Chapter-4 Amalgamation of firm.

1.what is amalgamation of firm?

Answer: Amalgamation of firms refers to the process in which two or more firms combine to form a new
entity, typically with the aim of achieving certain benefits like greater market share, improved efficiency,
or enhanced competitiveness. This process involves the merging of resources, assets, and liabilities, and
results in the dissolution of the original firms, which no longer exist as independent entities.

There are two primary types of amalgamation:

1. Amalgamation in the nature of merger: This occurs when two or more firms combine to form a
new firm, and the shareholders of the merging firms receive shares in the new firm in exchange
for their existing shares.
2. Amalgamation in the nature of consolidation: This involves the creation of a completely new
firm, where the existing firms lose their identity and are absorbed into the new entity, often
with new ownership structures.

2. what is meant by absorption?

Answer: Absorption refers to the process where one company takes over another company and absorbs
its operations, assets, liabilities, and employees, while the acquired company ceases to exist as a
separate legal entity. In other words, the absorbed company is integrated into the absorbing company,
and only the absorbing company continues to exist after the transaction.

3. what is meant by acquisition?

Answer: Acquisition refers to the process in which one company (the acquirer) buys the controlling
interest or full ownership of another company (the target). In an acquisition, the acquiring company
purchases the assets, shares, or controlling stake of the target company, which may continue to operate
independently or may be absorbed into the acquiring company, depending on the nature of the
acquisition.

4. what is amalgamation In the nature of merger.

Answer: Amalgamation in the nature of merger is a type of business combination where two or more
companies combine to form a new company. In this form of amalgamation, the merging companies
effectively cease to exist as separate legal entities, and shareholders of those companies receive shares
in the new company based on an agreed exchange ratio.

Here are the key features of amalgamation in the nature of merger:

1. Formation of a New Company: The merging companies are dissolved, and a new company is
formed. This new company takes on the combined assets, liabilities, and operations of the
merged companies.
 2. Share Exchange: The shareholders of the merging companies receive shares in the newly
formed company in proportion to their holdings in the original companies. The exchange ratio is
typically agreed upon based on the relative values of the merging companies.
3. Absence of Control: In an amalgamation in the nature of merger, no single company emerges as
the dominant entity. Instead, the combining companies are seen as equal partners, with no one
company maintaining control over the new entity.

5. what is amalgamation in the nature of purchase.

Answer: Amalgamation in the nature of purchase is a type of business combination where one
company (the acquirer) purchases the assets and liabilities of another company (the target), but the
target company itself is not dissolved. Instead, it continues to exist as a separate legal entity, and the
purchasing company acquires control over its assets, operations, and sometimes its shares.

Here are the key features of amalgamation in the nature of purchase:

1. Acquisition of Assets and Liabilities: In this form of amalgamation, one company acquires the
assets, liabilities, and operations of the other company. The target company’s assets and
liabilities are transferred to the acquirer.
2. Target Company Continues: Unlike in amalgamation in the nature of merger, where a new
company is formed, in the nature of purchase, the target company generally continues to exist
as a separate legal entity. The acquirer takes control of its assets and operations, but the target
company may not be immediately dissolved.

6. what is purchase consideration.

Answer: Purchase consideration refers to the total value or price paid by the acquiring company to the
target company (or its shareholders) in a business acquisition or amalgamation. It represents the
compensation given in exchange for acquiring the target company's assets, shares, or controlling
interest. This amount can be paid in various forms, including cash, shares, debentures, or other financial
instruments.

7. Name the different type of amalgamation according to AS14.

Answer: According to Accounting Standard 14 (AS 14), which deals with Amalgamation, there are two
main types of amalgamation based on the nature of the combination of the companies involved:

1. Amalgamation in the nature of a merger

2. Amalgamation in the nature of a purchase
8. what is meant by consideration amalgamation as per AS14.

Answer: Consideration for amalgamation, as per Accounting Standard 14 (AS 14), refers to the total
value or price paid by one company (the acquirer) to another company (the target) in the process of an
amalgamation. It represents the compensation or exchange made by the acquirer in return for the
assets, liabilities, and shares of the target company.

