What is the difference between amalgamation in the nature of merger and amalgamation in the nature of purchase?
GradeHunt_TeamGradeHunt Team · · CA Intermediate
I'm studying AS 14 for CA Inter. I keep mixing up the two types of amalgamation and which accounting method goes with each. How do I tell them apart in a question?
as 14amalgamationpooling of interestspurchase method
1 answer
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AS 14 says an amalgamation is in the nature of merger only if ALL five conditions are met. If even one fails, it is in the nature of purchase.
The five conditions for merger:
1. All assets and liabilities of the transferor company become those of the transferee company.
2. Shareholders holding at least 90% of the face value of equity shares of the transferor (other than shares already held by the transferee, its subsidiaries or their nominees) become equity shareholders of the transferee by virtue of the amalgamation.
3. Those shareholders are paid only in equity shares of the transferee, except cash for fractional shares.
4. The business of the transferor is intended to be carried on by the transferee.
5. No adjustment is made to the book values of the assets and liabilities taken over, except to bring accounting policies in line.
Accounting method:
- Merger: pooling of interests method. Assets, liabilities and reserves are taken over at book values, and the identity of reserves is kept.
- Purchase: purchase method. Assets and liabilities are recorded either at their existing carrying amounts or at their fair values on the date of amalgamation. Only the transferor's statutory reserves are carried forward, with a matching debit to Amalgamation Adjustment Reserve. The difference between purchase consideration and net assets is goodwill or capital reserve.
Exam tip: before solving, write one line stating the type of amalgamation and why (for example, "equity shareholders of the transferor receive preference shares as part of the consideration, so condition 3 fails: nature of purchase"). This line shows the examiner your basis, and it decides every entry that follows.
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