Amalgamation of companies refers to the merger of two or more companies into a single entity, resulting in a larger and stronger company. The process of amalgamation can be carried out through various methods such as absorption, merger, or consolidation. The main objective of amalgamation is to increase the efficiency and profitability of the companies involved.
There are two types of amalgamation:
- Amalgamation in the nature of merger: In this type of amalgamation, two or more companies merge to form a new company, where the assets and liabilities of the merging companies are transferred to the new company.
- Amalgamation in the nature of purchase: In this type of amalgamation, one company purchases the assets and liabilities of another company, and the purchased company ceases to exist.
The accounting treatment of amalgamation depends on the type of amalgamation.
Accounting Treatment for Amalgamation in the Nature of Merger:
When two or more companies amalgamate in the nature of merger, the following accounting treatment is carried out:
- The assets and liabilities of the merging companies are recorded at their respective book values in the books of the new company.
- The excess of the purchase consideration over the net assets acquired is treated as goodwill. Goodwill is an intangible asset that represents the value of the reputation, brand, customer base, and other non-physical assets of the company.
- Any difference between the book value of the shares issued and the face value of the shares is recorded as share premium.
- The share capital of the new company is recorded as the sum of the share capital of the merging companies.
- The reserves and surplus of the merging companies are transferred to the new company.
- The debit balance of the profit and loss account of the merging companies is transferred to the new company’s profit and loss account.
Accounting Treatment for Amalgamation in the Nature of Purchase:
When one company purchases the assets and liabilities of another company, the following accounting treatment is carried out:
- The assets and liabilities of the purchased company are recorded at their respective book values in the books of the purchasing company.
- The excess of the purchase consideration over the net assets acquired is treated as goodwill.
- Any difference between the book value of the shares issued and the face value of the shares is recorded as share premium.
- The share capital of the purchasing company is recorded as the sum of the share capital of the purchased company.
- The reserves and surplus of the purchased company are transferred to the purchasing company.
- The debit balance of the profit and loss account of the purchased company is transferred to the purchasing company’s profit and loss account.
Preparation of Balance Sheet and Cash Flow Statement for Amalgamation:
After the amalgamation, the balance sheet and cash flow statement of the new company are prepared as follows:
- Balance Sheet: The balance sheet of the new company is prepared by adding the assets and liabilities of the merging companies. The share capital of the new company is recorded as the sum of the share capital of the merging companies. The reserves and surplus of the merging companies are transferred to the new company’s balance sheet.
- Cash Flow Statement: The cash flow statement of the new company is prepared by combining the cash flow statements of the merging companies. The cash flows from operating, investing, and financing activities are combined and presented in the cash flow statement of the new company.
Accounting Software for Amalgamation:
Accounting software can be used for various aspects of amalgamation, including:
- Recording the financial transactions related to the amalgamation, such as the transfer of assets and liabilities, payment of consideration, and issuance of shares.
- Preparing financial statements, including the statement of financial position and the statement of comprehensive income, for the amalgamated entity.
- Generating reports for management and stakeholders that show the financial impact of the amalgamation.
- Keeping track of tax implications, such as capital gains tax and stamp duty, that may arise from the amalgamation.
- Tracking the progress of the amalgamation process, including any approvals required from regulatory bodies or shareholders.
Some popular accounting software programs that can be used for amalgamation include QuickBooks, Xero, and Tally. These software programs offer features such as automated data entry, financial reporting, and reconciliation of financial transactions. It is important to select the appropriate software based on the specific needs of the business and the complexity of the amalgamation process.