In a nutshell, in Amalgamation, the two companies are liquidated to form a new company, but in Absorption, only the merged company goes into liquidation, but there is no formation of a new company. A Ltd. and B Ltd. joined to form AB Ltd., it is known as an amalgamation, whereas A Ltd takes over the business of B Ltd., so B Ltd. loses its existence, and only A Ltd. exists, it is known as absorption. In this process, the companies which go into liquidation is known as Amalgamating Companies or Vendor Companies whereas the company which is newly formed is referred to as the Amalgamated Company or Vendee Company.
Purchase Consideration
When an amalgamation takes place, all the employees and shareholders of the involved companies may still retain their positions but in the new organisation that has been formed. This footnote is not added in the standard revised in 2016 by the ICAI for entities other than companies (see Announcement XLV). The scheme of amalgamation sanctioned under the provisions of the Companies Act, 1956 or any other statute may prescribe the treatment to be given to the reserves of the transferor company after its amalgamation. In this process, the weaker what do you mean by amalgamation company looses its identity by merging itself with the stronger company.
Amalgamation – Definition, Types, Advantages, Disadvantages
- While the term is rarely heard in the U.S. today, the practice continues both there and elsewhere around the world.
- During an amalgamation, the transferor company is absorbed by the stronger transferee company which then leads to the formation of a completely new company with more assets and a stronger customer base.
- The term amalgamation has become obsolete and not commonly used in developing countries like the United States of America.
Similarly, the shareholders of the old entity turn out as the shareholders of the amalgamated entity. For corporate entities to amalgamate, at least two companies of similar nature need to liquidate. The firms that liquidate are vendor companies, while the new one established to take over them becomes the purchasing company. The purchase provision is considered when the latter issues equity shares for investors to build capital. Where the requirements of the relevant statute for recording the statutory reserves in the books of the transferee company are complied with, statutory reserves of the transferor company should be recorded in the financial statements of the transferee company. The corresponding debit should be given to a suitable account head (e.g., ‘Amalgamation Adjustment Reserve’) which should be presented as a separate line item.
The terms like merger and consolidation have taken the place of amalgamation. But amalgamation is quite frequently used in developing countries like India for combining companies. The dictionary meaning of amalgamation is combining two or more things to form a new thing. The definition of amalgamation remains the same in business terminology.
Such amalgamation, they considered, need not be effected at one time, but should be accomplished gradually. Overall, the site appears like an amalgamation of some of the most odious factions of social media, centralized on one platform that’s attracted millions of users. Save taxes with Clear by investing in tax saving mutual funds (ELSS) online.
However, younger Indigenous groups are combining traditional languages with modern English to spur a new surge in linguistic diversity, with amalgamations such as Kriol being spoken by tens of thousands across Australia. Acculturation is one of several forms of culture contact, and has a couple of closely related terms, including assimilation and amalgamation. Amalgamation can also refer to the combining of other types of organizations into a single one, such as nonprofit groups and entities in the public sector, including government agencies and municipalities. The main reason behind absorption is gaining synergy, expansion, and instantaneous growth.
Amalgamation vs Merger vs Absorption
But, here one should know that Amalgamation can occur in two ways i.e. in the form of merger or the form of absorption. Amalgamation takes place when two or more companies with similar types of business combine their business operations to cut costs or to achieve synergy. Sometimes companies opt for amalgamation when they want to enter a new market and want to create a new product. The following are the reasons for which companies choose for amalgamation. The shareholders of the transferee company become the transferor company holding a minimum of 90% face value of equity shares. In this type of amalgamation, no adjustments are made among the companies to book values.
The transferee company exercises control over the transferor company. The two companies differ in their size, structure, financial condition and operations. The companies either mutually take the decision of absorption, or it can be a hostile takeover. The process in which one company acquires the business of another company is known as Absorption.
The purchase method of accounting applies in the same way as in the case of the normal asset purchase. In the process, the transferee company accounts amalgamate by incorporating the assets and liabilities to be carried forward or by allocating individually identified assets and liabilities of the transferor. The calculation is based on the fair values applicable on the amalgamation date.
However, it is still commonly used in certain countries, such as India.
In business terminology, the term “amalgamation” is used for the amalgam of two or more companies. Though the goals and objectives of the two amalgamating entities are the same, differences in opinion are quite common. In addition, there is a vast difference in the culture the two companies followed as separate entities in the past. Therefore, it is recommended that the amalgamating companies clarify the doubts and agree on specific terms before proceeding with the merger or purchase. CAs, experts and businesses can get GST ready with Clear GST software & certification course.
Amalgamation leads to joining two or more entities as one, thereby making them the support system of each other. The process is opted for when entities find it better to work collectively than rely on third-party entities for various services. While it is the combination of two or more business units in corporate finance, amalgamation is defined as the combination of multiple financial statements in accounting.
This is why amalgamations generally take place between small and large companies where the larger one takes over the smaller one. The reserves (whether capital or revenue or arising on revaluation) of the transferor company, other than the statutory reserves, should not be included in the financial statements of the transferee company except as stated in paragraph 39. Certain reserves may have been created by the transferor company pursuant to the requirements of, or to avail of the benefits under, the Income-tax Act, 1961; for example, Development Allowance Reserve, or Investment Allowance Reserve. The Act requires that the identity of the reserves should be preserved for a specified period. Likewise, certain other reserves may have been created in the financial statements of the transferor company in terms of the requirements of other statutes. This exception is made only in those amalgamations where the requirements of the relevant statute for recording the statutory reserves in the books of the transferee company are complied with.