1. Absorption is a form of merger where there is a combination of two or more companies into an 'existing company'. 2. Features - One or more companies are liquidated, Generally, larger company purchase the business of smaller company. 3. Objectives - To have control over the market, To eliminate unnecessary competition, To get benefits of large scale operations. 4. Advantages - Expansion, Faster growth, Increased efficiency. 5. Reconstruction - Internal reconstruction is a method in which the reconstruction is undertaken without winding up the company and forming a new one. External reconstruction takes place when an existing company goes into liquidation for the express purpose of selling its assets and liabilities. 6. Purchase Consideration - It is price payable by transferee company to transferor company by taking over the business of transferor company. 7. Amalgamation - When two or more different companies join to become one, the process is called Amalgamation.

1. Absorption of Company
By - Ayush Mishra
Advanced Corporate Accounting

2. What is Absorption?
 Absorption of Company is a way of business arrangement in which
an existing company takes over the business of the another entity.
The entity who gets absorbed goes into the liquidation process. The
payment for such absorption to the old entity can be made either
in cash or in shares or mixture of both.
 The absorbed company continue to run operations as it was doing
before the absorption and staff continue to work under the new
management.

3.  For example:
 Company “A” acquires the Company “B”. So that after the
acquiring the name of Company “B” will not exist but the name
of Company “A” will exist. All the assets and liabilities of old
company (B) are transferred to absorbing company (A).
 Say P ltd. was a market leader in mobile phone manufacturing
and R ltd. was a small manufacturer of mobile phones and P ltd.
brought the whole business of R ltd., the process is that of
Absorption. As there is no new company formed, only R ltd.
liquidated and P ltd. acquired the business of R ltd.

4. Features Of Absorption
 One or more companies are liquidated.
 No new company is formed.
 The nature of business of both companies is similar.
 Generally, larger company purchase the business of smaller
company.

5. Objectives
 To have control over the market.
 To get benefits of centralization and diversification.
 To eliminate unnecessary competition.
 Remove scarcity in capital.
 To get benefits of large scale operations.
 Achieve better management effectiveness and get
benefits of technology.

6. Advantages Of Absorption
 Expansion.
 Faster growth.
 Increased efficiency.
 Increased brand value.
 More resources etc.

7. Meaning of Reconstruction
If any company is suffering loss and it close its business and join
with or without other company, it creates new company. That is
called reconstruction. There are two types of reconstruction.
 External Reconstruction
• When a company has no power to operate his own business due
to heavy losses and it sells all its business to a new company. It
will be called as external reconstruction.
 Internal Reconstruction
• Internal Reconstruction means to do every action for bringing the
company out of losses. If a company is suffering heavy losses,
company can use the provision 94 of Indian Company law 1956
and reduce its capital.

8. Purchase Consideration in Absorption
 Purchase Consideration(PC) means the aggregate of the
shares/other securities issued & payment by way of cash/other
assets by the purchasing company to the share holders of
vendor company.
 Lump Sum Amount
• When party agrees to pay the vendor company, a lump sum
amount, then it will be taken as Purchase Consideration.
 Value of Shares
• If the purchasing company is buying the vendor company on the basis
of the value offered per share. For example, “A” company has 20,000
shares. The company “B” approached “A” and offered Rs. 20 per share
which the management has approved and signed the absorption
agreement then,
o Purchase consideration = 20,000 x 20 = Rs. 400,000

9. Methods of Calculation of PC
 Net Payment Method
• If the absorption involves payments to shareholders, debenture holders
and creditors of the absorbed company. The payment may be in the
form of cash, shares and debentures.
 Net Asset Method
• If the lump sum payment is not made by the purchasing company,
then we have to calculate the net worth of assets taken. Net worth
of the asset is calculated as follows:
o Value of assets as mutually agreed xxx
o Less: Value of liabilities as mutually agreed (yyy)
o Purchase Consideration zzz

10. Accounting in books of vendor company
 Balance sheet of vendor company on liquidation date.
 Ledger accounts
• Realization Account
• Cash & bank Account
• Shareholders Account
• Shares/debentures in New/purchasing company Account
• Purchasing Company Account

11. Journal Entries
 The vendor company needs to close its main accounts like:
• Realization Account
• Shareholders Account
• Purchasing Company Account

12. Journal Entries in the Books of
Liquidating (Vendor) Company:

14. Example
 The balance sheet of Tata Steel Ltd. on 31st Dec, 2011 is as follows:
 After detailed discussion, it was decided that the Tata Steel Ltd. should be
absorbed into JSW Ltd. . In order to complete the process of absorption,
JSW Ltd. will issue 4 shares of $100 each for three shares held in the Tata
Steel Ltd.. All liabilities and assets were taken over by the JSW Ltd. at the
book value.
 Required:
o Pass journal entries in the books of
• A. Tata Steel Ltd., B. JSW Ltd.
Total assets $1,000,000
Share capital $100 each) 600,000
Profit & Loss account 240,000
Creditors 160,000

15. Solution
Shares in JSW Ltd. (8,000 x 100) $800,000
If 03 old shares, so new shares = 4
If 01 old shares, so new shares = 4/3
If 6,000 old shares, so new shares = 4/3 x
6,000 = 8,000 shares
Description Debit Credit
All assets 1,000,000
Capital reserve 40,000
Creditors 160,000
Payable to Tata Steel Ltd. 800,000
Payable to Tata Steel Ltd. 800,000
Share capital 800,000
JSW
Ltd. Company
Journal Entries

16. Tata Steel Ltd.
Company Closing
Entries
Description Debit Credit
Realization account 1,000,000
to All assets 1,000,000
Creditors 1,60,000
to Realization account 1,60,000
Receivable from JSW Ltd. 8,00,000
to Realization account 8,00,000
Shares in JSW Ltd. 8,00,000
to Receivable from JSW Ltd. 8,00,000
Share capital 6,00,000
Profit & Loss account 2,40,000
to Realization account 40,000
to Shareholders 8,00,000
Shareholders 8,00,000
to Shares in JSW Ltd. 8,00,000

17. Amalgamation versus Absorption
Following are the main differences between amalgamation and
absorption:
 Meaning
• When 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.
 Liquidation
• Two or more companies are liquidated in the process of amalgamation.
One or more companies are liquidated in absorption.

18.  Size
• There is no such matter of size of amalgamating companies. Generally,
size of purchasing company is greater than that of vendor company in
absorption.
 Formation
• In amalgamation, a new company is formed to take over the
business of vendor companies. In absorption, no new company is
formed, only purchasing or absorbing company take over the
business of liquidated company.

19. Bibliography
 http://studymaterial.unipune.ac.in/
 http://www.easyaccounting101.com/
 https://accountlearning.blogspot.com/
 https://keydifferences.com/
 http://www.svtuition.org/

20. THANK
YOU