In this article we will discuss about:- 1. Meaning of Amalgamation 2. Definition of Amalgamation 3. Amalgamation and Absorption 4. Objectives 5. Comparative Position of Types of Amalgamations.
Meaning of Amalgamation:
Amalgamation is a form of combination. Amalgamation is a blending of two or more existing undertaking into one undertaking, the shareholders of each blending company becoming substantially the shareholders in the company which is to carry on the blended undertakings. There may be amalgamation either by transfer of two or more undertakings to a new company or by transfer of one or more undertakings to an existing company.
This is a very comprehensive and clear description of amalgamation. As such, amalgamation implies absorption also. Amalgamation may also be brought about by the transfer of one or more undertakings to an existing undertaking so as to result in merger or fusion of the undertakings. This form of combination is generally known as absorption.
However, the term amalgamation should be used only when two conditions are fulfilled:
1. At least two companies go into liquidation, and
2. A new company is formed to take over the businesses of companies going into liquidation.
For instance, there are two companies – A Company and B Company. One new company – AB Company – is formed to take over the businesses of A Company and B Company. This is amalgamation. Here, A Company and B Company are liquidated and a new Company, that is, AB Company is formed.
Similarly, the term absorption has two basic features:
1. There is no formation of a new company to take over the business of existing company or companies.
2. Only the absorbed company or companies lose their entities by going into liquidation, absorbing company continues to exist.
When an existing company purchases the business of another company carrying on similar business, it is called absorption i.e. one company absorbs another company. Absorption takes place when an existing company purchases the business of one or more companies. In this case, no new company is formed. The company, that is absorbed, goes into liquidation.
Definition of Amalgamation:
The following terms are used with specified meanings in the Accounting Standard 14 (AS – 14):
(a) Amalgamation means an amalgamation pursuant to the provisions of the Companies Act 1956 or any other statute which may be applicable to companies.
(b) Transferor company means the company which is amalgamated into another company.
(c) Transferee company means the company into which a transferor company is amalgamated.
(d) Reserve means the portion of earnings, receipts or other surplus of an enterprise (whether capital or revenue) appropriated by the management for a general or a specific purpose other than a provision for depreciation or diminution in the value of assets or for a known liability.
(e) Consideration for the amalgamation means 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 share-holders of the transferor company.
(f) Fair value is the amount for which an asset could be exchanged by the mutual consent of both the companies.
Amalgamation and Absorption:
As said above, absorption is brought about by the merger of one or more companies with an existing company and result is one liquidation and no formation. However, from the accounting point of view, the distinction between amalgamation and absorption is of no practical significance.
Account standard – 14 for amalgamation issued by the institute of Chartered Accountants of India does not recognise distinction between amalgamation and absorption. Even from the academic point of view, it is not necessary to distinguish between amalgamation and absorption.
Objectives of Amalgamation:
The main objectives of amalgamation are:
1. Establishment and management charges are reduced.
2. Competitions among the amalgamating companies are eliminated.
3. Purchase of materials, in bulk, can be made at reduced price.
4. Production can be carried on in large scale.
5. Capital amount is increased by combination of companies.
6. Manufactured products can be easily marketed.
7. All the advantages of combination are available.
8. Avoiding duplication of expenditure and reduction in cost.
9. Research and development facilities are increased.
10. Price maintenance can be regulated.
Prior to 1st April 1995, the accounting procedures for amalgamation were under three different treatment, that is, Amalgamation, Absorption and Reconstruction of companies. The Institute of Chartered Accountants of India introduced a new Accounting Standard known as “Accounting Standard – 14” (AS-14) from 1.4.1995 which over-ruled the old system of accounting. This change is of mandatory nature.
Comparative Position of Types of Amalgamations:
The two types of amalgamation – Amalgamation in the nature of Merger and Amalgamation in the nature of purchase, differ in the following ways:
1. Under merger one company is merged with other company but the identity of both the companies remains the same as before. In case of purchase, the company which is amalgamated to other company does not exist in future.
2. In case of merger, the share-holders of both the companies can take part in the management of the company while in case of purchase the share-holders have no right to take part in the management.
3. The share-holders of transferor company in case of merger get shares in the transferee company so that ownership can be continued. In case of purchase, the share-holders of transferor company get payment of purchase price in the form of shares, debentures and cash. The ownership of share-holders of transferor company does not continue.
4. In amalgamation in the nature of merger all types of reserves of transferor company are included in financial statements of the transferee company, while amalgamation in the nature of purchase, only statutory reserves like Development Allowance Reserve, Investment Allowance Reserve etc. are included in the financial statements of the transferee company and other reserves are excluded.