Dear frnds
would you pls help me out with entries of amalgamation
adjustments in case of merger and purchase.... when goodwill when capital reserve??? when gen res??? and when P&L???? I am totally confused?//HELP
CA Parth Verma (NYU Stern Alumni ) (90 Points)
20 April 2010Dear frnds
would you pls help me out with entries of amalgamation
adjustments in case of merger and purchase.... when goodwill when capital reserve??? when gen res??? and when P&L???? I am totally confused?//HELP
Kaushik Vankadkar
(Service)
(350 Points)
Replied 20 April 2010
Goodwill is the loss on purchase of the business and
Capital reserve is the profit on purchase of the business
Now you would say how come there be loss or profit on purchase....
But AS -14 governs Amalgamation prescribes that you can book loss or profit on purchase
So Amalgamation is the only exception to this norm.
Goodwill (loss) or Capital reserve(profit) is only in the case of Purchase and not in mergers as all assets / liabilities in case of merger is taken over at book values and thereby no chance of profit / loss.
CA Parth Verma
(NYU Stern Alumni )
(90 Points)
Replied 20 April 2010
@ Kaushik Sir
THank you for your wonderful support but it will be nice of you if you cleared it in detail tha
Kaushik Vankadkar
(Service)
(350 Points)
Replied 20 April 2010
Supposing there are two company's P purchasing co. and S selling co.
P had earlier sold goods to S goods costing Rs.100 at a profit margin of 20% on cost.
But S. had not resold it infact it is still in the godown at the time of amalgamation.
So the profit which you have booked of Rs. 20 will have to be eliminated and hence you create a stock reserve.
But let me tell you in practical life in case of amalgamation in nature of purchase this question will not arise, because P will not take their own goods at price hiked. P knows the original worth because in reality P had only sold that to S. So while determining Purchase consideration they would take 100 instead of 120.
However for exam purpose you ignore this practical reality....
GOD BLESS YOU DUDE....
Here i want to correct Mr Kaushik statement regarding amalgamation in the nature of merger point.....
SEE as Per para 35 of AS-14 , it says difference between share capital of the transferor co. and share capital issued by transferee co. should be adjusted in reserves.
So its not that in merger there will be no case of resrves arising... It will be there if its according to Para 35 of AS_14 which governs merger type of amalgamation
Dear Parth,
You should read AS-14 thoroughly to understand the implication of such reserves and other items...
In case of purchase, the excees of purchase consideration over the net assets acquired should be treated as goodwill and vice versa as capital reserve...
Why we show the diff. in case of purchase as goodwill is because you are paying more for the net assets acquired and after amalgamtion in purchase that difference is goodwill because now its your asset(intangible) which can be showed in B/s also as per AS-26. In a way you are purchasing goodwill.
On the other hand in case of purchase, when net assets are more than purchase consdrtn. , you have to treat as capital reserve which is nothing but you are paying less for the assets acquired so it goes to capital reserve as a capital profit...
CA Parth Verma
(NYU Stern Alumni )
(90 Points)
Replied 20 April 2010
@ faiz.. thnks for suggesting me as a good frnd... it would b gr8 of you if you mention the book in which the full AS14 is given
regards,
parth
Kaushik Vankadkar
(Service)
(350 Points)
Replied 20 April 2010
Yes I agree Mr. Faiz, there can be profits/loss even in mergers.
Regarding unrealised profit in stocks.....
In case of Purchase, you have to give entry Goodwill a/c Dr.
To stock A/c
Remember after amalgamation now those goods are of the new co... which means the new co. has acquired something excees in terms of unrealised profit which is nothing but earning capacity of the tranferor co's. So we debit Goodwill and credit stock so as to give effect to the above transaction...
In case of Merger, entry is P&l a/c Dr.
To stock a/c
here there is no such case called acquiring those stocks.. In this two or more Cos are becoming one... So there will be no goodwill as it will not amount to purchase of unrealised profit... hence we debit P&l and credit stock to nullify the unreakised profit as now all the co's are one ...
Anjusha Madhavan
(1 Points)
Replied 15 February 2016
Sir,How to identify easily Amalgamation in nature of merger or purchase.
Exam oriented
Landmark Judgments: Important Provisions of the EPF & ESI Act interpreted by the Honorable Supreme Court of India