Meaning of Amalgamation:-
Amalgamation means where two or more companies are merged to form a single entity.
Example: – Company X and Company Y merge to form Company Z. This is called as amalgamation. Here, company X and company Y are called transferor companies and company Z is called as transferee company. In addition to this, transferor company is also called as vendor company and transferee company is also called as vendee company.
Absorption:- When company takes over the other by outright purchase.
Example: – Company X taken over [purchased] by company Y. This is called as absorption. Here, Company X is called as transferor company and company Y is called as transferee company.
External Reconstruction:- When new company is formed to take over the business of an existing company which is wound-up.
Example: – Company Y is formed to take over the business of X. This is called as external reconstruction.
Note: – External reconstruction can be seen where company has been suffering from losses for past years.
Differences among Amalgamation, Absorption and External Reconstruction:-
| Sr. No. | Basis | Amalgamation | Absorption | External Reconstruction |
|---|---|---|---|---|
| 1. | Meaning | When two or more companies are combined to form a new company or entity. Old companies are wound up. | When one existing company takes over the business of another existing company. Old company is wound up and the new company will continue in business. | When new company is formed to take over the business of an existing company. One company takes over the business of an existing loss making company. |
| 2. | Example | X Company + Y Company = Z Company [New Company]. | X company taken over by Y company Y company will continue in business. | Y company is formed to take over the business of X. |
| 3. | Minimum number of companies required | At least three. | At least two. | only two. |
| 4. | Result | One company is formed, two companies are wound up. | No new company is formed. | New company is formed to take over business of existing. |
| 5. | Reason | Eliminate competition/Economies of large scale operations. | Eliminate competition/Economies of large scale operations. | Reorganize the financial structure of the company. |
Types of Amalgamation:- As per AS 14, there are two types of amalgamation.
- Amalgamation in the nature of merger: – Amalgamation which satisfies the following conditions is called as ‘amalgamation in the nature of merger‘.
- After amalgamation, all the assets and liabilities of transferor company become the assets and liabilities of the transferee company.
- Shareholders holding not less than 90% of the face value of the equity shares of the transferor company (other than the equity shares already held by the transferee company or its subsidiaries or their nominees immediately before the amalgamation) become equity shareholders of the transferee company by virtue of the amalgamation.
- 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.
- After the amalgamation, the intention of the transferee company is to be carried on the business of the transferor company.
- No adjustment 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.
- Amalgamation in the nature of purchase: – Amalgamation which doesn’t satisfy one one or more of the above conditions, then, such amalgamation is called as amalgamation in the nature of purchase.
Difference between amalgamation in the nature of merger and amalgamation in the nature of purchase
| Basis | Amalgamation in the nature of Merger | Amalgamation in the Nature of Purchase |
|---|---|---|
| Transfer of Assets & Liabilities | All the assets and liabilities are to be transferred by transferor company to transferee company. | No need to transfer all the assets & liabilities. |
| Shareholders | Equity shareholders holding at least 90% equity shares in transferor company become shareholders of the transferee company. | Equity shareholders of transferor company need not become shareholders of the transferee company. |
| Same business | The transferee company is intended to be carried on the same business of transferor company. | The transferee company need not be intended to be carried on the business of the transferor company. |
| Purchase consideration | PC is discharged wholly by issue of equity shares. | PC need not be discharged wholly by issue of equity shares. |
| Recording of Assets & Liabilities | At net cost as reflected in a company’s book. [except where adjustment is required to bring uniformity]. | At net cost or fair values. |
| Method of Accounting | Pooling of interest method. | Purchase method. |
Methods of calculating Purchase Consideration: – these are the following methods to compute purchase consideration: –
- Lumpsum method:– as the name suggests, in this method, the transferee company agrees to pay a fixed/lumpsum amount to shareholders of the transferor company.
- Net payment method: – under this method, the transferee company makes payments to the equity and preference shareholders.
- Net asset method: – in this method, purchase consideration is calculated by subtracting the outside liabilities [except share capital and reserves] from the value of assets taken over by the transferee company [book value/agreed value].
- Intrinsic value: – Under this method, purchase consideration is calculated at the intrinsic value of shares.