Short Note on AS-14
Introduction
1.
This statement deals with accounting
for amalgamations and the treatment of any resultant goodwill or reserves. This
statement is directed principally to companies although some of its requirements
also apply to financial statements of other enterprises.
2.
This statement does not deal with cases
of acquisitions which arise when there is a purchase by one company (referred
to as the acquiring company) of the whole or part of the shares, or the whole
or part of the assets, of another company (referred to as the acquired company)
in consideration for payment in cash or by issue of shares or other securities
in the acquiring company or partly in one form and partly in the other. The
distinguishing feature of an acquisition is that the acquired company is not
dissolved and its separate entity continues to exist.
Definitions
3.
The following terms are used in this
statement with the meanings specified:
(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)
Amalgamation
in the nature of merger is an amalgamation which satisfies all the
following conditions.
(i)
All the assets and liabilities of the
transferor company become, after amalgamation, the assets and liabilities of
the transferee company.
(ii)
Shareholders holding not less than 90%
of the face value of the equity shares of the transferor company (other than
the equity shares already held therein, immediately before the amalgamation, by
the transferee company or its subsidiaries or their nominees) become equity
shareholders of the transferee company by virtue of the amalgamation.
(iii)
The consideration for the amalgamation
receivable by those equity shareholders of the transferor company who agree to
become equity shareholders of the transferee company is discharged by the
transferee company wholly by the issue of equity shares in the transferee
company, except that cash may be paid in respect of any fractional shares.
(iv)
The business of the transferor company is
intended to be carried on, after the amalgamation, by the transferee company.
(v)
No adjustment is intended to be made to
the book values of the assets and liabilities of the transferor company when
they are incorporated in the financial statements of the transferee company
except to ensure uniformity of accounting policies.
(f)
Amalgamation
in the nature of purchase is an amalgamation which does not satisfy any one
or more of the conditions specified in sub-paragraph (e) above.
(g)
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 shareholders of the transferor company.
(h)
Fair
value 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.
(i)
Pooling
of interests is a method of accounting for amalgamations the object of
which is to account for the amalgamation as if the separate businesses of the
amalgamating companies were intended to be continued by the transferee company.
Accordingly, only minimal changes are made in aggregating the individual
financial statements of the amalgamating companies.
Explanation
Types of Amalgamations
4.
Generally speaking, amalgamations fall
into two broad categories. In the first category are those amalgamations where
there is a genuine pooling not merely of the assets and liabilities of the
amalgamating companies but also of the shareholders' interests and of the
businesses of these companies. Such amalgamations are amalgamations which are
in the nature of 'merger' and the accounting treatment of such amalgamations
should ensure that the resultant figures of assets, liabilities, capital and
reserves more or less represent the sum of the relevant figures of the
amalgamating companies. In the second category are those amalgamations which
are in effect a mode by which one company acquires another company and, as a
consequence, 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 not intended to be
continued. Such amalgamations are amalgamations in the nature of 'purchase'.
5.
An amalgamation is classified as an
'amalgamation in the nature of merger' when all the conditions listed in
paragraph 3(e) are satisfied. There are, however, differing views regarding the
nature of any further conditions that may apply. Some believe that, in addition
to an exchange of equity shares, it is necessary that the shareholders of the
transferor company obtain a substantial share in the transferee company even to
the extent that it should not be possible to identify any one party as dominant
therein. This belief is based in part on the view that the exchange of control
of one company for an insignificant share in a larger company does not amount
to a mutual sharing of risks and benefits.
6.
Others believe that the substance of an
amalgamation in the nature of merger is evidenced by meeting certain criteria
regarding the relationship of the parties, such as the former independence of
the amalgamating companies, the manner of their amalgamation, the absence of
planned transactions that would undermine the effect of the amalgamation, and
the continuing participation by the management of the transferor company in the
management of the transferee company after the amalgamation.
Methods of Accounting for
Amalgamations
7.
There are two main methods of
accounting for amalgamations:
(a)
the pooling of interests method; and
(b)
the purchase method.
8. The
use of the pooling of interests method is confined to circumstances which meet
the criteria referred to in paragraph 3(e) for an amalgamation in the nature of
merger.
9.
The object of the purchase method is to
account for the amalgamation by applying the same principles as are applied in
the normal purchase of assets. This method is used in accounting for
amalgamations in the nature of purchase.
The
Pooling of Interests Method
10.
Under the pooling of interests method,
the assets, liabilities and reserves of the transferor company are recorded by
the transferee company at their existing carrying amounts (after making the
adjustments required in paragraph 11).
