The accounting entries for amalgamation or business combination depend on the method of accounting adopted by the companies involved in the transaction. There are two methods of accounting: the pooling of interests method and the purchase method.
Pooling of interests method:
Under this method, the assets, liabilities, and reserves of the amalgamating companies are recorded at their existing carrying amounts, and no goodwill or capital reserve is recorded. The accounting entries for amalgamation under the pooling of interests method are as follows:
a) On the date of amalgamation:
i) Record the assets and liabilities of the amalgamating companies at their existing carrying amounts.
ii) Record the shares issued to the shareholders of the amalgamating companies at their face value.
iii) Record any expenses incurred in connection with the amalgamation.
b) After the date of amalgamation:
i) Eliminate the inter-company balances between the amalgamating companies.
ii) Record any adjustments required to bring the accounting policies of the amalgamating companies in line with each other.
Purchase method:
Under this method, the assets, liabilities, and reserves of the amalgamating companies are recorded at their fair values, and any excess consideration paid over the fair value is recorded as goodwill or capital reserve. The accounting entries for amalgamation under the purchase method are as follows:
a) On the date of amalgamation:
i) Record the fair value of the assets and liabilities of the amalgamating companies.
ii) Record any excess consideration paid over the fair value as goodwill or capital reserve.
iii) Record any expenses incurred in connection with the amalgamation.
b) After the date of amalgamation:
i) Eliminate the inter-company balances between the amalgamating companies.
ii) Record any adjustments required to bring the accounting policies of the amalgamating companies in line with each other.
In both methods, the amalgamated company’s share capital and reserves are recorded at their existing carrying amounts or fair values, as applicable. The amalgamation reserve is recorded as a part of reserves and surplus in the balance sheet.
It is important to note that the accounting treatment for amalgamation or business combination also depends on the legal form of the transaction. If the transaction is structured as a merger or amalgamation under the Companies Act, 2013, the accounting treatment will be governed by the provisions of the Act. However, if the transaction is structured as an acquisition, the accounting treatment will be governed by the applicable accounting standards.
Example:
Suppose company A acquires company B for a purchase consideration of Rs. 10,00,000. The fair value of assets and liabilities of company B is Rs. 8,00,000 and Rs. 6,00,000 respectively.
Purchase Consideration paid by A:
Bank A/c 10,00,000
To Cash/Bank A/c 10,00,000
Record the assets and liabilities of company B at their fair value:
Goodwill A/c (10,00,000 – (8,00,000+6,00,000)) = Rs. 2,00,000
To Fixed Assets A/c (Fair value) 8,00,000
To Current Liabilities A/c (Fair value) 6,00,000
Transfer the share capital and reserves of company B to company A:
Share Capital A/c (Face value of shares) X
Securities Premium Reserve A/c Y
General Reserve A/c Z
Profit and Loss A/c W
To Equity Share Capital A/c (Face value of shares) X
To Securities Premium Reserve A/c Y
To General Reserve A/c Z
To Profit and Loss A/c W
Record the payment of any additional consideration:
Goodwill A/c X
To Equity Share Capital A/c X
(Here, X represents the additional consideration paid by company A to company B)
Record the amount of goodwill:
Amalgamation Adjustment A/c 2,00,000
To Goodwill A/c 2,00,000
(Here, 2,00,000 is the value of goodwill calculated in step 2)
Record the closing of the books of company B:
Fixed Assets A/c (Fair value) 8,00,000
To Fixed Assets A/c (Book value) 8,00,000
Current Liabilities A/c (Fair value) 6,00,000
To Current Liabilities A/c (Book value) 6,00,000
Record the share capital of company A:
Equity Share Capital A/c X
To Bank A/c X
(Here, X represents the face value of shares issued by company A)