Absorptions, Amalgamations, External Reconstruction: formula sheet

Key formulas

Conditions for amalgamation in the nature of merger (AS 14)

All five must hold: (1) all assets and liabilities of transferor become those of transferee; (2) shareholders holding at least 90% of the face value of the transferor's equity shares become equity shareholders of the transferee; (3) consideration to those shareholders is wholly by equity shares of the transferee, except cash for fractional shares; (4) the business of the transferor is intended to be carried on by the transferee; (5) no adjustment is intended to be made to book values of assets and liabilities, except to ensure uniform accounting policies

If even one condition fails, it is an amalgamation in the nature of purchase. The 90% excludes shares already held by the transferee or its nominees.

Methods under AS 14

Merger → Pooling of interests method. Purchase → Purchase method

Under pooling, reserves of the transferor are generally preserved. Under purchase, goodwill or capital reserve arises.

Method under Ind AS 103

Business combination (not under common control) → Acquisition method. Common control → Pooling of interests (Appendix C)

Ind AS 103 has no merger-versus-purchase test.

Goodwill or capital reserve

Purchase consideration − Net assets taken over (at agreed values) = Goodwill if positive, Capital Reserve if negative

Applies to purchase method and acquisition method. Net assets means assets taken over less liabilities taken over.

Lump sum method

Purchase consideration = amount fixed in the scheme

No calculation of assets is needed. Only split the amount into shares and cash as the question says.

Net assets method

PC = agreed value of assets taken over − liabilities taken over

Leave out assets not taken over and liabilities not taken over. Use agreed values, not book values, where given.

Net payment method

PC = shares (at issue price) + other securities + cash payable to shareholders of the transferor

Include only payments to shareholders. Exclude liabilities paid off by the transferee, and the transferor's own liquidation costs.

Shares issued under an exchange ratio

Shares to issue = shares held in transferor × (new shares ÷ old shares in the ratio)

Example: ratio 4:5 means 4 new shares for every 5 old shares.

Intrinsic value per share

Value per share = net assets available to equity shareholders ÷ number of equity shares

Compute for both companies. Shares to issue = (transferor value per share ÷ transferee value per share) × transferor shares.

Value of shares issued

Shares issued × issue price = value in PC; share capital = shares × face value; securities premium = shares × premium

This split is needed for the journal entry.

Goodwill (acquisition method)

Goodwill = Consideration transferred − Fair value of net identifiable assets acquired

Net identifiable assets = fair value of assets − fair value of liabilities. If the result is negative, it is a bargain purchase, not goodwill.

Consideration (shares issued)

Consideration = Number of shares × fair value per share + cash/other assets paid

Under the acquisition method, share capital is credited at face value and the excess is credited to securities premium.

Bargain purchase

Gain = Fair value of net identifiable assets − Consideration

Under Ind AS 103 it is recognised in OCI and accumulated in equity as capital reserve. If there is no clear evidence of a bargain purchase, it goes directly to capital reserve in equity. Check the question's wording.

Capital reserve (pooling)

Difference = (Share capital issued + additional consideration) − Share capital of transferor

Transferred to capital reserve and shown separately from other capital reserves (Appendix C, para 12). If consideration is lower than transferor's share capital, the difference is a credit to capital reserve.

Reserves under pooling

Transferor's reserves are carried over in the same form

General Reserve stays General Reserve, Capital Reserve stays Capital Reserve, Revaluation Reserve stays Revaluation Reserve.

Realisation profit or loss

Profit or (Loss) = PC + liabilities taken over + proceeds of assets sold separately − book value of assets transferred − realisation expenses borne

Use book values of assets transferred. Only assets and liabilities actually taken over by the transferee appear.

Amount due to equity shareholders

Equity share capital + reserves and profits ± realisation profit or (loss) − any other claims settled out of their share

This must equal the shares and cash they receive. Use it as your check.

