Here we are trying to list the taxation and accounting implications for a typically Merger/Amalgamation of companies. We also look at various methods for accounting to treat different types of merger

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Accounting & Taxation
Of Amalgamation

2. Accounting & Taxation Of Amalgamation
Focus
o Accounting for amalgamation
o Treatment of resultant Goodwill or Reserves
o Tax Aspects

3. Accounting & Taxation Of Amalgamation
AS-14 : Accounting for Amalgamations
 Amalgamation means an amalgamation pursuant to the provisions of
the Companies Act,1956 or any other statute which may be applicable
to companies.
 Companies Act, 1956 – Does not define amalgamation
AS-14 defines Amalgamation

4. Accounting & Taxation Of Amalgamation
For accounting purposes
Amalgamation in the
Nature of Merger
Amalgamation in the
Nature of Purchase
Amalgamation

5. Accounting & Taxation Of Amalgamation
Amalgamation in Nature of Merger
 All the assets and liabilities are transferred;
 Shareholders holding not less than 90% of the face value of the equity shares of
the transferor company become shareholders of transferee company;
 The consideration is discharged by the issue of equity shares in the transferee
company;
 The business of the Transferor Company is intended to be carried on; &
 No adjustment to be made to the book values of the assets and liabilities.

6. Definitions
 Amalgamation in the nature of purchase
 An amalgamation which does not satisfy any one or more of the conditions
discussed
earlier.
 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.
Accounting & Taxation Of Amalgamation

7. Pooling of interest method
• 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
• Only minimal changes are made in aggregating the individual financial statements of the
amalgamating companies
Accounting & Taxation Of Amalgamation
Definitions

8. Accounting Methods Followed
Amalgamation in the
NATURE OF MERGER NATURE OF PURCHASE
8
Pooling of Interests
method
Purchase method

9.  The assets & liabilities are recorded at
their existing carrying amounts.
 The reserves of the transferor company
are recorded at their existing carrying
amounts.
 Uniform set of accounting policies is
adopted.
 The assets & liabilities are recorded either at
existing carrying values or by allocating the
consideration on the basis of Fair values on
the date of amalgamation.
 The reserves of the transferor company,
other than the statutory reserves, should
not be included in the financial statements
of the transferee company.
Pooling of Interests method Purchase method
9
Accounting Treatment

10. Accounting of Reserve/Goodwill
• 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.
• The difference is adjusted in reserves in the
financial statements of the transferee
company.
 Consideration > Net Asset
value “GOODWILL”
 Consideration < Net Asset
value “CAPITAL RESERVE”
POOLING OF INTEREST METHOD PURCHASE METHOD
10

11. Treatment of Goodwill
• Represents a payment made in anticipation of future income
• Can be treated as an asset to be amortized to income over its useful life.
• A proper basis is difficult to estimate.
• It is considered appropriate to amortize goodwill over a period not exceeding five years unless a
somewhat longer period can be justified.
Accounting & Taxation Of Amalgamation

12. Useful Life of Goodwill
• Foreseeable life of the business or industry;
• Effects of product obsolescence, changes in demand and other economic factors;
• 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.
Accounting & Taxation Of Amalgamation

13. Disclosures
Both Natures of Amalgamation
 Names and general nature of business of the amalgamating companies;
 Effective date of amalgamation for accounting purposes;
 The method of accounting used to reflect the amalgamation; and
 Particulars of the scheme sanctioned under a statute.
Accounting & Taxation Of Amalgamation

14. Disclosures
Additional disclosures
Pooling of Interests method
(a) description and number of shares issued,
(b) the amount of any difference between the consideration and the value of net
assets acquired
Purchase method
(a) a description of the consideration paid or payable;
(b) any difference between the consideration and the value of net assets acquired.
Accounting & Taxation Of Amalgamation

15. Taxation Issue
Definition :
• According to section 2(1B), “Amalgamation” in relation to companies means :
a) The merger of one or more companies With another.
b) The merger of two or more companies to form a NEW company.
In such a manner (by virtue of amalgamation) that –
i. All the property and liability of amalgamating company becomes the property/liability of amalgamated
company;
ii. Shareholders holding 75% or more in value of the shares become shareholders of the amalgamated
company.
Accounting & Taxation Of Amalgamation

16. Taxation of Amalgamation
 Definition is significant since :
 The loss of Transferor(amalgamating) company shall be allowed to be set off and carried
forward by the amalgamated company by virtue of Sec.72A.
 The income of the amalgamating company from effective date of transfer shall be assessed as
the income of the amalgamated company and shall be assessed accordingly.
Accounting & Taxation Of Amalgamation

17. Capital Gains Tax - Exceptions
As per Sec 47 : Exception to the following transaction is given from the charging section i.e. Sec 45 :
 Transfer of Capital Assets by holding company to its subsidiary company or vice versa.
 Transfer of a capital asset in a Scheme of amalgamation.
 Transfer of shares held in Indian company, in a Scheme of amalgamation, between 2 Foreign companies,
by the Amalgamating foreign company.
Accounting & Taxation Of Amalgamation

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