1. Internal reconstruction involves altering or reducing the claims of shareholders, creditors, and other liabilities of a company experiencing losses or overvaluation of assets, in order to write off accumulated losses and show a true financial position. This can involve reorganizing share capital through actions like increasing or decreasing share capital. 2. Amalgamation is the merging of two or more companies, and can reduce competition and costs while achieving economies of scale. There are two types: amalgamation in the nature of a merger, and amalgamation in the nature of a purchase. 3. External reconstruction involves liquidating an existing financially troubled company and starting a new company to take over its assets and liabilities. It differs from internal reconstruction

1. Internal and External Reconstruction
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Internal Reconstruction: Introduction
A company might have suffered huge losses in the past or might have the problem of over capitalization or
might have over valued its fixed assets because of inadequate provision for depreciation. Such a company faces the
dangerof goingontoliquidationeithervoluntarilyorbecause of a petitionby any of its creditors or Debenture holders.
In these circumstances companies have three options:
a) To Liquidate the company (Liquidation)
b) To Reconstruct Externally ( External Reconstruction)
c) To Reconstruct Internally ( Internal Reconstruction)
Meaning of Internal Reconstruction
Internal Reconstructionisanarrangementmade bycompanieswherebythe claims of shareholders, Debenture
holders,creditorsandotherliabilities are altered / reduced, so that the accumulated losses are written off, assets are
valued at its fair value and the balance sheet shows the true and fair view of the financial position.
Forms of Internal Reconstruction
Internal Reconstruction may take any of the following two forms:
a) Re-organization or Alteration of Share Capital
b) Reduction of Share Capital and other Liabilities
a) Re-organization or Alteration of Share Capital: Re-organization or alteration of share capital refers to the
arrangement of the capital of the company and include the following:
a. Increase the share capital by making fresh issue of shares
b. Decreasing the share capital by cancelling the unissued shares.
c. Conversion of shares into stock and vice versa
d. Consolidation of shares of smaller amounts into shares of larger amounts
e.Sub-divisionof sharesof largeramountsintoshare of smaller amounts. A company can alter its share capital
if it is authorized by its Articles of Association.
b) Reductionof Share Capital and other Liabilities: Reductionof Share Capital is an arrangement under which
the capital of the shareholderandsometimeseventhe claimsof debenture holders and the creditors are reduced. The
amount made available by capital reduction is utilized in writing off the accumulated losses, fictitious assets and the
overvaluedportion of the other assets. A company can reduce its paid-up capital if
a. It is authorized by its articles
b. A special resolution is passed and
c. A sanction of the court is obtained
Differences between Internal Reconstruction and External Reconstruction
a. No newcompanyisformedincase of Internal Reconstruction.A new companyis formed in case of External
Reconstruction.
b. In case of Internal Reconstruction, no company is liquidated. In case of External Reconstruction one
company is liquidated
c. Internal Reconstructionrequirescourt’sconfirmation.But External Reconstruction can be affected without
court’s confirmation
d. Internal Reconstructionisaslowandtediousprocess.But External Reconstruction can be carried out easily
e. In the case of Internal Reconstruction, the company is able to set off its past losses against future profits.
Whereas,inthe case of External Reconstruction, the past losses of the old company can’t be set off against the future
profits of the new company.

