CU-MCOM-SEM-IV-Merger and Acquisition-Second Draft

 Employee: A person who is hired to work for another or for a business, firm, etc., in return for payment. 7.5 LEARNING ACTIVITY 1. What journal entries are passed when debtors and creditors are not taken over by the purchasing company? ___________________________________________________________________________ ___________________________________________________________________________ 2. At the time of acquisition of business, what entries are recorded in the books of the purchasing company? ___________________________________________________________________________ ___________________________________________________________________________ 7.6 UNIT END ACTIVITY A. Descriptive Questions Short Questions 1. What is purchase consideration? How is it determined? 2. What do you mean by purchase of business? 3. What do you mean by vendor’s guarantee? 4. Explain the concept of vendor’s suspense account. 5. What do you mean by acquisition of business? What factors should be kept in mind while calculating purchase consideration? Long Questions 1. What are the methods of calculating purchase consideration? 2. Two companies Alpha and Beta are in the same line of business. They have decided to merge and form a new company Gamma. Gamma will take all the assets and liabilities of the old companies and that the Gamma will be paid $10 share to the value of net assets for each of the old companies. The Balance sheet of Alpha and Beta are as follows: 101 CU IDOL SELF LEARNING MATERIAL (SLM)

Balance SheetRequired Alpha Beta Assets 180,000 200,000 Machinery 190,000 150,000 Property 30,000 – Patents 150,000 90,000 Inventory/ Stock 48,000 70,000 Accounts Receivable 22,000 50,000 Cash 10,000 – Profit & Loss 630,000 560,000 Total 500,000 400,000 Equities 80,000 50,000 Share capital 50,000 – Accounts payable – 20,000 Notes Payable – 90,000 Profit and loss Reserve fund 630,000 560,000 Total 1. Compute the purchase consideration, 3. On 1st January, 2006 Naveen Limited purchased the business of Pankaj taking over his all assets, except debtors of ` 2,80,000, which it undertook to collect on behalf of Mr. Pankaj and out of this proceeds pay the creditors of Pankaj for ` 1,75,000, and an amount of ` 2,45,000 was realised from the debtors. Out of this amount ` 1, 68,000 were paid to the creditors in full settlement of their account. The company had to pay a contingent liability of ` 12,250 on account of a claim against Pankaj for damages. The company also collected a debt of ` 7,000 which was previously treated as bad by Pankaj. The company 102 CU IDOL SELF LEARNING MATERIAL (SLM)

was to get a commission of 5% on the amount collected and 2% on the amount paid. Pass the necessary journal entries in the books of Naveen Limited. 4. On 1st January, 2005, K. Ltd. purchased the business of Puneet, taking over his all assets except debtors of ` 80,000, which it undertook to collect on the behalf of Mr. Puneet and out of this proceeds pay the creditors of Puneet for ` 50,000. An amount of ` 70,000 was realised from the debtors. ` 48,000 was paid to creditors in full settlement of their account. It had to pay a contingent liability of ` 3,500 on account of a claim against Puneet for damages. The company collected a debt of ` 2,000 which was previously treated as bad by Puneet. The company was to get a commission of 5% on the amounts collected and 2% on amount paid. Pass the necessary journal entries in the books of K. Ltd. 5. When a company purchases a business what accounting records are made in the books of purchasing company? B. Multiple Choice Questions 1. Excess of net asset over purchase consideration is_______ a. Goodwill b. Capital Reserve c. Premium d. Dividend 2. If, after the sale of partnership firm, the partners want to receive the dividends in future in a profit sharing ratio, equity shares received from the company must be distributed in the ratio of: a. Capital b. Final claim c. Profit- Sharing d. No. of shares given in memorandum 3. Purchase consideration is determined by: 103 a. Shareholders b. Promoters CU IDOL SELF LEARNING MATERIAL (SLM)

c. Debenture-holder and creditors d. Mutual agreement 4. Excess of purchase consideration over net assets is called: a. Goodwill b. Capital Reserve c. Capital profit d. None of these 5. If purchase price is Rs. 40,00,000, total assets – Rs. 35,00,000 and liabilities – Rs. 10,00,000, value of goodwill will be: a. Rs. 15,00,000 b. Rs. 30,00,000 c. Rs. 25,00,000 d. None of these Answers 1-b, 2-d, 3-c, 4-a, 5-a. 7.7 REFERENCES References  Bruner Robert F. and Perella, Joseph R. Applied Mergers and Acquisitions. Wiley Finance.  Dr. Verma K. K. First Edition 2008, Corporate Accounting. Excel Books Pvt. Ltd. New Delhi.  Harvard Business Review on Mergers and Acquisitions Boston: Harvard Business School Pub. Corp., c2001.  Bruner , Robert F. (2005 ) Deals From Hell: M&A Lessons that Rise ab Textbooks  Mamoria, C.B. (2002). Personnel Management. Mumbai: Himalaya Publishing House. 104 CU IDOL SELF LEARNING MATERIAL (SLM)

