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Similar to Unit 2 - Introduction to Amalgamation & Absorption.pdf
Unit 2 - Introduction to Amalgamation & Absorption.pdf
- 1. Unit 2 BusinessCombination I - Amalgamation
- 2. Meaning of Amalgamation Amalgamationis a combination of two or more companies into a new entity. When two or more existing companies liquidate and jointly form a new company, it is called as Amalgamation.
- 4. Amalgamation…. There are twocompanies involved in the process of Amalgamation namely: 1. Transferor company 2. Transferee company Transferor company: Company which is amalgamated into another company Transferee company: Company into which a transferor company is amalgamated.
- 5. • Transferor Company→ The company that gives (transfers) its assets, liabilities, and business to another company. It ceases to exist afterward. • Transferee Company → The company that receives the assets, liabilities, and business of the transferor company. It continues after the process. If Company A merges into Company B: • Transferor: Company A • Transferee: Company B
- 6. Absorption - Meaning Absorptionrefers to the purchase of an existing company or companies by another existing company. In this case no new company is been formed or floated.
- 7. Difference b/w Amalgamation& Absorption
- 8. Difference b/w Amalgamation& Absorption BASIS Amalgamation Absorption Meaning Two or more different companies join to become one, the process is called Amalgamation. When one company takes over the business of another company, the process is called Absorption. New entity The new entity is formed. No new entity is formed. Liquidating companies At least two companies liquidate. Only one company is liquidated (whose business is overtaken by the other). Domination No company dominates any other company. The bigger company dominates the weaker company.
- 10. Types of Amalgamation Accordingto Accounting Standard 14 issued by ICAI amalgamation are of two types: Amalgamation in the nature of Merger Amalgamation in the nature of Purchase.
- 11. Amalgamation in thenature of Merger 1. All the assets and liabilities of the transferor company, after amalgamation becomes the assets and liabilities of the transferee company 2. Shareholders holding 90% of the face value of the equity shares of the transferor company become equity shareholders of the transferee company by virtue of amalgamation. 3. The business of the transferor company is intended to be carried out after amalgamation by the transferee company. 4. No adjustment is to be made to the book value 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. 5. 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.
- 12. Amalgamation in thenature of Purchase 1. All the assets and liabilities of the transferor company, after amalgamation doesn't become the assets and liabilities of the transferee company. 2. Shareholders holding 90% of the face value of the equity shares of the transferor company doesn’t become equity shareholders of the transferee company by virtue of amalgamation. 3. The transferee company is not intended to carry out the business of the transferor company after amalgamation. 4. The assets and liabilities of the transferor company is incorporated in the books of transferee company at adjusted values. 5. The consideration for amalgamation is given by the transferee company in the form of cash, debentures etc.. With or without equity shares of the transferee company.
- 13. • Meta, purchasedWhatsApp in 2014- The deal involved a combination of cash, stock, and restricted shares, totaling $19 billion. Amalgamation in the nature of Purchase- Example Assets $ bn Liabilities $ bn Servers & infra 1.0 Accounts Payable 0.2 Brand & goodwill 16.0 Debt 0.3 User base value 2.5 Cash 0.5 Total 20.0 Total 0.5 Net Assets = 20.0 − 0.5 = $19.5 bn Purchase Consideration = $19 bn (Meta shares + some cash)
- 14. ACCOUNTING FOR AMALGAMATION Thereare two methods of accounting for amalgamation that is: Pooling of Interest method Purchase method Note: Pooling method is adopted when the amalgamation is in the nature of merger. Purchase method is adopted when amalgamation is in the nature of Purchase
- 15. Difference between poolingand purchase method Pooling of Interest method Purchase method All the assets and liabilities of the transferor company will be incorporated in the books of transferee company Only assets and liabilities taken over by transferee company, will be incorporated in its books All reserves of transferor company will be recorded in the books of transferee company. Other than statutory reserve no other reserves of the transferor company will be recorded in the books of transferee company. The assets and liabilities will be recorded at book value unless any adjustment is required. The assets and liabilities will be recorded at Agreed value Any difference between purchase consideration and value of asset and liabilities taken over must be adjusted against General reserves. Any difference between purchase consideration and value of asset and liabilities taken over must be treated as goodwill or capital reserve
- 16. Steps involved inaccounting procedure for Amalgamation Step 1: Calculation of Purchase Consideration. Step 2: Discharge of Purchase Consideration. Step 3: Closing the books of Vendor or transferor companies. Step 4: Opening entries in the books of Transferee company.
- 17. Purchase Consideration Purchase considerationis the agreed amount which transferee company (Purchasing company) pays to the transferor company (Vendor company) in exchange of the ownership of the transferor company. It may be in form of cash, shares or any other assets as agreed between both the companies.
- 18. Methods of calculatingPC 1. Lump Sum Method 2. Net Worth or Net Assets Method 3. Net Payment Method 4. Other basis for purchase consideration Intrinsic value Exchange ratio
- 19. 1. Lump summethod In this method when Transferee Company agrees to pay Transferor Company a fixed sum of money. Ex: ABC limited agrees to pay XYZ ltd 50 lakh. This is lump sum method.
- 20. 2. Net PaymentMethod In this method purchase consideration is calculated by adding all the payments made by the transferee company to the shareholders of the transferor company. Payment can be in the form of cash, shares or debentures. Note: Value of assets and liabilities taken over by the transferee company are not to be consider Liquidation expenses paid by the transferee company should not consider Amount paid to third party by the transferee company should not consider
- 21. Net Payment Method •Thepurchase consideration is simply the total agreed payment made to the shareholders of the transferor company, regardless of the assets and liabilities taken over. •“How much are we paying to the shareholders of the old company in total?”
- 22. 3. Net Assetmethod Under this method the net asset value is calculated by deducting all the liabilities taken over by the transferee company from the entire asset taken by the transferee company Note: Assets and liabilities are taken over at agreed values PC = Asset taken over – Liability taken over
- 23. 4. Other methodsof PC Intrinsic Value method Exchange ratio method