Amalgamation,
Absorption, and External
Reconstruction
By
Dr. T.Mohan,M.Com CS., M.Phil., Ph.D.,
Assistant Professor,
Department of Corporate Secretaryship,
Sri Ramakrishna College of Arts & Science (Autonomous
Avinashi Road, Nava India ,
Coimbatore – 641 006.
Amalgamation, Absorption, and
External Reconstruction
These concepts are essential in corporate
restructuring and are governed by
Accounting Standard-14 (AS-14) in
India, focusing on accounting for
amalgamations and treatment of goodwill or
reserves.
Amalgamation
Amalgamation refers to the merger of two or more companies into a
single entity. The merging companies cease to exist, and a new
company is formed.
Types of Amalgamation:
Amalgamation in the Nature of Merger:
Assets and liabilities are pooled without significant adjustments.
Example: Merger of banks like SBI and its associates.
Amalgamation in the Nature of Purchase:
One company acquires another’s assets and liabilities at agreed
values.
Example: Acquisition of Flipkart by Walmart.
Accounting Treatment:
Pooling of Interest Method (used for mergers).
Absorption
Absorption occurs when one company takes over
another, and the absorbed company ceases to exist.
The purchasing company does not form a new entity.
Example:
Reliance Industries Limited absorbing Reliance
Petroleum Limited
External Reconstruction
In external reconstruction, an existing company
transfers its business to a newly formed company.
The old company is liquidated, and a new company
is formed to take over its operations.
Example:
A financially distressed company restructures by
forming a new entity to carry forward its business.
Purchase Consideration
Purchase consideration refers to the amount paid by
the purchasing company to the vendor company for
acquiring its business.
Methods to Calculate Purchase Consideration:
Lump Sum Payment: A single agreed amount.
Net Assets Method:
Purchase Consideration = Total Assets – Liabilities.
Net Payment Method: Sum of payments made to
shareholders (cash, shares, debentures).
Intrinsic Value Method: Based on the net worth per
share.
Methods of Accounting for
Amalgamation
a. Pooling of Interest Method:
Applicable for amalgamation in the nature of merger.
Assets, liabilities, and reserves of the transferor
company are recorded at book values in the
transferee company.
b. Purchase Method:
Applicable for amalgamation in the nature of
purchase.
Assets and liabilities are recorded at their agreed
values.
Journal Entries in the Books of the Purchasing
Company
Step 1: For Purchase of Business
plaintext
Copy code
Business Purchase A/c Dr
To Liquidator of Vendor Company A/c
(Being business purchase account debited for purchase consideration)
Step 2: For Assets and Liabilities Taken Over
plaintext
Copy code
Assets A/c Dr
To Liabilities A/cTo Business Purchase A/c
To Capital Reserve A/c (if any)
(Being assets and liabilities taken over at agreed values and balancing figure credited to capital reserve/goodwill)
Step 3: Payment of Purchase Consideration
plaintext
Copy code
Liquidator of Vendor Company A/c Dr
To Bank A/c
To Equity Share Capital A/c
To Debenture A/c
Key Differences
Thank you