Types of Consideration in Amalgamation (AS 14):

1. Shares: The acquiring company may issue its own shares to the shareholders of the target
company as the consideration for the amalgamation. The exchange ratio is typically based on
the agreed valuation of both companies and their respective shareholding.
2. Cash: The acquiring company may pay cash to the shareholders of the target company, either as
a lump sum or in installments, in exchange for their shares or assets.
3. Other Securities: The acquirer may offer other financial instruments such as debentures or
bonds instead of cash or shares.
4. Combination of the Above: The consideration may be a mix of cash, shares, and other securities
depending on the agreement between the companies involved.

Key Points about Consideration in Amalgamation (AS 14):

1. Consideration is Essential: The consideration is a critical part of the amalgamation process and
helps in determining how the amalgamation is accounted for (whether it's in the nature of a
merger or a purchase).
2. Valuation of Consideration:
o In an amalgamation in the nature of a merger, the consideration is generally not
monetarily significant (i.e., no purchase price or goodwill arises). Instead, it’s often a
share exchange based on an agreed ratio.
o In an amalgamation in the nature of a purchase, the consideration typically reflects the
purchase price for the assets or shares of the target company, and this may result in the
recognition of goodwill if the purchase price exceeds the fair value of the acquired
assets.
3. Accounting Treatment: The accounting treatment of the consideration differs based on the
nature of the amalgamation. In the case of a purchase, the acquirer records the purchase
consideration and may recognize goodwill if the price paid exceeds the fair value of the acquired
assets. In a merger, the consideration is generally recorded as a share exchange, and no
goodwill is created.

Importance of Consideration: The consideration paid affects the financial reporting and how the
transaction is reflected in the books of accounts. It determines how the assets and liabilities of the
target company are recognized, and whether goodwill or reserves are created.
9. Distinguish between amalgamation in the nature of merger and amalgamation in the nature of
purchase.

Answer: following are the difference.

Basis Amalgamation in the nature of merger Amalgamation in the nature of

purchase.

Formation of A new company is formed, and both The acquiring company continues to
New Entity merging companies cease to exist. exist, and the target may or may not
continue as a separate entity.

Control No company maintains control; both The acquiring company gains control
merging companies combine on an equal over the target company.
basis.

Shareholders' Shareholders of the merging companies Shareholders of the target company may
Position receive shares in the new company in receive cash, shares, or other securities,
proportion to their existing holdings. or may be bought out.
Goodwill Generally, no goodwill is recognized. Goodwill may arise if the purchase
price exceeds the fair value of the
acquired assets.
Nature of Assets Assets and liabilities of the merging Assets and liabilities of the acquired
and Liabilities companies are combined at book value. company are transferred at fair value.

Accounting It is treated as a pooling of interests. No It is treated as a purchase. The acquiring

Treatment adjustment to assets and liabilities. company records the assets and
liabilities at fair value.
Legal Status of The target companies dissolve, and only The target company may continue to
Target Company the new entity exists. exist as a subsidiary or be absorbed into
the acquirer.

Type of It is a merger of equals, where both It is a purchase transaction, where one

Transaction companies come together. company acquires another.
10. Write a note on treatment of realization expenses at the time of amalgamation in the nature of
purchase.

Answer: In the case of amalgamation in the nature of purchase (as per Accounting Standard 14), the
treatment of realization expenses refers to the costs incurred by the acquiring company in the process
of liquidating the assets of the acquired company, before they are transferred to the acquirer.

Treatment of Realization Expenses:

1. Definition of Realization Expenses: Realization expenses are the costs associated with the
disposal or transfer of the target company's assets and liabilities during the amalgamation
process. These expenses may include legal fees, accounting fees, commission for selling assets,
and other costs incurred while liquidating or transferring the assets.

2. Accounting Treatment: In an amalgamation in the nature of purchase, the acquiring company

takes control of the assets and liabilities of the acquired company. Any realization expenses
incurred during the process of transferring or liquidating the assets of the target company are
treated as part of the acquiring company's costs for the transaction. The realization expenses
are debited to the Profit and Loss Account of the acquiring company or, in some cases, directly
adjusted against the purchase consideration (if agreed). They may also be capitalized in certain
instances if they are directly related to the acquisition process.

3. Impact on Financial Statements: Realization Expenses are Charged to Profit and Loss: Since
these expenses are a part of the acquisition process, they are typically considered as operational
costs and are reflected in the Profit and Loss Account of the acquiring company. Capitalization
in Certain Cases: In some instances, when realization expenses are directly related to the
acquisition (for example, legal fees specifically for the transfer of assets), they may be
capitalized and added to the value of the acquired assets.