 Patrick A. Gaughan, Mergers, Acquisitions, And Corporate Restructurings Fourth Edition  Dr. Nishi Kant Jha, 2011 Mergers, Acquisitions And Corporate Restructuring Websites  http://www.behanlegal.com/KnowledgeCentre/MergersAcquisitions Businesses Corporate/Business Acquisition/tabid/232/Default.aspx  http://www.fdic.gov/regulations/examinations/supervisory/insights/ siwin08/accounting news.  html http://www.inc.com/guides/201101/business-acquisition-financing.html  http://www.eisneramper.com/new-accounting-for-business-acquisitions.aspx 105 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT-8 METHODS OF AMALGAMATION STRUCTURE 8.0 Learning Objectives 8.1 Introduction 8.2 Accounting treatment for amalgamation through Pooling of Interest method & Purchase method 8.3 Summary 8.4 Keywords 8.5 Learning Activity 8.6 Unit End Questions 8.7 References 8.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  State the objectives of amalgamation  Describe the methods of amalgamation  Determine the amount of purchase consideration on amalgamation 8.1 INTRODUCTION Amalgamation is the blending of two or more existing companies into one company. For example, if two existing companies say, X Ltd. and Y Ltd. go into liquidation to form a new company XY Ltd., it is a case of amalgamation. The Institute of Chartered Accountants of India has issued Accounting Standard (AS-14): “Accounting for Amalgamation” which has come into force in respect of accounting periods commencing on or after 1.4.1995 and is mandatory in nature. With the issue of this standard the terms used earlier viz. amalgamation; absorption and external reconstruction have lost their distinction. It should be noted that amalgamation includes absorption and reconstruction. Objectives of Amalgamation: 106 CU IDOL SELF LEARNING MATERIAL (SLM)

The main objective of amalgamation is to achieve synergetic benefits which arise, when two companies can achieve more in combination than when they are individual entities. The other objectives of amalgamation are: (i) To reap economies of scale (ii) To eliminate competition (iii) To build up goodwill (iv) To reduce the degree of risk through diversification (v) Managerial effectiveness. Procedure of Amalgamation: The following procedure is followed in an amalgamation: 1. The terms of amalgamation are finalized by the board of directors of the constituent companies. 2. A scheme of amalgamation is prepared and submitted for approval to the respective High Court. 3. Approval of the shareholders of the constituent companies is obtained. 4. Approval of SEBI is obtained. 5. A new company is formed (where necessary) and issues shares to the shareholders of the transferor company. 6. The transferor company is liquidated and all assets and liabilities are taken over by the transferee company. Types of Amalgamation: For accounting purposes, AS-14 has categorized amalgamation into two: 1. Amalgamation in the nature of merger. 2. Amalgamation in the nature of purchase. Amalgamation in the Nature of Merger: An amalgamation is considered as ‘Amalgamation in the Nature of Merger’ if all the following five conditions are satisfied: 107 CU IDOL SELF LEARNING MATERIAL (SLM)

1. All the assets and liabilities of the transferor company become the assets and liabilities of the transferee company after amalgamation. 2. Shareholders holding not less than 90% of the face value of the equity shares of the transferor company (other than the equity shares already held therein, immediately before amalgamation, by the transferee company or its subsidiaries or their nominees) become equity shareholders of the transferee company by virtue of amalgamation. 3. The consideration to the shareholders of the transferor company (who agree to become equity shareholders of the transferee company) is discharged by the transferee company wholly by 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. Amalgamation in the Nature of Purchase: An amalgamation is in the ‘Nature of Purchase’ if any one or more of the five conditions specified for Merger is not satisfied. In such kind of amalgamation shareholders of the company which is acquired normally do not continue to have a proportionate share in the equity of the combined company. The transferee company may also not intend to continue the business of Transferor Company. Accounting for Amalgamation: Accounting Standard AS-14 ‘Accounting for Amalgamation’ issued by the Institute of Chartered Accountants of India states the procedure for accounting for amalgamation. AS-14 uses and defines the various terms as under: (a) Amalgamation means an amalgamation pursuant to the provisions of the Companies Act, 1956 or any other statute which may be applicable to companies. (b) Transferor Company means the company which is amalgamated into another company. (c) Transferee Company means the company into which a transferor company is amalgamated. 108 CU IDOL SELF LEARNING MATERIAL (SLM)

(d) Reserve means portion of earnings, receipts or other surplus of an enterprise (whether capital or revenue) appropriated by the management for a general or a specific purpose other than a provision for depreciation or diminution in the value of assets or for known liability. (e) Consideration for the amalgamation means the aggregate of the shares and other securities issued and the payment made in the form of cash or other assets by the transferee company to the shareholders of the transferor company. 8.2 ACCOUNTING TREATMENT FOR AMALGAMATION THROUGH POOLING OF INTEREST METHOD & PURCHASE METHOD 1. Pooling of Interests Method: This method is followed in case of an amalgamation in the nature of merger. Under this method, the assets, liabilities and reserves of the transferor company are recorded by the transferee company at their existing carrying amounts and in the same form as at the date of the amalgamation. The balance of the Profit and Loss Account of the transferor company is aggregated with the balance of the Profit and Loss Account of the transferee company or transferred to the General Reserve, if any. The difference between the amount recorded as share capital issued plus any additional consideration in the form of cash or other assets on the one hand and the amount of share capital of the transferor company on the other hand is adjusted in reserves. If, at the tune of the amalgamation, the transferor and transferee companies have conflicting accounting policies, a uniform set of accounting policies is adopted following the amalgamation. The effects on the financial statements of any changes in accounting policies are reported in accordance with Accounting Standard (AS) 5 (Revised)—’Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies’. The following are the salient features of pooling of interest method: 1. All assets, liabilities and reserves of the transferor company are recorded by the transferee company at their existing carrying amounts (book values) except in cases where these are to be adjusted to follow uniform set of accounting policies. 109 CU IDOL SELF LEARNING MATERIAL (SLM)

