Advanced Accounting · Amalgamation of Companies

Amalgamation: Meaning and Types under AS 14

Updated 4 October 2026 · Fact-checked

Under AS 14, amalgamation means one or more companies combining into another company or forming a new one. It is either in the nature of merger, if all five conditions are met, or in the nature of purchase, if any one is not met. The type decides the accounting method.

Understand Amalgamation: Meaning and Types under AS 14

Amalgamation is when two or more companies join together. The company that is amalgamated into another company and loses its identity is the transferor company. The company that takes over its assets and liabilities is the transferee company. AS 14 covers two forms: a new company formed to take over the transferors, or an existing company absorbing one or more others. The common feature is that the transferor company loses its identity.

AS 14 recognises two types: an amalgamation in the nature of merger and an amalgamation in the nature of purchase. The type depends only on the five conditions given in the standard. Condition 4, the intention to carry on the transferor's business, is itself one of those five tests. How the parties label the deal, for example calling it a merger or a purchase, does not decide the type. The facts tested against the five conditions do.

The test is mechanical. An amalgamation is in the nature of merger only if ALL five conditions are satisfied. If even one fails, it is in the nature of purchase. You do not have a choice of treatment. The type decided by the conditions fixes the method: pooling of interests for merger, purchase method for purchase.

The five conditions cover assets and liabilities, shareholders, consideration, intention and book values. Learn them as a checklist and tick each one against the facts given in the question.

The purchase consideration is defined for both types of amalgamation. It is the aggregate of the shares and other securities issued, and the payments made in cash or other assets, by the transferee to the shareholders of the transferor. It does not include amounts paid to creditors or debenture holders, as those are liabilities taken over. Under the purchase method, you compare the consideration with the net assets taken over to compute goodwill or capital reserve. Under pooling of interests, you compare it with the share capital of the transferor to find the adjustment to reserves.

Key rules to remember

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.

How to solve Amalgamation: Meaning and Types under AS 14 questions

Use this method for any question that asks you to classify an amalgamation or justify its type.

1Identify the transferor and the transferee companies from the facts.
2Write the five conditions as a checklist: assets and liabilities, 90% equity holders, consideration in equity shares, intention to continue the business, no book value adjustment.
3Test each condition against the data. Use figures where given, for example compute the 90% test on face value.
4Exclude shares already held by the transferee or its subsidiaries before applying the 90% test.
5Check the form of consideration to the transferor's equity shareholders. Equity shares only (plus cash for fractions) satisfies the condition. Preference shares, debentures or cash to equity shareholders do not.
6State the conclusion: merger if all five are met, purchase if any one fails. Name the failed condition.
7State the method to be used: pooling of interests or purchase method.
8If asked, add the main accounting difference: reserves are preserved in merger; goodwill or capital reserve arises in purchase.

Quickest way: Five-condition tick check

When to use it: Use it for MCQs and short classification questions, where you need the answer in under a minute.

Scan the facts for the single red flag: cash paid to equity shareholders, preference shares or debentures issued to them as consideration, assets left out, assets revalued, or the business to be closed.
If you find any one red flag, answer purchase immediately.
If none appears, confirm the 90% test on face value, excluding shares held by the transferee.
If all pass, answer merger.
In written answers, write the five conditions in one line each, tick or cross each, then give the conclusion. Each condition earns step marks.

Common mistakes in Amalgamation: Meaning and Types under AS 14

Calling an amalgamation a merger because most conditions are met.
Students treat the conditions as a majority test.
Fix: All five must be met. One failure means purchase.
Applying the 90% test on number of shareholders or on market value.
The word shareholders suggests counting people.
Fix: Test the face value of equity shares, and exclude shares held by the transferee, its subsidiaries or nominees.
Treating preference shares issued to the transferor's preference holders as breaking the merger conditions.
Students read the equity-only rule as covering all shareholders.
Fix: The equity-shares-only consideration test applies to the transferor's equity shareholders. Issue of preference shares to the transferor's preference shareholders with the same rights does not make the amalgamation a purchase.
Ignoring revaluation of assets as a failed condition.
Students focus on shares and cash and skip the book value condition.
Fix: If the transferee records the transferor's assets at agreed or fair values different from book values, condition 5 fails. An adjustment made only to bring accounting policies into uniformity does not fail it.
Thinking cash paid in lieu of fractional shares makes it a purchase.
Students see the word cash and flag it.
Fix: Cash for fractional shares is permitted in a merger. Other cash to equity shareholders is not.

Worked examples

Example 1

A Ltd takes over all assets and liabilities of B Ltd. B Ltd has 1,00,000 equity shares of ₹10 each. A Ltd already holds 10,000 of these shares. Of the remaining shares, holders of 81,000 shares become equity shareholders of A Ltd and are paid wholly in A Ltd equity shares. The business of B Ltd will continue and assets are taken at book values. Classify the amalgamation.

Show the solution

Transferor is B Ltd. Transferee is A Ltd.
Condition 1: all assets and liabilities are taken over. Met.
Condition 2: exclude the 10,000 shares held by A Ltd. Shares counted = 1,00,000 − 10,000 = 90,000.
90% of 90,000 = 81,000 shares. Holders of 81,000 shares become shareholders of A Ltd, which is exactly 90%. Met.
Condition 3: consideration is wholly in equity shares. Met.
Condition 4: business to be continued. Met.
Condition 5: book values used with no adjustment. Met.

Answer: All five conditions are met, so it is an amalgamation in the nature of merger. Pooling of interests method applies.

Example 2

P Ltd absorbs Q Ltd. All assets and liabilities are taken over and the business of Q Ltd will continue. Shareholders of Q Ltd holding 95% of its equity shares will receive 80% of the consideration in P Ltd equity shares and 20% in cash. Assets will be taken at book values. Classify the amalgamation and name the method.

Show the solution

Condition 1: all assets and liabilities taken over. Met.
Condition 2: 95% of equity shareholders by face value become shareholders of P Ltd, which is at least 90%. Met.
Condition 3: consideration must be wholly in equity shares. Here 20% is paid in cash, and this is not for fractional shares. Not met.
Condition 3 fails, so the amalgamation is in the nature of purchase regardless of conditions 4 and 5. Apply the purchase method.

Answer: It is an amalgamation in the nature of purchase because condition 3 fails. The purchase method is used.

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.

Practice questions from Amalgamation of Companies

Amalgamation: Meaning and Types under AS 14 in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Amalgamation: Meaning and Types under AS 14: frequently asked questions

What are the conditions for amalgamation in the nature of merger under AS 14?

There are five. All assets and liabilities pass to the transferee, equity holders of at least 90% of face value become shareholders of the transferee, consideration is wholly in equity shares (cash only for fractions), the business is intended to continue, and no adjustment is made to book values except to ensure uniform accounting policies. All must be met.

What is the difference between merger and purchase under AS 14?

A merger meets all five conditions and uses the pooling of interests method, so reserves of the transferor are generally preserved. A purchase fails at least one condition and uses the purchase method, where assets may be recorded at fair values and goodwill or capital reserve can arise.

Who are the transferor and transferee companies?

The transferor company is the one that is amalgamated and loses its separate identity. The transferee company is the one into which the transferor is merged, or the new company formed to take over the businesses.

Can an amalgamation be partly merger and partly purchase?

No. AS 14 recognises only two types. The five-condition test places each amalgamation wholly in one type.