What is meant by amalgamation? Give methods of accounting for amalgamation.

Meaning of Amalgamation

Amalgamation means the combination or merger of two or more companies into a single entity.
In other words, it is a process where two or more existing companies unite to form a new company, or one company absorbs another.

👉 Example:
If Company A and Company B combine to form a new Company C, that is amalgamation.
If Company A absorbs Company B and continues its existence, that is also amalgamation (by absorption). methods of accounting for amalgamation

Objectives of Amalgamation:

• To achieve economies of scale.
• To eliminate competition.
• To increase efficiency and market share.
• To diversify or expand business operations. methods of accounting for amalgamation

Methods of Accounting for Amalgamation

According to Accounting Standard (AS) 14 – Accounting for Amalgamations, there are two methods of accounting:

Pooling of Interests Method

Purchase Method

Pooling of Interests Method

The Pooling of Interests Method is used when an amalgamation is in the nature of a merger — that is, when two or more companies combine to form a single entity, and their shareholders continue to have a proportionate share in the new company. methods of accounting for amalgamation

Features of Pooling of Interests Method

Here’s the explanation in simple stepwise form:

1. Nature:
   This method applies when the amalgamation represents a true merger — not a purchase.
   
2. Assets and Liabilities:
   All assets and liabilities of the transferor company are recorded in the books of the transferee company at their existing book values.
   
3. Reserves and Surplus:
   All reserves and surplus (like general reserve, profit and loss balance, etc.) of the transferor company are preserved and carried forward in the same form.
   
4. Shareholders’ Continuity:
   The shareholders of the transferor company become the shareholders of the transferee company — maintaining the same proportion of ownership.
   
5. No Goodwill or Capital Reserve:
   Usually, no goodwill or capital reserve arises under this method because assets and liabilities are taken over at book values, and there is no profit or loss on amalgamation.
   
6. Business Continuity:
   The business of the transferor company continues after amalgamation, and its identity merges completely with the transferee company.
   
7. Result:
   The financial statements of the new (or continuing) company show the combined book values of both companies as if they had always been a single entity.
   

In short:

The pooling of interests method treats amalgamation as a merger of equals, combining their books of accounts without any revaluation or creation of goodwill. methods of accounting for amalgamation

Pooling of Interests Method

Used in case of amalgamation in the nature of merger.

Features:

• All assets, liabilities, and reserves of the transferor company are recorded at their existing book values in the books of the transferee company.
• The identity of reserves (like general reserve, P&L account) is preserved.
• No goodwill or capital reserve arises, except for adjustments of share capital differences. methods of accounting for amalgamation

Journal Entry Example:

Assets A/c ………………..Dr

Liabilities A/c ……………Cr

To Share Capital A/c

To Reserves A/c

Result:
It reflects that the two companies have pooled their interests.

2. Purchase Method

Purchase Method in Amalgamation

The Purchase Method is used when an amalgamation is in the nature of a purchase — that is, one company acquires another, and the relationship is that of a buyer and seller, not a merger of equals. methods of accounting for amalgamation

Here’s the explanation in simple stepwise form:

Features of Purchase Method

1. Nature:
   This method applies when one company purchases or takes over another company’s business.
   The transferee company is the purchaser, and the transferor company is the vendor.
   
2. Assets and Liabilities:
   The assets and liabilities of the transferor company are recorded in the books of the transferee company at their fair values or agreed values, not at book values. methods of accounting for amalgamation
3. Reserves and Surplus:
   The reserves and surplus (except statutory reserves) of the transferor company are not carried forward to the transferee company.
   Only statutory reserves (required by law to be maintained) are continued.
   
4. Goodwill or Capital Reserve:
   
   • If the purchase consideration is greater than the net assets acquired → the difference is treated as Goodwill.
   • If the purchase consideration is less than the net assets acquired → the difference is treated as a Capital Reserve.
5. Shareholders:
   The shareholders of the transferor company may or may not become shareholders of the transferee company — it depends on the agreement.
   
6. Business Continuity:
   The transferee company may or may not continue the business of the transferor company.methods of accounting for amalgamation
   
7. Result:
   The financial statements of the transferee company reflect a new cost basis for the acquired assets and liabilities, as the transaction is treated like a purchase rather than a merger.
   

In short:

The Purchase Method treats amalgamation as an acquisition. Assets and liabilities are recorded at fair values, reserves are not preserved, and any difference between purchase consideration and net assets is shown as Goodwill or Capital Reserve.

Used in case of amalgamation in the nature of purchase.

Features:

• • Goodwill, if purchase consideration > net assets
  • Capital Reserve, if purchase consideration < net assets

Journal Entry Example:

Assets (at fair value) A/c …………Dr

Goodwill A/c (if any) ……………..Dr

To Liabilities A/c

To Capital Reserve A/c (if any)

To Purchase Consideration A/c

Conclusion

In conclusion, amalgamation is a process through which two or more companies combine to form a single entity. The accounting for amalgamation can be done using two methods — Pooling of Interests Method and Purchase Method. methods of accounting for amalgamation

The pooling method treats the merger as a union of equals, combining assets, liabilities, and reserves at book values, while the purchase method treats it as an acquisition, recording assets and liabilities at fair values and recognizing goodwill or capital reserve. The method chosen depends on the nature of amalgamation — whether it is a true merger or a purchase. If you would like to know the Syllabus of Corporate Accounting you must go to the Gndu.

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