This article is written by Sun Hwa Choi who is pursuing a Diploma in M&A, Institutional Finance and Investment Laws (including PE and VC transactions) from LawSikho.

Introduction

When it comes to an amalgamation, it regards as the integration of two or more companies into a larger single corporation. There are accounting features for amalgamation which is related into amalgamation of two or more entities, separately from legal features by the corporation to be complied with. As per Accounting Standard 14 (AS 14), which is applicable for amalgamation especially, stipulates specific conditions to be attained to consideration for amalgamation. 

It contains on features regarding to transformation of assets and liabilities,  the matter on shareholders of transferor firms forming shareholder of transferee firms. It stipulates that the accounting and disclosure indispensable factors in view of amalgamations of firms and the remedy of any combined goodwill or reserves. This standard is intended primarily for companies, despite the fact that part of indispensable factors enter into financial statements of other business enterprises.

This standards does not cover acquisition cases that occurs when a company, noted to as an acquiring company, purchases all or part of the shares and assets or in another firm, noted to as the acquired company, in the result of payment in cash, issues of shares, or other securities of the acquiring company some in one form and some in another. A striking aspect of the acquisition is that the acquired company does not disperse so that becoming as a separate legal entity keeps on existing.

Definition of Amalgamation

When it comes to amalgamation, two or more companies are integrated into one by a merger or one acquisition. Hence, the term ‘amalgamation ‘ refers to two kinds of activities:

(i) more than one company joins to create a new company, or

(ii) absorption and mixing with each other.

Therefore, amalgamation contains absorption.

The aim of business together is to stable various benefits such as economy of mass production, evading competition, soaring efficiency, expanding, etc.

A liquidated or merged enterprise is called a vendor firm or transferor firm. A new corporation formed to acquire a liquidated firm, or a company in which a transferor firm is amalgamated, is called a transferee or vendee.

In the event of amalgamation, the assets and liabilities of the transferor firm(s) are merged and the transferee company is attributable to those assets and liabilities.

There is an external reconstruction when the business is carried out by the company and is substantially transferred to another enterprise consisting of the same shareholders in order to continue by the transferee firm, not an outsider. These external reorganizations are mandatory to be kept in the category ‘amalgamation in the nature of merger’ in Accounting Standard (AS) 14, Accounting for Amalgamations.

Basis	1. Amalgamation	2. Absorption	3.1 Internal Reconstruction	3.2 External Reconstruction
Definition	Two or more companies are disbanded, and a new firm is established to hand over the business.	The current firm hands over the undertaking of one or more current companies.	It’s a plan that works to get relief through reduced liabilities that make the firm out of losses and put it in a profitable position. It is carried out through the restructuring of stock capital, which is a reorganization plan that is voluntarily sacrificed by all stakeholders in the capital structure.	The newly established enterprise hands over the work of the current company.
Minimum number of Companies related	Minimum number of  three companies are participated.	Minimum number of two companies are joined.	Only two companies are related.	Only two companies are related.
Number of brand-new resultant companies	As a result, only one firm is created. The two companies come together to establish a single resultant enterprise.	No brand-new resultant firm is created.	The firm is not liquidated, or a new firm is not created.	As a result, only one resultant firm is created. In this case, the newly established enterprise hands over the business of the current firm.
Purpose	Amalgamation is carried out to reduce competition and harvest the economy on a large scale.	Absorption is carried out to reduce competition and harvest the economy on a large scale.	The firm confronts constant financial difficulties and long suffered outgoings. Here, share capital may change asset valued its fair and some debt may be written off by its shareholders, bondholders, and creditors.	External reconstruction is carried out to reconstruct the financial structure of the enterprise. The old company goes into liquidation and the shareholders agree to take shares of equal value from the new company
Precedent	Maruti motors(India) and Suzuki(Japan) were amalgamated to establish Maruti Suzuki.	Myntra (Indian online Fashion business) was established to take over the current undertaking of Flipkart (India’s bigges5 online stores including fashion and mobiles) & Hutch (Indian mobile service provider), after that Vodafone (UK Mobile company) acquired.	After the Cabinet approved the restructuring plan for YES Bank in March 2020, private lenders ICICI Bank, HDFC, Kotak Mahindra Bank and Axis Bank rescued the bank’s running out of cash.	Lucky and Gold Star integrated and established Lucky-Goldstar in 1983. Koo Bonmu changed the company name to LG (South Korean electronics corporation) in 1995, which is designed of the letters L and G regarding the firm’s “Life’s Good” tagline.

What are Types of Amalgamations?

The Institute of Chartered Accountants of India (ICAI) has brought in Accounting Standard -14 (AS 14) on ‘Accounting for Amalgamations’ issued, is practicable to Transferee Company (Buying Company). The standard acknowledges two types of amalgamation – 

• Amalgamation in the nature of merger
• Amalgamation in nature of purchase

Purchase Consideration

There are in four ways of the purchase price can be calculated:

• One-time payment (Lump Sum) method 
• Net worth or net worth method 
• Net payment method 
• Intrinsic value method (stock exchange method).

What are Purchase Consideration Methods?

1. One-time payment (Lump Sum) method 

The purchasing firm can be in an agreement to make a payment in one time  method to the supplier firm as a reason to buy the undertaking. In reality, this method is not founded on scientific concept and technology, which is an unscientific and non-mathematical way to check purchasing considerations.

For instance, a buying firm  decided to hand over the undertaking of sale’s firm with Rs. 7,00,000. In this transaction, the purchase price is Rs. 7,00,000. No calculation is required.

