CA Intermediate · Advanced Accounting

Amalgamation of Companies: formula sheet

Full chapter guide

Key formulas

Condition 1: Assets and liabilities: All assets and liabilities of the transferor become those of the transferee; If some assets or liabilities are left behind, the amalgamation is a purchase.
Condition 2: Shareholders: Shareholders holding at least 90% of the face value of the transferor's equity shares become equity shareholders of the transferee; Shares already held by the transferee, its subsidiaries or nominees are excluded from this 90% count.
Condition 3: Consideration: Consideration to the transferor's equity shareholders is discharged wholly by issue of equity shares in the transferee; Cash is allowed only for fractional shares. This condition is about the transferor's equity shareholders. Preference shareholders of the transferor may be issued preference shares of the transferee with the same rights, and that does not break the condition.
Condition 4: Intention: The business of the transferor is intended to be carried on by the transferee; If the business is to be closed or sold, it is a purchase.
Condition 5: Book values: No adjustment is intended to the book values of the transferor's assets and liabilities when incorporated by the transferee; Revaluation or fair value adjustment at the time of takeover makes it a purchase. The only exception is an adjustment made solely to ensure uniformity of accounting policies, which does not break this condition.
Decision rule: All five conditions met → Merger (pooling of interests). Any one not met → Purchase (purchase method); There is no mixed type.
Purchase consideration (net payment method): PC = Value of shares issued + Cash paid + Other assets or securities given, all to shareholders (equity and preference); Value shares at the issue price or fair value stated in the question, so any premium is included.
Purchase consideration (net assets method): PC = Agreed value of assets taken over − Liabilities taken over; Include only the assets and liabilities the transferee actually takes. Use agreed or fair values, not book values, if given.
Lump sum method: PC = Fixed amount given in the agreement; No working needed. Then find how it is discharged (shares, cash) if asked.
Intrinsic value per share: Intrinsic value per equity share = (Assets − Outside liabilities − Preference share capital) ÷ Number of equity shares; Assets at agreed or fair values. Do this for both companies on the same basis. It is used only to fix the exchange ratio.
Shares to be issued (intrinsic value basis): Shares issued = (Intrinsic value per share of transferor ÷ Intrinsic value per share of transferee) × Shares of transferor; This fixes the number of shares only, not purchase consideration. The ratio holds only when both companies' shares are valued on the same basis. PC is then found by the net payment method: shares issued × the issue or fair value per share given in the question.
What is excluded: Liabilities taken over, payments to creditors (including debenture holders paid as creditors), and liquidation expenses paid by the transferee are NOT part of PC. Shares, debentures and other securities issued to the transferor's shareholders ARE part of PC.; Excluded items are not paid to the transferor's shareholders. Debentures that the transferee issues to the transferor's shareholders in discharge of their shares are consideration, so include them.
Net assets taken over: Net assets = Assets taken over − Liabilities taken over; Use book value in pooling. In purchase, use agreed or fair values if the question gives them.
Pooling of interests: adjustment: Difference = Share capital of transferor − (Face value of shares issued by transferee + Consideration paid in cash or other assets); AS 14 only requires this difference to be adjusted in reserves. If positive, it is a surplus added to reserves. Some problems label it Capital Reserve or Amalgamation Reserve; that is a convention, so use the label the question gives. If negative, it is a deficit deducted from reserves (use the reserve the question names, otherwise General Reserve). In pooling, you do not compare the purchase consideration with net assets to find goodwill.
Purchase method: goodwill or capital reserve: Purchase consideration − Net assets taken over = Goodwill (if positive) or Capital Reserve (if negative); Net assets = assets − external liabilities. Reserves and share capital are not deducted or added. Non-statutory reserves are simply not carried forward.
Reserves in pooling: Transferor's reserves are recorded in the transferee's books in the same form, at the same amounts; Securities Premium, General Reserve and P&L balance are carried forward. Adjust against the difference only as per the formula above.
Reserves in purchase: Non-statutory reserves of the transferor are not carried forward; statutory reserves are carried forward with a credit to the same Statutory Reserve and a debit to Amalgamation Adjustment Account; Amalgamation Adjustment Account is reversed when the statutory reserve is no longer required. This is a separate carry-forward entry and does not change the goodwill or capital reserve calculation.
Merger test: 90% of transferor's equity shareholders (excluding shares held by transferee) take equity shares in transferee, plus four other conditions; All five conditions must hold for the nature of merger.
Realisation Account debits: Dr: assets taken over (book value) + expenses paid by transferor + loss on realisation (if any); Do not debit fictitious assets or the profit and loss debit balance here. They go to Equity Shareholders Account. Assets not taken over are not transferred.
Realisation Account credits: Cr: liabilities taken over + purchase consideration due from transferee + profit on realisation (if any); Liabilities not taken over are paid separately by the transferor. The purchase consideration is credited, not the net assets.
Profit or loss on realisation: Profit = Purchase consideration – (Assets taken over – Liabilities taken over) – Expenses borne by transferor; A negative result is a loss. Transfer to Equity Shareholders Account.
Entry for transfer of assets: Realisation A/c Dr; To each asset account; Use book value. Show each asset separately.
Entry for transfer of liabilities: Liability accounts Dr; To Realisation A/c; Only liabilities the transferee takes over.
Entry for purchase consideration: Transferee Company A/c Dr; To Realisation A/c; Pass this at the total amount due, before the form of payment.
Entry for receipt of consideration: Shares / Debentures in Transferee A/c Dr; Bank A/c Dr; To Transferee Company A/c; Record shares at the value included in the purchase consideration.
Closing the shareholders: Equity Share Capital, Reserves, P&L (credit) Dr; To Equity Shareholders A/c. Equity Shareholders A/c Dr; To Shares in Transferee, Bank; Debit balances such as P&L loss go to the debit of Equity Shareholders A/c. Realisation profit is credited and loss is debited.
Net assets taken over: Net assets = Assets taken over − Liabilities taken over; Take only the assets and liabilities that the scheme says are taken over. Under the purchase method, use existing carrying amounts or the fair values to which the consideration is allocated.
Goodwill or capital reserve (purchase method): Goodwill = Consideration − Net assets; Capital reserve = Net assets − Consideration; If the transferee holds transferor shares, add the carrying amount of that investment to the consideration paid to outsiders.
Pooling adjustment: Adjustment in reserves = Share capital issued − Share capital of transferor; If the issue is larger, deduct the excess from the transferor's reserves taken over. If smaller, add the difference to reserves. The transferor's reserves are incorporated at book values, and the total incorporated is reduced or increased by this adjustment.
Shares held by transferee: Consideration payable to outsiders = Value of shares not held by the transferee; The investment in the transferor is credited in the entry. It is not paid for with new shares.
Unrealised profit in stock: Unrealised profit = Inter-company stock on hand × Profit % on selling price (or cost) charged; Reduce stock and debit the reserve or profit balance of the company that made the profit.
Inter-company owings: Debtors due from the other company = Creditors due to the other company → cancel both; Remove the amount once from each side of the combined balance sheet.

Quick revision

Amalgamation in the nature of merger needs all AS 14 conditions to be met; otherwise it is in the nature of purchase.
Pooling of interests is used for mergers; the purchase method is used for purchase-type amalgamations.
Purchase consideration is what the transferee gives to the transferor's shareholders, in shares, cash or other assets.
Liabilities taken over by the transferee are not part of purchase consideration; they are paid by the transferee itself.
In pooling, assets, liabilities and reserves are generally recorded at existing book values.
In pooling, the reserves of the transferor are incorporated in the same form, so their identity is preserved. Compare the amount recorded as share capital issued (plus any additional consideration in cash or other assets) with the share capital of the transferor company. If the amount recorded is higher, the excess is adjusted against reserves. If it is lower, the difference is treated as capital reserve.
In the purchase method, assets and liabilities are recorded either at existing book values or at fair values by allocating the consideration, as per AS 14. The transferor's reserves (other than statutory reserves) are not carried forward to the transferee's books.
Under the purchase method, excess consideration over net assets is goodwill; a shortfall is capital reserve.
The amalgamation adjustment reserve arises only in the purchase method, when the statutory reserves of the transferor are to be preserved. In pooling, the statutory reserves are incorporated in the same form as reserves, so no adjustment reserve is needed.
Inter-company debts cancel out, and unrealised profit on inter-company stock must be removed.
Transferor's closing entries run through realisation, shareholders and the transferee's account.
Under AS 14, amalgamation expenses are not included in purchase consideration. They are charged to the Statement of Profit and Loss in the year of amalgamation. Share and debenture issue costs are adjusted as permitted by law, for example against securities premium.

Common mistakes

Calling an amalgamation a merger because most conditions are met. Fix: All five must be met. One failure means purchase.
Applying the 90% test on number of shareholders or on market value. Fix: Test the face value of equity shares, and exclude shares held by the transferee, its subsidiaries or nominees.
Adding liabilities taken over to purchase consideration. Fix: PC is paid to shareholders only. Liabilities taken over are deducted in the net assets method and never added in the net payment method.
Valuing shares issued at face value when a premium or fair value is stated. Fix: Use the issue price or fair value given. PC includes the premium part.
Carrying forward all transferor reserves under the purchase method. Fix: Under purchase, only statutory reserves are carried forward, with a debit to Amalgamation Adjustment Account. Other reserves are not recorded.
Calculating goodwill under pooling of interests. Fix: In pooling, compare the transferor's share capital with the face value of shares issued plus any cash or other consideration. The result is a surplus added to reserves or a deficit adjusted against reserves, never goodwill.
Transferring assets to Realisation A/c at the amount of purchase consideration or at market value. Fix: In the transferor's books, always transfer assets and liabilities at their book values. The consideration is a separate credit.
Transferring the profit and loss debit balance or preliminary expenses to Realisation A/c. Fix: These are fictitious assets. Debit them to Equity Shareholders A/c, along with the other accumulated balances.
Paying shares to the transferee for shares it already holds in the transferor. Fix: Compute the consideration only for shares held by outsiders. Credit the investment account in the entry for the shares held.
Carrying the transferor's reserves forward under the purchase method. Fix: Under purchase, do not incorporate the transferor's reserves. Only statutory reserves are recorded, with a matching debit to Amalgamation Adjustment Reserve.

Exam tips

In theory questions, always list all five conditions and tick each. Naming the failed condition earns the conclusion marks.
In MCQs, hunt for the red flag: cash, preference shares, debentures, revaluation or closure of business.
Remember the 90% test excludes shares already held by the transferee and is on face value of equity shares.
Do not mix up the merger and purchase features. Merger preserves reserves under pooling. Purchase may create goodwill or capital reserve.
Link the classification to the method in the same answer, because many questions ask for both.
Always show a 'Computation of purchase consideration' working note. Step marks are given even if the final figure differs.
Read the question for which assets and liabilities are taken over. If the transferee does not take some of them, do not use them in the net assets method.
Look for traps such as liquidation expenses, payments to creditors and debenture holders as creditors, and fractional shares paid in cash. Remember that debentures issued to the transferor's shareholders are part of PC.