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Statements of Accounting
Standards (AS 14)
Accounting for Amalgamations
The following is the text of Accounting
Standard (AS) 14, 'Accounting for Amalgamations', issued by the
Council of the Institute of Chartered Accountants of India.
This standard will come into effect
in respect of accounting periods commencing on or after 1.4.1995
and will be mandatory in nature. The Guidance Note on Accounting
Treatment of Reserves in Amalgamations issued by the Institute
in 1983 will stand withdrawn from the aforesaid date.
Introduction
1. This statement deals with accounting
for amalgamations and the treatment of any resultant goodwill
or reserves. This statement is directed principally to companies
although some of its requirements also apply to financial statements
of other enterprises.
2. This statement does not deal with
cases of acquisitions which arise when there is a purchase by
one company (referred to as the acquiring company) of the whole
or part of the shares, or the whole or part of the assets, of
another company (referred to as the acquired company) in consideration
for payment in cash or by issue of shares or other securities
in the acquiring company or partly in one form and partly in the
other. The distinguishing feature of an acquisition is that the
acquired company is not dissolved and its separate entity continues
to exist.
Definitions
3. The following terms are used in
this statement with the meanings specified:
(a) Amalgamation means an amalgamation
pursuant to the provisions of the Companies Act, 1956 or any other
statute which may be applicable to companies.
(b) Transferor company means
the company which is amalgamated into another company.
(c) Transferee company means
the company into which a transferor company is amalgamated.
(d) Reserve means the portion
of earnings, receipts or other surplus of an enterprise (whether
capital or revenue) appropriated by the management for a general
or a specific purpose other than a provision for depreciation
or diminution in the value of assets or for a known liability.
(e) Amalgamation in the nature
of merger is an amalgamation which satisfies all the following
conditions.
(i) All the assets and liabilities
of the transferor company become, after amalgamation, the assets
and liabilities of the transferee company.
(ii) Shareholders holding not less
than 90% of the face value of the equity shares of the transferor
company (other than the equity shares already held therein, immediately
before the amalgamation, by the transferee company or its subsidiaries
or their nominees) become equity shareholders of the transferee
company by virtue of the amalgamation.
(iii) The consideration for the amalgamation
receivable by those equity shareholders of the transferor company
who agree to become equity shareholders of the transferee company
is discharged by the transferee company wholly by the issue of
equity shares in the transferee company, except that cash may
be paid in respect of any fractional shares.
(iv) The business of the transferor
company is intended to be carried on, after the amalgamation,
by the transferee company.
(v) No adjustment is intended to be
made to the book values of the assets and liabilities of the transferor
company when they are incorporated in the financial statements
of the transferee company except to ensure uniformity of accounting
policies.
(f) Amalgamation in the nature
of purchase is an amalgamation which does not satisfy any
one or more of the conditions specified in sub-paragraph (e) above.
(g) Consideration for the amalgamation
means the aggregate of the shares and other securities issued
and the payment made in the form of cash or other assets by the
transferee company to the shareholders of the transferor company.
(h) Fair value is the amount
for which an asset could be exchanged between a knowledgeable,
willing buyer and a knowledgeable, willing seller in an arm's
length transaction.
(i) Pooling of interests is
a method of accounting for amalgamations the object of which is
to account for the amalgamation as if the separate businesses
of the amalgamating companies were intended to be continued by
the transferee company. Accordingly, only minimal changes are
made in aggregating the individual financial statements of the
amalgamating companies.
Explanation
Types of Amalgamations
4. Generally speaking, amalgamations
fall into two broad categories. In the first category are those
amalgamations where there is a genuine pooling not merely of the
assets and liabilities of the amalgamating companies but also
of the shareholders' interests and of the businesses of these
companies. Such amalgamations are amalgamations which are in the
nature of 'merger' and the accounting treatment of such amalgamations
should ensure that the resultant figures of assets, liabilities,
capital and reserves more or less represent the sum of the relevant
figures of the amalgamating companies. In the second category
are those amalgamations which are in effect a mode by which one
company acquires another company and, as a consequence, the shareholders
of the company which is acquired normally do not continue to have
a proportionate share in the equity of the combined company, or
the business of the company which is acquired is not intended
to be continued. Such amalgamations are amalgamations in the nature
of 'purchase'.
