ACCOUNTING STANDARD- 14

ACCOUNTING FOR AMALGAMATIONS

Submitted by Group 5, Section C PGPM 2012-14

AMALGAMATION
Amalgamation is the act of merging many things into one. In business, it often refers to the mergers and acquisitions of many smaller companies into much larger ones. There are two types of Amalgamations : Nature of Merger Nature of Purchase Accounting Standard 14 deals with accounting for amalgamations, and treatment of any resultant goodwill or reserves. It does not deal with acquisition by one company of another company in consideration for payment in cash or by issue of shares.

TRANSFEROR, TRANSFEREE AND RESERVE

Transferor company means the company which is amalgamated into another company. Transferee company means the company into which a transferor company is amalgamated. Reserve means 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.

TYPES OF AMALGAMATION
Amalgamation in the nature of merger is an amalgamation which satisfies all the following conditions.
(i) All the assets and liabilities are transferred.

(ii) Shareholders holding not less than 90% of the face value of the equity shares of the transferor company become shareholders of transferee company. (iii) The consideration is discharged by the issue of equity shares in the transferee company. (iv) The business of the Transferor Company is intended to be carried on.

(v) No adjustment to be made to the book values of the assets and liabilities.

Amalgamation in the nature of purchase is an amalgamation which does not satisfy any one or more of the above conditions.

METHODS OF ACCOUNTING FOR AMALGAMATIONS

There are two main methods of accounting for amalgamations:
(a) the pooling of interests method - amalgamation in the nature of merger (b) the purchase method - amalgamations in the nature of purchase

POOLING OF INTERESTS METHOD

o

The assets, liabilities and reserves are recorded at their existing carrying amounts.

Uniform set of accounting policies is adopted.

The difference between the share capital issued and the share capital of the transferor company should be adjusted in reserves.

PURCHASE METHOD
o

The assets & liabilities are recorded either at existing carrying values or by allocating the consideration on the basis of Fair values on the date of amalgamation.

The reserves of the transferor company, other than the statutory reserves, should not be included in the financial statements of the transferee company.

The consideration for the amalgamation may consist of securities, cash or other assets. In determining the value of the consideration, an assessment is made of the fair value of its elements.

TREATMENT OF RESERVES ON AMALGAMATION

In 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. In amalgamation in the nature of purchase, the identity of the reserves is not preserved. The amount of the consideration is deducted from the value of the net assets of the transferor company acquired by the transferee company.

IfConsideration > Net Asset Value Dr to Goodwill Consideration < Net Asset Value Cr to Capital Reserve

TREATMENT OF GOODWILL ARISING ON AMALGAMATION

Goodwill arising on amalgamation represents a payment made in anticipation of future income and it is appropriate to treat it as an asset to be amortised to income over a period not exceeding five years unless a somewhat longer period can be justified.

BALANCE OF PROFIT AND LOSS ACCOUNT

In the case of an amalgamation in the nature of merger, the balance of the Profit and Loss Account is aggregated with the corresponding balance appearing in the financial statements of the transferee company. Alternatively, it is transferred to the General Reserve, if any. In the case of an amalgamation in the nature of purchase, the balance of the Profit and Loss Account appearing in the financial statements of the transferor company, whether debit or credit, loses its identity.

DISCLOSURES
First year For 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.

From second year Pooling of Interests method

description and number of shares issued, the amount of any difference between the consideration and the value of net assets acquired

Purchase method

a description of the consideration paid or payable; any difference between the consideration and the value of net assets acquired.

AS 14 VERSUS IND AS 103 BUSINESS COMBINATIONS

Ind AS 103 defines business combination with a wider scope whereas the AS 14 deals only with amalgamation. Under AS 14, there are two methods of accounting for amalgamation. The Ind AS 103 prescribes only the acquisition method for each business combination. Under AS 14, the acquired assets and liabilities are recognised at their existing book values or at fair values under the purchase method. The Ind AS 103 requires the acquired identifiable assets liabilities and non-controlling interest to be recognised at fair value under acquisition method. Ind AS 103 requires that for each business combination, the acquirer shall measure any non-controlling interest in the acquiree either at fair value or at the non-controlling interests proportionate share of the acquirees identifiable net assets. On other hand, the existing AS 14 states that the minority interest is the amount of equity attributable to minorities at the date on which investment in a subsidiary is made and it is shown outside shareholders equity. Under Ind AS 103, the goodwill is not amortised but tested for impairment on annual basis in accordance with Ind AS 36. AS 14 requires that the goodwill arising on amalgamation is amortised over a period not exceeding five years. Ind AS 103 deals with reverse acquisitions whereas the existing AS 14 doesnt deal with the same. In Ind AS 103, the consideration the acquirer transfers in exchange for the acquiree includes any asset or liability resulting from a contingent consideration arrangement. The existing AS 14 does not provide specific guidance on this aspect. Ind AS 103 requires the recognition of gain on bargain purchase, being the excess of the value of net assets acquired over the consideration for acquisition in profit or loss on acquisition date after reassessing the identification and measurement of the assets acquired. The existing AS 14 does not require the reassessment. The excess amount is treated as capital reserve.

IND AS 103 VERSUS IFRS 3 BUSINESS COMBINATIONS

IFRS 3 excludes from its scope business combinations of entities under common control. Ind AS 103 (Appendix C) gives the guidance in this regard. IFRS 3 requires bargain purchase gain arising on business combination to be recognised in profit or loss. Ind AS 103 requires the same to be recognised in other comprehensive income and accumulated in equity as capital reserve, unless there is no clear evidence for the underlying reason for classification of the business combination as a bargain purchase, in which case, it shall be recognised directly in equity as capital reserve.

THANK YOU

Members: Apoorva Dave (12P133) Lucky Sharma (12P145) Manav Gupta (12P146) Manoj Kapoor (12P147) Mayank Bathla (12P149) Mayank Sharma (12P150)