Amalgamation

Amalgamation Amalgamation is a process of unification. The following terms can be discussed 1. Amalgamation 2. Absorption or Take over 3. External Reconstruction 4. Transferor Company (selling co.) 5. Transferree company (purchasing co.) 1. 2. 3.

i) ii) iii) iv) v) vi)

In Amalgamation, one company merges with another company and forms a new company. Hereby both the old companies loses their existence. Eg. ‘A’ and ‘B’ combined to form ‘C’ co. Here, an existing company takes over another existing company. While the first one is the purchasing one, the second lone is the selling company which is liquidated. While one ;new company is formed to take over the old/existing company e.g. Z ltd. Is formed to take over X ltd. This all happen so due to the following reasons. To avoid cut-threat competition. To avail large scale economies. Socially desirable. Low selling price is possible High profit is possible. Possible dissolution or closure is avoided for small companies.

PURCHASE CONSIDERATION The new company takes over the old company and it has to pay something to the selling one, known as purchase consideration. It may be in the4 form of cash, equity shares, preference, debentures etc. They may be imued at par, premium or discount. I) II) III) IV) I.

These are the following 4 methods for calculating purchase consideration. Lump sum method Net-worth method (Net Assets) Net payment Method. Share- Exchange Method or Intrinsic Value Method. Lump sum Method :-

The purchasing company pays a fixed amount to the selling company which is calculated randomly with the discussion of ;both company without considering the fact of Assets and Liabilities taken over. II. Net worth method:Here, the purchase consideration is calculated as follows:- i.e. Value of Assets taken over (at agreed values)XXXX

Less: value of liabilities taken over (at agreed value)XXXX Purchase consideration XXXX Refer to pg No.327 III.

IV.

Net payment Method:Here, the purchasing co. decides to pay cash and securities such as equity, preference and debentures. These all are to be added to find out purchase consideration. These may be issued at premium, par or discount. Such issue price is to be added. Intrinsic/ Share Exchange Method:-

In the Books of selling company There should be a given b/s which must contain assets and liabilities. Assets can be fixed assets and current Assets and Fictious Assets. It can be used in the following ‘4’ ways. A. Some assets are sold. B. Some assets may be taken over by the purchasing company. C. Some assets may be taken over by the liabilities. D. Some assets will be transferred to Equity share holders A/c. (Preliminary exps, P&L A/c. (Dr)) The liabilities can be current liabilities, accumulated profits, equity shares capital, preference share capital, Debentures and other long term loans. It can be used in the following ways. A. It can be paid out of existing co.’s assets B. It can be paid out of assets received from new company. The selling company prepares the following accounts. 1. Realization A/c 2. Purchasing co. A/c 3. Equity shareholders’ A/c. 4. Cash A/c. etc. 1. The Realization A/c. This is a nominal account and prepared to find out the profit or loss on realization. It is debited with all the assets (both taken over and not taken over) except cash and fictious assets. i) ii) iii)

This account is credited with the followings. Liabilities taken over. Liabilities not taken over. Purchase consideration

The balance of this account represents profit or loss on realization which is transferred to equity share holders’ A/c. 2)

Purchasing company A/c.

This account is debited with purchase consideration and credited with all receipts in all forms at issue prices. No balance is left lover. 2. Equity Shareholder’s A/c. This account is credited with the followings. i) equity share capital ii) Accumulated profits iii) Profit on realization. This account is debited with the followings. i) Accumulated losses. ii) All cash and securities of the new company. ENTRIES 1)

For transferring assets Taken over.

2)

For all assets sold Or taken by liabilities For transferring Liabilities Taken over.

3) 4)

For purchase consideration

5)

For receiving purchase Consideration

6)

For amount received On assets sold. For payment to Liabilities (not taken over) For liquidation expenses It paid and borne by It paid and borne by purchasing co. It paid by selling co. but to be borne by purchasing co.

7) 8) i) ii) iii)

Realization A/c. Dr. To all assets taken over (Individually at Book value) Realization A/c. Dr. To all assets. Liabilities Dr. (Individually at BV) To Realization Purchasing co. Dr. To Realization A/c. Cash and Securities Dr. (at MV) To purchasing co. Bank A/c. Dr. To Realization Liabilities A/c. Dr. To Realization Realization A/c. Dr No entry (a) Purchasing co. Dr. To bank (b) Bank A/c. Dr. To purchasing co.

