Advanced Accounting · AS 14 Accounting for Amalgamations

AS 14 Scope and Types of Amalgamation: Merger vs Purchase

Updated 5 October 2026 · Fact-checked

AS 14 governs accounting for amalgamations of companies. An amalgamation is either in the nature of merger, if all five prescribed conditions are met, or in the nature of purchase, if any one is not met. To solve a question, test each condition in order.

Understand AS 14 Scope and Types of Amalgamation

Amalgamation means two or more companies combine. Either one company absorbs another, or a new company is formed to take over the combining companies. The company that goes out of existence is the transferor company. The company that takes over its business is the transferee company.

AS 14 applies to amalgamations of companies, whether or not they are carried out under a statutory scheme such as a court or tribunal scheme. It deals with accounting for amalgamations and their effects on the financial statements of the amalgamated (transferee) company, including the treatment of goodwill arising on amalgamation. A company that only acquires shares of another company, which then becomes its subsidiary, is not an amalgamation. AS 14 does not deal with goodwill arising on consolidation (AS 21) or with accounting for investments (AS 13).

AS 14 recognises two types. In an amalgamation in the nature of merger, the combining companies' shareholders continue as owners and the businesses are pooled. In an amalgamation in the nature of purchase, one company in effect buys the other. The type decides the accounting method: pooling of interests for merger and the purchase method for purchase.

For a merger, all of these conditions must hold:
- All assets and liabilities of the transferor company become those of the transferee company.
- Shareholders holding at least 90% of the face value of the transferor's equity shares (excluding shares already held by the transferee or its nominees) become equity shareholders of the transferee.
- The consideration for the shares held by those equity shareholders who become transferee shareholders is discharged wholly by issue of equity shares in the transferee. Cash may be paid only for fractional shares. Consideration paid to other shareholders, who do not become transferee shareholders, does not affect this test.
- The business of the transferor is intended to be carried on by the transferee.
- No adjustment is intended to be made to the book values of the transferor's assets and liabilities when they are incorporated, except to ensure uniform accounting policies.

If even one condition fails, the amalgamation is in the nature of purchase. There is no choice between the methods. The conditions decide the type, and the type decides the method.

Key rules to remember

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.

How to solve AS 14 Scope and Types of Amalgamation questions

Use this method for any question that asks you to identify or justify the type of amalgamation.

1Identify the transferor (the company being absorbed or wound up) and the transferee (the company taking over).
2Check condition 1: are all assets and liabilities taken over? If some are left out, it is purchase.
3Check condition 2: compute the percentage of the transferor's equity shares (by face value) that are held by shareholders who become transferee shareholders. Exclude shares already held by the transferee. It must be at least 90%.
4Check condition 3: is the consideration for those shares wholly equity shares of the transferee? Cash for fractional shares is allowed.
5Check conditions 4 and 5: is the business to continue, and are book values to be kept without adjustment, except for uniform accounting policies?
6State the conclusion: all five met means merger (pooling of interests); otherwise purchase (purchase method). Name the failed condition.
7If asked, state the method of accounting that follows.

Quickest way: Five-condition scan

When to use it: Use in MCQs and in the first lines of a written answer when the question gives a short fact pattern.

Scan the facts for words that signal a failure: cash, debentures, preference shares given to equity holders, assets not taken over, revaluation, business to be closed.
Do the 90% arithmetic only if shareholding numbers are given. Remember to exclude shares the transferee already holds.
For MCQs, if any one failure is found, mark purchase and stop. If none is found, mark merger.
For written answers, write one line per condition: condition, fact, met or not met. Then write the conclusion and the method. Each line can earn a mark.