11.
If, at the time of the amalgamation, the
transferor and the transferee companies have conflicting accounting policies, a
uniform set of accounting policies is adopted following the amalgamation. The
effects on the financial statements of any changes in accounting policies are
reported in accordance with Accounting Standard (AS) 5, 'Prior Period and
Extraordinary Items and Changes in Accounting Policies'.
The
Purchase Method
12.
Under the purchase method, the transferee
company accounts for the amalgamation either by incorporating the assets and
liabilities at their existing carrying amounts or by allocating the
consideration to individual identifiable assets and liabilities of the transferor
company on the basis of their fair values at the date of amalgamation. The
identifiable assets and liabilities may include assets and liabilities not
recorded in the financial statements of the transferor company.
13.
Where assets and liabilities are restated
on the basis of their fair values, the determination of fair values may be
influenced by the intentions of the transferee company. For example, the
transferee company may have a specialised use for an asset, which is not
available to other potential buyers. The transferee company may intend to
effect changes in the activities of the transferor company which necessitate
the creation of specific provisions for the expected costs, e.g. planned
employee termination and plant relocation costs.
Consideration
14.
The consideration for the amalgamation
may consist of securities, cash or other assets. In determining the value of
the consideration, an assessment is made of the fair value of its elements. A
variety of techniques is applied in arriving at fair value. For example, when
the consideration includes securities, the value fixed by the statutory
authorities may be taken to be the fair value. In case of other assets, the
fair value may be determined by reference to the market value of the assets given
up. Where the market value of the assets given up cannot be reliably assessed,
such assets may be valued at their respective net book values.
15.
Many amalgamations recognise that
adjustments may have to be made to the consideration in the light of one or
more future events. When the additional payment is probable and can reasonably
be estimated at the date of amalgamation, it is included in the calculation of
the consideration. In all other cases, the adjustment is recognised as soon as
the amount is determinable [see Accounting Standard (AS) 4, Contingencies and
Events Occurring after the Balance Sheet Date].
Treatment of Reserves on Amalgamation
16.
If the amalgamation is an 'amalgamation
in the nature of merger', the identity of the reserves is preserved and they
appear in the financial statements of the transferee company in the same form
in which they appeared in the financial statements of the transferor company.
Thus, for example, the General Reserve of the transferor company becomes the General
Reserve of the transferee company, the Capital Reserve of the transferor
company becomes the Capital Reserve of the transferee company and the
Revaluation Reserve of the transferor company becomes the Revaluation Reserve
of the transferee company. As a result of preserving the identity, reserves
which are available for distribution as dividend before the amalgamation would
also be available for distribution as dividend after the amalgamation. The
difference between the amount 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 18,
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 paragraphs 19-20. 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 statute. 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 account head
(e.g., 'Amalgamation Adjustment Account') which is disclosed as a part of
'miscellaneous expenditure' or other similar category in the balance sheet.
When the identify 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, therefore, made on a prudent basis. Accordingly, it is considered
appropriate to amortise goodwill over a period not exceeding five years unless
a somewhat longer period can be justified.
20.
Factors which may be considered in
estimating the useful life of goodwill arising on amalgamation include:
§ the
foreseeable life of the business or industry;
§
the effects of product obsolescence,
changes in demand and other economic factors;
§
the service life expectancies of key
individuals or groups of employees;
§
expected actions by competitors or
potential competitors; and
§
legal, regulatory or contractual
provisions affecting the useful life.
Balance of Profit and Loss Account
21.
In the case of an 'amalgamation in the
nature of merger', the balance of the Profit and Loss Account appearing in the
financial statements of the transferor company is aggregated with the
corresponding balance appearing in the financial statements of the transferee
company. Alternatively, it is transferred to the General Reserve, if any.
22.
In the case of an 'amalgamation in the
nature of purchase', the balance of the Profit and Loss Account appearing in
the financial statements of the transferor company, whether debit or credit,
loses its identity.
Treatment of Reserves Specified in A
Scheme of Amalgamation
23. The
scheme of amalgamation sanctioned under the provisions of the Companies Act,
1956 or any other statute may prescribe the treatment to be given to the
reserves of the transferor company after its amalgamation. Where the treatment
is so prescribed, the same is followed. In some cases, the scheme of amalgamation sanctioned under a
statute may prescribe a different treatment to be given to the reserves of the
transferor company after amalgamation as compared to the requirements of this
Statement that would have been followed had no treatment been prescribed by the scheme. In such cases, the
following disclosures are made in the first financial statements following the
amalgamation:
(a) A
description of the accounting treatment given to the reserves and the reasons
for following the treatment different from that prescribed in this Statement.
