MODULE 4

ACCOUNTING ASPECTS
OF
MERGERS
AND
ACQUISITION
Dr. Rajesh P Ganatra

Introduction

When a company just acquires

another company but does not
amalgamate
that
company
within
itself,
the
shares
purchased from the promoters
and other shareholders are
shown as investment in the
acquirer companys books and
are accounted at the cost at
which they were acquired.
In the target companys books
no adjustment is required at all.

Accounting Fundamentals
Amalgamation

Demerger

Books of account and balance

sheet of two (or more)
companies are required to be
combined.
The Institute of Chartered
Accountants of India (ICAI)
has
issued
Accounting
Standard 14 (AS 14) which
classifies different accounting
methods applicable to different
types of amalgamations.

Books of account and balance

sheet of the demerged company
are required to be split into two or
more.
The ICAI has not prescribed
any Accounting Standard.
The accounting norms for (tax
neutral) demergers are stipulated
in the Income Tax Act, 1961.

Accounting for Amalgamation

Accounting for Amalgamation

ACCOUNTING STANDARD 14

CLASSIFICATION OF AMALGAMATIONS

METHODS OF ACCOUNTING

(AS 14)
Accounting for Amalgamations

The Standard deals with accounting for amalgamations and

the treatment of any resultant goodwill or reserves.
The Standard does not deal with cases of acquisition which
arise when there is purchase by one company (referred to as
the acquiring company) of the whole or part of the shares, or
the whole or part of the assets of another company (referred to
as the acquired company) in consideration for payment in cash
or by issue of shares or other securities in the acquiring
company or partly in one form and partly in the other.

CLASSIFICATION OF
AMALGAMATIONS

Amalgamation by way
of Merger

Amalgamation by way
of Purchase

Amalgamation by way
of Merger
Five Preconditions for Merger:
All assets and liabilities of the transferor company become, after amalgamation, the assets
and liabilities of the transferee company.
Shareholders holding not less than 90 percent of the face value of the equity shares of
the transferor company (other than the equity shares already held by the transferee company
or its subsidiaries or nominees) become the equity shareholders of the transferee company
by virtue of the amalgamation.
The consideration for amalgamation received by those equity shareholders of the transferor
company who agree to become the 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.

Amalgamation by way
of Merger
The transferee company intends to carry on the business of the transferor
company after the amalgamation.
No adjustment is intended to be made in the book value of the assets and
liabilities of the transferor company when they are incorporated in the financial
statements of the transferee company except to ensure the uniformity of
accounting policies.

Amalgamation by Way of
Purchase

An amalgamation in which any one or more

of the five conditions mentioned earlier
are not satisfied, then it is considered as
amalgamation by way of purchase.

METHODS OF ACCOUNTING

Pooling of Interest
Method

Purchase Method

Pooling of Interest Method

In case of an amalgamation by way of merger, the method

prescribed is known as pooling of interests method.

Under this method following norms are required to be adhered to:

In preparing the transferee companys financial statements, the assets,

liabilities and reserves of the transferor company should be recorded at their
existing carrying amounts and in the same form as at the time of
amalgamation.
Even the reserves under various heads in the transferor companys books
have to be accounted under the same heads in the transferee companys
books. Thus, revaluation reserves of the transferor company will become or
get added to the revaluation reserves of the transferee company and so on.
The difference between the amount recorded as the share capital issued
(plus any additional consideration in the form of cash or other assets) and
the amount of share capital of the transferor company should be adjusted in
reserves.

Purchase Method

In amalgamation by way of purchase, while preparing financial statements,

the transferee company is required to follow the purchase method of
accounting.
Under the purchase method following norms are required to be adhered to:

A.

With regard to assets and liabilities, the transferee company can

(a) record the assets and liabilities of the transferor company at their
existing carrying values, i.e., book values or
(b) allocate the consideration to the individual identifiable assets and
liabilities on the basis of their fair values at the date of
amalgamation.

Purchase Method

B.

With regard to the reserves of the transferor company (whether

capital or revenue), the transferee company should not include them
in its books.
Only exception to this is the statutory reserves such as debenture
redemption reserves, which have to be shown in the transferee
companys books under the same account heads and at the same
values as appearing in transferor companys books at the time of
amalgamation.

On the other hand, any excess of the consideration over the value of the net
assets of the transferor company acquired by the transferee company should
be recognized in the transferee companys financial statements as goodwill
arising on amalgamation; whereas, if the amount of the consideration is
lower than the value of the net assets acquired, the difference should be
treated as capital reserve.

Purchase Method
C. With regard to the norm of crediting the difference between
the consideration paid and net value of assets to capital
reserve (where consideration is less than net value of assets),
there is a loophole provided in the AS 14 itself.
D. With regard to the goodwill, if any, as created above, AS 14
requires the said goodwill to be amortized over its useful life but
not exceeding five years.
E. AS 14 also provides that where the statutory reserves of
the transferor company have been recorded in the financial
statements of the transferee company under the same
accounting heads as in the books of the transferor company, a
corresponding debit should be given to the amalgamation
adjustment account, which should be disclosed under the
miscellaneous expenditure.

Accounting for Demerger

Accounting for Demerger

The ICAI has, as yet, not prescribed any

accounting standard for demerger. However,
ironically, the Income Tax Act, 1961, has
defined the accounting norms for demerger.

Accounting for Demerger

The Act stipulates that all the assets and liabilities of the undertaking
being demerged must be transferred to the resulting company and
must be transferred at book values only.
If any asset of the undertaking being demerged has been revalued,
such revaluation needs to be ignored.
This means that while transferring to the resulting company the assets
of the undertaking being demerged, which were earlier revalued, have
to be restated at cost (less accumulated depreciation in case of fixed
assets).
A peculiar situation would, however, arise if the company has already
capitalized these reserves by the issue of bonus shares. In such a
case, the transferor company would end up adjusting the diminution
in the value of assets against its general reserves.

Accounting for Demerger

Transfer of Liabilities and Loans
Specific liabilities of the undertaking being demerged have to be
transferred to the resulting company.
Specific loans or borrowings including debentures raised, incurred
and utilized solely for the activities and operations of the undertaking
being demerged have to be transferred to the resulting company.
Common loans and borrowing have to be apportioned to the
resulting company in the same ratio as the book value of the assets
transferred to the resulting company bears to the total book value of
the assets of the demerged company prior to demerger.