Amalgamation Definition, Types, Advantages, Disadvantages

In the case of an ‘amalgamation in the nature of purchase’, the balance of the Profit and Loss Account appearing in the financial statements of the transferor company, whether debit or credit, loses its identity. The distinguishing feature of an acquisition is that the acquired company is not dissolved and its separate entity continues to exist. When amalgamation is affected, some or all the assets and liabilities of the vendor companies, are transferred to the vendee company.

The transferor companies lose their identity to form a new company (transferee company). Accounting Standard – 14, issued by ICAI (Institute of Chartered Accountants of India) deals with Accounting for Amalgamation. Methods of accounting for amalgamation are Pooling of interest Method and Purchase Method. That means, in the process of amalgamation, two or more companies combine to form a new entity. In amalgamation, the new entity created is given a new name and holds the assets and liabilities of all the companies combined to form the new entity.

The main objective of an amalgamation is to form a unique entity which rests on the business combination of the involved companies for a greater competitiveness. During an amalgamation, the transferor company is absorbed by the stronger transferee company which then leads to the formation of a completely new company with more assets and a stronger customer base. The process of amalgamation helps to increase the cash resources, eliminate competition and save companies on taxes. But it can also have a negative effect where if too much competition is cut out, it can lead to a monopoly and the workforce might get scaled down which will increase the debt load of the new entity/organisation. As mentioned, in a typical amalgamation, two or more companies agree to combine their assets and liabilities and form an entirely new company. In an acquisition, by contrast, one company purchases another (usually by buying up enough of its stock) and takes on its assets and liabilities, with no new company being created.

Here, we have compiled all the differences between amalgamation and absorption of companies, which you were looking for. Amalgamation, as its name suggests, is nothing but two companies becoming one. On the other what do you mean by amalgamation hand, Absorption is the process in which the one dominant company takes control over the weaker company. These are two business strategies adopted by the companies to expand itself and take a competitive position in the market.

In this process, a smaller existing company is overpowered by an existing larger company. There are two companies involved in this process, i.e. the company who takes over the business of the other company is known as Absorbing Company, and the company whose business is taken over is known as Absorbed Company. AS – 14, Accounting for Amalgamation, governs the absorption of companies. Amalgamation is the legal process, in which two or more companies combine themselves to form a new company. On the other hand, absorption is when two or more companies are combined into an existing company.

New Business Terms

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1. In such cases the statutory reserves are recorded in the financial statements of the transferee company by a corresponding debit to a suitable account head (e.g., ‘Amalgamation Adjustment Reserve’) which is presented as a separate line item.
2. For example, the pooling interest method is used for the combinations that occur through the nature of the merger, where the transferor company’s assets and liabilities become the transferee company’s elements after amalgamation.
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Instead, the legal rights and authorities are shifted to the newly formed entity, combining them. However, the operations are diverse, so they do not have to outsource services to a third-party entity, which saves a lot of costs. Amalgamation is the process of combining two or more businesses to form one large entity.

How Amalgamations Work

Where the scheme of amalgamation provides for an adjustment to the consideration contingent on one or more future events, the amount of the additional payment should be included in the consideration if payment is probable and a reasonable estimate of the amount can be made. In all other cases, the adjustment should be recognised as soon as the amount is determinable [see Accounting Standard (AS) 4, Contingencies and Events Occurring After the Balance Sheet Date]. An amalgamation should be considered to be an amalgamation in the nature of purchase, when any one or more of the conditions specified in paragraph 29 is not satisfied. Goodwill arising on amalgamation represents a payment made in anticipation of future income and it is appropriate to treat it as an asset to be amortised to income on a systematic basis over its useful life.

Amalgamation vs Merger vs Absorption

That means, the larger companies buy the smaller company and all its assets. In this type of amalgamation, the transferor company doesn’t hold any share in the equity of the newly formed company after the amalgamation. The object of the purchase method is to account for the amalgamation by applying the same principles as are applied in the normal purchase of assets. This method is used in accounting for amalgamations in the nature of purchase. The standard AS-14 deals with accounting for amalgamations and the treatment of any resultant goodwill or reserves.

The effects on the financial statements of any changes in accounting policies should be reported in accordance with Accounting Standard (AS) 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies. The consideration for the amalgamation may consist of securities, cash or other assets. In determining the value of the consideration, an assessment is made of the fair value of its elements. For example, when the consideration includes securities, the value fixed by the statutory authorities may be taken to be the fair value. If, at the time of the amalgamation, the transferor and the transferee companies have conflicting accounting policies, a uniform set of accounting policies is adopted following the amalgamation.

In that respect, it is not all that different from an acquisition and similar strategies to aid corporate growth. Amalgamations typically happen between two (or more) companies engaged in the same line of business or that share some similarity in their operations. Usually, the process involves a larger entity, called a “transferee” company, absorbing one or more smaller “transferor” companies before creating the new entity. When an amalgamation is considered to be an amalgamation in the nature of merger, it should be accounted for under the pooling of interests method described in paragraphs 33–35.

This belief is based in part on the view that the exchange of control of one company for an insignificant share in a larger company does not amount to a mutual sharing of risks and benefits. The size of newly formed entities is more significant as compared to the companies that take part in the amalgamation. The amalgamation takes place between the companies that are part of the same market segment. The company with a smaller size (known as transferor company) is absorbed by the company with a larger size (known as the transferee company). As a result of which the customer base of the company increases along with the increased assets of the newly formed entity. In accounting, amalgamation means combining financial statements.

Purchase Consideration

Our experts suggest the best funds and you can get high returns by investing directly or through SIP. Download Black by ClearTax App to file returns from your mobile phone. The term amalgamation has generally fallen out of popular use in the United States, being replaced with terms like merger or consolidation, with which it can be synonymous.

The Jakarta-listed company aims to offer broader broadband and wireless network connections to people across the region. This merger would take the entity’s value to a new height, making it worth over $30 billion. The shares in Telkom have surged to 8% to date in 2022, thereby increasing the company’s value to around $28 billion. Company amalgamation helps enjoy various tax benefits and acts as a significant measure of tax planning. By uniting through amalgamation, companies take advantage of significant economies of scale. It is because it generally increases the value of the companies.

Many amalgamations recognise that adjustments may have to be made to the consideration in the light of one or more future events. When the additional payment is probable and can reasonably be estimated at the date of amalgamation, it is included in the calculation of the consideration. In all other cases, the adjustment is recognised as soon as the amount is determinable [see Accounting Standard (AS) 4, Contingencies and Events Occurring After the Balance Sheet Date]. People, most often, confuse amalgamation with concepts like merger and absorption. However, the terms differ widely with respect to their formation.