Accounting Standard (AS) 14 Accounting for Amalgamations. IPCC Paper 1 Accounting,Chapter 1 CA.Karan Chopra

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1 Accounting Standard (AS) 14 Accounting for Amalgamations IPCC Paper 1 Accounting,Chapter 1 CA.Karan Chopra

2 Agenda Introduction Definitions Types of Amalgamation Amalgamation in the Nature of Merger Amalgamation in the Nature of Purchase Methods of accounting for Amalgamations Pooling of Interest Method Purchase Method Consideration for Amalgamation Amortization of Goodwill (Purchase Method) Illustration 1 : Calculation of Purchase Consideration Illustration 2 : Journal entries in the books of the Transferee Co. Illustration 3: Journal entries in the books of the Transferor / Vendor Co. Disclosures 2

3 Introduction What is Amalgamation? Two or more companies are combined into one by merger or by one taking over the other Two or more companies join to form a new Company Absorption or blending of one by the other 3

4 Introduction (Cont ) Examples of Amalgamation? Existing companies A Ltd. and B Ltd. are wound up and a new company C Ltd. is formed to take over the businesses of A & B Amalgamation An existing company A ltd takes over the business of another existing company B ltd, which is wound up. Absorption A new company X ltd is formed to take over the business of an existing company Y ltd, which is wound up External reconstruction 4

5 Introduction (Cont ) Why Amalgamate? Economies of large Scale Operations To acquire cash resources Eliminate duplicate facilities, processes etc. Eliminate Competition Increase shareholders value Tax Savings 5

6 Agenda Introduction Definitions Types of Amalgamation Amalgamation in the Nature of Merger Amalgamation in the Nature of Purchase Methods of accounting for Amalgamations Pooling of Interest Method Purchase Method Consideration for Amalgamation Amortization of Goodwill (Purchase Method) Illustration 1: Calculation of Purchase Consideration Illustration 2 : Journal entries in the books of the Transferee Co. Illustration 3: Journal entries in the books of the Transferor / Vendor Co. Disclosures 6

7 Definitions AS 14 Accounting for Amalgamations defines amalgamation as Amalgamation means an amalgamation pursuant to the provisions of the Companies Act, 1956 or any other statute which may be applicable to companies Transferor or the Vendor company The company which is amalgamated into another company. 7

8 Definitions (Cont ) Transferee company The company into which a transferor company is amalgamated Reserve The portion of earnings, receipts or other surplus of an enterprise (whether capital or revenue) appropriated by the management for a general or a specific purpose other than a provision for depreciation or diminution in the value of assets or for a known liability. 8

9 Definitions (Cont ) Example of transferee & transferor company Existing companies A Ltd. and B Ltd. are wound up and a new company C Ltd. is formed to take over the businesses of A & B In this example, A ltd and B ltd are the transferor companies and C ltd is the transferee company 9

10 Agenda Introduction Definitions Types of Amalgamation Amalgamation in the Nature of Merger Amalgamation in the Nature of Purchase Methods of accounting for Amalgamations Pooling of Interest Method Purchase Method Consideration for Amalgamation Amortization of Goodwill (Purchase Method) Illustration 1 : Calculation of Purchase Consideration Illustration 2 : Journal entries in the books of the Transferee Co. Illustration 3: Journal entries in the books of the Transferor / Vendor Co. Disclosures 10

11 Types of Amalgamation Amalgamation for Accounting purpose Amalgamation in the Nature of Merger Amalgamation in the Nature of Purchase 11

12 Agenda Introduction Definitions Types of Amalgamation Amalgamation in the Nature of Merger Amalgamation in the Nature of Purchase Methods of accounting for Amalgamations Pooling of Interest Method Purchase Method Consideration for Amalgamation Amortization of Goodwill (Purchase Method) Illustration 1 : Calculation of Purchase Consideration Illustration 2 : Journal entries in the books of the Transferee Co. Illustration 3: Journal entries in the books of the Transferor / Vendor Co. Disclosures 12

13 Conditions: Amalgamation in the Nature of Merger All assets and Liabilities All assets and liabilities of the transferor company become assets and liabilities of the transferee company Not less than 90% of the face value Shareholders holding not less than 90% of the face value of the equity shares of the transferor company become the equity shareholders of the transferee company by virtue of the amalgamation For the purpose of computing 90% exclude the Shares already held prior to amalgamation by: Transferee company in the transferor company One or more subsidiaries of the transferee company Nominees of the transferee company 13

