Amalgamation (AS-14 Basics): Types, Methods (Pooling vs Purchase) and Purchase Consideration

Overview

Amalgamation is a business combination where two or more companies combine into one. In Corporate Accounting, AS-14 basics usually focus on:

• classification: amalgamation in the nature of merger vs purchase,
• accounting methods: pooling of interests vs purchase method,
• computing purchase consideration (PC),
• determining goodwill or capital reserve based on net assets.

Scoring areas: correct definitions, conditions for merger, PC working, and clear table comparison.

Learning objectives

You should be able to:

• Define amalgamation and differentiate merger vs purchase.
• Explain pooling vs purchase method (basic).
• Compute purchase consideration using net payment / net assets method.
• Determine goodwill or capital reserve.
• Write exam answers using tables and a small working format.

Key terms

• Transferor company: company that is amalgamated (vendor company).
• Transferee company: company that takes over business (purchasing company).
• Purchase consideration (PC): amount paid by transferee to shareholders of transferor.
• Merger (nature of merger): combination meeting AS-14 conditions.
• Purchase (nature of purchase): amalgamation not satisfying merger conditions.
• Pooling of interests: method used for merger.
• Purchase method: method used for purchase.
• Goodwill: PC > net assets.
• Capital reserve: PC < net assets.

Meaning of amalgamation

Amalgamation means combining two or more companies into one company. It may result in:

• formation of a new company, or
• absorption by an existing company.

In accounting problems, transferor’s business (assets and liabilities) is taken over by transferee.

Types of amalgamation (AS-14): merger vs purchase

AS-14 broadly classifies amalgamation into:

1) Amalgamation in the nature of merger

Generally, merger occurs when:

• all (or substantially all) assets and liabilities are taken over,
• shareholders holding substantial equity become shareholders of transferee,
• business is intended to be continued,
• consideration is discharged mainly by issue of equity shares.

(Exact conditions vary by syllabus wording; write “as per AS-14 conditions”.)

2) Amalgamation in the nature of purchase

If the above merger conditions are not satisfied, it is treated as purchase.

Quick comparison:

Pooling of interests method (merger): key points

Key idea: combine books as if companies were always together.

• Assets and liabilities recorded at existing book values (generally).
• Reserves of transferor are preserved in transferee (same nature).
• Difference between share capital issued and share capital of transferor may be adjusted in reserves (as per method rules).

Purchase method (purchase): key points

Key idea: transferee “purchases” the business.

• Assets and liabilities are recorded at agreed values (or fair values as given).
• Transferor’s reserves are generally not carried forward (except statutory reserves, if required).
• Difference between PC and net assets = goodwill or capital reserve.

Purchase consideration (PC): meaning and methods

Meaning

Purchase consideration is the amount payable by transferee to the shareholders of transferor company.

Important: PC is not the payment to creditors; liabilities are taken over separately.

Common methods

1. Net payment method: total of payments made to shareholders (shares, cash, debentures, etc.).
2. Net assets method: agreed value of assets taken over minus agreed value of liabilities taken over.

Net assets method and goodwill/capital reserve

Compute net assets:

Net assets = (Agreed assets taken over) – (Agreed liabilities taken over)

Then:

• If PC > net assets → Goodwill (debit)
• If PC < net assets → Capital Reserve (credit)

Small table:

Common journal entries (transferee books): outline

Exact entries depend on the method and question, but a standard outline is:

1. For business purchase: Business Purchase A/c Dr
   To Liquidator of Transferor Co. A/c

2. For assets and liabilities taken over: Individual Assets A/c Dr (at agreed values)
   To Individual Liabilities A/c (taken over)
   To Business Purchase A/c (balancing figure)

3. For discharge of purchase consideration: Liquidator A/c Dr
   To Share Capital / Bank / Debentures A/c (as per consideration)

Goodwill/capital reserve is recorded based on PC vs net assets (purchase method).

Mini worked example (purchase consideration)

Transferor: assets taken over = ₹10,00,000 (agreed), liabilities taken over = ₹3,00,000.

Net assets = 10,00,000 – 3,00,000 = ₹7,00,000

If transferee agrees to pay PC = ₹7,50,000: PC (7,50,000) > Net assets (7,00,000) → Goodwill = ₹50,000

If PC = ₹6,80,000: PC < Net assets → Capital reserve = ₹20,000

Exam-ready tables/flow

Flow: Identify type (merger/purchase) → Choose method → Compute PC → Compute net assets → Goodwill/Capital reserve → Pass entries

Quick “PC reminder”: PC = paid to shareholders (not creditors).

Quick recap (1-minute revision)

• Amalgamation combines companies; transferor is taken over by transferee.
• AS-14: merger vs purchase; methods: pooling vs purchase.
• Purchase consideration: net payment or net assets method.
• Goodwill if PC > net assets; capital reserve if PC < net assets.
• Keep clean working and table comparisons in exams.