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Amalgamation Adjustment Reserve Account is Required in Respect of
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Amalgamation Adjustment Reserve Account is Required in Respect of PDF
Amalgamation refers to a company merging under the provisions of the Firms Act, 2013 or any other statute that may apply to companies, and contains the term “merger.” The term “transferor company” refers to a company that merges with another.
The Amalgamation Adjustment Reserve Account appears on the balance sheet as a debit balance (negative figure) under the heading “Reserves and Surplus.” Both the reserves and the aforementioned account should be reversed when the identity of the statutory reserves is no longer required to be maintained.
Amalgamation Adjustment Reserve Account is Required in Respect of
- The identity of the reserves is kept in a ‘amalgamation in the type of merger,’ and they appear in the financial statements of the transferee company in the same manner as they appeared in the financial statements of the transferor firm. For example, the transferor company’s General Reserve becomes the transferee company’s General Reserve, the transferor company’s Capital Reserve becomes the transferee company’s Capital Reserve, and the transferor company’s Revaluation Reserve becomes the transferee company’s Revaluation Reserve. Reserves that were eligible for distribution as dividend before the amalgamation would still be available for distribution as dividend after the amalgamation as a result of preserving the identity. The difference between the amount recorded as issued share capital (plus any additional consideration in the form of cash or other assets) and the amount of transferor company share capital is adjusted in reserves in the transferee firm’s financial statements.
- Except for the statutory reserves discussed in paragraph 18, the identity of the reserves is not preserved if the amalgamation is in the character of a purchase. The consideration is deducted from the value of the transferor firm’s net assets acquired by the transferee company. If the computation yields a negative result, the difference is deducted from goodwill arising from the merger and handled as described in paragraphs 19-20. If the calculation yields a positive outcome, the difference is credited to Capital Reserve.
Certain reserves, such as Development Allowance Reserve and Investment Allowance Reserve, may have been established by the transferor company to meet the requirements of, or to benefit from, the Income-tax Act of 1961; for example, Development Allowance Reserve and Investment Allowance Reserve. The Act mandates that the reserves’ identities be kept secret for a set amount of time. Similarly, certain other reserves may have been created in the transferor company’s financial statements to meet the requirements of other regulations.
- Though the identity of reserves is normally not preserved in a purchase amalgamation, an exception is made in the case of reserves of the aforementioned nature (referred to hereinafter as’statutory reserves’), and such reserves retain their identity in the financial statements of the transferee company in the same form as they appeared in the financial statements of the transferor company, so long as their identity is required to be maintained to compel the transferee company to compel the transferor company to compel the transferee company
- This exception applies only to those mergers in which the applicable statute’s requirements for recording statutory reserves in the transferee company’s accounts are met. In such circumstances, the required reserves are recorded in the transferee company’s financial statements as a debit to a proper account head (e.g., ‘Amalgamation Adjustment Reserve’) that is reported as a separate line item. Both the reserves and the aforementioned account are reversed when the identity of the statutory reserves is no longer required to be maintained.
Treatment of Reserves Specified in A Scheme of Amalgamation
The treatment to be provided to the reserves of the transferor firm following its amalgamation may be prescribed by the scheme of amalgamation sanctioned under the provisions of the Companies Act, 1956 or any other statute. When a treatment is prescribed, it is followed to the letter. In rare situations, an amalgamation plan sanctioned by a legislation may prescribe a different treatment for the transferor company’s reserves after amalgamation than the requirements of this Standard that would have applied if the programme had not prescribed a treatment.
By notification dated March 30, 2016, the Ministry of Corporate Affairs, Government of India, added a footnote to this paragraph stating that “Paragraph 23 shall not apply to any scheme of amalgamation approved under the Companies Act, 2013,” which is relevant for companies adhering to the Companies (Accounting Standards) Rules, 2006. The ICAI standard for entities other than corporations, which was amended in 2016, does not have this footnote (see Announcement XLV).
The following disclosures are given in the first financial statements following the merger in such cases:
- A description of the accounting treatment given to the reserves, as well as the grounds for departing from the treatment prescribed in this Standard.
- Deviations in the accounting treatment given to reserves as stipulated by the statute-sanctioned amalgamation scheme compared to the criteria of this Standard that would have been implemented if the scheme had not been sanctioned.
- The financial consequences of such a divergence, if any.
Amalgamation Does Not Include
- Amalgamations can be divided into two kinds. The first group includes mergers in which the assets and liabilities of the merging companies are genuinely pooled, as well as the shareholders’ interests and the businesses of the merging companies. These are’merger’ amalgamations, and the accounting treatment of such amalgamations should ensure that the resultant figures of assets, liabilities, capital, and reserves more or less equal the sum of the relevant figures of the merging firms.
- The second category includes those mergers in which one company acquires another and, as a result, the shareholders of the acquired company do not have a proportionate stake in the merged firm’s ownership, or the acquired company’s business is not planned to be continued. Such amalgamations are amalgamations in the sense that they are amalgamations in the sense that they are amalgam
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