PART:
AAMALGAMATION AND EXTERNAL RECONSTRUCTION
1.
What is External Reconstruction, Amalgamation and Absorption?
Ans:
External Reconstruction: The term external reconstruction means the winding up
of an existing company and registering itself into a new one after a
rearrangement of its financial position. Thus, there are two aspects of
external reconstruction, one winding up of an existing company and the other
rearrangement of the company’s financial position.
Amalgamation:
Amalgamation refers to a case where two or more existing companies go into
liquidation to be formed into a new company to take over the business of those
existing companies. Hence, two or more liquidation and one formation take place
in the case of amalgamation. Amalgamation means amalgamation pursuant to the
provisions of the companies Act, 2013 or any other statue which may be
applicable to companies.
Absorption:
Absorption of company is a business arrangement in which an existing company
takes over the business of another entity. It does involve formation of a new
company. In such arrangement the absorbed company is liquidated and the
purchasing company will continue its operation. Absorption is mainly done with
a view to use the strength of an existing company to exploit the opportunities
exists in the market.
2.
What are the features of Amalgamation?
Ans:
Following are the features of Amalgamation:
1.
For amalgamation two or more companies are required to amalgamate or merge
themselves.
2.
All the existing companies which are merged are to be liquidated.
3.
A new company is formed to take over the business of the companies which are to
be merged.
4.
The value of the new company formed is expected to be greater than the total of
the independent values of the amalgamating companies because of companies of
large scale production, saving in cost by elimination of duplicate activities
and facilities and by avoiding the disastrous results of cut throat
competition.
3.
What are the differences between Amalgamation and Absorption?
Ans:
Following are the differences between Amalgamation and Absorption :
1.
Two or more companies are liquidated in the process of amalgamation. One or
more companies are liquidated in absorption.
2.
Amalgamation involves formation of a new company. However, absorption of
companies does not involve formation of a new company.
3.
There is no such matter of size of amalgamating companies. Generally, size of
purchasing company is greater than that of Vendor Company in absorption.
4.
What are the differences between Amalgamation and External reconstruction?
Ans:
Following are the differences between Amalgamation and External reconstruction:
1. Amalgamation of companies involves
liquidation of two or more companies, while external reconstruction involves
liquidation of only one company.
2. Amalgamation of companies results in combination of companies, but external reconstruction does not result in any such combination.
5. What are the different types of Amalgamation:
Ans:
From accounting point of view there are two types of amalgamation:
a. Amalgamation in the nature of
merger.
b. Amalgamation in the nature of
purchase.
a.
Amalgamation in the nature of merger or pooling interest method of
amalgamation:
An amalgamation should be considered
to be an amalgamation in the nature of merger when all the following conditions
are satisfied:
1.
All the assets and liabilities of the transferor company become, after
amalgamation, the assets and liabilities of the transferee company.
2.
Shareholders holding not less than 90% of the face value of the equity shares
of the transferor company become equity shareholders of the transferee company
by virtue of the amalgamation.
3.
The consideration for the amalgamation receivable by those equity shareholders
of the transferor company who agree to become equity shareholders of the
transferee company is discharged by the transferee company wholly by the issue
of equity shares in the transferee company, except that cash may be paid in
respect of any fractional shares.
4.
The business of the transferor company is intended to be carried on, after the
amalgamation, by the transferee company.
5.
No adjustment is intended to be made to the book values of the assets and
liabilities of the transferor company when they are incorporated in the
financial statements of the transferee company except to ensure uniformity of
accounting policies.
b. Amalgamation in the nature of purchase.
An amalgamation should be considered
to be an amalgamation in the nature of purchase, when any one or more of the
conditions specified for amalgamation in the nature of merger is not satisfied.
In fact under this type of amalgamation generally one company acquires another
company and equity shareholders of the combining entities do not continue to
have proportionate share in the equity of the combined entity or the business
of the acquired company is not intended to be combined after the amalgamation.
6.
What are the distinction between Amalgamation in the nature of merger and Amalgamation in the nature of purchase?
Ans:
Following are the distinction between Amalgamation in the nature of merger
and Amalgamation in the nature of
purchase:
1.
