Posted On : 15 June 2024
Doubt regarding adjustment of value of stock in amalgamation in nature of abasorption
Dear Sir/Madam,
In AS 14 we were taught an adjustment that when prior to absorption the purchasing company sells some goods to the vendor company it has to create a stock reserve to reducve the value of inventory by adjusting goodwill or capital reserve after the absorption is completed
we were also taught that the 2 conditions necessarry for making stock reserve are
1) the seller should earn some profit on the goods sold
2) the goods must be returned back to the seller
however when a vendor company sells goods to purchasing company at some profit prior to absorption the profit is distributed among its equity holders at the time of absorption and as far as purchasing company is concerned
1) neither it earns something on such purchase
2) neither the goods are returned by it to anyone
still in our study material module ICAI has advised us to create a stock reserve in the books of the purchasing company
please guide for the rationale followed by ICAI behind this adjustment
CAclubindia
