ACCOUNTING STANDARD 14/ IFRS -3/ IAS - 22: ACCOUNTING FOR AMALGMATION BY NAVEEN.

ROHATGI

CA.CS.ICWA.MBA

SCOPE: Accounting for amalgamations Treatment of goodwill and reserve Purchase Consideration

Purchase 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 (Equity and Preference) of the transferor company.

An amalgamation may be either a) an amalgamation in the nature of merger, b) an amalgamation in the nature of purchase

AMALGMATION IN NATUTRE OFMERGER 1) the assets and liabilities of the transferor are taken over by transferee company 2) Shareholders holding not less than 90% transferor company become equity shareholders of amalgamation.

3) The consideration for the amalgamation is paid in equity shares by the transferee company except fractional shares.
4) The business of the transferor company is intended to be carried out by the transferee company

. 5) No adjustment made in the book value of the assets and liabilities of the transferor company by way of revaluation or otherwise except adjustment to ensure uniformity in accounting policies Amalgamation will be considered in nature of purchase if any conditions regarding amalgamation in nature of merger are not satisfied.

Pooling interest Method (Amalgamation in nature of purchase) : 1. In preparing the financial statement i.e. balance sheet of the Transferee Company after amalgamation line by line addition of respective assets and liabilities of transferor and transferee company should be made except for share capital.
2.

The different between purchase consideration paid by the transferee company to the transferor company and the amount of share capital (equity + preference capital) of the transferor company should be adjusted with reserves. If purchase consideration is more than the share capital of the transferor company (equity + preference share capital), then amount shall be debited to reserves, if reverse is the case, the difference is credited to reserves

3.

Purchase Method (Amalgamation in nature of merger) 1)If any of the conditions of merger is not satisfied, then the amalgamation shall be classified as purchase, therefore the purchase method of accounting shall be followed in the books of Transferee Company. 2)As per the purchase method in the books of transferee company assets and liabilities shall be recorded at the value at which these assets and liabilities are taken over by the transferee company from the transferor company; certainly asset do not include fictitious assets and liabilities do not include inside / internal liabilities i.e. reserves and surplus. 3)If purchase consideration exceeds the net assets taken over (Net Assets = Assets at their agreed value less liabilities at agreed value) the difference is debited to Goodwill account. If purchase consideration is less than the net assets taken over, the difference is credited to capital reserve.

Purchase Method (Amalgamation in nature of merger) 1)If any of the conditions of merger is not satisfied, then the amalgamation shall be classified as purchase, therefore the purchase method of accounting shall be followed in the books of Transferee Company. 2)As per the purchase method in the books of transferee company assets and liabilities shall be recorded at the value at which these assets and liabilities are taken over by the transferee company from the transferor company; certainly asset do not include fictitious assets and liabilities do not include inside / internal liabilities i.e. reserves and surplus. 3)If purchase consideration exceeds the net assets taken over (Net Assets = Assets at their agreed value less liabilities at agreed value) the difference is debited to Goodwill account. If purchase consideration is less than the net assets taken over, the difference is credited to capital reserve.

Significant differences between AS-14, IFRS 3 and IAS -22: 1. IFRS-3/ IAS 22 allows only Purchase method where as AS-14 allows both pooling of interest and purchase method. 2. IFRS-3/ IAS 22 requires valuation of assets and liabilities at fair value whereas AS-14 requires valuation at carrying value.
3.

IFRS-3/ IAS 22 requires goodwill for impairment whereas AS-14 requires amortization of goodwill. IFRS-3/ IAS 22 requires negative goodwill immediately in profit and loss account where as AS-14 requires to be credited to capital reserve. IFRS-3/ IAS 22 reverse acquisition is accounted assuming that acquirer is the acquiree whereas AS-14 does not deal with reverse acquisition.

4.

5.

6. Under IFRS, the useful life of goodwill is indefinite hence not amortized . Under AS-14, the amortization should not exceed 5 years, unless longer period is justified.