14 Conditions: Amalgamation in the Nature of Merger (Cont..) Issue of equity shares in the transferee company The consideration for the amalgamation receivable by those equity shareholders of the transferor company who agree to become shareholders of the transferee company is discharged by the transferee company wholly by the issue of equity shares in the transferee company, except that the cash may be paid in respect of fractional shares. Business intended to be carried on The business of the transferor company is intended to be carried on, after the amalgamation, by the transferee company 14

15 Conditions: Amalgamation in the Nature of Merger (Cont..) No adjustments is intended to be made to the book values No adjustments 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. 15

16 Agenda Introduction Definitions Types of Amalgamation Amalgamation in the Nature of Merger Amalgamation in the Nature of Purchase Methods of accounting for Amalgamations Pooling of Interest Method Purchase Method Consideration for Amalgamation Amortization of Goodwill (Purchase Method) Illustration 1 : Calculation of Purchase Consideration Illustration 2 : Journal entries in the books of the Transferee Co. Illustration 3: Journal entries in the books of the Transferor / Vendor Co. Disclosures 16

17 Amalgamation in the Nature of Purchase An amalgamation should be considered to be an amalgamation in the nature of purchase, when any one or more of the conditions specified in Amalgamation the nature of merger is not satisfied. 17

18 Agenda Introduction Definitions Types of Amalgamation Amalgamation in the Nature of Merger Amalgamation in the Nature of Purchase Consideration for Amalgamation Methods of accounting for Amalgamations Pooling of Interest Method Purchase Method Amortization of Goodwill (Purchase Method) Illustration 1 : Calculation of Purchase Consideration Illustration 2 : Journal entries in the books of the Transferee Co. Illustration 3: Journal entries in the books of the Transferor / Vendor Co. Disclosures 18

19 Consideration Consideration means: aggregate of the shares and other securities issued and the payment made in the form of cash or other assets by the transferee company to the shareholders of the transferor company In simple words it is the price payable by the transferee company to the transferor company for taking over the business of the transferor company. Does Not Include the sum which the transferee company will directly pay to the creditors of the transferor company. 19

20 Consideration (Cont ) Consideration for amalgamation should include: Any non-cash element at fair value In case of issue of securities, fair value is the value fixed by the statutory authorities In case of other assets, the fair value may be determined by reference to the market value of the assets given up Where the market value of the assets given up cannot be reliably assessed, such assets may be valued at their respective net book values 20

21 Consideration (Cont ) Contingent Consideration If payment is : Probable, and Reasonable estimate of the amount can be made In all other cases, recognize adjustment as soon as the amount is determinable Include additional payment in Consideration Accounting Standard (AS) 4, Contingencies and Events Occurring After the Balance Sheet Date 21

22 Consideration (Cont ) Consideration > Net Asset value Recognized in the transferee company s financial statements as Goodwill arising on amalgamation Consideration < Net Asset value Difference Credited to Capital Reserve 22

23 Agenda Introduction Definitions Types of Amalgamation Amalgamation in the Nature of Merger Amalgamation in the Nature of Purchase Methods of accounting for Amalgamations Pooling of Interest Method Purchase Method Consideration for Amalgamation Amortization of Goodwill (Purchase Method) Illustration 1 : Calculation of Purchase Consideration Illustration 2 : Journal entries in the books of the Transferee Co. Illustration 3: Journal entries in the books of the Transferor / Vendor Co. Disclosures 23

24 Methods of accounting for Amalgamations Amalgamation in the NATURE OF MERGER Amalgamation in the NATURE OF PURCHASE Pooling of interests method Purchase method 24

25 Agenda Introduction Definitions Types of Amalgamation Amalgamation in the Nature of Merger Amalgamation in the Nature of Purchase Consideration for Amalgamation Methods of accounting for Amalgamations Pooling of Interest Method Purchase Method Amortization of Goodwill (Purchase Method) Illustration 1 : Calculation of Purchase Consideration Illustration 2 : Journal entries in the books of the Transferee Co. Illustration 3: Journal entries in the books of the Transferor / Vendor Co. Disclosures 25

26 Accounting under Pooling of interests method Existing carrying amounts Assets and liabilities of the transferor company: Recorded at In the same form as at the date of the amalgamation Balance of the Profit and Loss Account of the transferor company Aggregated with the corresponding balance of the transferee company Transferred to the General Reserve 26

27 Reserves under Pooling of interests method : Amalgamation in the Nature of merger Identity of reserves is preserved and they appear in the financial statements of the Transferee Company in the same form as they appear in the financial statements of the transferor company For example: Reserves which are available for distribution as dividend before the amalgamation would also be available for distribution as dividend after the amalgamation 27