(b) Deviations
in the accounting treatment given to the reserves as prescribed by the scheme
of amalgamation sanctioned under the statute as compared to the requirements of
this Statement that would have been followed had no treatment been prescribed
by the scheme.
(c) The financial effect, if any, arising
due to such deviation.”
Disclosure
24.
For all amalgamations, the following
disclosures are considered appropriate in the first financial statements
following the amalgamation:
(a)
names and general nature of business of
the amalgamating companies;
(b)
effective date of amalgamation for
accounting purposes;
(c)
the method of accounting used to reflect
the amalgamation; and
(d)
particulars of the scheme sanctioned
under a statute.
25.
For amalgamations accounted for under the
pooling of interests method, the following additional disclosures are
considered appropriate in the first financial statements following the
amalgamation:
(a)
description and number of shares issued,
together with the percentage of each company's equity shares exchanged to
effect the amalgamation;
(b)
the amount of any difference between the
consideration and the value of net identifiable assets acquired, and the
treatment thereof.
26.
For amalgamations accounted for under the
purchase method, the following additional disclosures are considered
appropriate in the first financial statements following the amalgamation:
(a)
consideration for the amalgamation and a
description of the consideration paid or contingently payable; and
(b)
the amount of any difference between the
consideration and the value of net identifiable assets acquired, and the
treatment thereof including the period of amortisation of any goodwill arising
on amalgamation.
Amalgamation after the Balance Sheet
Date
27.
When an amalgamation is effected after
the balance sheet date but before the issuance of the financial statements of
either party to the amalgamation, disclosure is made in accordance with AS 4,'Contingencies and Events Occurring after the Balance Sheet Date', but the
amalgamation is not incorporated in the financial statements. In certain
circumstances, the amalgamation may also provide additional information
affecting the financial statements themselves, for instance, by allowing the
going concern assumption to be maintained.
Accounting
Standard
(The
Accounting Standard comprises paragraphs 28–46 of this Statement. The Standard
should be read in the context of paragraphs 1–27 of this Statement and of the
'Preface to the Statements of Accounting Standards'.)
28.
An amalgamation may be either –
(a)
an amalgamation in the nature of merger,
or (b)
an amalgamation in the nature of
purchase.
29.
An amalgamation should be considered to
be an amalgamation in the nature of merger when all the following conditions
are satisfied:
(i)
All the assets and liabilities of the
transferor company become, after amalgamation, the assets and liabilities of
the transferee company.
(ii)
Shareholders holding not less than 90% of
the face value of the equity shares of the transferor company (other than the
equity shares already held therein, immediately before the amalgamation, by the
transferee company or its subsidiaries or their nominees) become equity
shareholders of the transferee company by virtue of the amalgamation.
(iii)
The consideration for the
amalgamation receivable by those equity shareholders of the transferor company
who agree to become equity shareholders of the transferee company is discharged
by the transferee company wholly by the issue of equity shares in the
transferee company, except that cash may be paid in respect of any fractional
shares.
(iv)
The business of the transferor company is
intended to be carried on, after the amalgamation, by the transferee company.
(v)
No adjustment is intended to be made to
the book values of the assets and liabilities of the transferor company when
they are incorporated in the financial statements of the transferee company
except to ensure uniformity of accounting policies.
30.
An amalgamation should be considered to
be an amalgamation in the nature of purchase, when any one or more of the
conditions specified in paragraph 29 is not satisfied.
31.
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 described in paragraphs 33–35.
32.
When an amalgamation is considered to be
an amalgamation in the nature of purchase, it should be accounted for under the
purchase method described in paragraphs 36–39.
The
Pooling of Interests Method
33.
In preparing the transferee company's
financial statements, the assets, liabilities and reserves (whether capital or
revenue or arising on revaluation) of the transferor company should be recorded
at their existing carrying amounts and in the same form as at the date of the
amalgamation. The balance of the Profit and Loss Account of the transferor
company should be aggregated with the corresponding balance of the transferee
company or transferred to the General Reserve, if any.
34.
If, at the time of the amalgamation, the
transferor and the transferee companies have conflicting accounting policies, a
uniform set of accounting policies should be adopted following the
amalgamation. The effects on the financial statements of any changes in
accounting policies should be reported in accordance with Accounting Standard
(AS) 5 'Prior Period and Extraordinary Items and Changes in Accounting
Policies'.
