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CA Intermediate · Advanced Accounting · AS 14 Accounting for Amalgamations

Meera Ltd amalgamates with Nikhil Ltd, treated as a purchase. Meera's statutory reserve of Rs 3,00,000 (Development Allowance Reserve) is required by law to be maintained for a further period. Net assets at fair value are Rs 20,00,000 and the consideration is Rs 18,00,000. How should Nikhil Ltd treat the statutory reserve in its books?

Nikhil Ltd should retain the statutory reserve of Rs 3,00,000 in its books and debit an equal Amalgamation Adjustment Reserve. AS 14 requires this where the reserves must be maintained under law. The reserve is not eliminated, and it is separate from the Rs 2,00,000 capital reserve on the purchase.

  1. AIgnore it, as in a purchase all reserves of the transferor are eliminated
  2. BCredit it to capital reserve with the Rs 2,00,000 difference
  3. CRecord it as goodwill reduction of Rs 3,00,000
  4. DRetain it by creating an Amalgamation Adjustment Reserve of Rs 3,00,000 on the asset side, and show the statutory reserve in its balance sheetCorrect

Explanation

AS 14 requires that if statutory reserves of the transferor are to be preserved, they are recorded in the transferee's books by crediting the reserve and debiting Amalgamation Adjustment Reserve. Capital reserve of Rs 2,00,000 arises separately from net assets Rs 20,00,000 less consideration Rs 18,00,000.

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