Amalgamation 396f32

AMALGAMATION AND INTERNAL RECONSTRUCTION

TABLE OF CONTENTS :  Intro, Meaning And Types  Distinction Between Amalgamation In Nature

Of Merger And Purchases

 Purchase Consideration And Methods  Amalgamation In Nature Of Merger  Amalgamation In Nature Of Purchases  Difference Between Pooling Of Interests And

Purchase Method, Dissenting Shareholders

 External Reconstruction And Inter-company

Owings

 Internal Reconstruction  Difference Between Internal And External

Reconstruction

 Valuation Of Shareholders  Journal Entries Of Internal Reconstruction

What Is Amalgamation? "Amalgamation is an agreement (deal) between two or more companies to consolidate (strengthen) their business activities by establishing a new company having a separate legal existence.“ Amalgamating companies are those two or more companies which willingly unite (combine) to carry on their business activities tly. Amalgamated company is a newly formed union (alliance) of two or more amalgamating companies. It has a separate legal existence with a new unique name. Amalgamation is an emerging trend of today's business world. It results in the formation of a new, strong, stable and large company. It also results in the growth and expansion of this newly formed company.

Features Of Amalgamation : Two or more existing companies are

liquidated.

A new company is formed to take over

the business of liquidating companies.

The nature of business of existing

companies is similar.

Liquidating companies are called

vendor companies and the new company is called purchasing company.

Features Of Amalgamation : Generally, purchase consideration is discharged by

the issue of equity shares of purchasing Normally, there are two types of amalgamations. The first one is similar to a merger where all the assets and liabilities and shareholders of the amalgamating companies are combined together. The ing treatment is done using the pooling of interests method. It involves laying down a standard ing policy for all the companies and then adding their relevant ing figures like capital reserve, machinery, etc. to arrive at revised figures.

PURCHASE CONSIDERATION Transferee or Purchasing or Vendee Company

Amount Payable

Transferror or Selling or Vendor Company

ING STANDARD (AS) 14 says :Consideration for Amalgamation is the : Aggregate of  Shares,

 Other securities issued; and

Payment made in the form of:  Cash,  Other assets

by the transferee company to the SHAREHOLDERS of the transfe company.

PURCHASE CONSIDERATION That means, The amount of Purchase Consideration does not include:

• Payment to or for Creditors / Debenture holders / any other outside liability

• Payment for the cost of Winding Up (also called ‘Liquidation Expenses’)

CALCULATION The different methods for computation of Purchase Consideration are as follows: Lump-sum Payment Method,  Net Assets Method,  Net Payment or Total Payments Method,  Intrinsic-worth or Swap Method.

LUMP-SUM PAYMENT METHOD

 Theeg., amount betakes paid over as Purchase For Ishikato Ltd. the business of

Consideration given Shubha Ltd. for is50 lakhs. in the question. Hence the Purchase Consideration is the sum of 50 lakhs and there is no need for any calculation.

NET ASSETS METHOD Purchase Consideration is arrived by: Adding the agreed (or market) values of the

Assets taken over, and

Deducting therefrom the agreed values of the

liabilities taken over by the purchasing company.

NET ASSETS METHOD WAIT A MINUTE…  Only the Assets and Liabilities which are taken over are

considered.

 Consider the agreed values only.  In absence of agreed values, consider book values.  Ficticious Assets not to be considered.

If there is any Asset or Liability which is not taken over, it‘Liabilities’ will not be here considered in the calculation of Purchase  means only outside liabilities. Consideration.  Purchase Consideration paid in only shares & cash.

NET ASSETS METHOD For Eg.,

BALANCE SHEET of Bhavna Ltd. as at 31st March 2013 Credit Balances Debit Balances Equity Share Capital Equity Share Capital 10% Debentures 10% Debentures Reserve Fund

8,00,000 8,00,00 Building 0 Plant and Machinery 1,00,000 1,00,000 and Machinery 10,000 Plant Bills Receivable

Workmen Comp. Fund Reserve Fund Bills Payable Workmen Comp. Fund Provident Fund

56,000 10,000 35,000 56,000 1,10,000

Preliminary Expenses Bills Receivable Cash at Bank Preliminary Cash in Hand Expenses

2,40,000 2,40,00 0 5,10,000 5,10,00 1,50,000 0 61,000 1,50,000 1,00,000 61,000 ..50,000

11,11,00 11,11,00 35,000 Cash at Bank 1,00,000 0 0 Sakshi Ltd. takes over the business of Bhavna Ltd. on the following and Provident Fund 1,10,000 Cash in Hand ..50,000 Bills Payable

valuation:

11,11,00

11,11,00

(i) Building at 2,00,000; Plant and Machinery at 4,00,000. 0 0 (ii) There was a liability of 26,000 against Workmen Compensation Fund. (iii) Equity shares of 100 each of Sakshi Ltd. are issued to Equity shareholders of Bhavna Ltd.