2. Internal and External Reconstruction
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Amalgamation: Introduction
Amalgamation means the merging of two or more than two companies for eliminating competition among
them or for growing in size to achieve the economies of scale. Amalgamation is a broad term which includes
mergers (uniting of two existing companies) and acquisition (one company buying out another company).
There are twotypesof amalgamation:AccordingtoAS-14 amalgamationisdividedintothe followingtwo
categoriesforaccountingpurposes:
(A) Amalgamationinthe nature of merger;and
(B) Amalgamationinthe nature of purchase.
Objectivesof amalgamationofcompanies
The followingare the mainobjectivesof amalgamationof companies:
(a) To avoid competition:The mainpurpose of amalgamationof companiesisto avoidcompetitionamong
themselves.Thiswill givethe companyanedge overitscompetitors.
(b) To reduce cost: The amalgamatedcompanycan derive the operatingcostadvantage throughloweringthe
cost of production.Thisispossible becauseof ‘economiesof large scale’.
(c) To gain financially:The amalgamatedcompanycan derive financial gainwhichmaybe inthe formof tax
advantage,highercreditworthinessandlowerrate of borrowing.
(d) To achieve growth: The amalgamatedcompanycanpool itsresourcesto facilitate internal growthandto
preventthe adventof a newcompetitor.
(e) To diversifythe activities: The riskof a companycan be loweredbydiversifyingitsactivitiesintotwoormore
industries.Attimes,amalgamationmayactas hedgingthe weakoperationwithastrongerone.
External reconstruction: Introduction
Reconstruction refers to certain arrangements made by financially unsound companies. The reconstruction
arrangement made by a company, to come out of its financial difficulties, may be external or internal. External
reconstructionrefersto closing/liquidating the company and starting again a new or a fresh. That is technically, a new
companywill be floatedorformedtotake overthe existingcompany. Internal reconstruction refers to making internal
arrangements for overcoming financial difficulties.
Differences between amalgamation and external reconstruction
1. Amalgamation of companies involves liquidation of two or more companies, while external reconstruction
involves liquidation of only one company,
2. Amalgamationof companiesresultsincombinationof companies,butexternalreconstructiondoesnot result
in any such combination.
Differences between absorption and external reconstruction
1. Absorption of companies does not involve formation of a new company; however, external reconstruction
involves formation of a new company,
2. Absorptionof companiesresultsinliquidationof one ormore companieswhile external reconstructionresults
in liquidation of only one company.
3. Absorption of companies involves combination of companies, whereas external reconstruction does not
involve any combination.

3. Internal and External Reconstruction
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Purchase Consideration
Purchase Considerationreferstothe considerationpayable bythe purchasing company to the vendor company
for taking over the assets and liabilities of Vendor Company.
Accounting Standard – 14 defines the term purchase consideration as the “aggregate of the shares and other
securities issued and the payment made in the form of ach or other assets by the transferee company to the
shareholdersof the transferorcompany”.Although,purchase considerationreferstototal paymentmade bypurchasing
company to the shareholders of Vendor Company, its calculation could be in different methods, as explained below:
a. Lump sum method
b. Net Assets method
c. Net Payment Method
a. Lump sumMethod: Under thismethodpurchase considerationwill be paid in lump sum as per the valuation
of purchasingcompaniesvaluation.E.g.,If it is stated that A Ltd. takes over the business of B Ltd. for Rs.15, 00,000 here
the sum of the Rs.15, 00,000 is the Purchase Consideration.
b. Net Assets Method: Under this method P.C. shall be computed as follows:
Particulars Rs.
Agreed value of assets taken over
Less: Agreed value of Liabilities taken over
XXX
XXX
Purchase Consideration XXX
Note:
i. The term “agreed value” means the amount at which the transferor company has agreed to sell and the
transferee company has agreed to take over a particular assets or a liability Otherwise book value will be the agreed
value.
ii.Fictitiousassets(i.e.,preliminaryexpenses,underwritingcommission,discountonissue of shares,discounton
issue of debentures and debit balance in P & L A/c) are not taken over.
c. Net Payment Method: Under this method P.C. should be calculated by aggregating total payments made by
the purchasing company. E.g.: A Ltd. had taken over B Ltd. and for that it agreed to pay Rs.5, 00,000 in cash 4, 00,000
EquitySharesof Rs.10 eachfullypaidat an agreedvalue of Rs.15 per share then the P.C. will be ascertained as follows:
Particulars Rs.
Cash
4,00,000 E. Shares of Rs.10 each fully paid, at Rs.15 per share
5,00,000
60,00,000
Purchase Consideration 65,00,000
Methods of accounting for amalgamation of Companies
a. Purchase method
b. Pooling of interest method
Conditions for ‘Amalgamation in the nature of Merger’ in an Amalgamation’
According to AS14 on Accounting for Amalgamation, the following conditions must be satisfied for an
amalgamation in the nature of merger:
a. Afteramalgamation,all the assetsandliabilitiesof the transferorcompanybecomes the assets and liabilities
of the transferee company.
b. Shareholders holding not less than 90% of the face value of the equity shares of the transferor company
become the equity shareholders of the transferee company by virtue of amalgamation.

