Amalgamation in the Nature of Merger versus Purchase
On 1 April 2024, Apex Ltd absorbed Beta Ltd. Beta Ltd had 2,00,000 equity shares of ₹10 each, general reserve ₹6,00,000 and profit and loss account ₹4,00,000. Its assets were: land ₹15,00,000, plant ₹12,00,000, stock ₹9,00,000, debtors ₹8,00,000 and cash ₹4,00,000. Liabilities were 10% debentures ₹10,00,000 and sundry creditors ₹8,00,000. Apex Ltd agreed to take over all assets and liabilities at book values. In consideration, Apex Ltd issued one equity share of ₹10 each at a premium of ₹20 for every two equity shares of Beta Ltd and paid cash ₹2 per Beta share to Beta shareholders. Apex Ltd also paid ₹50,000 as liquidation expenses. The management believes the transaction is an amalgamation in the nature of merger and wants to avoid recognising goodwill. The accountant seeks advice on purchase consideration, goodwill, and the accounting treatment under AS 14.
1. Compute purchase consideration and goodwill.
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Shares issued: one share for every two Beta shares. Beta has 2,00,000 shares, so Apex issues 1,00,000 shares of ₹10 each at ₹20 premium = ₹30,00,000. Cash: ₹2 × 2,00,000 = ₹4,00,000. Purchase consideration = ₹34,00,000. Net assets taken over: assets = 15,00,000 + 12,00,000 + 9,00,000 + 8,00,000 + 4,00,000 = ₹48,00,000. Liabilities = 10,00,000 + 8,00,000 = ₹18,00,000. Net assets = ₹30,00,000. Goodwill = purchase consideration ₹34,00,000 − net assets ₹30,00,000 = ₹4,00,000. Liquidation expenses of ₹50,000 are not part of purchase consideration; they are expensed in Apex's statement of profit and loss unless the scheme says otherwise.
2. Does AS 14 pooling of interests apply?
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AS 14 treats an amalgamation as in the nature of merger only if all five conditions are met: all assets and liabilities are taken over; at least 90% of the face value of the equity shareholders of the transferor become shareholders of the transferee; the consideration is discharged by issue of equity shares, except cash for fractional shares; the business is intended to be carried on; and the books are incorporated at carrying amounts with uniform accounting policies. Here the cash payment of ₹4,00,000 is not for fractional shares; it is 11.76% of the consideration (4/34). Hence the transaction is an amalgamation in the nature of purchase, not merger. Goodwill must be recognised, and Beta's reserves are not pooled into Apex's reserves.
3. Pass journal entries in Apex Ltd.
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- Business purchase: Dr Business Purchase A/c ₹34,00,000; Cr Liquidator of Beta Ltd ₹34,00,000.
- Assets and liabilities taken over: Dr Land ₹15,00,000; Dr Plant ₹12,00,000; Dr Stock ₹9,00,000; Dr Debtors ₹8,00,000; Dr Cash ₹4,00,000; Dr Goodwill ₹4,00,000; To 10% Debentures ₹10,00,000; To Sundry Creditors ₹8,00,000; To Business Purchase ₹34,00,000.
- Discharge: Dr Liquidator of Beta Ltd ₹34,00,000; To Equity Share Capital ₹10,00,000; To Securities Premium ₹20,00,000; To Bank ₹4,00,000.
- Liquidation expenses: Dr Statement of Profit and Loss ₹50,000; Cr Bank ₹50,000.