CA Intermediate · Advanced Accounting

AS 14 Accounting for Amalgamations: formula sheet

Full chapter guide

Key formulas

Merger test: Merger = Condition 1 AND 2 AND 3 AND 4 AND 5 all satisfied; Any single failure makes it an amalgamation in the nature of purchase.
90% test: Equity shares of transferor held by shareholders who become transferee shareholders ÷ Total equity shares of transferor (excluding those already held by transferee or its nominees) ≥ 90%; Use face value of equity shares. Preference shares are not part of this test.
Method linkage: Merger → Pooling of Interests; Purchase → Purchase Method; The type of amalgamation fixes the accounting method.
Consideration condition: Consideration to equity shareholders who become transferee shareholders = equity shares of transferee only (cash only for fractions); Cash, debentures or preference shares given to equity shareholders who become transferee shareholders (other than cash for fractions) break the merger condition. Consideration to holders who do not become transferee shareholders is outside this test.
Share capital difference: Difference = Consideration (face value of shares issued + cash for fractions) − Paid-up share capital of transferor; AS 14 says the difference is adjusted in reserves. In ICAI problems, a positive difference is usually debited to general reserve or other free reserves (as the question directs). A negative difference is commonly credited to Capital Reserve.
Purchase consideration (merger): Consideration = Number of shares issued × Face value per share (+ cash for fractional shares); Number of shares comes from the exchange ratio given in the question. Cash other than for fractions defeats the merger condition.
Entry in transferee's books: Dr Assets (book values) + Dr Reserves (if consideration exceeds capital) ; Cr Liabilities, Cr Share Capital, Cr Transferor's reserves (same names), Cr Capital Reserve (commonly, if consideration is less); Every figure comes from the transferor's balance sheet at book value. Do not revalue. If the same reserve is both debited and credited, you may show only the net figure, but show the gross entry first if you can.
Merger test: shareholding: Shares of transferor's equity shareholders who move to transferee ≥ 90% of face value of its equity shares; Equity shares already held in the transferor, immediately before the amalgamation, by the transferee, its subsidiaries or their nominees are excluded from this test.
Reserves after merger: Transferee's reserve after merger = Own reserve + Transferor's reserve − Adjustment for share capital difference; Do this reserve by reserve. The balance sheet should show each reserve separately.
Purchase consideration (net assets method): PC = Agreed value of assets taken over − Liabilities taken over; Include only assets and liabilities actually taken over. Leave out assets the transferee does not take, and liabilities it does not take.
Purchase consideration (net payment method): PC = Fair value of shares and securities issued + Cash + Other assets paid to the transferor's shareholders; Value shares at fair value if given, else at the issue price stated. Do not add liabilities paid to outsiders.
Intrinsic value per share: Intrinsic value = (Assets − Liabilities) ÷ Number of equity shares; Used only to fix the exchange ratio, not to compute PC. Calculate it for both companies using the values the question states. Check whether preference dues must be deducted first.
Exchange ratio and shares to issue: Shares to issue = Transferor's shares × (Intrinsic value of transferor share ÷ Intrinsic value of transferee share); Round fractional shares as the question instructs, and settle fractions in cash if stated.
Goodwill or capital reserve: PC − Net assets taken over (at recorded values): positive = Goodwill; negative = Capital Reserve; Net assets here means assets taken over less liabilities taken over, at the values the transferee records.
Statutory reserve entry in transferee's books: Amalgamation Adjustment Account Dr; To Statutory Reserve (same amount); Passed only when the statutory reserve of the transferor must be preserved.
Realisation Account sides: Debit: assets taken over (book value) + realisation expenses paid by transferor. Credit: liabilities taken over + purchase consideration; The balancing figure is profit (credit side larger) or loss (debit side larger). Only items taken over by the transferee go in.
