Amalgamation of a Company: 2 Types | Accounting

The following points highlight the two main types of amalgamation of a company. The types are:- 1. Amalgamation in the Nature of Merger 2. Amalgamation in the Nature of Purchase.

Type # 1. Amalgamation in the Nature of Merger:

An amalgamation in the nature of merger should, according to the Accounting Standard – 14, satisfy the following conditions:

1. All the assets and liabilities of the transferor company become the assets and liabilities of the transferee company after amalgamation.

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

3. The consideration to the share-holders of the transferor company (willing to become equity share-holders of the transferee company) is discharged by the transferee company wholly by issue of equity shares in the transferee company, except that cash may be paid in respect of any fractional shares.

4. The business of the transferee company is intended to be carried on after amalgamation by the transferee company.

5. 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.

Thus there is pooling of interests of the combining entities under this type of amalgamation. Equity share-holders of combining entities continue to have a proportionate share in the combining entity. It must be ensured that resultant figure of assets, liabilities capital and reserve of the combining entity more or less represent the sum of the relevant figures of the amalgamating companies.

Type # 2. Amalgamation in the Nature of Purchase:

An amalgamation should be considered to be an amalgamation in the nature of purchase, when any one or more of the conditions specified for amalgamation in the nature of merger is not satisfied. In fact under this type of amalgamation generally one company acquires another company and equity share-holders of the combining entities do not continue to have proportionate share in the equity of the combined entity or the business of the acquired company is not intended to be combined after the amalgamation.

In short, (a) All the assets and liabilities of the selling company may not be taken over.

(b) Less than 90% of the selling company’s share-holders may become share-holders of the purchasing company.

(c) Consideration payable to share-holders of selling company may be in the form of shares or cash or in any other form.

(d) Selling company’s business may or may not carried on in future.

(e) Assets and liabilities taken over by the purchasing company may be shown at values other than book values at the discretion of the purchasing company.