Page 44 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Unit 3: Accounting Standards (AS) – 14

11. If, at the time of the amalgamation, the transferor and the transferee companies have notes
conflicting accounting policies, a uniform set of accounting policies is adopted following
the amalgamation. The effects on the financial statements of any changes in accounting
policies are reported in accordance with Accounting Standard (AS)–5, ‘Prior Period and
Extraordinary Items and Changes in Accounting Policies’.
The Purchase Method
12. Under the purchase method, the transferee company accounts for the amalgamation either
by incorporating the assets and liabilities at their existing carrying amounts, or by allocating
the consideration to individual identifiable assets and liabilities of the transferor company
on the basis of their fair values at the date of amalgamation. The identifiable assets and
liabilities may include assets and liabilities not recorded in the financial statements of the
transferor company.
13. Where assets and liabilities are restated on the basis of their fair values, the determination
of fair values may be influenced by the intentions of the transferee company.

Example: The transferee company may have a specialised use for an asset, which is not
available to other potential buyers. The transferee company may intend to effect changes in the
activities of the transferor company which necessitate the creation of specific provisions for the
expected costs, e.g., planned employee termination and plant relocation costs.

consideration

14. The consideration for the amalgamation may consist of securities, cash or other assets. In
determining the value of the consideration, an assessment is made of the fair value of its
elements. A variety of techniques is applied in arriving at fair values.

Example: When the consideration includes securities, the value fixed by the statutory
authorities may be taken to be the fair value. This may be determined by reference to the market
value of the assets given up. Where the market value of the assets given up cannot be reliably
assessed, such assets may be valued at their respective net book values.
15. Many amalgamations recognise that adjustments may have to be made to the consideration
in the light of one or more future events. When the additional payment is probable and can
reasonably be estimated at the date of amalgamation, it is included in the calculation of
the consideration. In all other cases, the adjustment is recognised as soon as the amount is
determinable.
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Caution The object of the purchase method is to account for the amalgamation by applying
the same principles as are applied in the normal purchase of assets. This method is used in
accounting for amalgamations in the nature of purchase.

treatment of reserves on amalgamation

16. If the amalgamation is an ‘amalgamation in the nature of merger’ the identity of the
reserves is preserved and they appear in the financial statements of the transferee company
in the same form in which they appeared in the financial statements of the transferor
company. Thus, for example, the General Reserve of the transferor company becomes the
General Reserve of the transferee company; the Capital Reserve of the transferor company
becomes the Capital Reserve of the transferee company and the Revaluation Reserve of the
transferor company. As a result of preserving the identity, reserves which are available for

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