AS-14 Amalgamation Accounting: Merger vs. Purchase
Accounting Treatment of Amalgamation as per AS-14
Accounting Standard (AS) 14, ‘Accounting for Amalgamations,’ issued by the Institute of Chartered Accountants of India (ICAI), prescribes the accounting treatment for amalgamations. The standard classifies amalgamations into two types, which determines the appropriate accounting method to be used by the Transferee Company (the acquiring/new company).
I. Types of Amalgamation
AS-14 distinguishes between two types of amalgamation based on the conditions of the transaction:
1. Amalgamation in the Nature of Merger
An amalgamation is classified as a merger only if all five of the following conditions are satisfied:
- All assets and liabilities of the Transferor Company become the assets and liabilities of the Transferee Company.
- Shareholders holding not less than 90% of the face value of the equity shares of the Transferor Company (other than those already held by the Transferee Company) become equity shareholders of the Transferee Company.
- The consideration for the amalgamation is discharged wholly by the issue of equity shares by the Transferee Company, except for cash payment for fractional shares.
- The business of the Transferor Company is intended to be carried on by the Transferee Company.
- 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 books of the Transferee Company, except to ensure uniformity of accounting policies.
2. Amalgamation in the Nature of Purchase
If any one or more of the five conditions for a merger are not satisfied, the amalgamation is treated as being in the nature of purchase.
II. Methods of Accounting Treatment
The type of amalgamation dictates which of the two prescribed accounting methods the Transferee Company must use:
A. Pooling of Interest Method (For Amalgamation in the Nature of Merger)
This method aims to treat the amalgamation as a continuation of the combined businesses, reflecting a true pooling of interests and shareholders’ equity.
- Assets & Liabilities: These are incorporated by the Transferee Company at their existing carrying amounts (book values). Adjustments are only permitted to ensure uniform accounting policies.
- Reserves: All reserves (Statutory and non-Statutory) of the Transferor Company are transferred and amalgamated with the corresponding reserves of the Transferee Company.
- Difference in Share Capital: The difference between the consideration paid and the share capital of the Transferor Company is adjusted in the Reserves (e.g., General Reserve or Profit and Loss Account) of the Transferee Company.
- Goodwill/Capital Reserve: Goodwill or Capital Reserve does not arise under this method as assets and liabilities are recorded at book value.
B. Purchase Method (For Amalgamation in the Nature of Purchase)
This method treats the amalgamation as the acquisition of one company by another.
- Assets & Liabilities: These are incorporated by the Transferee Company at their agreed values or Fair Market Values (FMV), not necessarily their book values.
- Reserves: Only statutory reserves (like Export Profit Reserve, Development Rebate Reserve) are transferred to the books of the Transferee Company by debiting a specially created ‘Amalgamation Adjustment Account.’ Other reserves are not transferred.
- Goodwill or Capital Reserve: The core of this method is the calculation of Purchase Consideration (PC).
- If PC > Net Assets (agreed value of assets – agreed value of liabilities), the excess amount is treated as Goodwill and is amortized over a period not exceeding five years (though a longer period may be justified).
- If PC < Net Assets, the deficit amount is treated as a Capital Reserve.
Comparison Table: Merger vs. Purchase Methods
| Feature | Pooling of Interest Method (Merger) | Purchase Method (Purchase) |
|---|---|---|
| Assets & Liabilities | Recorded at Book Values | Recorded at Fair Values/Agreed Values |
| Reserves | All reserves are transferred | Only Statutory Reserves are transferred |
| Goodwill/Capital Reserve | Does not arise | Arises as the difference between PC and Net Assets |
Differentiating Amalgamation in the Nature of Merger and Purchase (As per AS-14)
The distinction between Amalgamation in the Nature of Merger and Amalgamation in the Nature of Purchase is critical, as it determines the accounting method used by the Transferee Company under AS-14.
A Merger reflects a true pooling of interests and a continuation of the combining businesses, whereas a Purchase is essentially an acquisition where one company buys the business of the other.
Key Differentiators
The distinction hinges on whether a transaction satisfies all five stipulated conditions for a ‘Merger’. If all five conditions are met, it is a Merger; if any one or more conditions are not met, it is a Purchase.
| Basis of Distinction | Amalgamation in the Nature of Merger | Amalgamation in the Nature of Purchase |
|---|---|---|
| 1. Accounting Method Used | Pooling of Interest Method | Purchase Method |
| 2. Transfer of Assets & Liabilities | All assets and liabilities of the Transferor Company are transferred to the Transferee Company. | There is no compulsion to transfer all assets and liabilities. Specific assets/liabilities may be excluded. |
| 3. Continuity of Shareholding | Shareholders holding not less than 90% of the face value of the equity shares of the Transferor Company must become equity shareholders of the Transferee Company. | There is no such condition. Shareholding continuity is not mandatory. |
| 4. Discharge of Consideration (PC) | Consideration to the equity shareholders must be discharged wholly by the issue of Equity Shares of the Transferee Company (cash only for fractional shares). | Consideration can be discharged in any form: Cash, Debentures, Preference Shares, or a combination, including equity shares. |
| 5. Business Continuity | The business of the Transferor Company is intended to be carried on by the Transferee Company. | The business of the Transferor Company is generally not intended to be continued (or its identity may be lost). |
| 6. Valuation of Assets & Liabilities | Assets and liabilities are incorporated at their Book Values (existing carrying amounts). | Assets and liabilities are incorporated at their Fair Market Values (or agreed values). |
| 7. Reserves Transfer | All reserves (statutory and non-statutory) are transferred and merged. | Only statutory reserves are required to be transferred. Other reserves lose their identity. |
| 8. Goodwill/Capital Reserve | Does not arise (since assets are recorded at book value). Any difference is adjusted in the reserves. | Arises as the difference between Purchase Consideration and the Fair Value of Net Assets acquired. |
| 9. Economic Substance | Substance of a joint venture/true pooling of resources and ownership. | Substance of an acquisition or takeover. |
For a quick revision of this topic, you can watch this video: AS 14 | Amalgamation of Company | Quick Revision | CA Inter | English. This video provides a detailed breakdown of AS 14 for accounting students.