Key takeaways:
- Distinguish clearly between merger and amalgamation, and understand their implications for corporate entities.
- Comprehend the two fundamental accounting methods under AS-14: pooling of interest and purchase method.
- Apply practical knowledge through journal entries and real-world amalgamation cases.
Source: Pixabay
Merger and Amalgamation: Definitions and Differences
a. Definitions
Merger refers to the absorption of one or more companies by another existing company. In a merger, only one company survives, while the other(s) cease to exist. Amalgamation, on the other hand, involves the combination of two or more companies to form a new entity; all participating companies dissolve, and a new company emerges in their place.
b. Differences
| Basis | Merger | Amalgamation |
|---|---|---|
| Survival | One company survives | All combine into a new company |
| Legal Identity | Absorbed company ceases | All old companies cease; new company forms |
| Objective | Expansion, synergy | Creation of a new entity |
| Accounting Standard | AS-14 applies | AS-14 applies |
Accounting Standard (AS-14): Methods of Accounting for Amalgamations
a. Pooling of Interest Method
This method is used when the amalgamation is in the nature of a genuine merger. The assets, liabilities, and reserves of the combining companies are recorded at their existing carrying amounts. No adjustment for fair values is made. The identity of the reserves is preserved, reflecting continuity rather than acquisition. Goodwill or capital reserve doesn't arise unless there is a difference between the purchase consideration and the net assets acquired.
b. Purchase Method
Used for amalgamations in the nature of purchase. Assets and liabilities of the acquired company are recorded at their fair values. Existing reserves (except statutory reserves) are not carried forward. The difference between the purchase consideration and the net assets taken over is recognized as goodwill (if consideration exceeds net assets) or capital reserve (if net assets exceed consideration).
Treatment of Reserves, Goodwill, and Capital Reserve
a. Pooling of Interest Method
- Reserves: All reserves (general, statutory, etc.) are preserved and shown in the books of the new or surviving company.
- Goodwill/Capital Reserve: Only arises if there's a difference between consideration paid and net assets acquired, but typically minimal as assets are taken at book value.
b. Purchase Method
- Reserves: Only statutory reserves are carried forward as per legal requirements; all other reserves are ignored.
- Goodwill: Recorded if purchase consideration exceeds net assets.
- Capital Reserve: Recorded if net assets exceed purchase consideration.
Example: Journal Entries under Both Methods
a. Scenario
Company X Ltd. acquires Company Y Ltd. Net assets of Y Ltd. are ₹500,000. Purchase consideration paid is ₹520,000.
b. Pooling of Interest Method
- All assets and liabilities of Y Ltd. are taken at book value.
- The difference of ₹20,000 (₹520,000 - ₹500,000) is treated as goodwill.
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| xx/xx/xxxx | Assets (taken over) A/c Dr. Goodwill A/c Dr. | 500,000 20,000 | |
| To Liabilities (taken over) A/c To Y Ltd. (Purchase Consideration) | xxx 520,000 | ||
| Reserves (General/Statutory) A/c Dr. To Respective Reserve A/cs (as required) | xxx | xxx |
c. Purchase Method
- Assets and liabilities are taken at fair value.
- Only statutory reserves are carried forward.
- Goodwill of ₹20,000 is recognized.
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| xx/xx/xxxx | Assets (at fair value) A/c Dr. Goodwill A/c Dr. | 500,000 20,000 | |
| To Liabilities (at fair value) A/c To Y Ltd. (Purchase Consideration) | xxx 520,000 | ||
| Statutory Reserve A/c Dr. To Amalgamation Adjustment A/c | xxx | xxx |
Case Note: Amalgamation of Banks in India
Practical Link
India has witnessed several large-scale bank amalgamations in recent years, such as the merger of State Bank of India with its associate banks and the amalgamation of multiple public sector banks since 2019. These transactions typically follow the purchase method, with assets and liabilities valued at fair value and only statutory reserves carried forward. The aim is to enhance financial stability, consolidate resources, and improve operational efficiency. Such cases offer valuable lessons in the practical complexities of amalgamation accounting, especially regarding regulatory compliance and treatment of reserves.