Accounting Standard (AS) 14: Accounting for Amalgamations (Revised)
Scope of AS 14
This standard deals with accounting for amalgamations and the treatment of any resultant goodwill or reserves. This standard is directed principally to companies although some of its requirements also apply to financial statements of other enterprises.
This standard does not deal with cases of acquisitions which arise when there is a purchase by one company (referred to as the acquiring company) of the whole or part of the shares, or the whole or part of the assets, of another company (referred to as the acquired 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 an acquisition is that the acquired company is not dissolved and its separate entity continues to exist.
As the Transferee Company is purchasing the business of Transferor Company, the transferee company pays purchase consideration to the transferor company. Which means total of the shares and other securities issued and payment made in form of cash or other assets given by the transferee company to shareholders of the transferor company.
Types of amalgamation
There are two types of amalgamation:
- Amalgamation in the nature of merger;
- Amalgamation in the nature of purchase.
Conditions to be satisfied for Amalgamation in the nature of merger
- Business of the transferor company is intended to be carried on by the transferee company.
- All assets and liabilities of Transferor Company are taken over by the transferee company.
- The shareholders holding at least 90% or more of the equity shares of the transferor company become the equity shareholder of the transferee company, shares already held by the transferee company and its subsidiaries are not counted for the purpose of 90% or more limit.
- Consideration for the amalgamation is paid in equity shares by the transferee company to the equity shareholder of the transferor company and fractional shares can be paid in cash.
- No adjustment is made in the book values of the assets and liabilities of the transferor company by way of revaluation or otherwise, except the adjustments to ensure uniformity of accounting policies.
Amalgamation in the nature of purchase:
If any of the conditions regarding amalgamation in the nature of merger is not satisfied.
Methods of Accounting
- in case of merger – pooling interest method
- in case of purchase – purchase method
AS-14 does not mention, how accounting is to be made in Transferor Company’s books in that case accounting as per common practice has to be done , irrespective of the type of amalgamation.
Pooling interest method
- After amalgamation in preparation of the financial statement of the transferee company, line by line addition of assets and liabilities of should be made except for share capital.
- The difference between purchase consideration paid and the amount of share capital (equity + preference capital) of the transferor company should be adjusted with reserves.
- If purchase consideration is more than the share capital of the transferor company, then amount shall be debited to reserves, if reverse is the case, the difference is credited to reserves.
- If any of the conditions of merger is not satisfied, then the amalgamation shall be classified as purchase, therefore the purchase method of accounting shall be followed.
- In the books of transferee company assets and liabilities shall be recorded at the value at which these assets and liabilities are taken over by the transferee; assets do not include fictitious assets and liabilities do not include inside/internal liabilities.
- If purchase consideration exceeds the net assets taken over (Net Assets = Assets at their agreed value less liabilities at agreed value), the difference is debited to Goodwill account. If purchase consideration is less, the difference is credited to capital reserve.
Treatment of Statutory Reserves
Statutory Reserves are those reserves, which are created as per the particular statute/law, under that law, the reserve is created and this law puts some restriction on utilisation and maintenance of reserves for a particular period.
- Separate accounting adjustment/entry is not required for statutory reserves in the case of merger, in case of amalgamation by way of purchase, the reserves being internal liabilities, are not recorded in the books of transferee.
- To comply with the requirements of particular statute, the statutory reserves created in the books of transferor company is to be maintained for some more years in the transferee company books. In that case transferee company shall record the statutory reserves in its books by debiting to amalgamation adjustment reserve and crediting statutory reserve. When the maintenance of statutory reserves is no longer required, the entry passed should be reversed.
- Amalgamation adjustment reserve shall be presented in balance sheet as a separate line item as there is not any sub-heading like ‘miscellaneous expenditure’ in Schedule III of The Companies Act, 2013.
Goodwill arising on Amalgamation — Treatment
It is considered appropriate to amortize goodwill over a period not exceeding five years unless a somewhat longer period can be justified. The requirement of AS-26 intangible asset regarding amortization shall not apply to such goodwill.
In first financial statement of transferee company the following disclosures are made for all amalgamation:
- Names and general nature of business of amalgamating companies;
- Effective date of amalgamation;
- Method of accounting applied;
- Particulars of scheme sanctioned under a law.
Amalgamation accounted under pooling interest method—
- description and number of shares issued,
- difference between consideration and net assets acquired and treatment thereof
Amalgamation accounted under purchase method—
- Consideration for the amalgamation.
- Difference between consideration and net assets acquired and treatment thereof. including period of amortization of goodwill.
Note: Amalgamation as per this Accounting Standard means an amalgamation pursuant to the provisions of the Companies Act, 2013 or any other law/statute which is applicable to companies, it also includes ‘merger’.