NET ASSETS METHOD Calculation of Purchase Consideration: Assets taken over:

Building 2,00,000 Plant and Machinery 4,00,000 Bills Receivable 1,50,000 Cash at Bank 1,00,000 Cash in Hand 50,000

9,00,000

Less: Liabilities taken over:

Debentures 1,00,000 Workmen Comp. Fund 26,000 Bills Payable 35,000 Provident Fund 1,10,000 Purchase Consideration

(2,71,000) 6,39,000

TOTAL OR NET PAYMENTS METHOD

Value of Net Assets taken over

Payment done by Purchasing company

TOTAL OR NET PAYMENTS METHOD The amount of Purchase consideration is derived by adding up:a) Amount of Preference shares, (Number of Preference Shares x Issue Price) b) Cash for preference shareholders, (Number of Equity Shares x Issue Amount of Equity shares, Price) (for fractional shares) d) Cash for equity shareholders.

c)

Purchase Consideration = Total payments under (a) + (b) + (c) + (d) above.

TOTAL OR NET PAYMENTS METHOD SOME POINTS TO …  Whatever is received for SHAREHOLDERS of Vendor

company is added. (Nothing is deducted).

 Payment by Purchasing company to Debenture holders

or other liabilities will NOT be included.

TOTAL OR NET PAYMENTS METHOD For eg., A Ltd. is absorbed by B Ltd., the consideration being:  allotment of one 14% preference share of  2 equity shares of

10 each per share, and

10 each fully paid per share in A Ltd.

 The 1000 5% Debenture holders of

amounts of 10% debentures in B Ltd.

100 each of A Ltd. are paid equal

The number of shares of the vendor company are 2,00,000 of each fully paid. Calculate the Purchase Consideration.

10

TOTAL OR NET PAYMENTS METHOD Calculation of Purchase Consideration: Payment to shareholders by Purchasing Company: 14% Preference Shares of 2 Equity Shares of

Purchase Consideration

10 each (2,00,000 x 10) :

10 each (2,00,000 x 10 x 2):

20,00,000 40,00,000

60,00,000

EXCHANGE OR SWAP RATIO METHOD It is involves on the ratio in which the shares (of

transferee company) are to be exchanged for the shares of the transferror company.

The Exchange or Swap Ratio is based on the

INTRINSIC VALUE of each company’s share.

EXCHANGE OR SWAP RATIO METHOD

means the value of shares based on INTRINSIC VALUE net assets of the company. This determines the Exchange Ratio between the two companies.

EXCHANGE OR SWAP RATIO METHOD For eg., JAYA LTD.

LALITA LTD.

(Purchasing Co.)

(Vendor Co.)

(a) Net Assets (b) No. of Equity Shares

55,00,000

82,50,000

1,00,000

75,000

(c) Intrinsic value per share (a ÷ b) (d) Share Exchange Ratio or Swap Ratio

55 1

110 2

Thus, for every share in Lalita Ltd., their shareholders will get 2 shares in Jaya Ltd.

Amalgamation is of Two Types :   1. In the Nature of Merger 2. In the Nature of Purchase

There are Some Conditions (Basically 5) that must be fulfilled for Amalgamation in the Nature of Merger. 1. The Transferor Company must take over all the assets and all the liabilities of the transferor company. 2. Assets and Liabilities of the transferor company will be taken over by the transferee company their book value. 3. The consideration must be discharged wholly by issue of equity shares. 4. The transferee company must carry on the same nature of business as that of the transferor company. 5. At least 90% of the Equity Shareholders of the transferor company must agree to become the shareholders of the transferee company.

Two main methods of ing for amalgamation :   1. 2.

Pooling of interest method Business Purchase Method Pooling Of Interest Method – When an amalgamation is considered to be Amalgamation in nature of merger, it should be ed for as per AS-14, under the pooling of interest method. The following are the highlighted features of this method :

.Assets and liabilities of transferor company taken over by transferee

company at book value, unless valuation required for uniformity in ing policy. .Difference in purchase consideration and net assets taken over if any adjusted with reserves. .All reserves of transferor company shown in the books of transferee company. .All reserves of transferor company will be shown in the books of transferee company.

AMALGAMATION IN THE NATURE OF PURCHASE: 1.

COMPANY A ABSORBED BY COMPANY B

2.

COMPANY A & B ABSORBED BY COMPANY C ETC.