4. Example: If the acquiring company incurs legal and administrative costs to transfer ownership of
the target company's assets, these costs will be either recorded as an expense or capitalized as
part of the asset value (depending on the nature of the expense). The cost of disposing of any
non-essential assets during the process would be treated similarly.

5. Disclosure: The acquiring company must disclose the treatment of realization expenses in the
financial statements, especially if the expenses are capitalized or if they significantly affect the
financial results of the amalgamation.

11. Discuss the legal and accounting aspects of settlement of accounts of dissenting shareholders.

Answer; Legal Aspects of Settlement of Accounts of Dissenting Shareholders:

1. Right to Dissent: Dissenting shareholders have the right to object to the amalgamation or
merger as per the relevant company law provisions (such as Section 395 of the Companies Act,
1956 in India, or similar laws in other jurisdictions).
 2. Procedure for Dissent: Dissenting shareholders must formally object to the amalgamation in
writing to the company within a prescribed time frame.
3. Appraisal and Fair Value: If shareholders disagree with the terms, the company may appoint an
independent valuer or use an agreed-upon process to determine the fair value of the dissenting
shares. The dissenting shareholders are typically entitled to receive fair compensation for their
shares based on the valuation of their stock in the target company.
4. Court Approval: In some jurisdictions, the settlement of dissenting shareholders may need to be
approved by the court. The court’s role is to ensure that the dissenting shareholders are
compensated fairly, and that their rights are protected in line with company law regulations.
5. Payment to Dissenting Shareholders: Once the value of the shares is determined, the acquiring
company is obligated to settle the accounts of the dissenting shareholders by providing payment
or other agreed consideration. This may be in the form of cash, shares, or other forms of
compensation.

Accounting Aspects of Settlement of Accounts of Dissenting Shareholders:

1. Recognition of Liability: In accounting, when dissenting shareholders exercise their right to be

bought out, the acquiring company recognizes a liability for the purchase of the dissenting
shares. This liability is recorded on the balance sheet as a current liability or long-term liability,
depending on the terms of the settlement.
2. Fair Value of Shares: The accounting treatment of the dissenting shares requires the fair value
of the shares to be determined. This value may differ from the amount agreed upon in the
amalgamation, particularly if the dissenting shareholders feel the agreed price (e.g., share
exchange ratio or cash offer) is too low.
3. Settlement as Part of Purchase Consideration: The purchase consideration in an amalgamation
typically includes the cost of acquiring the dissenting shares. The settlement with dissenting
shareholders adds to the overall acquisition cost of the target company.
4. Impact on Goodwill: If the settlement price for the dissenting shares is higher than their fair
value, the acquiring company will recognize additional goodwill. This can happen if the amount
paid exceeds the value of the net assets acquired. Conversely, if the purchase price is lower than
the net assets acquired, it could lead to gain on bargain purchase, affecting the profit and loss
account.
5. Disclosure Requirements: The acquirer must disclose the settlement of dissenting shareholders
in the financial statements. This includes information about the amounts paid, the method of
settlement, and any impact on the purchase consideration or goodwill.

12. Describe the types and objectives of merger and amalgamation.

Answer: 1. Types of Mergers:

Mergers refer to the combination of two companies, where one company absorbs the other, resulting in
the formation of a new company or one surviving entity.

 Horizontal Merger:
o This occurs when two companies in the same industry and at the same stage of
production merge. The goal is usually to achieve economies of scale, reduce
competition, or expand market share.
o Example: A merger between two car manufacturing companies.
  Vertical Merger:
o In a vertical merger, companies from different stages of the production or supply chain
in the same industry combine. This type of merger helps to integrate operations, reduce
costs, and ensure a steady supply of raw materials or access to the market.
o Example: A merger between a car manufacturer and a parts supplier.

 Conglomerate Merger:
o This involves the combination of companies that operate in completely different
industries. It helps in diversification, reducing risk, and achieving financial growth from
multiple business sectors.
o Example: A merger between a beverage company and a technology firm.

 Reverse Merger:
o A reverse merger occurs when a smaller company merges into a larger company,
effectively making the larger company the surviving entity, even though the smaller
company is the acquirer.
o Example: A private company merges into a public company to gain access to public
capital markets.

2. Types of Amalgamations:

Amalgamation is a combination of two or more companies to form a new entity or to merge the
operations of the companies involved.