Common mistakes in AS 14 Scope and Types of Amalgamation

Calling it a merger when 90% is met but the consideration to equity shareholders who become transferee shareholders includes cash or debentures.
Students stop after the percentage test and forget that consideration must be wholly equity shares.
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.
Students use total issued equity shares by habit.
Fix: Exclude equity shares already held by the transferee or its nominees, then compute the percentage.
Treating preference shareholders in the 90% test.
Students confuse equity and preference shares.
Fix: The 90% test is on equity shares only. Preference shareholders' treatment is a separate matter.
Saying the company can choose pooling or purchase method.
Students think of methods as a policy choice.
Fix: The method follows the type. Merger uses pooling of interests and purchase uses the purchase method.
Ignoring revaluation of assets as a failure of condition 5.
Students focus on shares and overlook the book value condition.
Fix: If the transferee records the transferor's assets at fair values instead of book values, it is purchase. Only changes for uniform accounting policies are allowed.
Mixing up transferor and transferee.
The terms look alike and the direction of transfer is easy to reverse.
Fix: Transferor transfers its business and goes out. Transferee receives it.

Worked examples

Example 1

A Ltd takes over B Ltd. B Ltd has 1,00,000 equity shares of ₹10 each. A Ltd already holds 10,000 of these shares. Holders of 85,500 shares agree to the scheme, become shareholders of A Ltd and receive only equity shares of A Ltd as consideration. The holders of the remaining 4,500 shares do not become shareholders of A Ltd. All assets and liabilities are taken over at book values, and A Ltd will continue B's business. Identify the type of amalgamation.

Show the solution

Shares held by the transferee are excluded: 1,00,000 − 10,000 = 90,000 shares.
Shares whose holders become A Ltd shareholders: 85,500. The other 4,500 shares (85,500 + 4,500 = 90,000) belong to holders who do not become A Ltd shareholders.
Condition 2: 85,500 ÷ 90,000 = 95%. This meets the 'at least 90%' test.
Condition 3 is tested on the consideration for the shares held by those who become A Ltd shareholders. Those 85,500 shares get only equity shares of A Ltd, so condition 3 is met.
The AS 14 conditions look only at the shares of holders who become A Ltd shareholders. Whatever is paid to the holders of the other 4,500 shares does not affect the merger test. Those 4,500 shares are 5% of the 90,000, which is within the maximum 10% (9,000 shares) that may remain outside the scheme.
Conditions 1, 4 and 5 are met: all assets and liabilities taken over, business continues, book values kept.

Answer: All five conditions are met, so it is an amalgamation in the nature of merger. Account for it using the pooling of interests method.

Example 2

P Ltd absorbs Q Ltd. All Q Ltd's equity shareholders will get equity shares of P Ltd. P Ltd will revalue Q Ltd's land upward before recording it and will carry on Q Ltd's business. All assets and liabilities are taken over. Identify the type of amalgamation and the method of accounting.

Show the solution

Condition 1: all assets and liabilities are taken over. Met.
Condition 2: all equity shareholders become shareholders of P Ltd, so 100% (at least 90%). Met.
Condition 3: consideration is wholly equity shares. Met.
Condition 4: the business will be carried on. Met.
Condition 5: land is to be revalued before recording, so book values are adjusted. Not met.
One failed condition is enough to make it a purchase. The method follows the type.

Answer: It is an amalgamation in the nature of purchase because condition 5 fails. Use the purchase method.

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.

Practice questions from AS 14 Accounting for Amalgamations

AS 14 Scope and Types of Amalgamation in other exams

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

AS 14 Scope and Types of Amalgamation: frequently asked questions

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

There are five. All assets and liabilities are taken over. Shareholders holding at least 90% of the face value of the transferor's equity shares (excluding shares already held by the transferee or its nominees) become equity shareholders of the transferee, and the consideration for those shares is wholly equity shares. The business is intended to continue, and book values are not adjusted except for uniform accounting policies.

What is the difference between amalgamation in the nature of merger and purchase?

In a merger, all five conditions are met and the shareholders' interests are pooled, so the pooling of interests method is used. In a purchase, at least one condition fails and the transferee is treated as acquiring the business, so the purchase method is used.

Who is the transferor and who is the transferee company?

The transferor company is the one that is amalgamated and loses its separate identity. The transferee company is the one that takes over the business, either an existing company or a new company formed for the purpose.

Can cash be paid to shareholders in a merger?

Cash may be paid only for fractional shares to those equity shareholders who become transferee shareholders. If any other cash or non-equity consideration is paid to them, the consideration condition fails and the amalgamation is in the nature of purchase. Payment to dissenting shareholders, who do not become transferee shareholders, does not affect the merger classification.