9) i)

For closing Realization A/c. For profit

ii)

For loss

10)

For preference Capital

11)

For equity capital And accumulated profits

12)

For accumulated losses

13)

For final payment

Realization A/c. Dr. To Eq. share holder Eq. sh. Holder Dr. To Realization Preference capital Dr. Realization (if to be paid more) To pref. holder Equity capital Dr. Ac. Profits Dr. To Eq. holder Equity holder Dr. To Au. Losses Preference holder Dr. Eq. holder Dr. To Bank/ securities of new co.

In the Books of purchasing The purchasing company follows two methods while recording. i. purchase method ii. Merger/poling of interest method (i)

Purchase method :-

Here, the following points are adopted (a) This method is adopted when the business of purchasing company and the business of selling company are same or similar in nature. (b) The assets and liabilities of transferer company (selling) is recorded at agreed or revised value otherwise at Book Value. (c) There is no guarantee that all the assets and liabilities will be taken. Selected items may be taken (d) The reserves of transferor company will never be taken unless and otherwise they are liabilities. (e) However, statutory Reserve will always be taken by the purchasing company by debiting “Amalgamation Adjustment A/c.” (f) While paying purchase consideration, the purchasing company may pay more or less it pays more, then difference is to be debited to Goodwill A/c. and if pays less, then difference is to be credited to “Capital Reserve A/c.” (g) The Goodwill so arising or capital. Reserve so arising will be maintained in assets and liabilities of the B/S respectively. (h) If Goodwill and Capital Reserve arising simultaneously, then it may be cancelled by passing a Reverse entry i.e. Capital Reserve A/c. Dr . To Goodwill A/c (Upto least amount)

i)

The Goodwill must be amortised (written off) through the income over a period of life which must not exceed 5 years unless a longer period is justified. Statutory Reserves include Development Allowance Reserves, Investment Allowance Reserve etc. The Amalgamation Adjustment A/c. so arising must be maintained in the asset side under the Head “Misc. Expenditure” Whenever it is so felt that statutory Reserves are no more required, then it should be cancelled by passing a Reverse entry i.e. Statutory Reserves A/c. Dr. To Amalgamation Adjustment A/c.

j) k) l)

Entries :(1)

For purchase :Business purchase A/c. Dr. To liquidator of selling Co. (transferor co.) For recording Assets and liabilities Various Assets (individually) Dr. (at agreed value or at BV) Goodwill A/c. (B/F) Dr. To Liabilities (individually at agreed value of BV) To Business purchase A/c. To Capital Reserve A/c. (B/F)

(2)

(3)

Liquidator of transferer co. Dr. Discount A/c. Dr. To Eq. Shares To Pref. shares To Cash To premium A/c. (4)For recording Statutory Reserves Amalgamation Adjustment A/c. Dr. To Statutory Reserve (5) For payment of liquidation exps. Goodwill A/c. Dr. To Bank A/c. (6) For payment of formation exps. Preliminary exps. A/c. Dr. To Bank A/c. (7) For setting off “Goodwill” or “CR” A/c. Capital Reserve A/c. Dr. To Goodwill A/c. (8) For payment of various liabilities

Liabilities A/c.Dr. To Cash To Securities To Premium (9) For issue of fresh shares Cash A/c. Dr. Discount A/c. Dr. To Sh. Capital A/c. To Sh. Premium A/c. (10)For any short term loan Cash A/c. Dr. To Bank O.D. (ii)

Nature of Merger/Pooling of Interest method.

(a)

This method is applicable mostly in those cases where transferee company and transferer company carries separate business. Here, all the assets and liabilities of the transferer company including all reserves, P&L A/c. (excluding eq. capital) is taken by the purchasing company The assets and liabilities are taken at Book value never at agreed value. The difference arising for excess/less payments will be credited to General Reserve A/c. (if payment is less) and will be debited to P&L A/c. (If payment is more) If there are different accounting policies followed by both the companies a uniform accounting policy should be followed for the purpose of amalgamation. The assets and liabilities so incorporated/adopted) will appear in the Balance sheet at their Book value. Preference shares are not taken by the transferee company.