.The Purchase Method (Highlighted Points) .Assets and liabilities are taken over at fair value. Book value

shall be considered when any revised values are not stated.

.No reserve except statutory reserve will be shown in the books

of transferee company :

S.NO.

PARTICULARS

Amalgamation Adjustment A/C Dr. To Statutory Reserve A/C

L.F

DEBIT

CREDIT

AMALGAMATION IN THE NATURE OF PURCHASE: Difference in net assets taken over and purchase

consideration is dealt as followed:  Purchase consideration > Net assets, difference being GOODWILL  Purchase consideration< Net Assets, difference being CAPITAL

RESERVE   Statutory Reserves - Reserve which is created / retained

due to applicability of laws/acts, is called statutory reserve. Example : Development Rebate Reserve, Investment

Allowance Reserve, Export Profit Reserve, Workmen’s Compensation Reserve Etc.

AMALGAMATION IN THE NATURE OF PURCHASE:

Amortization of goodwill - Goodwill arising

on amalgamation will be amortized usually for 5 years, unless there is justification for it amortization for a longer period.   ENTRIES IN THE BOOK OF

TRANSFEROR COMPANY – Same as in case of Amalgamation In Nature Of Merger

Distinction Between Amalgamation In Nature Of Merger And Purchase : Understanding common difference between amalgamation and absorption is necessary before moving toward its ing part. Amalgamation: In this case two companies get liquidated and one new company

forms and it acquires the liquidated companies business. For Instance, Two companies X and Y gets liquidated and there

is formation of say company Z, and company Z acquires the two businesses of X and Y. In this case X and Y is a selling companies (also known as Vendor

or Transferor Companies) and Z is called as purchasing company (also called as Transferee Company).

Distinction Between Amalgamation In Nature Of Merger And Purchase : Absorption: Absorption represents taking

over of two or more companies by an existing Company. For Instance, Suppose X and Y

are taken over by already existing Company Say Company Z. here, X & Y are Transferor and Z becomes Transferee co.

Opening entries in the case of amalgamation in the nature of merger : 1) For purchase consideration payable 2) For incorporation of assets, liabilities and reserves: S.No

PARTICULARS

1.

Business purchase a/c dr. To liquidators of transferor company

2.

Various assets a/c dr. General reserve a/c dr. To creditors a/c To bills payable a/c To reserves a/c To p/l a/c To business purchase a/c To general reserve a/c

LF

DEBIT

CREDIT

BUT WHERE AS IN THE NATURE OF PURCHASE METHOD : Purchase consideration remains the same , but for incorporation of assets and liabilities : S.No

1.

PARTICULARS Plant and machinery a/c dr. Land and building a/c dr. Other fixed assets a/c dr. Debtors a/c dr. STOCK a/c dr. Bank a/c dr. Goodwill a/c dr. To Creditors a/c To Bills payable a/c To Other liabilities a/c

LF DEBIT CREDIT

Difference Between Pooling Of Interest And Purchase Method

Difference PURCHASE METHOD

POOLING OF INTERESTS METHOD

Typically higher than pooling Book Value method.

Typically lower than purchase method, as no goodwill asset is created.

Earnings Trend

Typically lower than the pooling method because preacquisition income statements are not combined.

Typically higher than purchase method because income statements are combined retroactively.

Sales Trend

Typically distorts growth perception of the acquiring company, as much of its sales growth can be attributed to the acquisition.

Typically more accurate than the purchase method, as income statements are combined retroactively.

Earnings Typically lower than the Per Share pooling method. ROA &

Typically lower.

Typically higher than the purchase method, as the income statement is combined for the entire reporting period, rather than as of the acquisition date. Typically higher.

EXTERNAL RECONSTRUCTION Involve the formation of new company to take

over the problematic company The newly formed company will take over the assets and liabilities of old company and the old company is wound up. Strictly speaking, it is neither amalgamation nor absorption. The wound up company is called the vendor or transferor and the new company is called the vendee or transferee.

ing procedures External Reconstruction  Revalue assets and liabilities to cater for claims in old

company  Closed the asset, liability, equity and all reserves to the REALISATION AND RECONSTRUCTION .  Realisation and reconstruction :  Is debited with all assets disposed to the new company; and  Is credited with liabilities taken by the new company and purchase consideration from the new company  Open the new company to record items of consideration paid, i.e. recognising all assets, and liabilities taken over by crediting to the respective share capital and reserves s

Inter-Company Owings At the time of absorption, it may be found

that transferee company and transferor company are debtor and creditor of each other. On absorption both the companies become a single legal entity and hence these amounts are neither payable nor receivables. The common debts are cancelled by debiting the payables and crediting the receivables.

ing Entries 1. Cancellation of inter-company debtors and creditors 2. Cancellation of inter-company loans 3. Cancellation of inter-company bills of exchange S.NO .