2. The identity of the reserves is preserved as they appear in financial statements of the transferee company. For example, the general reserve of the transferor company becomes the general reserve of the transferee company, the capital reserve of the transferor company becomes the capital reserve of the transferee company and the revaluation reserve of the transferor company becomes the capital reserve of the transferee company. 3. No goodwill account should be accounted for as a result of amalgamation in the books of the transferee company. 4. The difference between the amount of share capital issued (plus any additional consideration in the form of cash or other assets) and the amount of share capital of Transferor Company should be adjusted in reserves in the financial statements of the transferee company. 5. The balance of profit and loss account appearing in the financial statements of the transferor company is aggregated with the corresponding balance appearing in the financial statements of the transferee company. 6. Although AS-14 does not specifically state, the purchase consideration under this method is to be valued at par value of shares issued. The logic is that this method considers book values and not the fair values. Accounting Entries in books of the Transferee Company (Pooling of Interest Method): 110 CU IDOL SELF LEARNING MATERIAL (SLM)

Illustration 1: The following are the Balance Sheets as on 31st December, 2013 of X Ltd. and Y Ltd.: 111 CU IDOL SELF LEARNING MATERIAL (SLM)

In January, 2014, the two companies agree to amalgamate and form a new company called Z Ltd. which takes over the assets and liabilities of both the companies. The authorized Capital of Z Ltd. is Rs. 10, 00,000, consisting of 1, 00,000 Equity Shares of Rs. 10 each. The purchase consideration is agreed at Rs. 1, 20,000 and Rs. 60,000 for X Ltd. and Y Ltd. respectively. The entire purchase consideration is to be paid by Z Ltd. in its fully paid shares. In return for debentures in X Ltd. debentures of the same amount and denomination are to be issued by Z Ltd. Give Journal Entries to close the books of X Ltd. and Y Ltd. and show the Opening entries in the books of Z Ltd. Also prepare the opening Balance Sheet of Z Ltd. 112 CU IDOL SELF LEARNING MATERIAL (SLM)

113 CU IDOL SELF LEARNING MATERIAL (SLM)

114 CU IDOL SELF LEARNING MATERIAL (SLM)

Illustration 2: Zuari Ltd. agrees to absorb the business of Agro India Ltd. and to take over the Assets and Liabilities at their Balance Sheet value, in exchange for which it is to issue 12 shares of Rs. 10 each for every share of Rs. 100 in the Agro India Ltd. The expenses of absorption Rs. 10,000 will be paid by Zuari Ltd. On the date of absorption i.e., 31st March, 2014, the Balance Sheets of the two companies were as under: 115 CU IDOL SELF LEARNING MATERIAL (SLM)

Show the Journal Entries in the books of the Zuari Ltd. and Agro India Ltd. Also prepare opening Balance Sheet of Zuari Ltd. immediately after absorption. Solution: 1. Purchase Consideration: 5,000 x 12 = 60,000 shares x Rs. 10 = Rs. 6, 00,000 2. Entries in books of Agro India Ltd. (Transferor Co.) 116 CU IDOL SELF LEARNING MATERIAL (SLM)

Note: The contents of paragraph 35 of the standard (AS-14) are given effect to in the case of pooling of interest method applicable to an amalgamation in the nature of a merger as under: 117 CU IDOL SELF LEARNING MATERIAL (SLM)

Since liquidation expenses of Rs. 10,000 paid by the transferee company are to be charged to Profit and Loss Account, the same are set-off against the balance of reserve in the absence of Profit and Loss Account. 2. Purchase Method: This method is followed in case of an amalgamation in the nature of purchase. Under this method, the transferee company accounts for the amalgamation either by incorporating the assets and liabilities of the transferor company at their existing carrying amounts or by allocating the consideration to individual identifiable assets and liabilities of the transferor company on the basis of their fair values at the date of amalgamation. The identifiable assets and liabilities may include assets and liabilities not recorded in the financial statements of the transferor company. Where assets and liabilities are restated on the basis of their fair values, the determination of fair values may be influenced by the intentions of the transferee company. For example, the transferee company may have a specialized use for an asset. Also, the transferee company may intend to effect changes in the activities of the transferor company which may necessitate the creation of specific provisions for the expected cost, for example, planned employee termination and plant relocation costs. The reserves (whether capital or revenue or arising on revaluation) of the transferor company, other than the statutory reserves, are not included in the financial statements of the transferee company. 118 CU IDOL SELF LEARNING MATERIAL (SLM)

