Amalgamation: Meaning and Types of Amalgamation

The below mentioned article provides a study note note on the Meaning and Types of Amalgamation.

Meaning of Amalgamation:

In order to reap the economies of scale and to reduce or eliminate competition, two or more than two joint stock companies may combine their undertakings and becomes one joint stock company.

ADVERTISEMENTS:

It may be done either by one of the existing joint stock companies taking over the other combining company or companies, the latter being dissolved or by starting a new joint stock company which takes over all the combining joint stock companies. Suppose, there are two joint stock companies A Ltd. and B Ltd.

Now A Ltd. may take over the business of B Ltd. which is dissolved or B Ltd. may absorb A Ltd. There is another choice. Both A Ltd. and B Ltd. may be dissolved and the business of both the companies may be taken over by a newly formed joint stock company, say C Ltd. In all the three cases, we shall say that there is an amalgamation of A Ltd. and B Ltd.

According to Halsbury’s Laws of England:

“Amalgamation is a blending of two or more existing undertakings into one undertaking, the shareholders of each blending company becoming substantially the shareholders in the company which is to carry on the blended undertakings. There may be amalgamation either by transfer of two or more undertakings to a new company or by the transfer of one or more undertakings to an existing company.”

The Institute of Chartered Accountants of India has issued Accounting Standard (AS) 14 on Accounting for Amalgamations. It has been made effective in respect of accounting periods commencing on or after 1st April, 1995. It is mandatory in nature.

With the issue of this Standard, the guidance Note on Accounting Treatment of Reserves in Amalgamations issued by the Institute in 1993 stands withdrawn with effect from the abovementioned date.

ADVERTISEMENTS:

According to AS-14, amalgamation means an amalgamation pursuant to the provisions of the Companies Act, 1956, or any other statute which may be applicable to companies. However, the Companies Act, 1956 has not specifically defined the term amalgamation.

But it is noteworthy that the Accounting Standard 14 has done away with the distinction between merger and amalgamation. According to AS-14, merger is only a type of, and therefore, only a part of amalgamation.

Types of Amalgamation:

Amalgamation may be in the nature of (i) merger or (ii) purchase.

Amalgamation in the nature of merger is an amalgamation which satisfies all the following conditions:

ADVERTISEMENTS:

(i) All the assets and liabilities of the transferor company become, after amalgamation, the assets and liabilities of the transferee company. The transferor company means the company which is amalgamated into another company while the transferee company means the company into which a transferor company is amalgamated.

(ii) Shareholders holding not less than 90% of the face value of the equity shares of the transferor company (other than the equity shares already held therein, immediately before the amalgamation, by the transferee company or its subsidiaries or their nominees) become equity shareholders of the transferee company by virtue of the amalgamation.

(iii) The consideration for the amalgamation receivable by those equity shareholders of the transferor company who agree to become equity shareholders of the transferee company is discharged by the transferee company wholly by the issue of equity shares in the transferee company, except that cash may be paid in respect of any fractional shares.

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 of the transferor company.

ADVERTISEMENTS:

(iv) The business of the transferor company is intended to be carried on, after the amalgamation, by the transferee company.

(v) No adjustment is intended to be made to the book values of the assets and liabilities of the transferor company when they are incorporated in the financial statements of the transferee company except to ensure uniformity of accounting policies.

An amalgamation is classified as an ‘amalgamation in the nature of merger’, when all the conditions listed above are satisfied.

There are, however, differing views regarding the nature of any further conditions that may apply. Some believe that, in addition to an exchange of equity shares, it is necessary that the shareholders of the transferor company obtain a substantial share in the transferee company even to the extent that it should not be possible to identify any one party as dominant therein.

This belief is based in part on the view that the exchange of control of one company for an insignificant share in a larger company does not amount to a mutual sharing of risk and benefits.

Others believe that the substance of an amalgamation in the nature of merger is evidenced by meeting certain criteria regarding the relationship of the parties, such as the former independence of the amalgamating companies, the manner of their amalgamation, the absence of planned transactions that would undermine the effect of the amalgamation, and the continuing participation by the management of the transferor company in the management of the transferee company after the amalgamation.

,


Related pages


disadvantages of debenturesaccounting ratios and formulaswhat is current liabilities with examplesindustrial financial institutionsmeaning of arbitrage in hindioverhead recovery rate formulabank reconciliation examples problemsoverhead variance analysisthe adjusted trial balance is preparedformula weighted average cost of capitalgeneral ledger vs general journalwealth maximization goalfactoring of debtsreceiver and liquidatorsecuritized noteswhat is the meaning of ledger in accountingwhat is budgetary control definitionm&m proposition 1meaning of explicit coststores requisition notedifferent types of profitability ratioswhat is a multinational corporation mnclabour absorption ratetrading account proformawhat is the meaning of amalgamatemoneys received basis of accountinghow to prepare a proforma balance sheettypes of variances in standard costingwhen is the trial balance preparedexamples of absorption costingbep analysis exampleapplications of marginal costingadvantages of stable dividend policytypes of budgeting in management accounting4 column bank reconciliationfactors that determine elasticity of supplybank reconciliation statement preparationwhat is the meaning of amalgamationbenefits of cvp analysisdeficit financing and economic developmentdefine professional misconductlearn bank reconciliation statementassest meaningeoq diagramaccounting for overheadsmeaning of reconcile in accountingwindow dressing accounting examplethe output of mrp isbuyback of shares pdfdebtor collection period ratiohow to compute break even analysisformula for operating leverageoar formula accountingbank to book reconciliation formatccps sharesunder the cost-recovery method of revenue recognitioncriticism of standard costingwhat does amalgamation meanformula for breakevenliquidation accounting treatmentdifference between tax evasion and tax avoidancedifferent types of npaprime cost percentage ratemeaning of trade cycleinterpolation formula for irrflexed budgetequity gearing formulaequilibria meaningaudit in hindisuspense account in accountingcvp costingbalance sheet solved problemsaccounting window dressingadjusted cash book formatsole proprietor balance sheetbills of exchange discounting