In an amalgamation in the nature of merger, there is a genuine pooling not
merely of assets and liabilities of the amalgamating companies but also of the
shareholders interest and of the businesses of the two companies. All the
assets and liabilities including reserves and surplus of the transferor
company, after amalgamation, become the assets and liabilities of the
transferee company. On the other hand an amalgamation in the nature of purchase
is a mode by which one company acquires another company and equity shareholders
of the combined entity. The business of the acquired company may not intended
to be continued.
2.
In the pooling of interest method of amalgamation, assets, liabilities,
reserves and surplus of the transferor company are all incorporated in the
books of the transferee company. Hence, pooling of interest method is a case of
total incorporation of financial figures. Hence, amalgamation in the nature of
purchase is only partial incorporation of financial figures.
3.
In case of amalgamation in the nature of merger, difference between the
purchase consideration and net assets taken over is adjusted in general reserve
or other reserves and is not treated as goodwill or capital reserve as is in
the case of amalgamation in the nature of purchase.
4.
In case of amalgamation in the nature of purchase, for carry forward of any
statutory reserve by the transferee company, amalgamation adjusted a/c is
debited and credit is given to the concerned statutory reserve by the
transferee company. On the other hand, in case of amalgamation in the nature of
merger, amalgamation adjustment a/c is not to be opened for the takeover of the
statutory reserve.
7.
What is purchase consideration? Discuss in detail the various methods of
calculating purchase consideration.
Ans:
Purchase consideration is the amount which is paid by the transferee company
for the purchase of the business of the transferor company. In other words
consideration for amalgamation means the aggregate of the shares and other
securities issued and payment in cash or other assets by the transferee company
to the shareholders of the transferor company. While determining the amount of
purchase consideration special care should be given to the valuation of assets
and liabilities of the transferor company.
Following
are the methods of calculating purchase consideration:
1.
Lump Sum Method: When the transferee company agrees to pay a fixed sum to the
transferor company, it is called a lump sum payment of purchase consideration.
2.
Net worth or Net assets method: According to this method, the purchase
consideration is calculated by calculating the net worth of the assets taken
over by the transferee company. The net worth is arrived at by adding the
agreed value of assets taken over by the transferee company minus agreed value
of liabilities to be assumed by the transferee company.
3.
Net payment method: Under this method purchase consideration is calculated by
adding the various payments in the form of shares, securities, cash etc. made
by the transferee company. Thus purchase consideration is the total of all the
payments whether in shares, securities or cash.
4.
Intrinsic value method: Under this method purchase consideration is required to
be calculated on the basis of intrinsic value of shares. The intrinsic value of
a share is calculated by dividing the net assets available for equity
shareholders by the number of equity shares
8.
What are the difference between Pooling of interest method and Purchase method?
Ans:
Following are the difference between Pooling of interest method and Purchase
method:
|
Basis |
Pooling of interest method |
Purchase method |
|
1. Applicability |
The pooling of interest method is
applied in case of an amalgamation in the nature of merger. |
Purchase method is applied in the
case of an amalgamation in the nature of purchase. |
|
2. Recording |
In the pooling of interest method
all the reserves of the transferor company are also recorded by the
transferee company in its books of account. |
In the purchase method the
transferee company records in its books of accounts only the assets and
liabilities taken over the reserves except the statutory reserves of the
transferor company are not aggregated with those of the transferee company. |
|
3. Adjustment of the differences |
Under the pooling of interest
method, the difference between the consideration paid and the share capital
of the transferor company is adjusted in the general reserve or other
reserves of the transferee company. |
Under the purchase method the
difference between the consideration and net assets taken over is treated by
the transferee company as goodwill or capital reserve. |
|
4. Statutory reserve |
In this method the statutory reserves
are recorded by the transferee company like all other reserves without
opening amalgamation adjustment a/c. |
In the purchase method, while
incorporating the statutory reserves, the transferee company has to open
amalgamation adjustment account debiting it with the amount of the statutory
reserves being incorporated. |
PART:
BINTERNAL RECONSTRUCTION
1.
What is Internal Reconstruction?
Ans: Internal Reconstruction: Internal
reconstruction means a recourse undertaken to make necessary changes in the
capital structure of a company without liquidating the existing company. In
internal reconstruction neither the existing company is liquidated, nor a new
company incorporated. It is a scheme in which efforts are made to bail out the
company from losses and put it in a profitable position. Internal
reconstruction of a company is done through the reorganization of its share
capital. It is a scheme of reorganization in which all interested parties in
the capital structure volunteer to sacrifice. They are company’s shareholders,
debenture holders, creditors etc. Under internal reconstruction the accumulated
trading losses and fictitious assets are written off against the sacrifice made
by these interest holders in the form of reduction of paid up value of their
interest.
