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Contents
‡ Accounting Standards: background
‡ Triggering off Event
‡ Accounting Methods for Amalgamation : AS 14
‡ Pooling of Interest Method
‡ Purchase Method
‡ Balance Sheet : Post Merger
‡ Treatments of Reserves on Amalgamation
‡ Battle Over Merger Accounting
Accounting Standards: background
‡ ICAI constituted Accounting Standards Board in
April 1977
‡ International Accounting Standards Committee
± 30 international accounting standards
‡ ICAI formulated 15 accounting standards
‡ ASB trying to integrate them to maximum extent
Triggering off Event
]thyl corporation (US) :
G ^oint owners GM and Standard Oil
G $40 mn profit on the sale of its half share in
the corporation
G GM showed it as proceeds of the part of its
trading income for the year
G Standard Oil did not bring in the surplus in
any P/L account, took the surplus to reserves
Accounting for Amalgamation (AS 14)
Accounting Methods :
1. Amalgamation in the nature of Merger
(Pooling of Interest Method)
2. Amalgamation in the nature of Purchase
(Purchase Method)
Pooling of Interest Method: conditions
1. Assets and liabilities of transferor company
become assets and liabilities of transferee
company after amalgamation
2. Shareholders holding not less than 90% of face
value of equity shares of transferor becomes
equity shareholders of transferee company
3. Cash may be paid for fractional shares
Pooling of Interest Method: conditions
4. Business of transferor company is intended to
be carried on by the transferee company after
amalgamation
5. No ad^ustments to be made to the book value
of assets and liabilities of the transferor
company when they are incorporated in the
financial statements of transferee company,
except to ensure uniformity of accounting
practices
Purchase Method: conditions
‡ Amalgamation which does not satisfy any one or
more conditions of Pooling of Interest Method
eatures of Pooling of Interest Method
‡ Assets and liabilities of the two firms are
combined according to their book value on the
acquisition date.
‡ Total asset value of the ^oint company equals the
sum of assets of the separate firms
‡ Accounting income is higher than in the
purchase method: Depreciation calculated based
on the historical book value of assets
* It is no longer allowed
Purchase Method
‡ Asset and liabilities of the merged company are
presented at their market values as on the date
of acquisition: refers to the value, which was
recorded before the final settlement of the
acquisition deal at the time of bargaining
‡ May overrate depreciation charges: book value
of assets used in accounting is generally lower
than the fair value if there is inflation in the
economy
Balance Sheet: relevance post merger
GPooling of Interest Method: assets, liabilities
and reserves should be stated at same book
value as transferor company¶s books
GPurchase Method: transferee company free to
restate the assets at their µfair value¶
GConsideration discharged otherwise than by way
of shares only: Purchase Method
Relevance of the option given in AS 14
ollowing norms ignored in considering credit
worthiness :-
1. Any intangible asset appearing in the balance
sheet like goodwill, trademark, patent etc.
2. Any revaluation of fixed assets for a period of
five years

D Lenders may ignore revaluation reserve

D Amalgamation surplus
Examples of Pooling of Interest Method
Amalgamation of TOMCO with Hindustan Lever :
GAssets and liabilities of TOMCO transferred &
vested to the company w.e.f. 1st April, 1993.
GAmalgamation accounted for under µpooling of
interests¶
GDifferences, aggregating Rs 6,74.76 lakh (net
assets less paid up value of shares and other
reserves) added to the company¶s General
Reserve in the previous year
Examples of Pooling of Interest Method
Amalgamation of WIL and WSL (1994-95):
M
  M
 
ixed Assets (net of 1,92,193 82,576
depreciation provided)
Investments 33,903 1
Current Assets 1,566,975 1,87,800
1,793,071 2,75,327
Ñ

