0Step 1:
Identify nature of Amalgamation: If the six conditions of amalgamation in nature of merger not satisfied then it is treated as amalgamation in nature of purchase. If the information provided in the question is not sufficient to decide the nature of amalgamation or question is silent on the nature of amalgamation then it is better to assume the nature of amalgamation as purchase.
Step 2:
Method of accounting: After identifying the nature of amalgamation the method of accounting is determined, it may be as follows:
Nature of Amalgamation | Method of Accounting |
Merger | Pooling of Interest Method |
Purchase | Purchase Method |
Step 3:
Purchase consideration: Purchase consideration is amount payable by transferee company (purchasing accompany) to transferor company (selling company) at the event of amalgamation. The payment may be in the mode of shares, debentures and cash. The purchase consideration may be in lump sum payment or based on net assets of selling company.
Lump Sum Payment/Payment Method | Net Assets Method |
Aggregate of consideration paid to share holder (equity and preference) in various forms | Aggregate of assets taken over at fair value XXXLess:Liabilities taken over at agreedamounts XXXNet assets xxxx |
Note: In case of pooling of interest method the 90% shareholders of selling company will get consideration in the form of equity shares. The consideration paid by the purchase company may be in following cases:
Particular | Merger nature | Purchase nature |
Case 1 | Consideration paid is more than paid up capital of selling company | Consideration paid is more than net assets of selling company |
Case 2 | Consideration paid is less than paid up capital of selling company | Consideration paid is less than net assets of selling company |
Step 4:
Discharge of purchase consideratio: Purchase consideration is discharged by transferee company(purchasing co) in various forms. After computation of purchase consideration it is discharged in the forms of shares at different values, It may be issued by debentures and by cash etc.
Step 5:
Accounting in the books of transferor company (Selling company). The selling company has to close all accounts by transferring to realization account except shareholders account. The shareholders account is prepaid and closed after passing necessary entries. Journal entries for the same can be find in part – 2 of amalgamation article.
Note: Before attempting the question just clarify whether there is any requirement of passing journal entries in the books of transferor(Selling Co)
Step 6:
Computation of Profit / loss in case of amalgamation for transferee company(Purchasing co)
As accounting standard 14 the profit or loss should be recognized in the following way:
Particular | Amalgamation in the nature of merger | Profit or Loss | |
Case 1 | Consideration paid is morethan paid up capital of selling company | It is loss for the purchasing company and the same should be adjusted against free reserves of selling company and purchasing company | |
Case 2 | Consideration paid is lessthan paid up capital of selling company | It is Profit for the purchasing company and the same should be treated as capital reserve in the books of purchasing company | |
Particular | Amalgamation in nature of purchase | Profit or Loss | |
Case 1 | Consideration paid is morethan net assets of selling company | It is loss for the purchasing company and the same should be treated as goodwill in the books of purchasing company | |
Case 2 | Consideration paid is lessthan net assets of selling company | It is Profit for the purchasing company and the same should be treated as capital reserve in the books of purchasing company | |
