Table of Contents
Amalgamation: Meaning
An amalgamation is the combination of two more companies
into a larger single company.
into a larger single company.
In accounting an amalgamation,
or consolidation, refer to the combination of financial statements. For
example, a group of companies reports their financials on a consolidated basis
which includes the individual statements of several smaller businesses.
or consolidation, refer to the combination of financial statements. For
example, a group of companies reports their financials on a consolidated basis
which includes the individual statements of several smaller businesses.
Examples: as
follows
follows
- Maruti
motors operating in India and Suzuki based in japan amalgamation to form a new company called Maruti Suzuki (India) Limited. - Tata
sons operating in India and AIA group based in hong kong amalgamation to form a new company called TATA AIG life insurance. - Year-2002
Asian acquired 50.1% controlling stake in Berger international. Deal Rs 57.6
crores Berger international has no operation in India but formed Berger paints
ltd. In Calcutta (subsidiary) objective: inter into the southeast Asian market,
growth. Such as Singapore, Thailand, Myanmar, Bahrain, Malta, USA, Jamaica, Barbados
and Trinidad, and Tobago. - 2002
pharmacy market Ranbaxy (RLL) helps to understand japan’s regulatory framework
and market environment, product advantage.
Types of amalgamation
According to accounting standard-14, there are two types of
amalgamation.
amalgamation.
- Amalgamation
in the nature of merger - Amalgamation
in the nature of purchase.
Amalgamation in the
nature of merger:
All the assets and liability of the vendor company become,
after amalgamation, the assets, and liabilities of the purchasing company.
after amalgamation, the assets, and liabilities of the purchasing company.
Shareholder holding not less than 90% of the face value of
equity shares of the vendor company became an equity shareholder of the
purchasing company by virtue of the amalgamation.
equity shares of the vendor company became an equity shareholder of the
purchasing company by virtue of the amalgamation.
The business of vendor company is intended to be carried on
after the amalgamation, by purchasing company.
after the amalgamation, by purchasing company.
The consideration for the amalgamation receivable by those
equity shareholders of the vendor of the purchasing company wholly by the issue
of equity shares in the purchasing company, except that, maybe paid in respect
of any fractional shares.
equity shareholders of the vendor of the purchasing company wholly by the issue
of equity shares in the purchasing company, except that, maybe paid in respect
of any fractional shares.
Book value of assets and liabilities of the vendor company
should be the same shown in accounts of the purchasing companies.
should be the same shown in accounts of the purchasing companies.
Amalgamation in the
nature of purchase:
This method is considered when the conditions for the
amalgamation in the nature of the merger is 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.
amalgamation in the nature of the merger is 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.
What is purchase
consideration??
Purchase consideration is the amount which is paid by the
purchasing company for the purchase of the business of the vendor company.
purchasing company for the purchase of the business of the vendor company.
In other words, consideration for amalgamation means the
aggregate of the shares and other securities issued and payment in cash or
other assets by the purchasing company t the shareholders of the vendor
company.
aggregate of the shares and other securities issued and payment in cash or
other assets by the purchasing company t the shareholders of the vendor
company.
Methods of calculating purchase consideration
(A). Lump-sum method
When the transferee company agrees to pay a fixed sum to the
transferor company, it is called a lump sum payment of purchases the business
consideration.
transferor company, it is called a lump sum payment of purchases the business
consideration.
For example, if X
Ltd, purchases of Y Ltd and agrees to pay rs. 2500000 in all, it is an example
of a lump-sum payment.
Ltd, purchases of Y Ltd and agrees to pay rs. 2500000 in all, it is an example
of a lump-sum payment.
(B). Net worth(or net assets)
method
method
According to this method, the purchase consideration is
calculated by calculating the net worth of the assets taken over by the
transferee company.
calculated by calculating the net worth of the assets taken over by the
transferee company.
Advantages of
amalgamation
- Amount
of capital can be increased by combining business. - Establishment
and management costs can be reduced. - Benefits
of large scale production can be secured. - Research
and development facilities are increased. - Monopoly
in the market can be achieved - Avoiding
competitions. - Increasing
efficiency. - Expansion.
Disadvantage of
amalgamation
- Business
combination brings a monopoly in the market, which may be harmful for society. - The
identity of the old company finishes. - Goodwill
of the company decrease. - Management
of the company becomes difficult.