To record the statutory reserves (such as Foreign Projects Reserve Account under sec. 80 HHB and Reserve created under sec. 80 HHD of the Income-tax Act) of the transferor company in the books of the transferee company, the relevant statutory reserve account is credited and the corresponding debit is given to a suitable account like amalgamation adjustment account which is disclosed in the balance sheet. When the identity of this statutory reserve is no longer required to be maintained, both the statutory reserves account and the corresponding debit account are reversed. Any excess of the amount of the consideration over the value of the net assets of the transferor company acquired by the transferee company is recognised in the transferee company’s books of account as goodwill arising on amalgamation. If the amount of the consideration is lower than the value of net assets acquired, the difference is credited to capital reserve. The goodwill arising in amalgamation, as per Accounting Standard 14, should be amortised to income on a systematic basis over its useful life. The amortisation period should not exceed five years unless a somewhat longer period can be justified. The factors which may be considered in estimating the useful life of goodwill arising on amalgamation include: (a) The foreseeable life of the business or industry; (b) The effects of product obsolescence, changes in demand and other economic factors; (c) The service life expectancies of key individuals or groups of employees; (d) Expected actions by competitors or potential competitors; and (e) Legal, regulatory or contractual provisions affecting the useful life. The following points which are common to the two methods described above are also noteworthy: The consideration for the amalgamation may include non-cash element at fair value. In case of issue of securities, the value fixed by the statutory authorities may be taken to be the fair value. In case of other assets, the fair value may be determined by reference to the market value of the assets given up. Where the market value of the assets given up cannot be reliably assessed, such assets are valued at their respective net book values. 119 CU IDOL SELF LEARNING MATERIAL (SLM)

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 is included in the consideration if payment is probable and a reasonable estimate of the amount can be made. In all other cases, the adjustment is recognised as soon as the amount is determinable. It is as per Accounting Standard (AS) 4 (Revised) on Contingencies and Events Occurring after the Balance Sheet Date. The salient features of this method are as follows: 1. Recording of assets and liabilities: The assets and liabilities of the transferor company should be incorporated at their existing carrying values or, alternatively, at their fair values (revised values) on date of amalgamation. 2. Recording of reserves: (i) Statutory Reserves: Are those reserves which are required to be maintained as per the legal provisions, and there is restriction on its usage. If a statutory reserve is appearing in the Balance Sheet of a transferor company, the same should appear in the Financial Statements of the transferee company. For this purpose ‘Amalgamation Adjustment Account’ is debited and ‘Statutory Reserve Account’ is credited. Amalgamation Adjustment Account is shown on the assets side as a part of “Miscellaneous Expenditure” or other similar category in the Balance Sheet. When identity of the statutory reserves is no longer required to be maintained, both the reserves and the aforesaid account should be reversed. Examples of Statutory Reserves are: Investment allowance reserve; development rebate reserve, export profit reserve etc.). (ii) Reserves other than statutory reserves: The reserves (whether capital or revenue or arising on revaluation) of the transferor company, other than the statutory reserves, should not be included in the financial statements of the transferee company. 3. Purchase Consideration: Any excess of purchase consideration over net assets of the transferor company should be recognized as goodwill in the financial statements of Transferee Company. If the amount of 120 CU IDOL SELF LEARNING MATERIAL (SLM)

consideration is lower than the value of net assets acquired, the difference should be treated as Capital Reserve. 4. Goodwill arising on amalgamation should be authorized systematically over its useful life. The authorization period should not exceed 5 years unless a somewhat longer period is justified. Accounting Treatment in the Books of Transferee Company: Illustration 1: Following are the Balance sheet of A Ltd. and B Ltd. as on 31.3.2013: 121 CU IDOL SELF LEARNING MATERIAL (SLM)

A Ltd. takes over B Ltd. as on 31.3.2013 on the following terms: 1. To issue 2, 00,000 Equity Shares of Rs. 10 each at Rs. 12.50 to the Equity Shareholders of B Ltd. 2. To issue 15% preference shares of Rs. 100 each to discharge preference shares of B Ltd. at par. 3. To convert debentures of B Ltd. into equivalent number of debentures of A Ltd. of Rs. 100 each. 4. To maintain investment allowance reserve for two years. 5. The fair value of Plant and Machinery is Rs. 15, 00,000. Pass Journal Entries in the books of the transferee company (if the intention is not to carry on the business of Transferor Company). 122 CU IDOL SELF LEARNING MATERIAL (SLM)

Illustration 2: 123 CU IDOL SELF LEARNING MATERIAL (SLM)

The Balance Sheet of A Co. Ltd. after amalgamation as at 31st March, 2013 was as under: Note: Contingent Liability in respect of a pending suit Rs. 10,000. On 1st April, 2013 B Co. Ltd. absorbed the business of A Co. Ltd. The Purchase Consideration was agreed as: 1. A cash payment of Rs. 2.50 for every Rs. 10 share in A Co. Ltd. 2. The issue of 1, 35,000 equity shares of Rs. 10 each fully paid in B Co. Ltd. 3. The issue of such an amount of fully paid 14% debentures in B Co. Ltd. at 96% as is sufficient to discharge 15% debentures in A Co. Ltd. at a premium of 20%. B Co. Ltd. valued land and building at Rs. 12, 00,000; stock at Rs. 1, 42,000; and debtors at book value subject to 5% provision for doubtful debts. B Co. Ltd. also agreed to take over the contingent liability, which ultimately materialized for Rs. 7,000. Prepare Ledger Accounts in the books of A Co. Ltd. and pass journal entries in the books of B Co. Ltd. Solution: It is an amalgamation in the nature of purchase because the assets of A Co. Ltd. are not taken over at book value and purchase consideration will be satisfied by issue of shares and cash payment. 124 CU IDOL SELF LEARNING MATERIAL (SLM)