35.
The difference between the amount
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 should be adjusted in reserves.
The
Purchase Method
36.
In preparing the transferee company's
financial statements, the assets and liabilities of the transferor company
should be incorporated at their existing carrying amounts or, alternatively,
the consideration should be allocated to individual identifiable assets and
liabilities on the basis of their fair values at the date of amalgamation. The
reserves (whether capital or revenue or arising on revaluation) of the
transferor company, other than the statutory reserves, should not be included
in the financial statements of the transferee company except as stated in
paragraph 39.
37. Any
excess of the amount of the consideration over the value of the net assets of
the transferor company acquired by the transferee company should be recognised
in the transferee company's financial statements as goodwill arising on
amalgamation. If the amount
of the consideration is lower than the value of the net assets acquired, the
difference should be treated as Capital Reserve.
38.
The goodwill arising on amalgamation
should be amortised to income on a systematic basis over its useful life. The
amortisation period should not exceed five years unless a somewhat longer
period can be justified.
39.
Where the requirements of the relevant
statute for recording the statutory reserves in the books of the transferee
company are complied with, statutory reserves of the transferor company should
be recorded in the financial statements of the transferee company. The
corresponding debit should be given to a suitable account head (e.g.,
'Amalgamation Adjustment Account') which should be 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 should be reversed.
Common
Procedures
40.
The consideration for the amalgamation
should include any non-cash element at fair value. In case of issue of
securities, the value fixed by the statutory authorities may be taken to be the
fair value. In case of other assets, the fair value may be determined by
reference to the market value of the assets given up. Where the market value of
the assets given up cannot be reliably assessed, such assets may be valued at
their respective net book values.
41.
Where the scheme of amalgamation provides
for an adjustment to the consideration contingent on one or more future events,
the amount of the additional payment should be included in the consideration if
payment is probable and a reasonable estimate of the amount can be made. In all
other cases, the adjustment should be recognised as soon as the amount is
determinable [see Accounting Standard (AS) 4, Contingencies and Events
Occurring after the Balance Sheet Date].
Treatment
of Reserves Specified in A Scheme of Amalgamation
42.
Where the scheme of amalgamation
sanctioned under a statute prescribes the treatment to be given to the reserves
of the transferor company after amalgamation, the same should be followed. Where the scheme of amalgamation sanctioned under a
statute prescribes a different treatment to be given to the reserves of the
transferor company after amalgamation as compared to the requirements of this
Statement that would have been followed had no treatment been prescribed by the
scheme, the following disclosures should be made in the first financial
statements following the amalgamation:
(a) A
description of the accounting treatment given to the reserves and the reasons
for following the treatment different from that prescribed in this Statement.
(b) Deviations
in the accounting treatment given to the reserves as prescribed by the scheme
of amalgamation sanctioned under the statute as compared to the requirements of
this Statement that would have been followed had no treatment been prescribed
by the scheme.
(c) The
financial effect, if any, arising due to such deviation.”
Disclosure
43.
For all amalgamations, the following
disclosures should be made in the first financial statements following the amalgamation:
(a)
names and general nature of business of
the amalgamating companies;
(b)
effective date of amalgamation for
accounting purposes;
(c)
the method of accounting used to reflect
the amalgamation; and
(d)
particulars of the scheme sanctioned
under a statute.
44.
For amalgamations accounted for under the
pooling of interests method, the following additional disclosures should be
made in the first financial statements following the amalgamation:
(a)
description and number of shares issued,
together with the percentage of each company's equity shares exchanged to
effect the amalgamation;
(b)
the amount of any difference between the
consideration and the value of net identifiable assets acquired, and the
treatment thereof.
45.
For amalgamations accounted for under the
purchase method, the following additional disclosures should be made in the
first financial statements following the amalgamation:
(a)
consideration for the amalgamation and a
description of the consideration paid or contingently payable; and
(b)
the amount of any difference between the
consideration and the value of net identifiable assets acquired, and the
treatment thereof including the period of amortisation of any goodwill arising
on amalgamation.
Amalgamation
after the Balance Sheet Date
46.
When an amalgamation is effected after
the balance sheet date but before the issuance of the financial statements of
either party to the amalgamation, disclosure should be made in accordance with
AS 4, 'Contingencies and Events Occurring after the Balance Sheet Date', but
the amalgamation should not be incorporated in the financial statements. In
certain circumstances, the amalgamation may also provide additional information
affecting the financial statements themselves, for instance, by allowing the
going concern assumption to be maintained.