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CS Professional · Corporate Restructuring, Valuation and Insolvency · Accounting in Corporate Restructuring: Concept and Accounting Treatment

Farah Ltd and Gagan Ltd are under common control. Farah's balance sheet has general reserve of Rs 40 lakh and retained earnings of Rs 25 lakh; Gagan's reserves are separate. On a merger of Farah into Gagan under pooling, how are Farah's reserves treated in Gagan's books?

Farah's reserves are carried into Gagan's financial statements in the same form in which they appeared in Farah's books. Appendix C requires preserving the identity of reserves under pooling. They are not eliminated or recast as capital reserve, apart from the adjustments for the share capital difference.

  1. AEliminated against investment and not carried forward
  2. BCarried forward in the same form as in Farah's books, except statutory reserves handled as per the schemeCorrect
  3. CConverted wholly into capital reserve
  4. DTransferred to securities premium

Explanation

Appendix C requires the identity of the reserves to be preserved, so they appear in the transferee's financial statements in the same form as in the transferor's. Converting them to capital reserve is the acquisition-style error, and eliminating them loses their identity.

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