Accounting Standards
AS-14 — ‘Accounting for
Amalgamations’ defines amalgamations in the nature of merger and in the nature
of purchase (acquisition). The classification is important because in the case
of amalgamation in the nature of merger, the difference between the equity of
the transferor company and the equity issued to the shareholders of the
transferor company is adjusted against reserves of the amalgamated (transferee)
company. This accounting is usually known as the pooling method. In the case of
amalgamation in the nature of acquisition, the difference is reflected as
goodwill, which is then amortised in the income statement of the amalgamated
company over a period of 3-5 years. This method is usually known as acquisition
accounting.
Under AS-14 for an
amalgamation to qualify as being in the nature of merger it should satisfy all
the following conditions :
(a) All the assets and
liabilities of the transferor company become, after amalgamation, the assets
and liabilities of the transferee company.
(b) 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.
(c) 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.
(d) The business of the
transferor company is intended to be carried on, after the amalgamation, by
the transferee company.
(e) 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.
Amalgamation in the nature
of purchase is an amalgamation which does not satisfy any one or more of the
conditions specified above.
Assuming conditions (a), (d)
and (e) are fulfilled, a question arises that in the case of an amalgamation of
a wholly-owned subsidiary into the parent company, whether the same would
qualify as being in the nature of merger and would require to apply pooling
method or in the nature of purchase and hence would need to apply acquisition
accounting.
The question arises because
it is not clear whether conditions (b) and (c) are fulfilled. For example,
condition (c) requires the parent company to discharge its obligation by issuing
shares to the shareholders of the wholly-owned subsidiary. In the given case,
that is not possible since the amalgamation would involve cancellation of the
existing shares (100%) of the parent company in the subsidiary, rather than the
parent issuing new shares to the shareholders (own self) of the subsidiary.
In the author’s view, in the
case of an amalgamation with a 100% subsidiary, conditions (b) and (c) are not
applicable at all, rather than unfulfilled. Therefore it is possible to apply
pooling method in the case of an amalgamation with a 100% subsidiary. This is
also in line with IFRS which requires the pooling method to be applied in the
case of common control transactions, i.e., restructuring or amalgamation
transactions within the group.
