Accounting Standard (AS) 14 Accounting for Amalgamations (This Accounting Standard includes paragraphs set in bold italic type an...
Accounting Standard (AS) 14
Accounting for Amalgamations
(This Accounting Standard includes paragraphs set
in bold italic type and plain type, which have equal authority. Paragraphs in
bold italic type indicate the main principles. This Accounting Standard should
be read in the context of the General Instructions contained in part A of the
Annexure to the Notification.)
1.
This
standard deals with accounting for amalgamations and the treatment of any
resultant goodwill or reserves. This standard is directed principally to
companies although some of its requirements also apply to financial statements
of other enterprises.
2.
This
standard 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 standard with
the meanings specified:
(a) Amalgamation means an
amalgamation pursuant to the provisions of the Companies Act, 2013 or any other
statute which may be applicable to companies and includes ‘merger’.
(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
(i) All the
assets and liabilities of the transferor company become, after amalgamation,
the assets and liabilities of the transferee company.
(ii) Share
holders 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
As defined in AS 21, Consolidated Financial
Statements
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, Net Profit or Loss for the Period, Prior Period Items and
Changes in Accounting Policies.
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 is 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 Reserve’) which is presented as a separate line
item. When the identity 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:
(a)
the
foreseeable life of the business or industry;
(b)
the effects of product
obsolescence, changes in demand and other economic factors;
(c)
the
service life expectancies of key individuals or groups of employees;
(d)
expected
actions by competitors or potential competitors; and
(e)
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
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. In some cases, the scheme of amalgamation sanctioned under a
statute may prescribe a different treatment to be given to the reserves of the
transferor company after amalgamation as compared to the requirements of this
Standard that would have been followed had no treatment been prescribed by the
scheme. In such cases, the following disclosures are made in the first
financial statements following the amalgamation:
(a)
A
description of the accounting treatment given to the reserves and the reasons
for following the treatment different from that prescribed in this Standard.
(b)
Deviations
in the accounting treatment given to the reserves as prescribed by the scheme
of amalgamation sanctioned under the statute as compared to the requirements of
this Standard that would have been followed had no treatment been prescribed by
the scheme.
(c)
The
financial effect, if any, arising due to such deviation.
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.
Main Principles
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
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 Net Profit or Loss for the
Period, Prior Period 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 Reserve’)
which should be presented as a separate line item. 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 noncash
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. Where the scheme of amalgamation sanctioned under a
statute prescribes a different treatment to be given to the reserves of the
transferor company after amalgamation as compared to the requirements of this
Standard that would have been followed had no treatment been prescribed by the
scheme, the following disclosures should be made in the first financial
statements following the amalgamation:
(a) A
description of the accounting treatment given to the reserves and the reasons
for following the treatment different from that prescribed in this Standard.
(b) Deviations
in the accounting treatment given to the reserves as prescribed by the scheme
of amalgamation sanctioned under the statute as compared to the requirements of
this Standard that would have been followed had no treatment been prescribed by
the scheme.
(c) The
financial effect, if any, arising due to such deviation.
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
(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 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.
This is applicable from 01.04.2017
Amendment in Other accounting standards
Notification
AS 2, Valuation of Inventories
AS 4, Contingencies and Events Occurring After the Balance Sheet Date
AS 10, Property, Plant and Equipment
AS 13, Accounting for Investments
AS 21, Consolidated Financial Statements
AS 29, Provisions, Contingent Liabilities and Contingent Assets
Amendment in Other accounting standards
COMMENTS