4. Internal and External Reconstruction
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c. The businessof the transferorcompanyisintendedtobe carriedonafterthe amalgamationbythe transferee
company.
d. Purchase considerationshouldbe dischargedonlybyissue of equitysharesinthe transferee company except
that cash may be paid in respect of any fractional shares.
e. No adjustments are required to be made in the book values of the assets and liabilities of the transferor
company,whentheyare incorporatedinthe financial statementsof the transferee company.If anyone of the condition
is not satisfied in a process of amalgamation, it will not be considered as amalgamation in the nature of merger.
Difference between Pooling of interest and purchase method of recording transactions relating to amalgamation:
Basis Pooling of Interest Method Purchase Method
a) Applicability The poolingof interest method is applied in
case of an amalgamation in the nature of
merger.
Purchase methodisappliedinthe case of
an amalgamation in the nature of
purchase.
b) Recording In the pooling of interest method all the
reserves of the transferor Co. are also
recorded by the transferee Co. in its books
of account.
In the purchase method the transferee
Co. records in its books of accounts only
the assets and liabilities taken over the
reserves,exceptthe statutoryreservesof
the transferor company are not
aggregated with those of the transferee
Co.
c) Adjustment of the
differences
Under the pooling of interest method, the
difference between the consideration paid
and the share capital of the transferor
company is adjusted in the general reserve
or other reserves of the transferee
company.
Under the purchase method, the
difference between the consideration
and net assets taken over is treated by
the transferee company as goodwill or
capital reserve.
d) Statutory reserves In this method, the statutory reserves are
recorded by the transferee co. like all other
Reserves without opening Amalgamation
and Adjustment A/c.
In the purchase method, while
incorporating the statutory reserves, the
transferee Co.hasto openamalgamation
adjustment account debiting it with the
amt. of the statutory reserves being
incorporated.
Difference between Amalgamation in the nature of purchase and Amalgamation in the nature of merger
Basis of Distinction Amalgamation in the Nature of Merger Amalgamationinthe Nature of Purchase
a) Transferof Assetsand
Liabilities
There is transfer of all assets & liabilities. There need not be transfer for all assets
& liabilities.
b) EquityShareholder’s
holding90%
Equity shareholders holding 90% equity
shares in transferor company become
shareholders of transferee company.
Equity shareholders need not become
shareholders of transferee company.
c) Purchase Consideration Purchase considerationisdischargedwholly
by issue of equity shares (except cash for
fractional shares)
Purchase consideration need not be
discharged wholly by issue of equity
shares.

5. Internal and External Reconstruction
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d) Same Business The same business of the transferor
companyisintendedtobe carriedon bythe
transferee company.
The business of the transferor company
neednotbe intendedtobe carriedon by
the transferee company.
e) Recordingof Assets&
Liabilities
The assets & liabilities taken over are
recordedat their existing carrying amounts
except where adjustment is required to
ensure uniformity of accounting policies.
The assets & liabilities taken over are
recorded at their existing carrying
amountsor the basis of their fair values.
f) Recordingof Reservesof
TransferorCo.
All reserves are recorded at their existing
carrying amounts and in the same form.
Only statutory reserves are recorded at
their existing carrying amounts.
g) Recordingof Balance of
Profit& Loss A/cof Transferor
The balance of P&L A/c should be
aggregatedwiththe corresponding balance
of the transferee co. or transferred to the
General.
The balance of P&L A/clossesitsidentify
and is not recorded at all.