125 CU IDOL SELF LEARNING MATERIAL (SLM)

Illustration 3: To companies Weak Ltd. and Feeble Ltd. amalgamate and form a new company Recovery Ltd. The Balance Sheets of two companies are as under: The past average profits of Weak Ltd. and Feeble Ltd. were Rs. 60,000 and Rs. 40,000 respectively. Recovery Ltd. agreed to take over the two companies for the sum of Rs. 15, 00,000 and to discharge all liabilities. Rs. 3, 00,000 of the purchase consideration is paid in cash and balance in equity shares. It is agreed that before being amalgamated, the debtors of the two companies will be written- down to the extent of 10%. The profit on conversion is to be divided between the two companies in the same proportion as to the profit previously earned by them. Show Business Purchase Account in the books of Recovery Ltd. Also show how the Equity Shareholders Account of Weak Ltd. and Feeble Ltd. be closed. Solution: It is an amalgamation in the Nature of Purchase because the purchase consideration has not been satisfied fully in equity shares. Rs. 3, 00,000 was paid in cash out of total purchase consideration of Rs. 15, 00,000. Working Notes: 126 CU IDOL SELF LEARNING MATERIAL (SLM)

Total net assets taken over = Rs. (6, 85,000 + 6, 50,000) = Rs. 13, 35,000. Purchase consideration = Rs. 15, 00,000. Profit on conversion = Rs. (15, 00,000 – 13, 35,000) = Rs. 1, 65,000. This is also the goodwill paid by Recovery Ltd. Again, profit sharing ratio between Weak Ltd. and Feeble Ltd. is: Rs. 60,000: Rs. 40,000 = 3: 2. Therefore, profit on conversion of Rs. 1, 65,000 will be shared by the two companies as under: Weak Ltd.—Rs. 1, 65,000 x 3/5 = Rs. 99,000; Feeble Ltd. – Rs. 1, 65,000 x 2/5 = Rs. 66,000. (3) Statement Showing Mode of Payment: The above purchase consideration will be satisfied as under assuming that the equity share of Recovery Ltd. is divided equally and the balance by cash: 127 CU IDOL SELF LEARNING MATERIAL (SLM)

Illustration 4: The abridged Balance Sheet of P Ltd. as at 31st December, 2014 is as follows. 128 CU IDOL SELF LEARNING MATERIAL (SLM)

The following scheme of reconstruction was passed and approved by the court: (i) A new company PK Ltd. to be formed to take over the entire business of P Ltd. (ii) PK Ltd. to issue one equity shares of Rs. 100, Rs. 60 paid-up in exchange of every two shares in P Ltd. to the shareholders who agree with the scheme. Shareholders, who do not agree with the scheme, to be paid @ Rs. 20 per share in cash. Such shareholders hold 400 equity shares. (iii) Preference shareholders to get 15, 11% preference shares of Rs. 10 each in exchange of 2 preference shares of P Ltd. (iv) Liability in respect of 15% debentures and interest accrued thereon to be taken over and discharged directly by PK Ltd. by issue of equity shares of Rs. 100 each fully paid-up. (v) The creditors of P Ltd. will get from PK Ltd. 50% of their dues in cash and 25% in equity shares of Rs. 100 each and the balance to be foregone by them. (vi) The freehold premises to be revalued at 20% more. The value of machinery to be reduced by 331/3% and that of debtors by 10%. The value of stock to be reduced to Rs. 1, 60,000 and patents to have no value. (vii)The preliminary expenses amounted to Rs. 5,000. You are required to prepare necessary Ledger Account in the books of P Ltd. and pass opening journal entries in the books of PK Ltd. Solution: Working Note: 129 CU IDOL SELF LEARNING MATERIAL (SLM)

130 CU IDOL SELF LEARNING MATERIAL (SLM)

Note: It is an amalgamation in the Nature of Purchase because the value of different assets and liabilities are to be adjusted. Illustration 5: The Balance Sheet of Moon Limited as on 31st December, 2013 was as follows: On 1st January, 2014 Sun Limited was formed to take over the business of Moon Limited on the following terms: 131 CU IDOL SELF LEARNING MATERIAL (SLM)

(i) Debentures will be discharged by the issue of sufficient number of 12% Debentures of Sun Limited as would bring the same amount of interest. (ii) Shareholders will be issued 2,400 Equity Shares of Rs. 100 each of Sun Limited. (iii) Liquidation expenses of Rs. 2,000 will be paid by Sun Limited. Prepare the necessary Ledger Accounts to close the books of Moon Limited. Pass the opening journal entries in the books of Sun Limited and prepare the Balance Sheet of Sun Limited assuming that the assets of Moon Limited are taken over at 25% discount. 132 CU IDOL SELF LEARNING MATERIAL (SLM)