5. An amalgamation is classified as
an 'amalgamation in the nature of merger' when all the conditions
listed in paragraph 3(e) are satisfied. There are, however, differing
views regarding the nature of any further conditions that may
apply. Some believe that, in addition to an exchange of equity
shares, it is necessary that the shareholders of the transferor
company obtain a substantial share in the transferee company even
to the extent that it should not be possible to identify any one
party as dominant therein. This belief is based in part on the
view that the exchange of control of one company for an insignificant
share in a larger company does not amount to a mutual sharing
of risks and benefits.
6. Others believe that the substance
of an amalgamation in the nature of merger is evidenced by meeting
certain criteria regarding the relationship of the parties, such
as the former independence of the amalgamating companies, the
manner of their amalgamation, the absence of planned transactions
that would undermine the effect of the amalgamation, and the continuing
participation by the management of the transferor company in the
management of the transferee company after the amalgamation.
Methods of Accounting for Amalgamations
7. There are two main methods of accounting
for amalgamations:
(a) the pooling of interests method;
and
(b) the purchase method.
8. The use of the pooling of interests
method is confined to circumstances which meet the criteria referred
to in paragraph 3(e) for an amalgamation in the nature of merger.
9. The object of the purchase method
is to account for the amalgamation by applying the same principles
as are applied in the normal purchase of assets. This method is
used in accounting for amalgamations in the nature of purchase.
The Pooling of Interests Method
10. Under the pooling of interests
method, the assets, liabilities and reserves of the transferor
company are recorded by the transferee company at their existing
carrying amounts (after making the adjustments required in paragraph
11).
11. If, at the time of the amalgamation,
the transferor and the transferee companies have conflicting accounting
policies, a uniform set of accounting policies is adopted following
the amalgamation. The effects on the financial statements of any
changes in accounting policies are reported in accordance with
Accounting Standard (AS) 5, 'Prior Period and Extraordinary Items
and Changes in Accounting Policies'.
The Purchase Method
12. Under the purchase method, the
transferee company accounts for the amalgamation either by incorporating
the assets and liabilities at their existing carrying amounts
or by allocating the consideration to individual identifiable
assets and liabilities of the transferor company on the basis
of their fair values at the date of amalgamation. The identifiable
assets and liabilities may include assets and liabilities not
recorded in the financial statements of the transferor company.
13. Where assets and liabilities are
restated on the basis of their fair values, the determination
of fair values may be influenced by the intentions of the transferee
company. For example, the transferee company may have a specialised
use for an asset, which is not available to other potential buyers.
The transferee company may intend to effect changes in the activities
of the transferor company which necessitate the creation of specific
provisions for the expected costs, e.g. planned employee termination
and plant relocation costs.
Consideration
14. The consideration for the amalgamation
may consist of securities, cash or other assets. In determining
the value of the consideration, an assessment is made of the fair
value of its elements. A variety of techniques is applied in arriving
at fair value. For example, when the consideration includes securities,
the value fixed by the statutory authorities may be taken to be
the fair value. In case of other assets, the fair value may be
determined by reference to the market value of the assets given
up. Where the market value of the assets given up cannot be reliably
assessed, such assets may be valued at their respective net book
values.
15. Many amalgamations recognise that
adjustments may have to be made to the consideration in the light
of one or more future events. When the additional payment is probable
and can reasonably be estimated at the date of amalgamation, it
is included in the calculation of the consideration. In all other
cases, the adjustment is recognised as soon as the amount is determinable
[see Accounting Standard (AS) 4, Contingencies and Events Occurring
after the Balance Sheet Date].
