Unit 3: Amalgamation & reconstruction
Corporate Accounting notes · PTU syllabus (BBA 521-18)
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Unit summary
Companies combine, restructure and form groups. This unit covers accounting for amalgamation under AS 14, calculation of purchase consideration, internal reconstruction, and holding and subsidiary companies with consolidated balance sheets.
After this unit you can
- Distinguish amalgamation in the nature of merger from purchase
- Calculate purchase consideration by different methods
- Pass entries for internal reconstruction
- Prepare a consolidated balance sheet with minority interest and goodwill
PTU syllabus topics
- Accounting treatment and disclosures for amalgamation
- calculation of purchase consideration
- treatment as per Accounting Standard 14
- internal reconstruction
- holding and subsidiary companies
- consolidated balance sheet preparation
Method
Pooling of interests
Purchase method
Assets and liabilities
Recorded at book values
Recorded at fair values
Reserves
Preserved
Only statutory reserves kept
Difference
Adjusted in reserves
Goodwill or capital reserve
Topic 1
Amalgamation and AS 14
Amalgamation is the combination of two or more companies into one, either by absorption or by forming a new company.
Conditions
All AS 14 merger conditions met (90% shareholders, same business continues, book values)
Any condition not met
Assets and liabilities
Recorded at book values
At agreed (fair) values
Reserves
All reserves preserved
Only statutory reserves kept
Difference
Adjusted in reserves
Goodwill or capital reserve
Topic 2
Purchase consideration
Purchase consideration is the amount paid by the transferee company to the shareholders of the transferor company.
Lump sum method
A fixed amount agreed
Net payment method
Total of shares, cash and other payments to shareholders
Net assets method
Agreed value of assets taken − liabilities taken
Intrinsic value (share exchange) method
Based on the value of each company's shares
Example
Assets taken over ₹10 lakh, liabilities ₹2 lakh: purchase consideration (net assets method) = ₹8 lakh. Paid as 70,000 shares of ₹10 and ₹1 lakh cash.
Topic 3
Internal reconstruction
Internal reconstruction reorganises a company's capital without liquidating it — usually to write off accumulated losses and fictitious assets. Methods: reduction of share capital (Section 66, with tribunal approval), alteration of capital, variation of shareholders' rights and compromise with creditors. Losses written off are debited to a Capital Reduction (Reconstruction) Account; any balance left goes to capital reserve.
Topic 4
Holding and subsidiary companies
A holding company controls a subsidiary by holding more than half of its voting power or controlling its board.
- 1
Add assets and liabilities of both companies
- 2
Eliminate the investment in subsidiary against its share capital
- 3
Calculate pre-acquisition (capital) profits
- 4
Calculate goodwill or capital reserve
- 5
Calculate minority (non-controlling) interest
- 6
Eliminate inter-company balances and unrealised profit
- Goodwill (cost of control) = cost of investment − holding company's share of subsidiary's share capital and pre-acquisition reserves.
- Minority interest = minority's share of subsidiary's share capital + reserves (pre- and post-acquisition).
Key terms
- Amalgamation
- Combining two or more companies into one
- Purchase consideration
- Amount paid to the transferor company's shareholders
- Internal reconstruction
- Reorganising capital without liquidation
- Holding company
- A company controlling another company
- Minority interest
- Outsiders' share in a subsidiary
Quick revision
- AS 14: merger (book values, reserves kept) vs purchase (fair values, goodwill/capital reserve).
- PC methods: lump sum, net payment, net assets, intrinsic value.
- Reconstruction losses → Capital Reduction A/c.
- Consolidation: add, eliminate investment, goodwill, minority interest.
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.What is amalgamation?
- Q2.Differentiate between amalgamation in the nature of merger and purchase.
- Q3.Define purchase consideration.
- Q4.What is internal reconstruction?
- Q5.What is minority interest?
Long-answer questions
- Q1.Explain the accounting treatment of amalgamation under AS 14.
- Q2.Calculate purchase consideration and pass entries in the books of the transferee company.
- Q3.Explain internal reconstruction with journal entries.
- Q4.Prepare a consolidated balance sheet from given data.
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