AMALGAMATION AND EXTERNAL RECONSTRUCTION, INTERNAL RECONSTRUCTION, Dibrugarh University, Corporate Accounting, B.Com 2nd Semester (CBCS) B.Com 1st Year Notes, Unit- 4 - myedu365

 

Unit -4


PART: A
AMALGAMATION 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: B
INTERNAL 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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