Treatment of Reserves on Amalgamation
16. If the amalgamation is an 'amalgamation
in the nature of merger', the identity of the reserves is preserved
and they appear in the financial statements of the transferee
company in the same form in which they appeared in the financial
statements of the transferor company. Thus, for example, the General
Reserve of the transferor company becomes the General Reserve
of the transferee company, the Capital Reserve of the transferor
company becomes the Capital Reserve of the transferee company
and the Revaluation Reserve of the transferor company becomes
the Revaluation Reserve of the transferee company. As a result
of preserving the identity, reserves which are available for distribution
as dividend before the amalgamation would also be available for
distribution as dividend after the amalgamation. The difference
between the amount recorded as share capital issued (plus any
additional consideration in the form of cash or other assets)
and the amount of share capital of the transferor company is adjusted
in reserves in the financial statements of the transferee company.
17. If the amalgamation is an 'amalgamation
in the nature of purchase', the identity of the reserves, other
than the statutory reserves dealt with in paragraph 18, is not
preserved. The amount of the consideration is deducted from the
value of the net assets of the transferor company acquired by
the transferee company. If the result of the computation is negative,
the difference is debited to goodwill arising on amalgamation
and dealt with in the manner stated in paragraphs 19-20. If the
result of the computation is positive, the difference is credited
to Capital Reserve.
18. Certain reserves may have been
created by the transferor company pursuant to the requirements
of, or to avail of the benefits under, the Income-tax Act, 1961;
for example, Development Allowance Reserve, or Investment Allowance
Reserve. The Act requires that the identity of the reserves should
be preserved for a specified period. Likewise, certain other reserves
may have been created in the financial statements of the transferor
company in terms of the requirements of other statutes. Though,
normally, in an amalgamation in the nature of purchase, the identity
of reserves is not preserved, an exception is made in respect
of reserves of the aforesaid nature (referred to hereinafter as
'statutory reserves') and such reserves retain their identity
in the financial statements of the transferee company in the same
form in which they appeared in the financial statements of the
transferor company, so long as their identity is required to be
maintained to comply with the relevant statute. This exception
is made only in those amalgamations where the requirements of
the relevant statute for recording the statutory reserves in the
books of the transferee company are complied with. In such cases
the statutory reserves are recorded in the financial statements
of the transferee company by a corresponding debit to a suitable
account head (e.g., 'Amalgamation Adjustment Account') which is
disclosed as a part of 'miscellaneous expenditure' or other similar
category in the balance sheet. When the identify of the statutory
reserves is no longer required to be maintained, both the reserves
and the aforesaid account are reversed.
Treatment of Goodwill Arising on Amalgamation
19. Goodwill arising on amalgamation
represents a payment made in anticipation of future income and
it is appropriate to treat it as an asset to be amortised to income
on a systematic basis over its useful life. Due to the nature
of goodwill, it is frequently difficult to estimate its useful
life with reasonable certainty. Such estimation is, therefore,
made on a prudent basis. Accordingly, it is considered appropriate
to amortise goodwill over a period not exceeding five years unless
a somewhat longer period can be justified.
20. Factors which may be considered
in estimating the useful life of goodwill arising on amalgamation
include:
- the foreseeable life of the business or
industry;
- the effects of product obsolescence, changes
in demand and other economic factors;
- the service life expectancies of key individuals
or groups of employees;
- expected actions by competitors or potential
competitors; and
- legal, regulatory or contractual provisions
affecting the useful life.
Balance of Profit and Loss Account
21. In the case of an 'amalgamation
in the nature of merger', the balance of the Profit and Loss Account
appearing in the financial statements of the transferor company
is aggregated with the corresponding balance appearing in the
financial statements of the transferee company. Alternatively,
it is transferred to the General Reserve, if any.
22. In the case of an 'amalgamation
in the nature of purchase', the balance of the Profit and Loss
Account appearing in the financial statements of the transferor
company, whether debit or credit, loses its identity.
Treatment of Reserves Specified in A Scheme of
Amalgamation
23. The scheme of amalgamation sanctioned
under the provisions of the Companies Act, 1956 or any other statute
may prescribe the treatment to be given to the reserves of the
transferor company after its amalgamation. Where the treatment
is so prescribed, the same is followed.
