What is Amalgamation?

[ashabansal]

Before getting into insights, let us understand what amalgamation means. As the name suggests, Amalgamation is the blending of two or more existing companies into one. Say, company A and company B go into liquidation to create a new entity C. Amalgamation also includes the Absorption. Absorption is the process where one company takes control over the other. Considering the example, company A takes over company B and now, B is the wounded up.

There are two commonly used terms you need to remember while referring the companies in amalgamation. They are as follows:

1. Transferor company is the amalgamating company
2. Transferee company is the amalgamated company.

Types of Amalgamation: As per the accounting purposes, AS-14, amalgamation has been categorized into two as follows:
1. Amalgamation in the nature of merger: When the assets and liabilities of the companies are truly pooled, as well as the interest of the companies and shareholders, is also combined, then it is called an amalgamation in the nature of merger.
2. Amalgamation in the nature of purchase: This method comes into existence when the conditions of the amalgamation in the nature of merger are not satisfied. When the assets and liabilities of the company are obtained by another and purchase consideration is paid by the transferee company.

Based on the above classification there are two methods to perform the accounting of amalgamation as follows:
1. The Pooling of Interests Method: The object of Pooling of Interest Method is to account for the amalgamation as if the separate businesses of the amalgamating companies were intended to be continued by the transferee company. Accordingly, only minimal changes are made in aggregating the individual financial statements of the amalgamating companies. Through this accounting method, the assets, liabilities and reserves of the transferor company are recorded by the transferee company at their existing carrying amounts.
2. The Purchase Method: The object of the Purchase Method is to account for the amalgamation by applying the same principles as are applied to the normal purchase of assets. In this method, the transfer company accounts for the amalgamation either by incorporating the assets and liabilities at their existing carrying amounts or by allocating the consideration to individual assets and liabilities of the transferor company on the basis of their fair values at the date of amalgamation.
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