2.
What are the differences between Internal Reconstruction and External
Reconstruction?
Ans:
Following are the differences between Internal Reconstruction and External
Reconstruction:
1.
No new company is formed in case of internal reconstruction. A new company is
formed in case of external reconstruction.
2.
In case of internal reconstruction, no company is liquidated. In case of external
reconstruction one company is liquidated.
3.
Internal reconstruction requires court’s confirmation. But external
reconstruction can be affected without courts confirmation.
4.
Internal reconstruction is a slow and tedious process. But external reconstruction
can be carried out easily.
5.
In the case of internal reconstruction, the company is able to set off its past
losses against future profits. Whereas in case of external reconstruction the
past losses of the old company can’t be set off against the future profits of
the new company.
3.
Explain the scope of Internal Reconstruction?
Ans: Internal reconstruction of a company can be
carried out in the following different ways. These are as under:
a. Alteration of Share capital
b. Reduction in Share capital
Provisions
for Alteration of Share capital:
According
to section 61 of the Company’s Act 2013 a limited company can, if authorized by
its Articles of Association, alter the capital clause of its Memorandum of
Association in any of the following ways:
1.
Increasing its share capital by such amount as it thinks expedient by issue of
new shares. Accounting entries are the same as are done for the issue of new
shares.
2.
Consolidated all or part of its existing shares of smaller amounts into shares
of larger amounts. For example, X Ltd., having a share capital of Rs. 500000
divided into 5000 shares of Rs.100 each, resolve to consolidated the shares
into 50000 shares of Rs.10 each.
3.
Sub-divide its shares of higher denomination into shares of smaller denomination
subject to the condition that in case of partly paid up shares, the proportion
between the paid up and the unpaid amount on the shares continue to be the same
after sub-division as before. For example, X Ltd. resolves to sub-divide 5000
shares of Rs.100 each into 50000 shares of Rs.10 each.
4.
Convert all or any of its fully paid up shares into stock or reconvert that
stock into fully paid up shares.
5.
Cancel those shares which have not been taken up, i.e., decrease its unissued
capital without resulting in the reduction of paid up capital. It does not
require any journal entry because it does not affect paid up issued capital in
any way.
Under section 64 of the Company’s
Act 2013 the company shall give notice of the alteration of capital to the Registrar
within thirty days of doing so who make necessary alteration in Company’s
Memorandum or Articles of Association. If a default is made in complying with
this provision the company and every officer of the company who is in default
is punishable with a fine which may extend to fifty rupees for every day the
default continues.
Provisions
for Reduction of share capital:
Reduction of share capital is
unlawful except when sanctioned by the court because conservation of capital is
one of the main principles of the company law. The issued share capital of a
company represents the security on which the creditors rely. Companies usually
do not call the full value of shares at one time. The uncalled capital acts as
a future security for the company’s creditors. Therefore any reduction of
capital reduces the security of creditors. Keeping this in view, all safeguards
have been provided for in the company’s Act to conserve the capital of a
company. However, a company is permitted to reduce its share capital by section
66 in any of the following ways:
1.
By extinguishing or reducing the liability on any of its shares in respect of
share capital not paid up, i.e., reducing or extinguishing the uncalled
liability of members of the company.
2.
By paying off any paid up capital which is in excess of the needs of the
company.
3.
Where any paid up share capital is being reduced without reducing the liability
on the shares.
4.
Where any paid up share capital is being reduced, reducing the liability on
shares.
5.
By any other method approved by the court.
The court ordinarily gives sanction
for the third type of capital reduction without consulting the creditors
because creditor’s interest is in no way affected by such reduction. Such
capital reduction neither amounts to reducing or extinguishing the uncalled
liability of the members nor returning of any paid up capital.
The court consults creditors for
giving approval of the first and second type of capital reduction because
security available to creditors is affected by these types of capital
reduction. If some creditors are unwilling to give their consent to such type
of capital reduction, the company will have to settle their claims before
getting sanction from the court.
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 B.Com 1st Year Notes, Unit- 4 - myedu365){kind=link}