Cash balance check

Opening cash + cash from transferee + cash from assets sold − payments made = cash paid to equity shareholders

If the figure is negative, recheck whether the transferee paid the liquidation expenses or you missed a receipt.

Discharge of PC entry

Dr Transferee company A/c; Cr Realisation A/c (PC). Then Dr Shares/Cash/Debentures in transferee; Cr Transferee company A/c

The transferee account must close to nil once the full PC is received.

Mutual owings

Transferee's debtor = Transferor's creditor → cancel both

Take only the net balance of other assets and liabilities. Include the cancellation in the balance sheet working.

Unrealised profit on closing stock

Profit on sales (P%): Unrealised profit = Stock × P ÷ 100. Profit on cost (P%): Unrealised profit = Stock × P ÷ (100 + P)

Stock means the closing stock still held by the buyer, valued at the transfer price. State the profit basis in your working.

Pooling method: reserves

Reserves of transferor are carried into the transferee in the same form

Per Ind AS 103 Appendix C, the identity of reserves is preserved, for example General Reserve stays General Reserve.

Pooling method: difference

Difference = [Share capital issued + additional consideration in cash or other assets] − [Share capital of transferor] → transferred to capital reserve

Per Ind AS 103 Appendix C para 12, this difference is transferred to capital reserve, whichever way it arises. It is presented separately from other capital reserves, with its nature and purpose disclosed in the notes.

Shares in transferor held by transferee

Shares issued = (Total shares of transferor − Shares held by transferee) × Exchange ratio

The investment is cancelled and no new shares are issued against it.

Purchase consideration

Purchase consideration = Fair value of shares issued + cash paid + other consideration given to the transferor's shareholders

Under the acquisition method, shares issued are valued at fair value, not face value. Use the issue price given in the question.

Goodwill or capital reserve (acquisition method)

Goodwill = Consideration − (Fair value of identifiable assets − Fair value of liabilities taken over)

A positive result is goodwill. A negative result is a bargain purchase gain, recognised after reassessment. It is recognised in other comprehensive income and accumulated in equity as capital reserve. If there is no clear evidence of a bargain purchase, it goes directly to capital reserve in equity.

Share capital issued

Shares to be issued = Consideration payable in shares ÷ Issue price per share

Share capital = number of shares × face value. Securities premium = number of shares × (issue price − face value).

Difference under pooling of interests

Difference = Share capital issued by transferee (plus any other consideration) − Share capital of transferor

Under common control, the transferor's reserves are carried over in the same form. The difference is adjusted in equity, usually in capital reserve. If shares issued exceed the transferor's share capital, the difference is a debit.

Post-merger balance sheet

Post-merger item = Transferee's own balance + Absorbed balance (at fair value or carrying amount) ± adjustments

Total assets must equal total equity and liabilities. Use this as your final check.

Transaction costs

Acquisition-related costs are expensed in the period incurred

Costs of issuing shares are dealt with under the equity standards, not added to goodwill.

Purchase consideration (net assets method)

PC = Agreed value of assets taken over − Liabilities taken over

Use only the assets and liabilities the new company actually takes over, at the values agreed in the scheme.

Purchase consideration (payment method)

PC = Shares at issue price + Debentures + Cash paid to the old company

Use the issue price of shares (including premium), not face value, unless the question says otherwise.

Realisation Account result

Profit or loss = PC received − (Book value of assets taken over − Liabilities taken over) − Realisation expenses borne by the old company

Net assets transferred means the book value of assets taken over less the liabilities taken over. Assets or liabilities not taken over are dealt with separately (realised or settled by the old company). Profit goes to shareholders' credit, loss to their debit, in the Shareholders Account.

Goodwill or capital reserve in new company

Goodwill = PC − Net assets taken over; Capital reserve = Net assets taken over − PC

Apply the sign carefully. PC above net assets gives goodwill; PC below gives capital reserve.

Settlement to shareholders of old company

Amount due = Share capital + Reserves + Realisation profit (or − loss) − Liabilities not taken over and paid by shareholders

Check that total shares and cash received from the new company equals the balance of the Shareholders Account.

