Page 80 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Unit 4: Amalgamation: Accounting Treatment

l z Mode of Payment is generally decided by the mutual agreement between Transferor notes
Company and Transferee Company.
l z Fair value of the different elements of the consideration is also considered as the market
value of assets.

l z When an amalgamation is considered to be an amalgamation in the nature of merger, it
should be accounted for under the pooling of interests method.
l z When an amalgamation is considered to be an amalgamation in the nature of purchase, it
should be accounted for under the purchase method.
l z The goodwill arising on amalgamation should be amortised to income on a systematic
basis over its useful life.

l z The consideration for the amalgamation should include any non-cash element at fair
value.

4.4 keywords

Amalgamation: It means an amalgamation pursuant to the provisions of the Companies Act,
1956, or any other statute which may be applicable to companies.
Consideration: Consideration for the amalgamation means for the aggregate of the shares and
other securities issued and the payment made in the form of cash or other assets by the transferee
company to the shareholders of the transferor company.
Fair value: It is the amount for which an asset could be exchanged between a knowledgeable,
willing buyer and a knowledgeable, willing seller in an arm’s length transaction.
Liability: A company’s legal debts or obligations that arise during the course of business
operations.
Liquidation: When a business or firm is terminated or bankrupt, its assets are sold and the
proceeds pay creditors. Any leftovers are distributed to shareholders.
Purchase consideration: The purchase consideration is that amount which is determined at the
time of amalgamation.

Transferee Company: It means the company into which a transferor company is amalgamated.
Transferor Company: It means the company, which is amalgamated into another company.

4.5 review Questions

1. What journal entries are passed in the books of Transferor Company and Transferee
Company regarding amalgamation/absorption?
2. What do you understand by purchase consideration? How is it determined? Explain.
3. Distinguish between amalgamation in the nature of merger and amalgamation in the
nature of purchase. Explain.

4. How is the difference between purchase consideration and net assets treated?
5. How will you deal with accumulated losses?
6. Pass journal entries in the books of Transferee Company relating to the liquidation cost of
Transferor Company.
7. How is purchase consideration determined? Explain.

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