Difference Between Amalgamation and Absorption with Comparison Chart

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.

The Purchase Method

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.

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. AS-14 standard addresses accounting for amalgamations and goodwill, excluding acquisitions. It specifies definitions, methods for accounting (pooling of interests and purchase), and treatment of reserves and goodwill arising from amalgamations. Amalgamation is a process in which two companies liquidate to create a new company, which takes over the business of the liquidating companies.

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2. This new entity houses the combined assets and liabilities of both the involved companies.
3. Such amalgamations are amalgamations in the nature of ‘purchase’.
4. If the amount of the consideration is lower than the value of the net assets acquired, the difference should be treated as Capital Reserve.
5. Company amalgamation helps enjoy various tax benefits and acts as a significant measure of tax planning.
6. These are two business strategies adopted by the companies to expand itself and take a competitive position in the market.

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What Are the Methods of Accounting for Amalgamation?

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.

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.

Instead, the legal rights and authorities are shifted to the newly formed entity, combining them. However, the operations are what do you mean by amalgamation 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.

Treatment of Goodwill Arising on Amalgamation

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.

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.

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.

Types of Amalgamation

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.

Here, these assets and liabilities’ accounts must not be those belonging to the financial statements of the transferor entity. The balance of the Profit and Loss Account of the transferor company should be aggregated with the corresponding balance of the transferee company or transferred to the General Reserve, if any. In accounting, the process means combining financial statements.