Matters the Tribunal may provide for under section 232(3)

Transfer of property and liabilities; allotment of shares; continuation of legal proceedings; dissolution of the transferor without winding-up; provision for dissenters; transfer of employees

These are matters the Tribunal may provide for in its order. Section 232(3) does not prescribe a fixed sequence. Section 232(3)(d) covers dissolution without winding-up of the transferor company.

Quick revision

• Merger by absorption: transferor's business goes to an existing company. Merger by formation of a new company: two or more companies transfer to a new one.
• Purchase consideration is what the transferee gives to the transferor's shareholders, in shares, cash or both.
• Net assets method: agreed value of assets taken over minus liabilities taken over.
• Net payment method adds only the shares and cash given. Lump sum is a stated amount.
• Intrinsic value method uses share values to work out the exchange ratio.
• Pooling of interests keeps the transferor's reserves, and the difference with share capital issued goes to reserves.
• Under the acquisition method, excess consideration over net assets is goodwill. A bargain purchase is treated as Ind AS 103 requires.
• Under Ind AS 103, common control combinations use pooling and other business combinations use the acquisition method.
• The scheme must state an appointed date, and the auditor must certify that the accounting treatment follows the accounting standards under Section 133.
• Shares of the transferee held by the transferor are not held by the transferee after the scheme and are cancelled.
• Cancel mutual owings and investments between the companies, and remove unrealised profit in closing stock.
• In external reconstruction, a new company takes over the business and the old company is wound up.

Common mistakes

• Calling any amalgamation a merger when the shareholders get equity shares. Fix: Always test all five conditions. A single failure, such as revaluation of assets, makes it a purchase.
• Applying the merger-versus-purchase test under Ind AS 103. Fix: Under Ind AS 103 use the acquisition method for non-common-control combinations. The pooling method is for common control only.
• Valuing shares at face value instead of issue price. Fix: Always multiply the number of shares by the issue price. Show share capital and securities premium separately only after finding the total.
• Including liabilities that the transferee does not take over. Fix: Deduct only liabilities expressly taken over. A liability left with the transferor stays out.
• Revaluing assets to fair value under pooling. Fix: Under pooling, use carrying amounts. Only adjust for aligning accounting policies.
• Showing goodwill under pooling. Fix: Under pooling the difference goes to capital reserve, measured against the transferor's share capital.
• Including cash and bank balance in the realisation account when the transferee does not take it over Fix: Read the takeover clause. Items not taken over stay in the books and are used to pay outside claims.
• Valuing assets at the price agreed with the transferee instead of book value Fix: The transferor's realisation account uses its own book values. The agreed price is reflected through the PC.
• Leaving mutual owings in the balance sheet Fix: Always cancel an amount due from the transferor against the amount due to the transferee, and the other way round.
• Issuing shares against shares the transferee already holds in the transferor Fix: Reduce transferor shares by the transferee's holding first, then apply the ratio.

Exam tips

• Write the five conditions in the answer and tick each one against the facts. Examiners award marks for each condition tested.
• State the framework at the start. Say whether you are using AS 14 or Ind AS 103 so that your method is clearly justified.
• For theory questions, give the definition of amalgamation, absorption and external reconstruction separately, with one line of difference.
• In MCQs, look for the one fact that breaks a merger condition, such as cash paid, revaluation, or less than 90% acceptance.
• If asked about cross-border mergers, mention that Section 234 needs prior RBI approval and notified jurisdictions, and that consideration may be in cash or Depository Receipts.
• Read the scheme terms line by line and underline what is taken over and what is left behind. Marks are lost mainly on inclusion and exclusion.
• Show a clear working note for the purchase consideration. Even if one figure is wrong, step marks protect you in the written answer.
• In MCQs on a case scenario, check whether the question asks for total PC or only the share part. The options usually include the wrong total.