Amalgamation, Absorption and External Reconstruction of Joint Stock Companies

 Amalgamation, Absorption & External Reonstruction

 Amalgamation : Amalgamation is a business combination. It means formation  of  a new company to take over the existing business of  two  or more  companies. Sections 391, 394, 394A, 395 & 396A of the Companies Act 1956 deal with amalgamation of the companies.

In  amalgamation,  old existing companies will close  down  their business  &  their  assets & liabilities are transferred  to  the  new company's account as per the agreement.

Absorption : When one company buys another and integrates its operations, assets, and liabilities with those of the acquired company, a limited company is absorbed. This can be achieved through a merger or acquisition procedure.

When two or more businesses merge, a new firm is created. The shareholders of the merging firms become shareholders in the new company, and the assets and liabilities of the merging companies are transferred to it.

A company buys the assets and liabilities of another company in an acquisition. The purchased company's shareholders may be compensated in cash, shares, or a combination of both.

A limited business may be absorbed for a number of reasons, which includes :

A bigger market share and more competition

Access to new markets or products

Integration of operations results in efficiency and cost savings.

Increased stability and financial strength

Risk diversification

However, there may be disadvantages to absorption, such as :

Integration costs and difficulties

Cultural distinctions between the two businesses

Employees and other stakeholders opposition

Regulation obstacles and authorization requirements

Possibility of decreasing shareholder value.

Before engaging in an absorption, businesses should do due diligence to evaluate the advantages and risks associated and prepare a thorough integration plan to guarantee a smooth transition.

PURCHASE CONSIDERATION :

1. Lump sum Method : If purchase consideration is more than  the  Net Assets,  the difference between the two is Goodwill & if the  purchase consideration is less than the Net Assets, the difference between  the two is Capital Reserve.

2.      Net Asset Method : Purchase consideration = Assets taken over  less Liabilities taken over.

3.      Net  Payment Method : Calculate the purchase consideration  &  the difference between the purchase consideration and the Net Assets  will be Goodwill or Capital Reserve.

ACCOUNTING TREATMENT

Journal Entries in the books of Vendor / Purchased Company

Journal Entries in the books of Purchasing Company