Profit or loss on realisation: Profit or loss = (Liabilities taken over + Purchase consideration) − (Assets taken over + Realisation expenses); If positive it is a profit and is credited to Equity Shareholders A/c. If negative it is a loss and is debited.
Amount due to equity shareholders: Equity share capital + Reserves and surplus + Profit on realisation (or − Loss) + any other credit balance of equity holders; This must equal shares of the transferee plus cash paid to equity holders. Use it as your closing check.
Value of shares in transferee: Number of shares × agreed issue price (including premium); Record Shares in Transferee at issue price, not just face value. Premium is part of the purchase consideration.
Cash left to distribute: Opening cash and bank + Cash from transferee + other cash realised − Realisation expenses − Liabilities paid − Preference shareholders paid in cash; This is the cash paid to equity shareholders. Bank must close to zero.
Mutual owings: Combined debtors = Debtors of both − Amount owed between them; Combined creditors = Creditors of both − Same amount; Apply the same cancellation to bills receivable and bills payable. Check that both sides are reduced by the same figure.
Unrealised profit on stock sold at a mark-up on cost: Unrealised profit = Stock still held × Mark-up % ÷ (100 + Mark-up %); Use this when the question says cost plus a percentage. Reduce stock and reduce reserves by this amount.
Unrealised profit on stock sold at a margin on sales: Unrealised profit = Stock still held × Profit % on sales ÷ 100; Use this when the profit is a percentage of selling price. Read the wording carefully. Reduce stock and reduce reserves by this amount.
Shares to be issued to outsiders: Outsiders' shares = Total transferor shares − Shares held by transferee; Shares of assenting outside holders = Outsiders' shares − Dissenting shares (if paid in cash); Apply the exchange ratio only to the shares of assenting outside holders.
Purchase consideration with dissenters: Purchase consideration = Value of shares issued to assenting holders + Cash paid to dissenters + Any other cash; Include only what is paid to the transferor's shareholders. Do not include liquidation expenses the transferee bears for the transferor.
Cost of acquisition when transferee holds shares in transferor (purchase method): Goodwill or capital reserve = (Purchase consideration + Cost of shares already held) − Net assets taken over; The cost of shares already held is not part of the purchase consideration. You add it only for this computation. If the figure is positive it is goodwill. If negative it is capital reserve. Liquidation expenses borne by the transferee, if the question so directs, are adjusted against capital reserve or added to goodwill, and are not part of this consideration.
Pooling of interests: difference adjusted to reserves: Adjustment = Share capital of transferor − (Share capital issued by transferee + cash, if any, paid to shareholders); a positive result increases reserves, a negative result reduces reserves; If the transferor's share capital is more than the capital issued plus cash, the result is positive and the difference is credited to reserves. If it is less, the result is negative and the difference is debited to reserves. All reserves of the transferor are carried over, then adjusted by this figure. Liquidation expenses borne by the transferee are usually adjusted against reserves or the Statement of Profit and Loss, as the question directs.
Goodwill (purchase method): Goodwill = Purchase consideration − Value of net assets taken over (at existing carrying amounts, or at fair values of identifiable assets and liabilities if the consideration is allocated on that basis); If the result is negative, the difference is capital reserve, not goodwill.
Annual goodwill amortisation: Annual amortisation = Goodwill ÷ Useful life (presumed not more than 5 years); A somewhat longer period needs justification and disclosure. Charge it to the statement of profit and loss.
Amalgamation after balance sheet date: Non-adjusting event: disclose, do not adjust year-end figures; Disclose the nature of the event and an estimate of its financial effect, or a statement that no estimate can be made.
Pooling of interests difference: Difference = Consideration (face value of shares issued + any cash or other assets) − Share capital of transferor; The difference is adjusted in reserves. If the transferor's share capital exceeds the consideration, credit the excess to reserves. If the consideration exceeds the transferor's share capital, debit the deficit to reserves. No goodwill arises under pooling.