28 Share Capital under Pooling of interests method : Difference between Amount recorded as share capital issued (plus any additional consideration in the form of cash or other assets) The amount of share capital of the transferor company Adjusted in reserves 28

29 Conflicting Accounting Policies under Pooling of interests method : Where there are Conflicting accounting policies in the transferor and transferee company A uniform set of accounting policies is adopted Accounting Standard (AS) 5, Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies Changes in accounting policies reported in accordance with 29

30 Example: Amalgamation in the Nature of merger Consider the following Balance Sheet of X Ltd. And Y Ltd. Liabilities X Ltd Y Ltd. Assets X Ltd Y Ltd. (in 000 Rs.) (in 000 Rs.) (in 000 Rs.) (in 000 Rs.) Equity share Capital (Rs. 10 each) Land and Building % Preference share capital, Rs. 100 each, fully paid up Plant and Machinery General Reserve Furniture and Fittings Export Profit Reserve Investments Investment Allowance Reserve 100 Stock Profit and Loss Account Debtors % Debentures, Rs. 100 each, fully paid up Cash & Bank Trade Creditors Other Current Liabilities

31 Example: Amalgamation in the Nature of merger (Cont ) X Ltd. Takes over Y Ltd. On 1 April, X Ltd. Discharges the purchase consideration as below: (i) Issued 3,50,000 equity shares of Rs. 10 each at par to the equity shareholders of Y Ltd. (ii) Issued 15% preference shares of Rs. 100 each to discharge the preference shareholders of Y Ltd. At 10% premium. The debentures of Y Ltd. Will be converted into equivalent number of debentures of X Ltd. The statutory reserves of Y Ltd. Are to be maintained for 2 more years. On the assumption that this is Amalgamation is in the nature of merger, what amounts would appear in the Balance Sheet for the following items: Share Capital Reserves and Surplus Long Term Borrowings Tangible assets 31

32 Notes to Accounts : Share Capital (1) Particulars Amount (in 000's Rs.) Equity Share Capital Existing share Capital of X Ltd Share Capital issued to equity shareholders of Y Ltd. (3,50,000 X Rs. 10 each) Preference Share Capital 22,000, 14% Preference shares of Rs. 100 each ,700, 15% Preference shares of Rs. 100 each TOTAL SHARE CAPITAL in the Books of X Ltd

33 Notes to Accounts: Reserves and Surplus (2) Particulars Amount (in 000's Rs.) General Reserve of X Ltd. 500 Add: General Reserve of Y Ltd Less: Adjustment for Amalgamation ** (See working below) (670) 80 Export Profit Reserve of X Ltd. 300 Add: Export Profit Reserve of Y Ltd Investment Allowance Reserve 100 Profit & Loss A/C of X Ltd. 750 Add: Profit & Loss A/C of Y Ltd ** The difference between the amount recorded as share capital issued and the amount of share capital of the transferor company should be adjusted in reserves: General Reserve = Rs. 000 s [ 750 ( )] = Rs

34 Notes to Accounts: Long term borrowings (3) and Tangible Assets (4) Particulars Amount (in 000's Rs.) Long term Borrowings Secured % Debentures of Rs. 100 aech 850 Tangible Assets Land and Building ( ) 4050 Plant and Machinery ( ) 4950 Furniture and Fittings ( )

35 Balance Sheet of X Ltd. Equity & Liabilities Notes Rs. In 000's Assets Notes Rs. In 000's Share Capital 1 12,570 Tangible Assets 4 9,925 Reserves & Surplus 2 1,930 Non current Investments 1,200 Long term Borrowings Inventories 2,200 Trade Payables 800 Trade Receivables 1,930 Other Current Liabilities 350 Cash & Cash Equivalents 1,245 16,500 16,500 35

36 Agenda Introduction Definitions Types of Amalgamation Amalgamation in the Nature of Merger Amalgamation in the Nature of Purchase Consideration for Amalgamation Methods of accounting for Amalgamations Pooling of Interest Method Purchase Method Amortization of Goodwill (Purchase Method) Illustration 1 : Calculation of Purchase Consideration Illustration 2 : Journal entries in the books of the Transferee Co. Illustration 3: Journal entries in the books of the Transferor / Vendor Co. Disclosures 36

37 Assets and Liabilities under Purchase method Assets and liabilities of the transferor company Incorporated at their existing carrying amounts Or Consideration allocated to individual identifiable assets and liabilities on the basis of their fair values at the date of amalgamation 37