 Amalgamation in the Nature of Merger:

o In this case, two or more companies combine to form a new company, and the original
companies cease to exist. The shareholders of the merging companies receive shares in
the new company in proportion to their existing holdings.
o The companies are seen as merging on equal terms with no significant difference in size
or power.
 Amalgamation in the Nature of Purchase:
o One company acquires the assets and liabilities of another company, and the acquired
company may either be dissolved or continue as a subsidiary.
o In this case, the purchasing company pays a price (purchase consideration) for the
assets of the target company, often resulting in the recognition of goodwill in the
financial statements.

Objectives of Mergers and Amalgamations:

Mergers and amalgamations are often driven by various strategic, financial, and operational objectives
that are designed to enhance the performance of the combined companies.

1. Achieving Economies of Scale:

 By combining operations, companies can reduce per-unit costs due to the larger scale of
operations. This can help in reducing duplication of efforts and optimizing resource usage.
2. Market Share Expansion:

 Mergers and amalgamations allow companies to increase their market share by gaining access
to the customer base, brand equity, or distribution networks of the other company. This is
particularly important in competitive markets.

3. Diversification:

 Through mergers and amalgamations, companies can diversify their product offerings, markets,
or geographical reach. This reduces business risk by spreading operations across multiple sectors
or regions.

4. Enhancing Competitive Advantage:

 A merger or amalgamation can create a more powerful company that has a stronger
competitive position in the market, making it better equipped to face competitors. This can be
achieved by combining resources, technology, intellectual property, or talent.

5. Improved Financial Strength:

 The combination of companies can provide access to a larger pool of resources, including
capital, credit, and assets. This financial strength can be used for expansion, research and
development, or to weather market downturns.

6. Technology and Knowledge Acquisition:

 Mergers or amalgamations can facilitate the acquisition of new technologies or expertise that
the acquiring company may lack. This is often seen in the tech and pharmaceutical industries,
where a company might merge with a smaller entity to acquire its innovative technologies or
patents.

7. Tax Benefits:

 In some cases, amalgamations or mergers can lead to tax savings due to the ability to offset
profits with losses from the acquired company. This is often referred to as tax-efficient
structuring.

8. Reduction of Competition:

 By merging with or acquiring a competitor, a company can reduce competition in the market.
This can lead to greater pricing power and improved profitability.

13. Discuss the various methods of calculating purchase consideration.

Answer: Here are the various methods of calculating purchase consideration:

1. Cash Method (or Lump Sum Payment)

Under this method, the acquirer pays a fixed amount of cash to the shareholders of the target
company.This is the simplest method where the total purchase consideration is agreed upon,
and the entire amount is paid in cash.

 Example: If Company A acquires Company B for $10 million, the purchase consideration is $10
million in cash.

2. Share Exchange Method

In the share exchange method, the shareholders of the target company receive shares of the
acquirer in exchange for their own shares.The number of shares to be issued is determined
based on an exchange ratio, which is usually based on the relative values of the shares of both
companies.

 Example: If Company A is acquiring Company B, and the agreed exchange ratio is 1 share of
Company A for every 5 shares of Company B, then the shareholders of Company B will exchange
their shares for shares of Company A according to this ratio.

3. Combination of Cash and Shares (Mixed Consideration)

In this method, the purchase consideration is a combination of cash and equity shares in the
acquiring company.This method is often used when the acquiring company wants to preserve
some cash flow but also offer the target company's shareholders an ownership stake in the new
or combined entity.

 Example: Company A might offer $5 million in cash and 100,000 shares of its own stock as the
total purchase consideration for acquiring Company B.

4. Debt Instruments or Debentures Method

Instead of offering cash or shares, the acquiring company may issue debt instruments (such as
debentures or bonds) as the purchase consideration.The value of the debt instruments is
determined by the agreed amount in the acquisition.

 Example: Company A might issue debentures worth $10 million to Company B's shareholders as
the purchase consideration.

5. Net Asset Value (or Asset-based) Method

In some cases, the purchase consideration is determined based on the net asset value (NAV) of
the target company. The net asset value is the difference between the total assets and total
liabilities of the target company at the time of the acquisition.The NAV method may be used if
the acquiring company wants to pay for the net value of the target company’s tangible assets
and liabilities, ignoring goodwill and other intangible assets.
  Example: If Company B has assets worth $20 million and liabilities of $5 million, the net asset
value is $15 million. Company A may decide to pay $15 million as purchase consideration.