133 CU IDOL SELF LEARNING MATERIAL (SLM)

134 CU IDOL SELF LEARNING MATERIAL (SLM)

Working Notes: 1. Face value of Debentures of Moon Ltd was Rs. 1, 00,000. Interest payable @ 9%. Therefore, the debenture holders were getting interest of Rs. 9,000 (9% of Rs. 1, 00,000). Sun Ltd. will issue 12% Debentures of such value which will result in same amount of interest. Therefore, the face value of 12% Debentures of Sun Ltd. will be: Rs. 9,000/12 x 100 = Rs. 75,000. In the books of Sun Ltd., debentures will be recorded at Rs. 75,000 only. 2. Bank will be taken at book value since it is a monetary asset. Illustration 6: Following is the Balance Sheet of Star Ltd. as on 31st March, 2013: On 1st April, 2013 a new company Suraj Ltd was incorporated which took over fixed assets and stock of Star Ltd for Rs. 12,60,000 payable as Rs. 9,00,000 in the form of 1,80,000 equity shares of Rs. 5 each and Rs. 3,60,000 in the form of 3,600, 12% Mortgage Debentures of Rs. 100 each. Lender accepted the debentures in Suraj Ltd in discharge of the loan. Debtors realised Rs. 2, 05,000. Expenses of liquidation amounted to Rs. 8,000 and were met by Star Ltd. The available cash was distributed among creditors in full satisfaction of their claim. Show necessary Ledger Account to close the books of Moon Ltd. and draw the opening Balance Sheet of Suraj Ltd. 135 CU IDOL SELF LEARNING MATERIAL (SLM)

136 CU IDOL SELF LEARNING MATERIAL (SLM)

Note: It is an amalgamation in Nature of Purchase because all the assets and liabilities are not taken over by the transferee company. 137 CU IDOL SELF LEARNING MATERIAL (SLM)

Illustration 7: (Apportionment of purchase consideration – Merger and Purchase) On 1st April, 2013 the Balance Sheets of R Ltd. and S Ltd. were as under: A new company RS Ltd. was formed to take-over the business of R Ltd. and S Ltd. on the following terms: (i) RS Ltd. to takeover both the companies at a total price of Rs. 24,00,000 to be discharged by issue of equity shares of Rs. 10 each at a premium of 20%. (ii) The shareholders of R Ltd. and S Ltd. to get shares in RS Ltd. in the ratio of net assets value of their respective shares. (iii) The debentures of both companies are to be converted into equivalent number of 12% Debentures in RS Ltd. (iv) Statutory Reserves are to be maintained for 3 more years. 138 CU IDOL SELF LEARNING MATERIAL (SLM)

(v) The Fixed assets of R Ltd. and S Ltd. are valued at Rs. 12, 00,000 and Rs. 7, 00,000 respectively. Record journal entries in the books of RS Ltd. and prepare a Balance Sheet if: (a) It is a case of amalgamation in nature of merger. (b) It is an amalgamation in nature of purchase. 139 CU IDOL SELF LEARNING MATERIAL (SLM)

140 CU IDOL SELF LEARNING MATERIAL (SLM)

8.3 SUMMARY  Amalgamation is a form of combination. Amalgamation is a blending of two or more existing undertaking into one undertaking, the shareholders of each blending company becoming substantially the shareholders in the company which is to carry on the blended undertakings. There may be amalgamation either by transfer of two or more undertakings to a new company or by transfer of one or more undertakings to an existing company.  This is a very comprehensive and clear description of amalgamation. As such, amalgamation implies absorption also. Amalgamation may also be brought about by the transfer of one or more undertakings to an existing undertaking so as to result in merger or fusion of the undertakings. This form of combination is generally known as absorption. 8.4 KEYWORDS 141 CU IDOL SELF LEARNING MATERIAL (SLM)

 Amalgamation: When two or more companies which are similar in all respect go into liquidation and form a new company to take over the business is called amalgamation.  Absorption: In absorption, one existing company purchases the another existing company  External Reconstruction: It refers to reorganization of existing company in order to set-off huge losses. Existing company is merged with a newly formed company with same name and same members and existing company is wounded up.  Internal reconstruction: It refers to a situation where the existing company continues with its legal entity and is internally organised.  Purchase Consideration: It refers the amount of paid by Transferee Company for the purchase of business of the transferor company. 8.5 LEARNING ACTIVITY 1. Why is it necessary to find out profit prior and after incorporation? Explain it in detail. ___________________________________________________________________________ ___________________________________________________________________________ 2. Why and how are pre- and post-incorporation profits and losses calculated? ___________________________________________________________________________ ___________________________________________________________________________ 8.6 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What is Amalgamation? Describe the objectives of Amalgamation. 2. What conditions are required to be fulfilled for amalgamation in the nature of merger? Explain. 3. Write Short note on the Pooling of the interest method 4. Write Short note on Net payment method of Purchase Consideration 142 CU IDOL SELF LEARNING MATERIAL (SLM)

5. Differentiate between Amalgamation, Absorption and Reconstruction. Long Questions 1. The following information has been extracted from the balance sheets of P Ltd. and S Ltd. as on 31st March, 2012: P Ltd. takes over S Ltd. on 1st April, 2012, and discharges consideration for the business as follows: (i) Issued 35 lakh fully paid equity shares of Rs 10 each at par to the equity shareholders of S Ltd. (ii) Issued fully paid 12% preference shares of Rs 10 each to discharge the preference shareholders of S Ltd. at a premium of 10%. It is agreed that the debentures of S Ltd. will be converted into equal number and amount of 10% debentures of P Ltd. You are required to show the balance sheet of P Ltd. assuming that: (i) The amalgamation is in the nature of merger, and (ii) The amalgamation is in the nature of purchase. 2. What are the conditions, which according to AS14 on accounting for amalgamations, must be satisfied for an amalgamation in the nature of merger? 3. Distinguish between the pooling interest method and the purchase method of recoding transactions relating to amalgamation. 143 CU IDOL SELF LEARNING MATERIAL (SLM)

