Amalgamation of companies
Amalgamation: Amalgamation means when two or more companies merge. Here the assets and the liabilities of separate companies combine in one balance. Amalgamation includes Absorption and reconstruction
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Amalgamation: Amalgamation means when two or more companies merge. Here the assets and
the liabilities of separate companies combine in one balance. In amalgamation,
the identity of both the companies exists and survives. It is the pooling of
assets and liabilities and interest of two companies. It usually consists of
two companies of same size and status.
Absorption: In
absorption, one company is taken over by another and hence the absorbed loses
its identity. The identity of absorbing company only sustains. Here, it is the
taking of a small company by a comparatively bigger business company. It's not
pooling of interest. It is the dominance of absorbing company.
Reconstruction:
Reconstruction includes internal reconstruction and external reconstruction.
Internal reconstruction internal reconstruction means reconstruction of financial statements of
any company in such a way that is loses is wiped out and it key financial
parameters are improved. This reconstruction involves following process.
· A scheme is drafted by management for elimination of
losses.
· Such scheme is approved by court, shareholders and
creditors of company
· After approval, necessary journal entries are passed
(through capital Reconstruction a/c) for adjusting agreed transactions.
· Name of company is altered to “name and reduced”.
Such alteration is for a period specified by court.
External reconstruction refers
to forming of a new company to take over the assets and liabilities of old company.
Here, the new company is formed with the deliberate purpose of taking over the
old company. Hence old company is liquidated and new company is formed. It does
not require court’s permission and takes less time as compared to internal
reconstruction.
Parties involved
- Transferor company or vendor company is the company which sells its business to the purchasing company.
- Transferee company or purchasing company is the company which purchases the business of another company
Purchase consideration:
It is the amount which is paid by
the transferee company for the purchase of business of Transferor Company.
Purchase consideration may be determined by the following methods;
Lump sum method
- net assets method
- net payment method
- intrinsic value method
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