AS 14 - Accounting for Amalgamations

Purpose and Scope: This statement deals with accounting for amalgamations and the treatment of any resultant goodwill or reserves. It does not deal with acquisition by one company of the whole or part of the shares, or the whole or part of the assets, of another company in consideration for payment in cash or by issue of shares or other securities in the acquiring company or partly in one form and partly in the other.

The distinguishing feature of such an acquisition is that the acquired company is not dissolved and its separate entity continues to exist.

Types of Amalgamations

An amalgamation may be either in the nature of merger or in the nature of purchase. An amalgamation is considered as, in the nature of merger, if it satisfies all the following conditions. If it does not satisfy any one or more of the following conditions it is said to be in the nature of purchase.

1. All the assets and liabilities of the transferor company become, after amalgamation, the assets and liabilities of the transferee company.
2. 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).
3. 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.
4. The business of the Transferor Company is intended to be carried on, after the amalgamation, by the Transferee Company
5. No adjustment is intended to be made to the book values of the assets and liabilities of the transferor company when they are incorporated in the financial statements of the transferee company except to ensure uniformity of accounting policies.

The Pooling of interest method of accounting is followed for amalgamation in the nature of merger whereas the purchase method is followed for amalgamations in the nature of purchase.

Pooling of Interests Method

• While preparing the transferee company's financial statements, the assets, liabilities, reserves (capital, revenue or revaluation reserve) of the transferor company should be recorded at their existing carrying amounts and in the same form as at the date of the amalgamation.
• The balance of the Profit and Loss Account of the transferor company should be aggregated with the corresponding balance of the transferee company or transferred to the General Reserve, if any.
• In case of conflicting accounting policies, of the transferor and the transferee company, a uniform set of accounting policies should be adopted after the amalgamation and the effects on the financial statements of any changes in accounting policies should be reported in accordance with Accounting Standard (AS) 5 'Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies'
• The difference between the amount recorded as share capital issued (plus any additional consideration in the form of cash or other assets) and the amount of share capital of the transferor company should be adjusted in reserves.

Purchase Method

• Under this method, the assets and liabilities of the transferor company should be recorded at their existing carrying amounts or, the consideration should be allocated to individual identifiable assets and liabilities on the basis of their fair values at the date of amalgamation. Reserves, other than the statutory reserves, should not be included in the financial statements of the transferee company.
• The statutory reserves of the transferor company should be recorded in the financial statements of the transferee company by giving corresponding debit to a suitable account head like 'Amalgamation Adjustment Account' to be disclosed under "miscellaneous expenditure" or other similar category in the balance sheet. When the identity of the statutory reserves is no longer required to be maintained, both the reserves and the aforesaid account should be reversed.
• If the amount of consideration exceeds the value of net assets of the transferor company acquired by the transferee company the excess is recorded as goodwill and if the amount of consideration is lower than the value of the net assets acquired, the difference is recorded as capital reserve.
• The goodwill arising on amalgamation should be amortised to income on a systematic basis over its useful life. The amortisation period should not exceed five years unless a somewhat longer period can be justified.

Consideration

Consideration for amalgamation may consist of securities, cash or other assets. The value of the consideration is determined by making an assessment of the fair value of its elements. Various techniques are applied in arriving at fair value. For example, when the consideration includes securities, the value fixed by the statutory authorities may be taken to be the fair value and for other assets, the fair value may be determined by reference to the market value of the assets given up.

However, if the market value of the assets given up cannot be reliably assessed, such assets may be valued at their respective net book values. Further, adjustments to the consideration may be made in the light of one or more future events. If the additional payment is probable and can reasonably be estimated at the date of amalgamation, it should be included in the calculation of the consideration, but in all other cases, the adjustment should be made only after the amount is determinable.

Treatment of Reserves on Amalgamation

In the case of Amalgamation in the Nature of Merger, the identity of the reserves is preserved and they appear in the financial statements of the transferee company in the same form in which they appeared in the financial statements of the transferor company, for example, the General Reserve of the transferor company becomes the General Reserve of the transferee company, the Capital Reserve of the transferor company becomes the Capital Reserve of the transferee company and the Revaluation Reserve of the transferor company becomes the Revaluation Reserve of the transferee company. Further, the difference between the amount recorded as share capital issued (plus any additional consideration in the form of cash or other assets) and the amount of share capital of the transferor company is adjusted in reserves in the financial statements of the transferee company.

In the case of Amalgamation in the Nature of Purchase, the identity of the reserves, other than statutory reserves, is not preserved. Statutory reserves, for example, Development Allowance Reserve or Investment Allowance Reserve retain their identity in the financial statements of the transferee company in the same form in which they appeared in the financial statements of the transferor company, so long as their identity is required to be maintained to comply with the relevant statute. The amount of consideration is deducted from the value of the net assets of the transferor company acquired by the transferee company. If the result of the computation is negative, the difference is debited to goodwill and if the result of the computation is positive, the difference is credited to Capital Reserve.

Treatment of Goodwill Arising on Amalgamation

Goodwill represents a payment made in anticipation of future income and is generally treated as an asset to be amortised to income on a systematic basis over its useful life. However, since it is difficult to estimate its useful life with reasonable certainty, it is considered appropriate to amortise goodwill over a period not exceeding five years unless a somewhat longer period can be justified.

Factors which may be considered in estimating the useful life of goodwill include:

• the foreseeable life of the business or industry,
• the effects of product obsolescence, changes in demand and other economic factors,
• the service life expectancies of key individuals or groups of employees,
• expected actions by competitors or potential competitors, and
• legal, regulatory or contractual provisions affecting the useful life.

Disclosures

For All Amalgamations the following disclosure should be made in the first financial statements following the amalgamation:

1. Names and general nature of business of the amalgamating companies.
2. Effective date of amalgamation for accounting purposes.
3. The method of accounting used to reflect the amalgamation.
4. Tarticulars of the scheme sanctioned under a statute.

Additional disclosures in the first financial statements after Amalgamation in the Nature of Pooling of Interests

1. Description and no of shares issued together with the percentage of the each companies equity shares exchange to effect amalgamation, and
2. The amount of any difference between the consideration and the value of the net identifiable assets acquired and the treatment thereof.

Additional disclosures in the first financial statements after Amalgamation in the Nature of Purchase:

1. Consideration for the amalgamation and the description of the consideration paid or contingently payable, and
2. The amount of any difference between the consideration and the value of the net identifiable assets treatment thereof.

If an amalgamation is effected after the balance sheet date but before the issuance of the financial statements of either party to the amalgamation, the amalgamation should not be incorporated in the financial statements but disclosure needs to be made in accordance with AS 4 - Contingencies and Events Occurring after the Balance Sheet Date.