The document discusses amalgamation, absorption, and reconstruction in business combinations. It defines amalgamation as when two or more existing companies go into liquidation and a new company is formed, taking over their businesses. Absorption is when an existing company buys the business of one or more liquidating companies, without forming a new entity. Reconstruction involves an existing company liquidating and a new company being formed to purchase its business. The document outlines the accounting treatments and considerations for different types of business combinations.

1. Amalgamation & Absorption
Prepared by:
Mohd. Rehan
Assistant Professor
ARSD College

2. Meaning of Amalgamation
When two or more existing companies go into
liquidation and a new company is formed to
take over their business , it is known as
amalgamation.
The institute of chartered accountants of India has
issued Accounting Standard 14 (AS 14) on
accounting for amalgamation. This standard
specifies the procedure of accounting for
amalgamation and the treatment of any resultant
goodwill or reserve.

3. Types of Amalgamation
From Accounting point of view :
A. Amalgamation in the nature of
merger.
B. Amalgamation in nature of purchase.

4. Amalgamation in the nature of
Merger
An amalgamation should be considered in nature of
merger if it fulfills following conditions :
1. All assets & Liabilities of the transferor company
become the assets & liabilities of transferee co.
after amalgamation.
2. Shareholders holding not less than 90% of face
value of equity share capital of the transferor
company (other than equity shares already held
therein, immediately before the amalgamation, by the
transferee company or its subsidiaries or their
nominees) become the equity shareholders of the
transferee by virtue of the amalgamation.
3. The business of transferor company is intended
to be carried on, after the amalgamation by the
transferee company.

5. 4.The consideration for 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 issue of equity shares in the
company, except that cash may be paid in respect
of any fractional shares.
5. 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.
In this way there is a pooling of assets and liabilities of
the combining companies under amalgamation. It
must be ensured that the resultant figures of the
assets, liabilities, capital and reserve of the
combining entity more or less represent the addition
of the relevant figures of the amalgamation entities.

6. Amalgamation in the nature of
Purchase
An amalgamation in nature of purchase takes
place when any one or more of the
conditions specified for the amalgamation
in nature of merger is not satisfied.
Under this nature of amalgamation one
company acquires another company and
equity shareholders of the combining
entities do not continue to have
proportionate share in the equity of the
combined entity or the business of the
combined entity is not intended to be
combined after amalgamation.

7. Absorption
When one or more existing companies go into
liquidation and some existing company buys the
business, it is known as absorption.
The major characteristics of the absorption are
as follows :
1.There is no formation of any new company.
2.There is an absorption of one or more existing
companies by one existing company.
3.There is only liquidation of absorbed company
while the absorbing company retains its legal entity.

8. External Reconstruction
External reconstruction is effected by liquidating the
company. It is just like by absorption.
In it a new company is formed to purchase the
business of an existing company.
The assets and liabilities of the existing company
are transferred to the newly formed company.
X ltd goes into liquidation and a new company Y ltd
comes into existence to take over the business of X
ltd, this is the case of the External Reconstruction.

9. Difference between
Amalgamation, Absorption &
Reconstruction
Basis No of
Distinction
Amalgamation Absorption Reconstruction
1.Formation of a
New Company.
2.No Liquidating
Companies
3.Objective
New company is
formed in a
Amalgamation.
At least two
companies wind
up their
business.
The aim of the
amalgamation is
to remove the
competition
among the
entities.
No new
company is
formed in
absorption.
At least one
company is
required to wind
up its business.
Generally
weaker units are
taken over by
strong units
New company is
formed in
External
Reconstruction.
One company is
required to wind
up its business.
The aim of the
external
reconstruction is
to write off the
accumulated
losses and
fictitious assets.

10. Differences
Basis No of
Distinction
Amalgamation Absorption Reconstruction
4.Position of
companies
The position of
the companies
is almost same.
The position of
purchasing
company is
comparatively
better than
vendor
company.
The position of
vendor company
is bad because
of accumulated
losses and
fictitious assets.

11. Purchase Consideration
Purchase Consideration refers to the amount paid by
the purchasing company to the vendor company
for the purchase of business.
The purchase consideration for amalgamation includes
the shares and other securities issued and
payment made in cash or other assets by the
transferee company to the shareholders of transferor
company.
It should not include the amount of liabilities taken
over by transferee company, which will be paid
directly by this company.
Payments made to debenture holders should not be
considered as part of purchase consideration.

12. Methods of Purchase
Consideration
1. Lump sum Method
2. On basis of Value of Shares or Shares Exchange
Method
3. Net Payment Method.
4. Net Worth or Net Assets Method.

13. Lump sum Method
Under this method, purchased consideration is
specified at a particular figure and goodwill or
capital reserve is arrived at on the basis of this
figure.
For example, a Company ABC ltd purchase the
business of the company XYZ ltd at an agreed
price of Rs.10,00,000 in all. Here the amount of Rs.
10,00,000 is the purchase consideration.