14. Explain the accounting treatment for amalgamation in the nature of merger and amalgamation in
the nature of purchase.

Answer; 1. Amalgamation in the Nature of Merger:

In an amalgamation in the nature of a merger, two or more companies combine to form a new entity,
or one company absorbs the other, and the original companies cease to exist. This type of
amalgamation is generally seen as a merger of equals.

Key Characteristics:

 Both companies (the acquirer and the target) generally continue as equals in terms of size and
operations.
 The assets and liabilities of the combining companies are recorded at book value.
 There is no recognition of goodwill or any other intangible assets arising from the transaction.
 The shareholders of the merging companies receive shares in the new company (if a new
company is formed) or in the surviving company.

Accounting Treatment:

1. Pooling of Interests Method:

o Under the pooling of interests method, no adjustment is made to the book values of the
assets and liabilities.
o The combined entity’s balance sheet reflects the book values of assets and liabilities of
the amalgamating companies.
o Shareholders of both companies are issued shares in the new or surviving company in
proportion to their holdings.
o No goodwill is recognized since it is assumed that the merging companies are of equal
standing.
o Retained earnings of the combining companies are also carried forward to the new
company’s balance sheet.

2. Treatment of Assets and Liabilities:

o The assets and liabilities of the transferor company (target company) are transferred at
book value to the transferee company (acquirer or new company).
o There is no revaluation of assets or liabilities.
o The equity accounts (such as share capital, reserves, and retained earnings) of the
merging companies are consolidated and transferred into the new entity.

3. Treatment of Shareholders:
o Shareholders of both merging companies receive shares in the new company in
proportion to their existing holdings.
o In case of a share swap, the share exchange ratio is based on the relative net worth of
the companies involved.
 4. Disclosures:
o The financial statements must disclose the names of the amalgamating companies, the
method of amalgamation, the accounting treatment used, and the impact on financial
statements.

2. Amalgamation in the Nature of Purchase:

In an amalgamation in the nature of a purchase, one company acquires the assets and liabilities of
another, and the target company may either cease to exist or continue as a subsidiary of the acquiring
company. This method is commonly used when one company gains control over another and treats the
transaction as a purchase rather than a merger.

Key Characteristics:

 One company (the acquirer) gains control over the other company (the target).
 The assets and liabilities of the target company are recorded at fair value (i.e., at the acquisition
date value, not at book value).
 Goodwill is recognized if the purchase price exceeds the fair value of the assets and liabilities
acquired.
 The acquiring company may issue shares, pay cash, or use other forms of consideration to settle
the purchase.

Accounting Treatment:

1. Purchase Method:
o Under the purchase method, the acquirer records the assets and liabilities of the
acquired company at their fair values as of the acquisition date.
o The purchase consideration (price paid by the acquirer) is allocated to the assets and
liabilities of the acquired company based on their fair values.

2. Recognition of Goodwill:
o If the purchase price exceeds the fair value of the assets acquired and liabilities
assumed, the difference is recognized as goodwill.
o Goodwill is recorded as an intangible asset on the acquirer’s balance sheet and is
subject to impairment testing but not amortized (as per current accounting standards
like IFRS and AS 14).
o If the purchase price is lower than the fair value of net assets acquired, the acquirer
records a gain on bargain purchase.

3. Treatment of Purchase Consideration:

o The total purchase consideration (cash, shares, or other financial instruments) is
allocated to the assets acquired and liabilities assumed.
o The acquirer records a liability for the purchase consideration payable to the target
company.
 o Contingent consideration (e.g., earn-outs or future payments) may also be included in
the purchase consideration and accounted for based on the likelihood of being paid.

4. Treatment of Reserves and Surplus:

o The reserves and surplus of the target company are not transferred to the acquirer’s
balance sheet unless there is an agreement to that effect.
o The acquirer’s balance sheet reflects only its own reserves, and the target company’s
reserves are not carried forward.

5. Disclosures:
o The financial statements must provide detailed disclosures about the purchase
consideration, goodwill or gain on bargain purchase, the fair values of assets and
liabilities acquired, and the purchase date.
o The acquirer should also disclose the impact on consolidated earnings (if applicable)
and any adjustments to the fair value of assets or liabilities.