What is Amalgamation of Companies?

The amalgamation of companies means to form one company by merging two or more companies. It may also mean that one company has acquired another company. In India, accounting problems regarding amalgamations are dealt with in accordance with the Accounting Standard (AS) – 14 issued by the Institute of Chartered Accountants of India (ICAI).

In India, Amalgamation is used in the same sense as Business Combination is used in the USA. In case of amalgamation, as the transferor company is dissolved, its assets and liabilities find a place in the financial statements of the transferee company, prepared subsequent to the date of amalgamation.

There are two types of amalgamation: According to AS-14 amalgamation is divided into the following two categories for accounting purposes:

1. Amalgamation in the nature of merger
2. Amalgamation in the Nature of Purchase

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Objectives of Amalgamation of Companies

Here you should know the reasons for which companies amalgamate with one another. The following are the main objectives of amalgamation of companies:

1. To avoid competition: The main purpose of the amalgamation of companies is to avoid competition among themselves. This will give the company an edge over its competitors.
   
   
2. To reduce cost: The amalgamated company can derive the operating cost advantage through lowering the cost of production. This is possible because of ‘economies of large scale’.
   
   
3. To gain financially: The amalgamated company can derive financial gain which may be in the form of tax advantage, higher creditworthiness, and a lower rate of borrowing.
   
   
4. To achieve growth: The amalgamated company can pool its resources to facilitate internal growth and to prevent the advent of a new competitor.
   
   
5. To diversify the activities: The risk of a company can be lowered by diversifying its activities into two or more industries. At times, amalgamation may act as hedging the weak operation with a stronger one.

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Types of Amalgamation

Amalgamation in the nature of merger is an amalgamation where there is a genuine pooling not merely of assets and liabilities of the transferor and transferee companies but also of the shareholders’ interests and of the businesses of the companies.

1. Amalgamation in the Nature of Merger
2. Amalgamation in the Nature of Purchase

Amalgamation in the Nature of Merger

In this type of amalgamation, not only is the pooling of assets and liabilities is done but also of the shareholders’ interests and the businesses of these companies. In other words, all assets and liabilities of the transferor company become that of the transfer company.

In this case, the business of the transferor company is intended to be carried on after the amalgamation. There are no adjustments intended to be made to the book values.

The other conditions that need to be fulfilled include that the shareholders of the vendor company holding at least 90% face value of equity shares become the shareholders of the vendee company.

Amalgamation in the Nature of Purchase

This method is considered when the conditions for the amalgamation in the nature of the merger are not satisfied.

Through this method, one company is acquired by another, and thereby the shareholders of the company which is acquired normally do not continue to have a proportionate share in the equity of the combined company or the business of the company which is acquired is generally not intended to be continued.

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Advantages of Amalgamation

1. Eliminate competition: Companies at times amalgamate with the object of avoiding competition among themselves. This will give the company an edge over its competitor.
   
   
2. Tax savings: The amalgamated company can derive financial gain which may be in the form of tax advantage, higher credit worthiness and lower rate of borrowing.
   
   
3. Economies of large scale operations: The amalgamated company can derive the operating cost advantage through lowering the cost of production. This is possible because of economies of large scale operations.
   
   
4. Increase shareholders value: The amalgamated company increases the value of the company. It increases the shareholders value of the company.
   
   
5. Diversification: The risk of a company can be lowered by diversifying its activities into two or more industries. At times, amalgamation may act as hedging the weak operation with a stronger one.
   
   
6. Managerial effectiveness: Effectiveness is the degree of attainment of a predetermined goal. An amalgamated company can pool its intellectual resources to achieve managerial effectiveness.
   
   
7. To achieve growth and gain financially: The amalgamated company can pool its resources to facilitate internal growth and to prevent the advent of a new competitor.
   
   
8. To acquire cash resources: The amalgamated company acquire the cash resources of other company which increases the cash resources of the amalgamated company.

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Difference between Pooling of Interest Method and Purchase Method

Basis for Comparison	Pooling of Interest Method	Purchase Method
Meaning	Pooling of Interest Method of accounting is one in which the assets, liabilities and reserves are combined and shown at their historical values, as of the date of amalgamation.	Purchase Method, is an accounting method, wherein the assets and liabilities of the transferor company are shown at their market value in the books of the transferee company, as of the date of amalgamation.
Applicability	Merger	Acquisition
Assets and liabilities	Appear at book values.	Appear at fair market values.
Recording	All the assets and liabilities of the companies undergoing merger are aggregated.	Only those assets and liabilities are recorded in the books of transferee company, which are taken over by it.
Reserves	The identity of transferor company’s reserves is kept intact.	The identity of the transferor company’s reserves except statutory reserves is not kept intact.
Purchase Consideration	Difference in the amount of purchase consideration and share capital is adjusted with reserves.	Surplus of deficit of purchase consideration over the net asset acquired, should be credited or debited, as capital reserves or goodwill.

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Difference between Amalgamation in Nature of Merger and Amalgamation in Nature of Purchase

Basis for Comparison	Amalgamation in Nature of Merger	Amalgamation in Nature of Purchase
Transfer of Assets and Liabilities	There is transfer of all assets & liabilities.	There is transfer of all assets & liabilities.
Equity Shareholder’s holding 90%	Equity shareholders holding 90% equity shares in transferor company become shareholders of transferee company.	Equity shareholders need not become shareholders of transferee company.
Purchase Consideration	Purchase consideration is discharged wholly by issue of equity shares (except cash for fractional shares).	Purchase consideration need not be discharged wholly by issue of equity shares.
Same Business	The same business of the transferor company is intended to be carried on by the transferee company.	The business of the transferor company need not be intended to be carried on by the transferee company.
Recording of Assets and Liabilities	The assets & liabilities taken over are recorded at their existing carrying amounts except where adjustment is required to ensure uniformity of accounting policies.	The assets & liabilities taken over are recorded at their existing carrying amounts or the basis of their fair values.
Recording of Reserves of Transferor Co.	All reserves are recorded at their existing carrying amounts and in the same form.	Only statutory reserves are recorded at their existing carrying amounts.
Recording of Balance of Profit & Loss A/c of Transferor	The balance of P&L A/c should be aggregated with the corresponding balance of the transferee co. or transferred to the General.	The balance of P&L A/c losses its identity and is not recorded at all.

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