The procedure for mergers (referred to as amalgamation in the legal parlance) generally involves the following steps:
* Intimate the stock exchanges, where the amalgamating and amalgamated companies are listed, about the amalgamation proposal.
* Get the draft amalgamation proposal approved by the respective boards of the amalgamating and amalgamated companies.
* Apply to the respective high courts for convening the meetings of shareholders and creditors and get their permission.
* Despatch the notice of meetings of shareholders and creditors.
* Hold the meetings of shareholders and creditors and obtain their approval.
* Petition the court for confirming the scheme of amalgamation (as approved by shareholders and creditors) and passing the orders.
* File the order of the court with the Registrar of Companies.
* Transfer the assets and liabilities of the amalgamating company to the amalgamated company.
* Issue securities of the amalgamated company in exchange for the securities of the amalgamating company.
Tax Aspects of Amalgamations:
* For tax purposes, the depreciation chargeable by the amalgamated company has to be based on the written down value of the assets before amalgamation. For accounting (company law) purposes, however the depreciation charge may be based on the consideration paid for the assets.
* The amalgamated company can carry forward the accumulated losses and unabsorbed depreciation of the amalgamating company when certain conditions are satisfied.
* The amalgamated company can amortize certain expenditures incurred by the amalgamating company.
* Capital gains tax is not applicable to the amalgamating company or its shareholders if they get shares in the amalgamated company.
Accounting for Amalgamations:
According to the Accounting Standard 14(AS-14) on Accounting for Amalgamation issued by the Institute of Chartered Accountants of India, an amalgamation can be in the nature of either uniting of interests which is referred to as amalgamation in the nature of merger or acquisition.
The conditions to be fulfilled for an amalgamation to be treated as an amalgamation in the nature of merger are as follows: (1) All assets and liabilities of the transferor company before amalgamation should become the assets and liabilities of the transferee company. (2) Shareholders holding not less than 90 per cent of the face value of the equity shares of the transferor company (excluding the proportion held by the transferee company) should become shareholders to the transferee company. (3) The consideration payable to the aforesaid shareholders should be discharged by the transferee company by issue of equity shares. Cash can be paid in respect of fractional shares. (4) The business of the transferor company is intended to be carried on by the transferee company. (5) The transferee company intends to incorporate into its balance sheet the book values of assets and liabilities of the transferor company without any adjustment except to the extent needed to ensure uniformity of accounting policies. An amalgamation which is not in the nature of a merger is treated as an acquisition.
The accounting treatment of an amalgamation in the books of the transferee company is dependent on the nature of amalgamation as stated above. For a merger, the pooling of interest method is to be used and for an acquisition the purchase method is to be used.
Under the pooling on interest method, the assets and liabilities of the two companies are aggregated at their book values in the combined balance sheet. The difference in capital arising on account of the share swap ratio (exchange ratio) is adjusted in the reserves.
Under the purchase method, the acquiring company treats the acquired company as acquisition investment and, hence, reports its tangible assets at fair market value. So there is often an asset write-up. Further, if the consideration exceeds the fair market value of tangible assets, the difference is reflected as goodwill that has to be amortized over a period of five years. (Should the consideration paid be less than the fair market value of tangible assets, the difference is shown as capital reserve).
Since there is often an asset write-up as well as some goodwill, the reported profit under the purchase method is lower because of higher depreciation charge as well as amortization of goodwill.