14. On basis of Value of Shares or
Shares Exchange Method
Under this method, the purchase consideration is
required to be calculated on the basis of intrinsic
value of shares.
Intrinsic value is calculated by dividing the net assets
available for equity shareholders by the number of
equity shares.
This value determines the ratio of exchange of
the shares between the transferee and
transferor companies.
Intrinsic value of share =
Net assets available for Equity Shareholders
Number of equity shares

15. E.g. Suppose A ltd and B ltd are two companies
involved in same business. Their capital is Rs.
6,00,000 and Rs. 2,00,000 (each of Rs.10).The
two companies arrived to amalgamate in AB ltd.
If each share of A ltd and B ltd is valued at Rs. 10
and Rs. 20 respectively for the purpose of
amalagmation, the purchase consideration will be
as under :
A ltd B ltd
60000 shares@Rs.10 600000 -
20000 shares@Rs.20 - 400000
Note: While issuing shares to individual
shareholders of the selling company, these may
be in fractions. A company cannot issue shares
in fraction but it can issue fractional certificates or
coupons or pay cash for the fractions.

16. 3.Net Payment Method.
Under this method the purchase consideration is arrived at by
merely adding every component of purchase
consideration in respect of which the purchasing company
makes payment.
The following Points should be considered at the time of
calculation of purchase consideration:
1.The assets & liabilities taken over by the transferee co. are not
to be considered.
2. Any payment whether in cash or shares made by the
transferee co. for shareholders must be considered.
3. If creditors and debtors are taken over by transferee co. to
discharge subsequently such amount should not be
considered in purchase consideration.
4. If the liquidation expenses of the transfer co. are to be born
by transfer co., these should not be increased in purchase
consideration.
5. Any payments made by the transferee co. to some other party
on behalf of the transferor co. are to be ignored.
6. When liabilities are taken over by transferee co. they are
neither added or deducted to the amount of purchase
consideration.

17. 4.Net Worth or Net Assets Method.
Under this method, purchase consideration is the
difference between the value of the assets taken
over and the liabilities assumed.
Net asset or Net worth =
Assets taken over – Liabilities assumed
(at agreed value) (at agreed value)

18. Important points to be
considered :
 Assets taken over by purchasing Co. should be valued
at agreed price.
 All assets means not just the tangible assets e.g. cash
and bank but the intangible assets e.g. goodwill,
trademarks etc. all taken at agreed value.
 The liabilities assumed by purchasing company are
deducted at their agreed value. The term liabilities does
not include undistributed profits like reserve fund
,general fund, share premium, insurance fund.
 The consideration for the amalgamation should include
any non-cash element at fair value. In case of issue of
securities, the value fixed by the statutory authorities
may be taken to be their fair value.
 Where the scheme of amalgamation provide for an
adjustment to the consideration contingent on one or
more future events, the amount of additional payment
should be included in the consideration if payment is
probable and a reasonable estimate of the amount can
be made.

19. The following entries should be passed in the books
of transferor and transferee companies in the case
of amalgamation
In books of Transferor co.
1. For transferring assets taken over by the transferee company.
Realisation a/c Dr.
To Various assets (individually)(at book value)
Note : Assets on which some provisions has been made are to be
transferred to realisation account at their gross figures and
provisions made should be transferred along with liabilities.
2. For transferring liabilities taken over by the transferee
company.
Various liabilities a/c Dr. (at book value)
To Realisation a/c
Note: Only those liabilities are to be transferred which have been
assumed by the transferee co. If there is any fund which partially
represents liability and partially represents undistributed profit,
then that portion which represents liability should be transferred
to realisation a/c.

20. 3. For Purchase consideration
Transferee Company’s a/c Dr.
To Realisation a/c
4. For receiving PC from the transferee Co.
Bank a/c Dr.
Shares in transferee Co. a/c Dr.
To Transferee Co a/c
5.For assets sold bt the transferor co. not taken over by the
transferee co.
Bank a/c Dr.
Realisation a/c (if loss on sale of assets)Dr.
To Assets a/c
To Realisation a/c (if profit on sale of assets)

21. 6. For Liquidation Expenses
(a) If expenses are to be met by transferor co.
Realisation a/c Dr.
To Bank a/c
(b)If Expenses are to be met by transferee co. there are two alternatives :
First alternative : No entry
Second alternative :
(i) Transferee Co. a/c Dr.
To Bank a/c
(ii) Bank a/c Dr.
To Transferee co.’s a/c
7. For liabilities not taken over by the transferee co. when paid by
the transferor co.
Various liabilities a/c Dr.
Realisation a/c (if excess payment is made)
To Bank a/c
or
To Shares in transferee Co. a/c
To realisation a/c (if less payment is made)

22. 8. For transferring preference share capital
Preference share capital a/c ..Dr.
Realisation a/c(if excess is to paid) ..Dr.
To Preference Shareholders a/c
To Realisation a/c (if less is to be
paid)
9. Preference Share Holders ..Dr.
To equity/Preference Shares of transferee
co.
Note : If the arrears of the dividend are to be paid
to preference Shareholders, then such excess
amount should be debited to realisation a/c and
credited to preference shareholders a/c. If the
preference shareholders have agreed to get
less than the amount of capital, then reverse
entry is to be passed.

