Accounting for Amalgamation, Absorption and External Reconstruction
This domain tests business combinations under AS 14: amalgamation in the nature of merger versus purchase, purchase consideration, goodwill or capital reserve, and external reconstruction.
Core rules
- Amalgamation combines two or more companies; absorption is one company taking over another; external reconstruction is a new company taking over an existing one.
- Pooling of interests applies only if assets and liabilities are recorded at book values, at least 90% of shareholders become shareholders of the transferee, consideration is in equity shares, and reserves are not adjusted.
- Otherwise the purchase method applies: assets and liabilities are recognised at fair values, and the difference between consideration and net assets is goodwill or capital reserve.
- Goodwill under AS 14 is amortised over a period not exceeding five years.
- Statutory reserves are retained even under the purchase method where required by law.
Worked example
Transferee takes over assets of 12,00,000 and liabilities of 4,00,000; net assets are 8,00,000. If consideration is 9,00,000, goodwill is 1,00,000. If consideration is 7,50,000, capital reserve is 50,000. The transferee records the business purchase, individual assets and liabilities, consideration discharged, and goodwill or capital reserve.
Traps
Using pooling for a non-qualifying merger; recording assets at book value under purchase method; and forgetting AS 14 goodwill amortisation.
Exam focus
Computation of purchase consideration, goodwill and capital reserve, and journal entries in the transferee.