Unit 3: Amalgamation & internal reconstruction
Corporate Accounting notes · PTU syllabus (BCOM 401-18)
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Unit summary
Companies combine to grow or reorganise to survive. This unit covers the concept of amalgamation, its types and accounting treatment under Accounting Standard 14 — purchase consideration, pooling of interests and purchase methods, entries in the books of transferor and transferee companies — and internal reconstruction.
After this unit you can
- Explain the meaning and types of amalgamation under AS 14
- Calculate purchase consideration by different methods
- Pass entries in the books of transferor and transferee companies
- Explain internal reconstruction and pass the related entries
PTU syllabus topics
Concept and accounting treatment of amalgamation as per Accounting Standard 14, internal reconstruction concepts and accounting treatment
When
Amalgamation in the nature of merger
Amalgamation in the nature of purchase
Assets and liabilities
At existing book values
At agreed or fair values
Reserves
Preserved as they are
Only statutory reserves kept
Difference in consideration
Adjusted in reserves
Goodwill or capital reserve
Topic 1
Concept of amalgamation
Amalgamation is a combination of two or more companies into one — either by absorption (an existing company takes over another) or by merger into a new company. Related terms: external reconstruction (a new company formed to take over an existing one), takeover (acquisition of controlling interest).
Conditions
All five conditions satisfied
Any condition not satisfied
Method
Pooling of interests
Purchase method
Assets and liabilities
Recorded at book values
At agreed/fair values
Reserves of transferor
All reserves preserved
Only statutory reserves preserved (via Amalgamation Adjustment A/c)
Difference
Adjusted in reserves
Goodwill or capital reserve
Five conditions for merger (AS 14)
- 1All assets and liabilities of the transferor become those of the transferee.
- 2Shareholders holding at least 90% of equity shares of the transferor become equity shareholders of the transferee.
- 3Consideration is discharged wholly by issue of equity shares (except cash for fractions).
- 4The business of the transferor is intended to be continued.
- 5No adjustment to book values except to ensure uniform accounting policies.
Exam tip
Under Ind AS 103, business combinations use the acquisition method; AS 14 applies to non-Ind AS companies — mention this if asked about current practice.
Topic 2
Purchase consideration
Purchase consideration (AS 14): the aggregate of shares and other securities issued and payment in cash or other assets by the transferee to the shareholders of the transferor.
Lump sum method
A fixed figure agreed
Net payment method
Sum of all payments to shareholders — shares (at issue price), cash, debentures
Net assets method
Agreed value of assets taken over − agreed value of liabilities taken over
Intrinsic value (share exchange) method
Shares issued in ratio of intrinsic values of shares
Example
Transferee pays: 2 equity shares of ₹10 issued at ₹12 for every share of the transferor (50,000 shares), plus ₹2 cash per share. Purchase consideration = 50,000 × 2 × 12 + 50,000 × 2 = ₹12,00,000 + ₹1,00,000 = ₹13,00,000.
- Payment to debenture holders and liquidation expenses are not part of purchase consideration (unless borne by transferee and paid for the transferor's shareholders).
Topic 3
Accounting entries
Books of the transferor (closing the books) — Realisation Account
- 1
Transfer assets to Realisation A/c (book values)
- 2
Transfer liabilities taken over to Realisation A/c
- 3
Transferee Co. A/c Dr. To Realisation A/c (purchase consideration)
- 4
Receive consideration
Shares in Transferee Co. A/c, Bank A/c Dr. To Transferee Co. A/c
- 5
Pay liabilities not taken over and expenses
- 6
Transfer share capital and reserves to Equity Shareholders A/c
- 7
Transfer realisation profit or loss to Equity Shareholders A/c
- 8
Distribute shares and cash to equity shareholders
Books of the transferee
- Pooling of interests: Business Purchase A/c Dr. To Liquidator of Transferor; assets and liabilities at book values; difference between share capital issued and share capital of transferor adjusted in reserves.
- Purchase method: assets and liabilities at fair values; excess of purchase consideration over net assets = goodwill (amortised over up to 5 years under AS 14); shortfall = capital reserve; statutory reserves of transferor recorded with Amalgamation Adjustment A/c (debit).
Example
Net assets taken over at fair value ₹11,50,000; purchase consideration ₹13,00,000 → goodwill ₹1,50,000 (purchase method).
- Inter-company owings and unrealised profit in stock are eliminated in the transferee's books.
Topic 4
Internal reconstruction
Internal reconstruction reorganises the capital structure of a company without liquidating it — usually to write off accumulated losses and fictitious assets and reduce over-capitalisation. Governed by Section 66 (reduction of capital — special resolution and NCLT confirmation) and Sections 230–232 (compromise or arrangement with creditors).
Alteration of share capital (Section 61)
Consolidation, sub-division, conversion into stock — no reduction
Reduction of share capital (Section 66)
Reduce face value or paid-up value of shares to absorb losses
Variation of shareholders' rights (Section 48)
Change preference dividend rate or rights
Compromise with creditors (Section 230)
Creditors and debenture holders give up part of claims
Surrender of shares
Shareholders surrender shares, which are re-issued to creditors
- Capital Reduction (Reconstruction) A/c is credited with the amount by which capital and liabilities are reduced and debited with losses and fictitious assets written off (P&L debit balance, goodwill, preliminary expenses, discount on issue) and decreases in asset values; any balance goes to capital reserve.
Example
Equity shares of ₹10 reduced to ₹4 (1,00,000 shares): Equity Share Capital (₹10) A/c Dr. ₹10,00,000 To Equity Share Capital (₹4) A/c ₹4,00,000, To Capital Reduction A/c ₹6,00,000. Capital Reduction A/c then writes off P&L debit balance ₹4,50,000 and goodwill ₹1,00,000; balance ₹50,000 to capital reserve.
Company
Same company continues
Old company liquidated, new company formed
Approval
Special resolution + NCLT
Scheme of arrangement
Accounting
Capital Reduction A/c
Realisation A/c and new company's books
Key terms
- Amalgamation
- Combination of two or more companies into one
- Purchase consideration
- Consideration paid to the transferor's shareholders
- Pooling of interests
- Merger method where book values and reserves are preserved
- Realisation account
- Account used to close the transferor's books
- Internal reconstruction
- Reorganising capital without liquidating the company
Quick revision
- AS 14: merger (5 conditions, pooling) vs purchase.
- Purchase consideration: lump sum, net payment, net assets, intrinsic value.
- Transferor closes books via Realisation A/c.
- Purchase method: goodwill or capital reserve; Amalgamation Adjustment A/c for statutory reserves.
- Internal reconstruction: Section 66 reduction; Capital Reduction A/c.
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.Distinguish amalgamation in the nature of merger and purchase.
- Q2.State the conditions for amalgamation in the nature of merger.
- Q3.Define purchase consideration.
- Q4.What is the net assets method?
- Q5.What is an Amalgamation Adjustment Account?
- Q6.What is internal reconstruction?
Long-answer questions
- Q1.Explain the types of amalgamation and accounting methods under AS 14.
- Q2.Explain the methods of calculating purchase consideration with examples.
- Q3.Explain the entries in the books of transferor and transferee companies.
- Q4.Explain internal reconstruction and the use of the Capital Reduction Account.
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