23. 10. For closing Realisation a/c
(a) If profit
Realisation a/c ..Dr.
To equity Shareholders a/c
(b) If Loss
Equity shareholders a/c ..Dr
To Realisation a/c
11. For transferring equity share capital and accumulated profit
Equity Share Capital a/c ..Dr.
General reserve a/c ..Dr.
Debenture Redemption Fund a/c ..Dr.
Dividend equilisation Reserve a/c ..Dr.
Securities Premium a/c ..Dr.
Profit & Loss a/c ..Dr.
Accident Compensation Fund a/c ..Dr.
(to the extent it does not denote the liability)
Shares Forfeited a/c ..Dr.
Profit Prior to incorporation a/c ..Dr.
Any other reserve or Fund a/c ..Dr
To Equity shareholders a/c

24. 12. For transferring accumulated losses and expenses not
writtenoff
Equity shareholders a/c ..Dr.
To Profit & Loss a/c ( Debit balance)
To Discount or exp on issue of shares or
debentures a/c
To Preliminary Expenses
To Underwriting commission
13. For paying Shareholders
Equity Shareholders a/c ..Dr.
To Bank or Shares in Transferee co. a/c

25. Accounting entries in books of transferee
Co.
There are two methods of accounting for
amalgamation in the books of transferee company :
1.The pooling of Interest Method
2.The purchase Method

26. Pooling of Interest method
The following journal entries are to be passed in books of
transferee co. for incorporating the financial statements
of the transferor co:
(1) On amalgamation of business
Business Purchase a/c ..Dr.(with amt
of PC)
To Liquidators of Transferee Co. a/c
(2) For recording assets & liabilities taken over
Sundry assets(individually) (Book Value)
To Sundry Liabilities(individually) (Book Value)
To Reserves a/c (Book Value)
To Business Purchase a/c (Book Value)
Note :The difference between debits & credits is adjusted
in the reserves of transferee company.

27. Instead Of passing Two entries, one combined entry
can be passed.
Sundry assets a/c ..Dr
To Sundry Liabilities
To Different reserves of transferee co
To Liquidators of transferor Co.
(3) For making payment to the liquidator of transferor co.
Liquidators of transferor Co. a/c Dr.
To Bank/Share Capital/Security Premium
(4) If Liquidation expenses are paid by the transferee
company.
General reserve or Profit & Loss a/c Dr.
To Bank a/c
(5) For formation expenses of the transferee co.
Preliminary Expenses a/c Dr.
To Bank a/c

28. Purchase Method
The following Journal entries are passed in the
books of transferee company for incorporation
of the financial statements of the transferor co.
(1) For purchase of business from the transferor
company :
Business Purchase a/c ..Dr. (For
PC)
To Liquidation of transferor co.
(2) For recording assets & liabilities taken over
Various assets a/c ..Dr. (at revised value, if any
otherwise at
book value)
To various Liabilities a/c (with figures at
which they
are taken over)
To Business Purchase a/c
Note : If credit is more than debit it is debited to

29. (3) For making payment to the liquidator of the vendor
company :
Liquidators of transferor co. a/c..Dr
To Bank a/c
To Share Capital a/c
(4) When Statutory Reserve is maintained
Amalgamation adjustment a/c ..Dr
To Statutory Reserve a/c
(5) If liquidation exp are paid by transferee co.
Goodwill a/c ..Dr
To Bank
(6) For Formation exp of transferee co.
Preliminary Expenses a/c ..Dr
To Bank a/c

30. (7) When goodwill is written off against Capital reserve
Capital reserve a/c ..Dr.
To Goodwill a/c
(8) If any liability is discharged by the transferee company
Respective Liability a/c ..Dr. (with payable
amount)
To Share capital/debentures/bank a/c

31. Distinguish between Amalgamation
in nature of merger and
Amalgamation in nature of
purchase
In nature of Merger In nature of Purchase
1. In this case transferee co. must
acquire whole business of the
transferor co which includes all
assets and liabilities of the
transferor company.
1.Transferee co may or may not
acquire all assets and liabilities of
the transferor co.
2. Shareholders having 90% of
the face value of equity shares of
transferor co become the equity
shareholders of the transferee co.
2.This condition is not applicable in
case of amalgamation in the nature
of purchase.
3.The claim of equity
shareholders of the transferor co
must be discharged by transferee
co by issuing equity shares only,
except in case of fractional shares.
3.The claim of equity shareholders
of transferor company may be
discharged by issuing equity shares
or cash.

32. In nature of merger In nature of purchase
4.All assets & liabilities of the
transferor co are taken over by
transferee co at book value as
shown by the balance sheet of the
transferor co on the date of
amalgamation.
4. Assets & Liabilities of transferor
co may be taken at book value or
agreed value, as per their
agreement.
5. Difference between purchase
consideration and net worth is
taken as general reserve or net
profit and loss a/c.
5. Such difference is taken as
goodwill or capital reserve as the
case may be.

33. Reference:
 Monga J.R, Corporate Accounting
 www.icai.org
 www.caclubindia.com