Disclosure
24. For all amalgamations, the following
disclosures are considered appropriate in the first financial
statements following the amalgamation:
(a) names and general nature of business
of the amalgamating companies;
(b) effective date of amalgamation
for accounting purposes;
(c) the method of accounting used
to reflect the amalgamation; and
(d) particulars of the scheme sanctioned
under a statute.
25. For amalgamations accounted for
under the pooling of interests method, the following additional
disclosures are considered appropriate in the first financial
statements following the amalgamation:
(a) description and number of shares
issued, together with the percentage of each company's equity
shares exchanged to effect the amalgamation;
(b) the amount of any difference between
the consideration and the value of net identifiable assets acquired,
and the treatment thereof.
26. For amalgamations accounted for
under the purchase method, the following additional disclosures
are considered appropriate in the first financial statements following
the amalgamation:
(a) consideration for the amalgamation
and a description of the consideration paid or contingently payable;
and
(b) the amount of any difference between
the consideration and the value of net identifiable assets acquired,
and the treatment thereof including the period of amortisation
of any goodwill arising on amalgamation.
Amalgamation after the Balance Sheet Date
27. When an amalgamation is effected
after the balance sheet date but before the issuance of the financial
statements of either party to the amalgamation, disclosure is
made in accordance with AS 4, 'Contingencies and Events Occurring
after the Balance Sheet Date', but the amalgamation is not incorporated
in the financial statements. In certain circumstances, the amalgamation
may also provide additional information affecting the financial
statements themselves, for instance, by allowing the going concern
assumption to be maintained.
Accounting Standard
(The Accounting Standard comprises
paragraphs 28–46 of this Statement. The Standard should be read
in the context of paragraphs 1–27 of this Statement and of the
'Preface to the Statements of Accounting Standards'.)
28. An amalgamation may be either
–
(a) an amalgamation in the nature
of merger, or
(b) an amalgamation in the nature
of purchase.
29. An amalgamation should be considered
to be an amalgamation in the nature of merger when all the following
conditions are satisfied:
(i) All the assets and liabilities
of the transferor company become, after amalgamation, the assets
and liabilities of the transferee company.
(ii) Shareholders holding not less
than 90% of the face value of the equity shares of the transferor
company (other than the equity shares already held therein, immediately
before the amalgamation, by the transferee company or its subsidiaries
or their nominees) become equity shareholders of the transferee
company by virtue of the amalgamation.
(iii) The consideration for the
amalgamation receivable by those equity shareholders of the transferor
company who agree to become equity shareholders of the transferee
company is discharged by the transferee company wholly by the
issue of equity shares in the transferee company, except that
cash may be paid in respect of any fractional shares.
(iv) The business of the transferor
company is intended to be carried on, after the amalgamation,
by the transferee company.
(v) No adjustment is intended to
be made to the book values of the assets and liabilities of the
transferor company when they are incorporated in the financial
statements of the transferee company except to ensure uniformity
of accounting policies.
30. An amalgamation should be considered
to be an amalgamation in the nature of purchase, when any one
or more of the conditions specified in paragraph 29 is not satisfied.
31. When an amalgamation is considered
to be an amalgamation in the nature of merger, it should be accounted
for under the pooling of interests method described in paragraphs
33–35.
32. When an amalgamation is considered
to be an amalgamation in the nature of purchase, it should be
accounted for under the purchase method described in paragraphs
36–39.
The Pooling of Interests Method
33. In preparing the transferee
company's financial statements, the assets, liabilities and reserves
(whether capital or revenue or arising on revaluation) of the
transferor company should be recorded at their existing carrying
amounts and in the same form as at the date of the amalgamation.
The balance of the Profit and Loss Account of the transferor company
should be aggregated with the corresponding balance of the transferee
company or transferred to the General Reserve, if any.
34. If, at the time of the amalgamation,
the transferor and the transferee companies have conflicting accounting
policies, a uniform set of accounting policies should be adopted
following the amalgamation. The effects on the financial statements
of any changes in accounting policies should be reported in accordance
with Accounting Standard (AS) 5 'Prior Period and Extraordinary
Items and Changes in Accounting Policies'.