(b) (c) (d) (e) (f) • Entries (1)

(2)

(3)

For Business purchase :Business purchase A/c. Dr. To liquidator of transferor co. (with purchase consideration) For recording Assets and Liabilities :Assets A/c. Dr. (individually) P&L A/c. (BF) Dr. To Liabilities To Reserves To Business purchase To General Reserve A/c. (BF) For payment:-

(4)

(5) (6)

Liquidator of transferor co. A/c. Dr. To Bank A/c To Sh. Capital A/c To Securities premium A/c. For payment of liquidation expenses :General Reserve Ac. Dr. P&L A/c. Dr. To Bank A/c. For formation expenses:Preliminary expenses A/c. Dr. To Bank A/c. For discharge of liabilities Liabilities A/c. Dr. To Bank A/.c.

Liquidation Liquidation refers to winding up or closure of a company. It refers to a process whereby the life of the company is ended. The affairs of the organization is closed and the name of the company is struck off from the Register of companies maintained by the Registrar of the companies. Hereby, an administrator, known as liquidator is appointed to control the process of liquidation who takes the charge of collection of assets and payment of liabilities. Liquidation is different from Insolvency. 1. 2. 3.

Insolvency is applicable to sole-trading firms, partnership firms & HUF whereas liquidation is applicable to Joint Stock companies. Insolvency leads to liquidation, but liquidation does not lead to insolvency. Insolvency is governed by Insolvency Act, but liquidation is governed by companies Act.

MODES OR METHODS OF LIQUIDATION Liquidation can be done in three ways. (A) Compulsory winding up by the court (B) Voluntary winding up by the members or creditors (C) Winding up under the super vision of the court (A)

Compulsory winding up by the court :

Whenever the court of law does not feel satisfied about the progress or affairs of the organization, then it may order for liquidation by which the affairs of the company has to be closed.

(B)

Voluntary winding up by the members or creditors

Whenever the members feel that the dividend is not properly paid or wherever the Debenture holders feel that the interest is not properly paid or whenever the creditors feel that their amount is not regularly paid, then they may apply to the court of law for liquidation of the organisation. And if the court of law is satisfied of their claim, then it may order for liquidation. (C)

Winding up under the supervision of the court

Liquidation arising due to any other reason is also done under the supervision of the court. CONSEQUENCES LOF WINDING UP 1.

2. 3. 4. 5.

A liquidator is appointed by the court in case of compulsory winding up. But in case of voluntary winding up the members appoint the liquidator. In case members and creditors differ about the liquidator to be appointed then the creditor’s decision will be final. The liquidator collects the sale proceeds of the assets and distribute among the right claimants as per law. Liquidation leads to closure of the organization. With the start of liquidation process the power of the director becomes nullified. The liquidator prepares a list of contributories who will contribute to the assets of the organization in case of liquidation.

Contributories Contributories refer to those members (share holders) who are supposed to contribute to the organization in case of liquidation. They may be present members or past members. Present members come under ‘A’ list of contributories. And past members are coming under ‘B’ list of contributories. Present members are those who are share holders of the company at the time of liquidation. They are supposed to pay the unpaid amount of the value of the shares or guaranteed amount, as the case may be. Past members are those 2who are ceased to be the share holders within one year of the winding of the company. They are also required to contribute towards liquidation in the sense that their activities have also affected the process of liquidation. However, the following points are to be remembered. (a) (b)

A past member will not contribute for any liability arising lout of any contract made after he ceased to be a member of the company. A past member will not contribute if his ceased up period is more than 1 year.

Order of payment

The amount realized from assets (not specifically pleased) will be distributed as follows I. II. III IV V.

Liquidation expenses (including liquidators’ Remuneration Creditors or Debenture holders having a floating charge over the asset Preferential creditors Unsecured creditors Any surplus is to be distributed among the preference share holders and equity share holders.

Preferential Creditors These are those creditors who are ;not secured, but they are having prior rights over unsecured creditors regarding payment. They are paid out of Assets not specifically pledged and surplus from assets specifically pledged, after payment of legal expenses. These includes the followings 1. 2.

3. 4. 5. 6.

All revenues, taxes, cesses and rates payable to govt. or local authorities within 12 months before the date of commencement of winding up. All wages or salaries or commission to the employees for services rendered to the company for a period not exceeding 4 months within 12 months before the date of commencement. However, salary to (director, Branch Manager, Manager, Secy, Asst. Secy) are not preferential creditors. All remuneration to employees due to termination of employment is preferential. Persons who have advanced money to pay the preferential creditors are also called preferential creditors. All money payable under ESI Act and workmen compensation Act is also preferential creditors. All sum payable to employee such as provident fund, pension, gratuity fund is also called preferential creditors.

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