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CA Intermediate · Advanced Accounting · Amalgamation of Companies

Sundaram Textiles Ltd (transferor) has 1,00,000 equity shares of ₹10 each, held by outside shareholders, and no other shares. Kaveri Fabrics Ltd (transferee) takes over all its assets and liabilities at book values. Holders of 85,000 shares (85% of face value) receive equity shares of Kaveri Fabrics. The remaining 15,000 shares are paid for in cash. The business of Sundaram Textiles will continue. All other conditions are met. How should the amalgamation be classified under AS 14?

It is an amalgamation in the nature of purchase. AS 14 requires equity holders of at least 90% of the face value of the transferor's equity shares to become equity holders of the transferee for a merger. Only 85% do so, so that condition fails and purchase treatment applies.

  1. AAmalgamation in the nature of merger, because the larger part of the consideration is paid in equity shares
  2. BAmalgamation in the nature of purchase, because equity holders of at least 90% of the face value of the transferor's equity do not become equity holders of the transfereeCorrect
  3. CAmalgamation in the nature of merger, because the business of the transferor will continue
  4. DAmalgamation in the nature of purchase, because the transferee has paid some of the consideration in cash

Explanation

One condition for a merger under AS 14 is that equity shareholders holding at least 90% of the face value of the transferor's equity shares become equity shareholders of the transferee. Here only 85% do, so the condition fails and the amalgamation is in the nature of purchase. Cash payment alone does not decide the classification, because the 90% test governs.

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