4. National Company Limited is absorbed by Universal Company Limited, the consideration being the taking over of liabilities. The payment of cost of absorption as a part of purchase consideration not exceeding ` 25,000 (actual cost ` 22,500), the payment of debentures of ` 2, 50,000 at a premium of 10% in 13% Debentures issued at 96%, and the payment of ` 15 per share in cash and allotment of one 8% preference share of ` 10 each and 5 equity shares of ` 10 each fully paid for every 4 shares in National Company Limited. The number of shares of the National Company Limited is 2 lakhs of ` 10 each fully paid. You are required to calculate the purchase consideration. 5. Distinguish between amalgamation in the nature of merger and amalgamation in the nature of purchase. Explain. B. Multiple Choice Questions 1. Excess of purchase consideration over net assets is called- a. Revenue loss b. Capital reserve c. Capital profit d. Goodwill 2. As per AS-14, purchase consideration is payable to– a. Debenture-holders b. Shareholders c. Creditors d. Shareholders, Debenture-holders and Creditors. 3. X Limited takes over the business of Y Limited and agrees to issue two shares of ` 10 each, ` 8 paid up and market value of ` 15 per share for every three shares in Y limited. If Y limited has 90,000 shares of ` 10 each, ` 7 paid up and market value ` 9 per share, the amount of purchase consideration is – a. ` 4,80,000 b. ` 9,00,000 144 CU IDOL SELF LEARNING MATERIAL (SLM)

c. ` 4,20,000 d. None of these Answers 1-b, 2-d, 3-ba 8.7 REFERENCES References  Dr. Verma, J. C., Dr. Kumar, Sanjeev, Corporate Merger, Amalgamation & Takeovers. Gaughan, Patrick A. Mergers and Acquisitions, New York: Harper Collins, 1991.  Bekier , M.M. , Bogardus , A.J. , and Oldham , T.( 2001 ) Why mergers fail . The McKinsey Quarterly, Number 4.  Bower, J. (2001) Not all M&As are alike. Harvard Business Review, March/April.  Bruner , Robert F. (2005 ) Deals From Hell: M&A Lessons that Rise ab Textbooks  Mamoria, C.B. (2002). Personnel Management. Mumbai: Himalaya Publishing House.  Patrick A. Gaughan, Mergers, Acquisitions, And Corporate Restructurings Fourth Edition  Dr. Nishi Kant Jha, 2011 Mergers, Acquisitions And Corporate Restructuring Websites  http://www.caalley.com/list_as.html  http://www.wirc-icai.org/material/AS%2014%20Amalgamations%20 [Compatibility%20Mode].pdf  http://highered.mcgraw-hill.com/sites/0072922559/student_view0/chapter6/ chapter_highlights.html  http://www.scribd.com/doc/5990975/Amalgamation “Consolidated Statements (Interco eliminations)”. FindMyBestCPA.com 145 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT-9 FUNDING OF MERGER AND TAKEOVER STRUCTURE 9.0 Learning Objectives 9.1 Introduction 9.2 characteristics 9.3 Types of Funding through various types of Financial Instruments 9.4 Summary 9.5 Keywords 9.6 Learning Activity 9.7 Unit End Questions 9.8 References 9.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Describe the meaning of funding.  Describe the process of funding of merger and takeover.  Explain the best funding options. 9.1 INTRODUCTION Mergers and Acquisitions are portions of the normal pattern of business. A consolidation or procurement can assist a business with growing, accumulate information, move into another market fragment, or work on yield. Nonetheless, these chances accompany costs for the two sides. Standard consolidation bargains ordinarily include heads, attorneys, and speculation brokers even before the absolute procurement cost is thought of. Without virtual information room and a sizable measure of money close by, an organization should discover substitute techniques for financing M&A. The following is a definite glance at the best financing alternatives accessible today just as data on the ones to stay away from. 146 CU IDOL SELF LEARNING MATERIAL (SLM)

Securing finance alludes to the various wellsprings of capital that are utilized to support a consolidation or procurement. This is generally a mind boggling mission requiring intensive arranging, since procurement finance structures regularly require a ton of varieties and mixes, in contrast to most different buys. Also, securing financing is rarely acquired from one source. With different options accessible to back procurement, the difficult aspect is getting the fitting blend of financing that offers the least expense of capital. Organizations can fill differently, for example, by expanding their labour force, dispatching new administrations or items, growing showcasing, or arriving at new clients. Notwithstanding, the previously mentioned development strategies are regularly less invigorating to financial backers. Aside from quick development, synergistic acquisitions can offer other huge advantages like economies of scale and expanded portion of the overall industry. Notwithstanding, the obtaining of another organization is a significant choice that requirements sound monetary assets. 9.2 CHARACTERISTICS One of the fastest, and often most effective, ways to grow a small business are through mergers and acquisitions. This process, however, also comes with a lot of risk that cannot be ignored. Whether your business is looking to buy out another one, or you are looking for a potential buyer to acquire it, understanding key characteristics needed to successfully complete this type of process is essential. The following are five key things to focus on throughout any M&A process. Defined Goals When looking to purchase another business (or be purchased for that matter) it is important to have very well-defined goals on what you hope this merger or acquisition to accomplish. The following are some types of goals to give you an idea of what to focus on:  Expanding Territory  Boosting Sales  Acquiring Patents/Technology/Other Assets  Entering a New Market There are, of course, many other types of goals that a business may have when it comes to buying another small business, or being purchased. Identifying these goals as early as 147 CU IDOL SELF LEARNING MATERIAL (SLM)

