intended to be carried...
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