In the process, two separate units come together to create an entirely new company. The combination helps the businesses act collectively with respect to their expertise and make the new entity self-sufficed. The fact that neither entity survives in an amalgamation is what sets it apart from a merge or an acquisition as in those cases at least one of the companies or organisations involved stays intact in the market.
Amalgamation vs Merger vs Absorption
- Such companies often decide to go through the process of amalgamation and combine to form a totally new identity in order to diversify their activities and expand their reach in the market.
- The terms like amalgamation, merger, and acquisition are used when two or more companies decide to come together to form a new entity.
- In this process, the companies which go into liquidation is known as Amalgamating Companies or Vendor Companies whereas the company which is newly formed is referred to as the Amalgamated Company or Vendee Company.
- In the process of acquisition, both companies survive and keep their identity.
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. 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.
An amalgamation is the combination of two or more companies into an entirely new entity. Amalgamations are distinct from acquisitions in that none of the companies involved in the transaction survive as a legal entity. Instead, a completely new entity, with the combined assets and liabilities of the former companies, is born.
But, here one should know that Amalgamation can occur in two ways i.e. in the form of merger or the form of absorption. Amalgamation takes place when two or more companies with similar types of business combine their business operations to cut costs or to achieve synergy. Sometimes companies opt for amalgamation when they want to enter a new market and want to create a new product. The following are the reasons for which companies choose for amalgamation. The shareholders of the transferee company become the transferor company holding a minimum of 90% face value of equity shares. In this type of amalgamation, no adjustments are made among the companies to book values.
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. An amalgamation is a process of combining two or more companies to create a new company. The amalgamation is quite different from the merger, as all the companies involved in the process of amalgamation lose their previous identity to become a new entity. The newly formed entity holds the assets and liabilities of all combined companies. 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 what do you mean by amalgamation statements of the transferor company.
What Is an Amalgamation Reserve in Accounting?
While some amalgamations receive a warm welcome, a few invites criticism, and legal disputes. One such much-talked-about merger is of the two major grocers of the United States – Kroger and Albertsons. The expected merger is likely to set a monopoly in the grocery industry as the top two grocers of the country plan to unite. The two main types of amalgamation are amalgamation in the nature of a merger and amalgamation in the nature of a purchase.
However, sometimes forming a completely new company by combining the two existing companies to get more benefits may take place. To understand what this term actually means and how it works let us have a look at the process in a little more detail. The first type of amalgamation is a kind of amalgamation where all the companies involved in the amalgamation process combine their assets, liabilities, and shareholders’ interests. All the assets and liabilities of the transferor company became the assets and liabilities of the transferee company.
New Business Terms
While amalgamations tend to involve voluntary agreements between the different parties, acquisitions can occur without the assent of the acquired company, in what’s known as a hostile takeover. The terms of an amalgamation are finalized by the board of directors of each company involved. In India, for example, that authority resides in the High Court and Securities and Exchange Board of India (SEBI). The goodwill arising on amalgamation should be amortised to income on a systematic basis over its useful life.
Difference Between Amalgamation and Absorption
When it comes to the method of accounting, if the amalgamation affected is in the nature of merger, then pooling of interest method is followed, whereas if the amalgamation is in the nature of the purchase, in that case, purchase method is followed. The process is opted for to increase the value of the business, build capital, enjoy tax benefits, eliminate competition, have diversified business functions, expand a business, etc. Although both these types seem fairly similar, it is important to differentiate them and know the difference because both the types need different methods of accounting. In accounting, the amalgamation reserve is the amount of cash left over at the new entity after the amalgamation is completed. Once approved, the new company officially becomes a legal entity and can issue shares of stock in its own name. 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.
Similarly, the shareholders of the old entity turn out as the shareholders of the amalgamated entity. For corporate entities to amalgamate, at least two companies of similar nature need to liquidate. The firms that liquidate are vendor companies, while the new one established to take over them becomes the purchasing company. The purchase provision is considered when the latter issues equity shares for investors to build capital. 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.
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. In amalgamation, the companies that are wound up or merged are termed as vendor or transferor companies. On the other hand, the new company that acquires the liquidated ones or the company with which the vendor company is combined is considered as the transferee or vendee company.
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. 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.
The terms of the amalgamation are finalised by the board of directors of the involved companies. After this the detailed plan is prepared and submitted to the High court and the Securities and Exchange Board of India (SEBI). These authorities need to approve the submitted plan and the shareholders of the new company for the process to go further. The consideration for the amalgamation should include any non- cash element at fair value.
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 in the nature of ‘purchase’. Amalgamation occurs in two forms – the nature of the merger and the nature of the purchase. The former is the combining entities wherein the assets and liabilities of the involved participants are pooled and collectively viewed along with the interests of shareholders and of the businesses these entities are a part of. In the process, all the corporate elements of the companies are merged.