possible, and including ways that the goals can be measured, will help get this process off on the right foot. Transparency Throughout the merger and acquisition process, transparency is absolutely critical. All parties who are directly involved with this event will likely need to sign non-disclosure agreements to limit the risk of someone withholding information. Disclosing things about the business finances, legal situations, and anything else that could impact the purchase is important, and often legally required. Communication Open and frequent communication during these types of events is critical. This applies not only to communication between the two owners of the companies in question, but also with the employees. If employees feel that information is not being given to them, they are much more likely to start looking for other jobs, which can seriously hurt the company during this critical process. Qualified Transition Team Having a qualified transition team in place is a great way to avoid problems and keep things running smooth during and after the merger or acquisition have been completed. The transition team will help individuals from both companies learn to work together effectively, and ensure the focus always remains on the customer. Experienced Legal Representation Mergers and acquisitions are complicated matters, and have a lot of legal regulations that must be followed. With that in mind, it is necessary to have representation from an experienced attorney working on your behalf. Contact Carla D. Aikens to get the help you need throughout this important event. 9.3 TYPES OF FUNDING THROUGH VARIOUS TYPES OF FINANCIAL INSTRUMENTS Let’s look at some of the popular acquisition financing structures that are available: Stock Swap Transaction At the point when organizations own stock that is exchanged openly, the acquirer can trade its stock with the objective organization. Stock trades are normal for privately owned 148 CU IDOL SELF LEARNING MATERIAL (SLM)

businesses, whereby the proprietor of the objective organization needs to hold a bit of the stake in the joined organization since they will probably remain effectively engaged with the activity of the business. The securing organization regularly depends on the capability of the proprietor of the objective firm to work adequately. Cautious stock valuation is significant while thinking about a stock trade for privately owned businesses. There are different stock valuation strategies utilized by capable vendor investors, like Comparative Company Analysis, DCF Valuation Analysis, and Comparative Transaction. Valuation Analysis. Acquisition through Equity In procurement finance, value is the most costly type of capital. Value financing is frequently alluring by obtaining organizations that target organizations that work in temperamental businesses and with insecure free incomes. Obtaining financing is additionally more adaptable, because of the shortfall of responsibility for intermittent instalments. Cash Acquisition In an all-cash procurement bargain, shares are generally traded for cash. The value segment of the monetary record of the parent organization stays as before. Money exchanges during an obtaining regularly occur in circumstances where the organization being gained is more modest and with lower cash holds than the acquirer. Acquisition through Debt Obligation financing is one of the most loved methods of financing acquisitions. Most organizations either do not have the ability to pay out of money or their monetary records will not permit it. Obligation is additionally viewed as the most reasonable strategy for financing procurement and comes in various structures. When giving assets to an obtaining, the bank for the most part investigations the objective organization's projected income, overall revenues, and liabilities. Investigation of the monetary soundness of both the gaining organization and the objective organization is a prep course. Resource upheld financing is a technique for obligation financing where banks can loan reserves dependent on the security offered by the objective organization. Guarantee might incorporate fixed resources, receivables, licensed innovation, and stock. Obligation financing additionally usually offers charge benefits. 149 CU IDOL SELF LEARNING MATERIAL (SLM)

Acquisition through Mezzanine or Quasi Debt Mezzanine or semi obligation is a coordinated type of financing that incorporates both value and obligation highlights. It normally accompanies an alternative of being changed over to value. Mezzanine financing is appropriate for target organizations with a solid accounting report and consistent productivity. Adaptability makes mezzanine financing engaging. Leveraged Buyout A utilized buyout is an extraordinary blend of both value and obligation that is utilized to fund an obtaining. It is perhaps the most well-known securing finance structures. In a LBO, the resources of both the getting organization and target organization are considered as gotten security. Organizations that include themselves in LBO exchanges are typically adult, have a solid resource base, create steady and solid working incomes, and have not many capital necessities. The important thought behind a utilized buyout is to constrain organizations to yield consistent free incomes equipped for financing the obligation taken on to secure them. Seller’s Financing / Vendor Take-Back Loan (VTB) Vender's financing is the place where the procuring organization's wellspring of procurement financing is interior, inside the arrangement, coming from the objective organization. Purchasers for the most part resort to the dealer's financing strategy while acquiring capital from outside is troublesome. The financing might be through deferred installments, dealer note, procure outs, and so on Like all speculations, the technique for installment for consolidations and acquisitions (M&A) assumes an exceptionally huge part in whether making the venture at all is attainable. There are various strategies accessible to pay for M&A, each with their upsides and downsides.  Cash: Money is extraordinary. It's modest contrasted with different techniques, it's a moment exchange, and it's without wreck (implying that whenever it's done, you don't need to screw with it once more). The issue is that you're not discussing a modest quantity of money. These aggregates are regularly gigantic and not generally accessible. Relatively few organizations, considerably less people, haul around millions or billions in an effectively open ledger. 150 CU IDOL SELF LEARNING MATERIAL (SLM)