38 Reserves under Purchase method Reserves (of the transferor company), other than the statutory reserves Not be included in the financial statements of the transferee company except Where, the transferee company is complying with a relevant statute for recording Statutory reserves Such Statutory reserves incorporated in the Balance sheet of Transferee Company Dr. Amalgamation Adjustment **** Cr. Statutory Reserve **** When such reserves are not required, eliminate reserve by reversing the above entry 38

39 Balance of Profit & Loss under Purchase method Amalgamation in the nature of purchase Balance of the Profit and Loss Account of the transferor company, Loses its identity Whether Debit or credit 39

40 Example: Amalgamation in the Nature of Purchase Refer same example as in the above slides: On the assumption that this is Amalgamation is in the nature of Purchase, what amounts would appear in the Balance Sheet for the following items: Share Capital Reserves and Surplus Long Term Borrowings Tangible assets 40

41 Notes to Accounts : Share Capital (1) Particulars Amount (in 000's Rs.) Equity Share Capital Existing share Capital of X Ltd Share Capital issued to equity shareholders of Y Ltd. (3,50,000 X Rs. 10 each) Preference Share Capital 22,000, 14% Preference shares of Rs. 100 each ,700, 15% Preference shares of Rs. 100 each TOTAL SHARE CAPITAL in the Books of X Ltd

42 Notes to Accounts: Reserves and Surplus (2) Particulars Amount (in 000's Rs.) Reserves and Surplus Capital Reserve ** (see below) 380 General Reserve 500 Export Profit Reserve ( ) 500 Investment Allowance Reserve (100 of Y Ltd.) 100 Surplus (Profit & Loss A/c) ** Capital Reserve arising on Amalgamation: (A) Net Assets taken over Rs. (000's) Rs. (000's) Sundry Assets 6600 Less: 13% Debentures 350 Trade Creditors 350 Other current liabilities (B) Purchase Consideration To Equity shareholders of Y Ltd To Preference shareholders of Y Ltd (C) Capital Reserve (A - B)

43 Notes to Accounts: Long term borrowings (3),Tangible Assets (4) and Other non current assets (5) Particulars Amount (in 000's Rs.) Long term Borrowings Secured % Debentures of Rs. 100 aech 850 Tangible Assets Land and Building ( ) 4050 Plant and Machinery ( ) 4950 Furniture and Fittings ( ) Other Non Current Assets Amalgamation Adjustment Account (assumed to be maintained for more than a year) (for statutory reserves of Y :Ltd )

44 Balance Sheet of X Ltd. Equity & Liabilities Notes Rs. In 000's Assets Notes Rs. In 000's Share Capital Tangible Assets Reserves & Surplus Non current Investments 1200 Long term Borrowings Other Non current assets Trade Payables 800 Inventories 2200 Other Current Liabilities 350 Trade Receivables 1930 Cash & Cash Equivalents

45 Agenda Introduction Definitions Types of Amalgamation Amalgamation in the Nature of Merger Amalgamation in the Nature of Purchase Consideration for Amalgamation Methods of accounting for Amalgamations Pooling of Interest Method Purchase Method Amortization of Goodwill (Purchase Method) Illustration 1 : Calculation of Purchase Consideration Illustration 2 : Journal entries in the books of the Transferee Co. Illustration 3: Journal entries in the books of the Transferor / Vendor Co. Disclosures 45

46 Amortization of Goodwill Goodwill arising on amalgamation Amortized on a systematic basis over its useful life and Unless a longer period can be justified Amortization period should not exceed five years 46

47 Amortization of Goodwill (contd.) Factors which may be considered in estimating the useful life of goodwill arising on amalgamation 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. 47

48 Agenda Introduction Definitions Types of Amalgamation Amalgamation in the Nature of Merger Amalgamation in the Nature of Purchase Methods of accounting for Amalgamations Pooling of Interest Method Purchase Method Consideration for Amalgamation Amortization of Goodwill Illustration 1 : Calculation of Purchase Consideration Illustration 2 : Journal entries in the books of the Transferee Co. Illustration 3: Journal entries in the books of the Transferor / Vendor Co. Disclosures 48

49 Illustration 1: A Ltd. Takes over B Ltd. On April 1, 2006 and discharges consideration for the business as follows: (i) Issued 42,000 fully paid equity shares of Rs. 10 each at par to the equity shareholders of B Ltd. (ii) Issued fully paid up 15% preference shares of Rs. 100 each to discharge the preference shareholders (Rs. 1,70,000) of B Ltd. At a premium of 10%. (iii) It is agreed that the debentures of B Ltd. (Rs. 50,000) will be converted into equal number and amount of 13% debentures of A Ltd. Calculate the amount of Purchase consideration? 49