Current liabilities & 7,35,268 43,248
provisions
Ñ

Loan unds 5,97,309 1,19,413
4,60,494 1,12,666
 M   M
 

Ñ

Arrears of depreciation accounted - 6,762

- 1,05,904

Ñ

Transfers to specific reserves 49,738 844

4,10,756 1,05,060

Ñ

Investment of the company in WIL 1,14,655 39,045

and WSL extinguished on amalgamation
2,96,101 66,105

Ñ

 2,65,105 equity shares of Rs 10 each 389 2,262

issued to minority shareholders of WIL
and WSL
Surplus on amalgamation transferred to 2,95,712 63,753
General Reserve
Examples of Purchase Method
Amalgamation of ]scorts Tractors Ltd with
]scorts Ltd. (1995-96)
Gassets and liabilities as on April 1, 1995 of
]rstwhile ]TL incorporated in the accounts of
the company at their fair market value
Gdifference between the fair values of assets &
liabilities taken over, credited to amalgamation
reserve
Gimpairment of certain assets taken over,
ad^ustments relating to pre amalgamation period
 Examples of Purchase Method
1995-96(M




Ad^ustments relating to pre amalgamation period 0.22

Recognition of leave encashment liability under AS 15 0.21

ees paid for technical know how as part of disengagement 15.69

agreement with New Holland
Reserve for contingent liabilities on account of sales tax 27.50

Provision for inter-corporate deposits placed with MS 0.85

shoes ]ast Ltd and Montari Industries Ltd
Provision for doubtful advances o.42

Deposits written off 0.21

45.10
Amalgamation with Retrospective Effect
GIn most cases there is a time lag of 1 or 2 years
between the sanction from court/ BIR and the
appointed date fixed in the scheme
GCertain companies in the past have incorporated the
results of say, 31 months of transferor company into
12 months results of transferee
GOthers like Amblal Sarabhai ]nterprises Ltd.
reopened their accounts of last 2 yrs. & incorporated
the results in that period & again re- adopted the
accounts by taking sanctions from shareholders
˜ividend to the shareholders of
transferor company
‡ Shareholders of transferor company are entitled
to the dividend w.e.f the appointed date
e.g. µAppropriations made in the accounts of
Hindustan Lever : Arrears of dividend payable to
the shareholdrs of TOMCO after amalgamation¶
Treatments of Reserves on Amalgamation
‡ In case of Pooling of Interest method, reserves of
the transferor company should be preserved by
the transferee company
‡ In case of a sick company absorbed by a
profitable company P/L debit balance of a
transferor company should also be preserved
initially before it being set off
‡ Treatment of the reserves should be as per the
clause mentioned in the scheme
Treatments of Reserves on Amalgamation
r

 



(M 

Profit & Loss Debit Balance Dr 292
ixed Assets Dr 303
Current Assets Dr 673
To ]quity Share Capital (Outside Shareholders) 13
To Loans 668
To Current Liabilities 270
To Revaluation Reserves 164
To Capital Reserve 36
To Investment Allowance Reserve 42
To Capital Reserve(Balancing igure) 55
To Investments 20
Merger Accounting: Intricacies
‡ When shares are allotted by the transferee
company at premium, can it pass entries
recognizing share premium?
Aü]S, value of shares along with premium has to
be recorded in the books
Merger Accounting: Intricacies
2 2




 






1-0-
199

























































































(M 


Profit/ (loss) before tax (981.84)
Prior year expenses (15.73)
Prior year income/ excess provision written back 35.63
Loss brought forward (1042.46)
2004.40
Ñ

 Surplus in revaluation of assets 2027.58
Surplus transferred to Capital Reserve 23.18
The Battle Over Merger Accounting
‡ ³The (purchase) accounting method itself would
prove an obstacle to a merger that both parties
want to consummate. As a result, the wave of
consolidations that has enhanced productivity,
encouraged innovation, and stimulated
dynamism in the U.S. economy may notably
decline." - u Ñ

References
‡ Mergers et Al by Ramanu^am

‡ http://blogs.siliconindia.com/mergers/Mergers
__Acquisitions__A_Conceptual_Overview-bid-
10xKT2zV63179066.html