35. The difference between the
amount recorded as share capital issued (plus any additional consideration
in the form of cash or other assets) and the amount of share capital
of the transferor company should be adjusted in reserves.
The Purchase Method
36. In preparing the transferee
company's financial statements, the assets and liabilities of
the transferor company should be incorporated at their existing
carrying amounts or, alternatively, the consideration should be
allocated to individual identifiable assets and liabilities on
the basis of their fair values at the date of amalgamation. The
reserves (whether capital or revenue or arising on revaluation)
of the transferor company, other than the statutory reserves,
should not be included in the financial statements of the transferee
company except as stated in paragraph 39.
37. Any excess of the amount of
the consideration over the value of the net assets of the transferor
company acquired by the transferee company should be recognised
in the transferee company's financial statements as goodwill arising
on amalgamation. If the amount of the consideration is lower than
the value of the net assets acquired, the difference should be
treated as Capital Reserve.
38. The goodwill arising on amalgamation
should be amortised to income on a systematic basis over its useful
life. The amortisation period should not exceed five years unless
a somewhat longer period can be justified.
39. Where the requirements of the
relevant statute for recording the statutory reserves in the books
of the transferee company are complied with, statutory reserves
of the transferor company should be recorded in the financial
statements of the transferee company. The corresponding debit
should be given to a suitable account head (e.g., 'Amalgamation
Adjustment Account') which should be disclosed as a part of 'miscellaneous
expenditure' or other similar category in the balance sheet. When
the identity of the statutory reserves is no longer required to
be maintained, both the reserves and the aforesaid account should
be reversed.
Common Procedures
40. The consideration for the amalgamation
should include any non-cash element at fair value. In case of
issue of securities, the value fixed by the statutory authorities
may be taken to be the fair value. In case of other assets, the
fair value may be determined by reference to the market value
of the assets given up. Where the market value of the assets given
up cannot be reliably assessed, such assets may be valued at their
respective net book values.
41. Where the scheme of amalgamation
provides for an adjustment to the consideration contingent on
one or more future events, the amount of the additional payment
should be included in the consideration if payment is probable
and a reasonable estimate of the amount can be made. In all other
cases, the adjustment should be recognised as soon as the amount
is determinable [see Accounting Standard (AS) 4, Contingencies
and Events Occurring after the Balance Sheet Date].
Treatment of Reserves Specified in A Scheme
of Amalgamation
42. Where the scheme of amalgamation
sanctioned under a statute prescribes the treatment to be given
to the reserves of the transferor company after amalgamation,
the same should be followed.
Disclosure
43. For all amalgamations, the
following disclosures should be made in the first financial statements
following the amalgamation:
(a) names and general nature of
business of the amalgamating companies;
(b) effective date of amalgamation
for accounting purposes;
(c) the method of accounting used
to reflect the amalgamation; and
(d) particulars of the scheme sanctioned
under a statute.
44. For amalgamations accounted
for under the pooling of interests method, the following additional
disclosures should be made in the first financial statements following
the amalgamation:
(a) description and number of shares
issued, together with the percentage of each company's equity
shares exchanged to effect the amalgamation;
(b) the amount of any difference
between the consideration and the value of net identifiable assets
acquired, and the treatment thereof.
45. For amalgamations accounted
for under the purchase method, the following additional disclosures
should be made in the first financial statements following the
amalgamation:
(a) consideration for the amalgamation
and a description of the consideration paid or contingently payable;
and
(b) the amount of any difference
between the consideration and the value of net identifiable assets
acquired, and the treatment thereof including the period of amortisation
of any goodwill arising on amalgamation.
Amalgamation after the Balance Sheet Date
46. When an amalgamation is effected
after the balance sheet date but before the issuance of the financial
statements of either party to the amalgamation, disclosure should
be made in accordance with AS 4, 'Contingencies and Events Occurring
after the Balance Sheet Date', but the amalgamation should not
be incorporated in the financial statements. In certain circumstances,
the amalgamation may also provide additional information affecting
the financial statements themselves, for instance, by allowing
the going concern assumption to be maintained.
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