50 Illustration 1: (Solution) Particulars Rs. Rs. Equity shares (42,000 shares X Rs. 10 per share) 4,20,000 Preference Share Capital 1,70,000 Add: Premium on Redemption 17,000 1,87,000 Purchase Consideration 6,07,000 50

51 Agenda Introduction Definitions Types of Amalgamation Amalgamation in the Nature of Merger Amalgamation in the Nature of Purchase Methods of accounting for Amalgamations Pooling of Interest Method Purchase Method Consideration for Amalgamation Amortization of Goodwill Illustration 1 : Calculation of Purchase Consideration Illustration 2 : Journal entries in the books of the Transferee Co. Illustration 3: Journal entries in the books of the Transferor / Vendor Co. Disclosures 51

52 Illustration 2: Following are the summarized Balance Sheets of A Ltd. (Rs.) and B Ltd. (Rs.) as on March 31, 2011: Liabilities A Ltd B Ltd. Assets A Ltd B Ltd. Equity shares, Rs. 10 each, fully paid up 7,20,000 3,00,000 Goodwill 2,00,000 60,000 14% Preference share capital, Rs. 100 each, fully paid up 1,50,000 1,70,000 Land and Building 2,50,000 Securities Premium 1,50,000 Plant and Machinery 3,25,000 2,70,000 Capital Reserve 13,000 Furniture and Fixtures 57,000 95,000 General Reserve 80,000 45,000 Stock 2,15,000 1,75,000 Export Profit Reserve 20,000 Debtors 72,000 30,000 Profit and Loss Account 75,000 40,000 Income Tax Refund Claim 6,000 Workmen Compensation fund 3,000 Cash at Bank 2,16,000 50,000 13% Debentures, Rs. 100 each, fully paid up 1,00,000 50,000 Cash in Hand 70,000 Creditors 1,15,000 35,000 Provision for taxation 15,000 10,000 14,05,000 6,86,000 14,05,000 6,86,000 52

53 Illustration 2: (Cont ) A Ltd. Takes over B Ltd. On April 1, 2006 and discharges consideration for the business as follows: (i) Issued 42,000 fully paid equity shares of Rs. 10 each at par to the equity shareholders of B Ltd. (ii) Issued fully paid up 15% preference shares of Rs. 100 each to discharge the preference shareholders of B Ltd. At a premium of 10%. (iii) It is agreed that the debentures of B Ltd. (Rs. 50,000) will be converted into equal number and amount of 13% debentures of A Ltd. (iv) The Statutory Reserves of B Ltd. Is to be maintained for two more years. (v) Expenses of amalgamation amounting to Rs. 15,000 are borne by A Ltd.. Pass Journal entries in the books of A Ltd. When this is : Amalgamation in the nature of merger ; Amalgamation in the nature of purchase 53

54 Solution: Amalgamation in the nature of merger Since all the five conditions are satisfied, it is amalgamation in the nature of merger. Following Journal entries will be passed in the books of A Ltd. : Particulars Dr. (Rs.) Cr. (Rs.) JOURNAL ENTRY 1: Goodwill Account Dr. 60,000 Plant and Machinery Account Dr. 2,70,000 Furniture and Fixture Account Dr. 95,000 Stock Account Dr. 1,75,000 Debtors Account Dr. 30,000 IT Refund Account Dr. 6,000 Bank Account Dr. 50,000 General Reserve Account (Balancing Figure) Dr. 52,000 To Capital Reserve Account Cr. 13,000 To Export Profit Reserve Account Cr. 20,000 To workmen Compensation Fund Account Cr. 3,000 To 13% Debentures Account Cr. 50,000 To Creditor Account Cr. 35,000 To Provision for Tax Account Cr. 10,000 To Business Purchase Account Cr. 6,07,000 (Being the assets, liabilities and reserves of the transferor company recorded by the transferee company at their existing carrying amount) 54

55 Solution: Amalgamation in the nature of merger (Cont ) Particulars Dr. (Rs.) Cr. (Rs.) JOURNAL ENTRY 2: Business Purchase Account Dr. 6,07,000 To B s Liquidator Account Cr. 6,07,000 Being consideration made due to the liquidator s of B Ltd. JOURNAL ENTRY 3: B s Liquidator Account Dr. 6,07,000 To Equity Share Capital Account Cr. 4,20,000 To Preference Share Capital Account Cr. 1,87,000 Being consideration paid to liquidators of B Ltd. JOURNAL ENTRY 4: 13% Debentures Account (in B Ltd.) Dr. 50,000 To 13% Debentures Account (in A Ltd.) Cr. 50,000 Being 13% debentures of B Ltd. Converted into equal number and amount of 13% debentures of A Ltd. JOURNAL ENTRY 5: General Reserve Account Dr. 15,000 To Bank Account Cr. 15,000 Being expenses of amalgamation amounting to Rs. 15,000 borne by A Ltd 55