2. Net Worth or Net Assets Method

In this method, the consideration for purchase is computed by summing up the worth of all kinds of assets acquired by the purchasing firm and then subtracting them from the worth of all kinds of liabilities acquired by the purchasing company. The worth of assets and liabilities to be considered for purchase are the worth agreed upon between the purchaser and the supplier, not the value of the all kinds of assets and liabilities shown on the supplier’s balance sheet.

(Summed value of acquired assets) – (summed value of acquired liabilities) = net worth

3. Net payment method

An agreement between the selling company and the buying company may state the amount to be paid to the shareholders of the selling company in the form of cash, stocks or debentures from the buying company. According to AS-14, consideration for amalgamation means the sum of the issued shares and other securities and payments made by the transferee firm to shareholders of the transferor firm in the form of cash or other assets. Therefore, the purchase price of the net payment method is the total amount of stocks, debentures, and cash owed for the transferor firm’s shares and claims of preference shareholders.

The purchase price is calculated from the net payment method based on:

1. The supplier firm   agrees to redeem the 7% debentures at a premium of 10% by capitalising the supplier firm’s 9% debentures.
2. Preference shares are issued at a premium of 10% by capitalising 15% preferential shares of Rs. 100 each from the supplier firm.
3. Abi Ltd. 3 shares of Rs per share 2 shares, additionally, the cash payment of Rs, 10 pieces of each of the supplier firm will be capitalised. Abi Ltd. 3 per share.

4. Intrinsic Value Law (Stock Exchange Method)

In this method, the net value of the asset is computed to the net worth method and divided by the worth of one share of the transferee firm, which provides the total number of shares the firm will gain from the transferee shareholder or transferee firm. If you know the number of shares the transferor firm will gain, you can find the share ratio by dividing it by the current stocks of the transferor firm.

Suppose that you can use 100 shares of the transferee firm’s shares by transfer or exchanging 50 shares of the firm, and you can use 2 shares of the transferee firm’s shares for each share of the transferor firm. Hence, the ratio is 1:2, which is also known as the Share Proportion Method.

Intrinsic Value = Number of assets/shares available to shareholders

What are Method of Accounting for Amalgamation?

What is Pooling of interest method?

The equity pooling method of accounting for mergers and acquisitions is to consolidate the balance sheets of the two companies into one balance sheet based on their book value. After that, the historical financial statements are rewritten. This method counts out intangible assets from the consolidated balance sheet if they are not already recognized in the balance sheet of one of the existing enterprises. Therefore, no goodwill is reported in connection with a merger or acquisition. Expenses related to the business combination were recorded as part of the company’s comprehensive income.

In short, with the accounting method, the transferee firm on their current carrying figures records to the transfer company the assets, liabilities and reserves. 

What is Benefit of Pooling of Interests method?

Some particular sectors are favourable to use the interest pooling method of accounting for business integrations prior to its disruption. The use of this method peaked in 1998, accounting for 52% of the total trading volume in United States. In terms of dollars, it amounted to $850 billion. Large tech firms made profit on these pooling methods because they were able to evade recording the associated acquisition costs. Also, in this method, the reduction on goodwill was not needed, resulting in stronger profits. This had the added value of soaring profits on assets and capital.

What is Purchase (Price) method?

The purchase price method is a method of creating a linked balance sheet on a fair value basis. The transfer company constitutes the amalgamation by consolidating the assets and liabilities into their current carrying figures or by allocating consideration to the transfer or the individual assets and liabilities of the company based on the fair value at the date of the amalgamation by this method.

 When a company buys a target company, in FASB Accounting Standards Codification (ASC) 805 stipulates comprehensive guidance on how to compute the various components of goodwill, including intangible assets such as customer lists, trade names and revenue leases. 

For instance, Ernst & Young published a report in 2009 announcing purchase price allocation practices for 54 telecom deals. As a result, it was found that intangible assets constitute an average of 30% of the value of the acquired company, and goodwill accounts for an average of 60% of the value of the company. There are Intangible assets with a variety of assets, for example, trademarks and trade names, technology, non-compete agreements, contracts, customer relationships, and licenses.

Case study on Amalgamation

One of the amalgamations lately made an announcement to the front of the enterprise is PVR Limited in 2017. Multiplex operator PVR Limited has authorised an amalgamation plan between Bijli Holdings Private Limited and itself to make simple the equity structure of PVR. According to management, the objective of the amalgamation is to make simple PVR’s stake structure and reduce the stake hierarchy. It also plans to show Bijli Holdings immediately participating in PVR. After the amalgamation, each promoter will immediately grasp shares in PVR, and there will be no transition in the total promoters’ holdings in PVR.

Conclusion 

Amalgamation is one of Mergers and Acquisitions’ tools that can assist businesses evading competition and including to market products. It is for the mutual benefit of the acquirer and the acquired company. This is an appropriate method of corporate restructuring to cause better change and make the business environment competitive.

The accounting standard for amalgamation is interpreted as allowing an enterprise in a rare and dissimilar accounting practice that goes over various times, even the relatively accepted accounting, instead of legally achieving the goal of equalizing treatment in all scenarios of amalgamation.

Furthermore, integration of AS and IFRS in India is practicable with the continuation updated on the accounting standard alterations or modification for the users.

References 

https://cleartax.in/s/as-14-accounting-for-amalgamations

https://legaldhanda.com/blogs/accounting-aspects-of-amalgamation/

https://www.edupristine.com/blog/amalgamation-explained-detail

https://www.securedocs.com/blog/what-is-amalgamation-1#:~:text=Two%20types%20of%20amalgamations%20exist,works%20more%20like%20a%20merger.

https://castudyweb.com/wp-content/uploads/2019/05/Amended-Amalgamation-of-Companies-ICAI-Notes.pdf

https://www.accountingnotes.net/amalgamation/top-4-methods-of-purchase-consideration-amalgamation/12603

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skill.

LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join: