Amalgamation is a common business strategy used by companies to expand operations, achieve economies of scale, or restructure their business. In India, the accounting treatment of amalgamations is governed by Accounting Standard 14 (AS 14). This standard provides clarity on how amalgamations should be recorded in the books of the transferee company, ensuring consistency, transparency, and fairness in financial reporting.
This article explains AS 14 in a simple and practical manner, covering its meaning, objectives, types of amalgamations, accounting methods, and key implications for companies.
Introduction
In today’s dynamic corporate environment, companies often merge or combine their businesses to remain competitive. Such combinations, legally referred to as amalgamations, involve the transfer of assets and liabilities from one or more companies to another company.
Accounting for these transactions is not merely a bookkeeping exercise. It directly impacts the financial statements, profitability, reserves, and overall financial position of the company. To bring uniformity in accounting practices, the Institute of Chartered Accountants of India (ICAI) introduced Accounting Standard 14 – Accounting for Amalgamations.
AS 14 lays down the principles and methods to be followed while accounting for amalgamations in the books of the transferee company.
Meaning of Amalgamation Under AS 14
As per AS 14, an amalgamation refers to the combination of two or more companies into one company, in such a manner that:
- one or more companies are merged into an existing company, or
- two or more companies merge to form a new company.
In an amalgamation, the assets and liabilities of the transferor company are taken over by the transferee company, and shareholders of the transferor company usually receive shares in the transferee company as consideration.
Objective of AS 14
The primary objective of AS 14 is to prescribe –
- the accounting treatment for amalgamations, and
- the disclosure requirements in the financial statements of the transferee company.
The standard ensures that amalgamations are recorded in a manner that reflects their true economic substance and does not distort the financial results.
Types of Amalgamations Under AS 14
AS 14 classifies amalgamations into two broad categories based on their nature and intent.
1. Amalgamation in the Nature of Merger
An amalgamation is treated as a merger when all the conditions specified under AS 14 are satisfied. These conditions broadly indicate that the combining companies intend to continue business operations jointly and share risks and rewards.
Key features include –
- All assets and liabilities of the transferor company become assets and liabilities of the transferee company.
- Shareholders holding at least 90% of the equity shares of the transferor company become shareholders of the transferee company.
- The business of the transferor company is intended to be carried on after amalgamation.
- Consideration is discharged only by the issue of equity shares, except for fractional shares.
Such amalgamations are treated as a pooling of interests rather than a purchase.
2. Amalgamation in the Nature of Purchase
If any of the conditions required for a merger are not fulfilled, the amalgamation is classified as an amalgamation in the nature of purchase.
In this type of amalgamation:
- The transferee company acquires the business of the transferor company.
- Assets and liabilities may be recorded at fair values.
- The shareholders of the transferor company may or may not become shareholders of the transferee company.
This form of amalgamation reflects an acquisition rather than a continuation of joint ownership.
Methods of Accounting Under AS 14
AS 14 prescribes two methods of accounting depending on the type of amalgamation.
1. Pooling of Interests Method
This method is used for amalgamations in the nature of a merger. Under this method:
- Assets, liabilities, and reserves of the transferor company are recorded at their existing book values.
- No goodwill or capital reserve arises.
- The identity of reserves is preserved.
- The difference between share capital issued and share capital of the transferor company is adjusted against reserves.
This method reflects continuity of business and ownership.
2. Purchase Method
This method is applied in amalgamations in the nature of a purchase. Under this approach:
- Assets and liabilities of the transferor company are recorded at their agreed or fair values.
- The difference between the consideration paid and net assets acquired results in goodwill or capital reserve.
- Only statutory reserves are preserved, subject to compliance with legal requirements.
This method reflects the acquisition nature of the transaction.
Treatment of Goodwill and Capital Reserve
Under the purchase method, if the consideration exceeds the net assets acquired, the excess is recorded as goodwill, which is amortised over its useful life.
If the net assets acquired exceed the consideration, the difference is treated as a capital reserve, reflecting a gain on acquisition.
Consideration in Amalgamation
Consideration refers to the amount payable by the transferee company to the shareholders of the transferor company. It may include:
- issue of equity shares,
- preference shares,
- cash, or
- other securities.
Disclosure Requirements Under AS 14
AS 14 requires adequate disclosures to ensure transparency. Companies must disclose –
- the names of the companies involved,
- the nature of the amalgamation,
- the method of accounting used,
- details of consideration, and
- treatment of goodwill or reserves.
These disclosures help stakeholders understand the financial impact of the amalgamation.
Significance of AS 14 to Corporate Financial Reporting
The Amalgamation Accounting Standard 14 (AS 14) has been instrumental in developing a comprehensive accounting framework across India regarding Amalgamations. It establishes uniform criteria for the presentation of Amalgamation Financial Statements (AFS), thus preventing the misrepresentation or manipulation of profit or reserve figures through arbitrary accounting practices. Establishing AFS in accordance with AS 14 instils confidence and reliability in the minds of investors, lenders and regulatory authorities – thereby creating a basis for sound decision-making based on financial reporting.
Conclusion
In summary, the Amalgamation Accounting Standard 14 (AS 14) provides Companies with a consistent and transparent process for presenting their Amalgamations in the Financial Records (FR). This includes identifying and classifying Amalgamations as Mergers or Purchases and providing guidance on what is acceptable as a method of recognition in accordance with AS 14. In order to remain in Good Standing with all Stakeholders, it is essential for Companies to have a full comprehension of and adhere strictly to the requirements of AS 14.
Related Services