56 Solution: Amalgamation in the nature of Purchase If we consider that the fifth point i.e. business of B Ltd. Was not carried on by A Ltd. Then it will be amalgamation in the nature of Purchase. Journal entries as follows: Particulars Dr. (Rs.) Cr. (Rs.) JOURNAL ENTRY 1: Goodwill Account (Balancing figure) Dr. 76,000 Plant and Machinery Account Dr. 270,000 Furniture and Fixture Account Dr. 95,000 Stock Account Dr. 175,000 Debtors Account Dr. 30,000 IT Refund Account Dr. 6,000 Bank Account Dr. 50,000 To 13% Debentures Account Cr. 50,000 To Creditor Account Cr. 35,000 To Provision for Tax Account Cr. 10,000 To Business Purchase Account Cr. 6,07,000 Being the assets and liabilities of the transferor company recorded by the transferee company at their existing carrying amount) JOURNAL ENTRY 2: Business Purchase Account Dr. 6,07,000 To B s Liquidator Account Cr. 6,07,000 Being consideration made due to the liquidator s of B Ltd. 56

57 Solution: Amalgamation in the nature of Purchase (Cont ) Particulars Dr. (Rs.) Cr. (Rs.) JOURNAL ENTRY 3: B s Liquidator Account Dr. 6,07,000 To Equity Share Capital Account Cr. 4,20,000 To Preference Share Capital Account Cr. 1,87,000 Being consideration paid to liquidators of B Ltd. JOURNAL ENTRY 4: 13% Debentures Account (in B Ltd.) Dr. 50,000 To 13% Debentures Account (in A Ltd.) Cr. 50,000 Being 13% debentures of B Ltd. Converted into equal number and amount of 13% debentures of A Ltd. JOURNAL ENTRY 5: Goodwill Account Dr. 15,000 To Bank Account Cr. 15,000 Being expenses of amalgamation amounting to Rs. 15,000 borne by A Ltd JOURNAL ENTRY 6: Amalgamation Adjustment Account Dr. 20,000 To Export Profit Reserve Account Cr. 20,000 Being retaining the identity of Statutory reserves by making a corresponding debit to a suitable account head Amalgamation adjustment Account 57

58 Agenda Introduction Definitions Types of Amalgamation Amalgamation in the Nature of Merger Amalgamation in the Nature of Purchase Methods of accounting for Amalgamations Pooling of Interest Method Purchase Method Consideration for Amalgamation Amortization of Goodwill Illustration 1 : Calculation of Purchase Consideration Illustration 2 : Journal entries in the books of the Transferee Co. Illustration 3: Journal entries in the books of the Transferor / Vendor Co. Disclosures 58

59 Illustration 3: (Journal entries to close the books of the Vendor / Transferor company ) Wye Limited acquires the business of Z Ltd. Whose balance sheet as on 31 December, 2012 is as under: Liabilities Z Ltd. Assets Z Ltd Share Capital divided into shares of Rs. 100 each Goodwill 2,00,000 6% Preference share capital 4,00,000 Land and Building 4,00,000 Equity Share Capital 8,00,000 Plant and Machinery 6,00,000 Capital Reserve 1,00,000 Patents 50,000 Profit and Loss Account 50,000 Stock 1,50,000 6% Debentures 2,00,000 Book Debts 1,80,000 Interest outstanding on above 12,000 Cash at Bank 70,000 Workmen Compensation Reserve (Expected Liability Rs. 5,000) 8,000 Underwriting Commission 40,000 Trade Creditors 1,20,000 16,90,000 16,90,000 59

60 Illustration 3: (Cont ) Wye Ltd. Was to take over all assets (except cash) and liabilities (except for interest due on debentures) and to pay following amounts: (i) Rs. 2,00,000 7% Debentures (Rs. 100 each) in Wye Ltd. For the existing debentures in Z Ltd. ; for the purpose, each debenture of Wye Ltd. is to be treated as worth Rs (ii) For each preference share in Z Ltd. Rs. 10 in cash and one 9% preference share of Rs. 100 each in Wye Ltd. (iii) For each equity shares in Z Ltd. Rs. 20 in cash and one equity share in Wye Ltd. Of Rs. 100 each having the value of Rs. 140 (iv) Expense of liquidation of Z Ltd. Are to be reimbursed by Wye Ltd. To the extent of Rs. 10,000. Actual expenses amounted to Rs. 12,500. Wye Ltd. Valued Land and building at Rs. 5,50,000, Plant & Machinery at Rs. 6,50,000 and Patents at Rs. 20,000. Pass Journal entries to close the books of the Vendor Company? 60

61 Solution: Purchase Consideration: Particulars From Rs. (i) Preference share : Rs. 10 per share Cash 40,000 9% Preference share in Wye Ltd. Preference shares 4,00,000 4,40,000 (ii) Equity shares : Rs. 20 per share Cash 1,60,000 8,000 equity shares in Wye Rs. 140 Equity shares 11,20,000 12,80,000 Purchase Consideration 17,20,000 61

62 Solution: (Cont ) Steps to close the books of Transferor / Vendor Company STEP 1: Open Realization account and transfer all assets at book value Exception: If cash is not taken over by the purchasing Company, it should not be transferred. Note: Profit and Loss Account (Dr.) and expenses not written off are not assets and should not be transferred to the Realization Account Particulars Dr. (Rs.) Cr. (Rs.) Realization Account Dr. 15,80,000 To Goodwill Cr. 2,00,000 To Land and Building Cr. 4,00,000 To Plant & Machinery Cr. 6,00,000 To Patents Cr. 50,000 To Stock Cr. 1,50,000 To Book debts Cr. 1,80,000 (Transfer of assets to Realization Account on sale of business to Wye Ltd.) 62

63 Solution: (Cont ) STEP 2: Transfer Liabilities and provisions to the Realization A/C Transfer liabilities which the purchasing company is taking over Provisions which represent liability expected to arise in future should be transferred Portion of reserves which is not required, should be treated as profit. Particulars Dr. (Rs.) Cr. (Rs.) 6% Debentures in Wye Ltd. Dr. 2,00,000 Workmen s Compensation Reserve Dr. 5,000 Trade Creditors Dr. 1,20,000 To Realization A/C Cr. 3,25,000 (Transfer of liabilities taken over by Wye Ltd. To Realization A/C) For liabilities not taken over by the purchasing company, the profit or loss on discharge of such liabilities shall be transferred to the Realization Account 63

64 Solution: (Cont ) STEP 3: Debit purchasing Company and the Realization Account with the Purchase consideration: Particulars Dr. (Rs.) Cr. (Rs.) Wye Ltd. Account Dr. 17,20,000 To Realization Account Cr. 17,20,000 (Transfer of liabilities taken over by Wye Ltd. To Realization A/C) STEP 4: On receipt of the purchase consideration debit what is received (cash, debentures, shares etc.) and credit the purchasing company. Thus: Particulars Dr. (Rs.) Cr. (Rs.) Cash Account Dr. 2,00,000 9% Preference shares in Wye Ltd. Dr. 4,00,000 Equity shares in Wye Ltd. Dr. 11,20,000 To Wye Ltd. Cr. 17,20,000 ( Receipt of purchase consideration from the purchasing company) 64

65 Solution: (Cont ) STEP 5: Expenses of liquidation have to be dealt with according to the circumstances of each case: Vendor bears the expense Purchasing Co. bears the expense Debit Realization A/C Credit Cash A/C Ignore in the books of the vendor Company Where expenses are first paid by the vendor company and later reimbursed by the purchasing company (a) When expenses paid by vendor: Debit Purchasing company and credit Cash Account (b) On the expenses being reimbursed: Debit Cash Account and credit purchasing company. 65

66 Solution: (Cont ) STEP 5: Expenses of liquidation In our Illustration, Wye Ltd. Has to pay maximum of Rs. 10,000 only whereas, the amount spent is Rs. 12,500. Hence, Rs. 2,500 is borne by Z Ltd. Particulars Dr. (Rs.) Cr. (Rs.) JOURNAL ENTRY 1: Wye Ltd. Account Dr. 10,000 Realization Account Dr. 2,500 To Cash Account Cr. 12,500 ( Liquidation expenses out of which Rs. 10,000 is payable by Wye Ltd.) Particulars Dr. (Rs.) Cr. (Rs.) JOURNAL ENTRY 2: Cash Account Dr. 10,000 To Wye Ltd. Cr. 10,000 (Amount reimbursed by Wye Ltd. For expense) 66

67 Solution: (Cont ) STEP 6: Liabilities not assumed by the purchasing company, have to be paid off Particulars Dr. (Rs.) Cr. (Rs.) JOURNAL ENTRY 1: Interest Outstanding Dr. 12,000 To Debenture holders Account Cr. 12,000 (Amount due to debenture holders for Debentures Interest) Particulars Dr. (Rs.) Cr. (Rs.) JOURNAL ENTRY 2: Debenture holders Dr. 12,000 To Cash Account Cr. 12,000 (Debenture holders paid cash Rs. 12,000 for outstanding amount ) 67

