Page 45 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Accounting for Companies – II

notes distribution as dividend before the amalgamation would also be available for distribution
as dividend after the amalgamation. The difference between the amounts recorded as 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 is adjusted in reserves in the financial
statements of the transferee company.
17. If the amalgamation is an ‘amalgamation in the nature of purchase’, the identity of the
reserves, other than the statutory reserves dealt with in paragraph 1, is not preserved. The
amount of the consideration is deducted from the value of the net assets of the transferor
company acquired by the transferee company. If the result of the computation is negative,
the difference is debited to goodwill arising on amalgamation and dealt with in the manner
stated in next section (Treatment of Goodwill arising on Amalgamation). If the result of the
computation is positive, the difference is credited to Capital Reserve.
18. Certain reserves may have been created by the transferor company pursuant to the
requirements of, or to avail of the benefits under the Income-tax Act, 1961; for example,
Development Allowance Reserve, or Investment Allowance Reserve. The Act requires that
the identity of the reserves should be preserved for a specified period. Likewise, certain
other reserves may have been created in the financial statements of the transferor company
in terms of the requirements of other statutes. Though, normally, in an amalgamation in the
nature of purchase, the identity of reserves is not preserved, an exception is made in respect
of reserves of the aforesaid nature (referred to hereinafter as ‘statutory reserves’) and such
reserves retain their identity in the financial statements of the transferee company in the
same form in which they appeared in the financial statements of the transferor company,
so long as their identity is required to be maintained to comply with the relevant statues.
This exception is made only in those amalgamations where the requirements of the
relevant statute for recording the statutory reserves in the books of the transferee company
are complied with. In such cases, the statutory reserves are recorded in the financial
statements of the transferee company by a corresponding debit to a suitable accounts
head ‘Amalgamation Adjustment Accounts’ which is disclosed as a part of ‘miscellaneous
expenditure’ or other similar category in the balance sheet. When the identity of the statutory
reserves is no longer required to be maintained, both the reserves and the aforesaid account
are reversed.

treatment of goodwill arising on amalgamation

19. Goodwill arising on amalgamation represents a payment made in anticipation of future
income and it is appropriate to treat it as an asset to be amortised to income on a systematic
basis over its useful life. Due to the nature of goodwill, it is frequently difficult to estimate
its useful life with reasonable certainty. Such estimation is, however, made on a prudent
basis. Accordingly, it is considered appropriate to amortized goodwill over a period not
exceeding five years unless a somewhat longer period can be justified.

20. Factors which may be considered in estimation the useful life of goodwill arising on
amalgamation include:
(a) The foreseeable life of the business or industry.

(b) The effects of product obsolescence, changes in demand and other economic
factors.
(c) The service life expectancies of key individuals or groups of employees.
(d) Expected actions by competitors or potential competitors; and

(e) Legal, regulatory or contractual provisions affecting the useful life.

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