Quick revision

Transferor is the company absorbed; transferee is the company that takes over.
Merger needs all five conditions; failing even one makes it a purchase.
For a merger, shareholders holding at least 90% of the face value of the transferor's equity shares (other than those held by the transferee, its subsidiaries or their nominees) must become equity shareholders of the transferee.
In a merger, consideration to equity shareholders is wholly in equity shares; cash is allowed only for fractional shares.
Pooling of interests: assets and liabilities at existing carrying amounts, and reserves preserved in the same form.
Under pooling, the difference between the share capital issued (plus other consideration) and the transferor's share capital is adjusted in reserves.
Purchase consideration is shares and securities issued plus cash or other assets paid by the transferee to the transferor's shareholders.
Purchase consideration excludes liabilities that the transferee pays directly to outsiders.
Net assets method (a textbook method, not AS 14 text): purchase consideration equals the agreed value of the assets actually taken over less the liabilities actually taken over. Count only assets and liabilities taken over, at agreed values.
Under the purchase method, consideration above the net assets taken over is goodwill; consideration below is capital reserve.
Under the purchase method, the transferor's reserves are not carried over, except statutory reserves. These are recorded in the transferee's books with an equal debit to Amalgamation Adjustment Account, which is reversed when the reserve is later reversed.
Cancel mutual owings and shares held by one company in the other, and remove unrealised profit on stock in the transferee's books.
An amalgamation after the balance sheet date but before approval of the financial statements is disclosed as a non-adjusting event under AS 4.

Common mistakes

Calling it a merger when 90% is met but the consideration to equity shareholders who become transferee shareholders includes cash or debentures. Fix: Always check all five conditions. For equity shareholders who become transferee shareholders, cash is allowed only for fractional shares.
Including shares already held by the transferee in the denominator of the 90% test. Fix: Exclude equity shares already held by the transferee or its nominees, then compute the percentage.
Revaluing assets to fair value under pooling Fix: Under pooling, use book values only. The one exception is aligning accounting policies, and only when the question mentions it.
Creating goodwill in a merger Fix: Pooling creates no goodwill. The difference between consideration and the transferor's share capital is adjusted in reserves.
Including all assets and liabilities in the net assets figure, even those not taken over Fix: Tick each item the question says is taken over. Compute net assets only from ticked items.
Adding liabilities paid to outsiders (such as debenture holders or creditors) into PC Fix: PC is only what shareholders receive. Payments to creditors or debenture holders are settlements of liabilities, not PC.
Putting cash and bank into the Realisation Account when the transferee does not take them over. Fix: Read the question first. Transfer only what the transferee takes over. Untaken cash stays in the transferor's books and is used in the final settlement.
Treating Transferee Company A/c as credited when consideration is due. Fix: The transferee owes you the consideration, so it is an asset-type debit: Dr Transferee Company A/c, Cr Realisation A/c. It is credited only when you receive shares, debentures or cash.
Cancelling mutual owings on only one side of the balance sheet. Fix: Always reduce both debtors and creditors by the same amount. Do the same for bills receivable and bills payable. A balance sheet that does not balance usually has this error.
Taking the whole unrealised profit from stock as the profit on the selling price. Fix: For a mark-up on cost, profit = stock × 20 ÷ 120. For profit on selling price, profit = stock × 20 ÷ 100.

Exam tips

In theory questions, list the five conditions in order and apply each to the facts. Step marks are given for each condition.
In MCQs, hunt for the one breaking fact such as cash, debentures, revaluation or a business to be closed.
Always state the conclusion and the accounting method that follows. Examiners often award a mark for it.
When numbers are given, show the 90% working with the denominator clearly stated after excluding the transferee's own holding.
Do not write detailed journal entries if the question asks only for type. Keep the answer to the point.
Start every answer by stating that the amalgamation is in the nature of merger and the pooling method applies. This usually earns a mark and protects you if a number goes wrong.
Write the journal entry in full, with every asset and every reserve on its own line. Examiners award marks for each correct line.
If a question gives fair values for assets, ignore them under pooling, unless you are asked to align accounting policies. In MCQs, this is a common trap.