68 Solution: (Cont ) STEP 7: Credit Preference shareholders with the amount payable to them.. Debit Preference share capital with the amount shown in the books Transfer the difference between the two, if any, to the Realization Account Particulars Dr. (Rs.) Cr. (Rs.) 6% Preference share Capital A/c Dr. 4,00,000 Realization A/c Dr. 40,000 To Preference shareholders A/c Cr. 4,40,000 The amount due to preference shareholders for capital and the extra amount payable under the scheme of absorption STEP 8: Pay off preference share holders: Particulars Dr. (Rs.) Cr. (Rs.) Preference shareholders A/c Dr. 4,40,000 To Cash Cr. 40,000 To 9% Preference shares in Wye Ltd. Cr. 4,00,000 The amount due to preference shareholders for capital and the extra amount payable under the scheme of absorption 68

69 Solution: (Cont ) STEP 9: Amount receivable by Equity share holders Transfer equity share capital and account representing profit and loss (including balance in the Realization account) to Equity shareholders Account.. This will determine the amount receivable by the equity shareholders of Z Ltd. Particulars Dr. (Rs.) Cr. (Rs.) Equity share Capital A/c Dr. 8,00,000 Capital Reserve A/c Dr. 1,00,000 Profit & Loss A/c Dr. 50,000 Workmen s Compensation Reserve A/c Dr. 3,000 Realization A/c Dr. 4,22,500 ** To Equity shareholders of Z Ltd. A/c Cr. 13,35,500 To Underwriting commission A/c Cr. 40,000 Various accounts representing capital and profit transferred to equity shareholders account 69

70 Solution: (Cont ) Realization Account will appear as follows: Dr. Amount Cr. Amount To Sundry Assets (Step 1) 15,80,000 By Sundry liabilities (Step 2) 3,25,000 To Cash (excess expense of liquidation) (Step 5) 2,500 By Wye Ltd. (Step 3) 17,20,000 To Preference shareholders (Step 7) 40,000 To Equity shareholders A/c PROFIT TRANSFERRED (Bal Fig.) 4,22,500 ** 20,45,000 20,45,000 70

71 Solution: (Cont ) Equity Shareholder's Account will appear as follows: Dr. Amount Cr. Amount By Equity Shareholder s of Z To Equity shares in Wye Ltd. 11,20,000 ltd. (Step 9) 13,35,500 To Cash 2,15,500 13,35,500 13,35,500 71

72 Solution: (Cont ) Cash Account will appear as follows: Dr. Amount Cr. Amount To Equity Shareholder s account 2,15,500 By Opening Balance 70,000 To Preference Shareholder s account (Step 8) 40,000 By Wye Ltd. (Step 4) 2,00,000 To Realization A/c (Step 5) 2,500 By Wye Ltd. (Step 5) 10,000 To Liquidation expenses (Step 5) 10,000 To Debentureholders (Step 6) 12,000 2,80,000 2,80,000 72

73 Agenda Introduction Definitions Types of Amalgamation Amalgamation in the Nature of Merger Amalgamation in the Nature of Purchase Methods of accounting for Amalgamations Pooling of Interest Method Purchase Method Consideration for Amalgamation Amortization of Goodwill Illustration 1 : Calculation of Purchase Consideration Illustration 2 : Journal entries in the books of the Transferee Co. Illustration 3: Journal entries in the books of the Transferor / Vendor Co. Disclosures 73

74 Disclosures BOTH NATURES OF AMALGAMATION Names and general nature of business of the amalgamating companies Effective date of amalgamation for accounting purposes The method of accounting used to reflect the amalgamation; and Particulars of the scheme sanctioned under a statute 74

75 Disclosures (Cont ) Pooling of Interests method Description and number of shares issued The amount of any difference between the consideration and value of net assets acquired Purchase method Description of the consideration paid or payable Any difference between the consideration and value of net assets acquired 75

76 Disclosures (Cont ) Amalgamation after the Balance Sheet Date When an amalgamation is effected after the balance sheet date but before the issuance of the financial statements of either party to the amalgamation, disclosure should be made in accordance with AS 4, Contingencies and Events Occurring After the Balance Sheet Date But the amalgamation should not be incorporated in the financial statements. In certain circumstances, the amalgamation may also provide additional information affecting the financial statements themselves. for instance, by allowing the going concern assumption to be maintained. 76

77 Thank You 77

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