PARTICULARS Sundry creditors a/c Dr. To Sundry debtors a/c Loans payable a/c Dr. To Loans receivables Bills payable a/c Dr. To Bills receivables

L. F

DEBIT CREDI T

Internal reconstruction It is concerned with the complete overhauling of financial position of company. There is no liquidation of company. The purpose is to improve the profitability of existing company in relation to the true or real value of assets as compared to existing book values which are either overvalued or fictitious.

Need for internal reconstruction  Financial position does not show a true and

fair view.  Assets do not present true book values  Overdue outside liabilities

ALTERATION OF SHARE CAPITAL SECTION 61 OF COMPANIES ACT 2013 PERMITS A COMPANY TO ALTER ITS SHARE CAPITAL. IT MEANS CHANGE IN NUMBER OF AUTHORISED SHARES A COMPANY MAY ISSUE.

It is done in following manner – 1. INCREASE IN SHARE CAPITAL – it can be done by Issue of new share capital. the only restriction is the offer must be made first to existing equity shareholders proportionately. 2. SUB DIVISION AND CONSOLIDATION OF SHARES – sub division means conversion of shares of into shares of smaller denomination. Consolidation of shares of smaller nominal value into shares of higher nominal value. there will be no change in the amount of total paid up capital of the company. Only the face value and no. of shares change

3. Conversion of fully paid shares into stock and Reconversion of stock into fully paid shares – for this following things must be therea. The articles must empower the company to do so. b. It also requires the ing of ordinary resolution by . 4. Cancellation of unissued shares - which till date have not been taken or agreed to be taken by any person. This can be done only if c. It is authorized by articles d. By ing resolution in general meeting of shareholders.

DIFFERENCE BETWEEN INTERNAL AND EXTERNAL RECONSTRUCTION The points of distinction may be outlined as under: Points of difference 1. Concept

2. Liquidation

3. Formation of New Company

Internal reconstruction

External

It involves the internal

reconstruction It involves the

over- hauling of

liquidation of existing

reorganization of the

company and take over

company by the new company The existing company is The existing company is not liquidated or wound

liquidated or wound up

up No new company is

A new company is

formed. Only rights of

formed

the shareholders and creditors are changes

DIFFERENCE BETWEEN INTERNAL AND EXTERNAL RECONSTRUCTION Points of difference 1.

Take Over

Internal reconstruction It does not involve the take over the business

1.

Mode

External It does involve the take over reconstruction the business

It may involve the issue of

It may take place through

fresh share capital,

liquidation and take over

consolidation, sub- division of shares and concellation of unissued share capital 1.

Reduction of Share Capital There is certain reduction of

There is no reduction of share

share capital and sometimes

capital. In fact, there is fresh

outside liabilities like

share capital of the company

creditors and debentureholders may have to reduce their chain 1.

Legal Position

Internal reconstruction is done Internal reconstruction is as per session 100 of the

regulated by Session 494 of

company anies Act.

the Companies Act.

Journal entries in the books of the company under reconstruction

The following journal entries are ed in the books of the company: 1. When the number of shares is reduced: Share capital Dr.

XXXX

To Reconstruction

XXXX

(Being the reduction in the share capital)

2. When the face value of shares is reduced : Share capital Dr.

XXXX

To Share capital

XXXX

To Reconstruction

XXXX

(Being the face value of shares reduced)

3.When the number of debentures is reduced: Debentures Dr.

XXXX

To Reconstruction

XXXX

(Being the reduction in debentures)

4. When the face value of debentures reduced: Debentures A/C

Dr.

Debentures A/C XXXX

Dr.

To Reconstruction XXXX (Being the face value of debentures reduced)

XXXX

5. When the creditors forego their claims: Creditors

Dr.

XXXX

To Reconstruction A/C

XXXX

(Being the creditors reduced)

6. When the accumulated losses are written off: Reconstruction Dr.

XXXX

To Profit and loss

XXXX

To Preliminary expenses

XXXX

To Discount on issue of shares AC

XXXX

To Goodwill

XXXX

To Patents

XXXX

To Other overvalued assets AC

XXXX

(Being the accumulated losses written off) 7. For the expenses of reconstruction: Reconstruction

Dr.

XXXX

A Team Effort By : JATIN GUPTA KUNAL AGGARWAL KUNAL JAIN MANSI GARG MINAL BANSAL MRIGESH GARG NIKITA BASSI POOJA SHOKEEN PRAG SAREEN RAJAT AGARWAL ROHAN SHARMA