Core Course 11:

CORPORATE ACCOUNTS – II
Instructional Hours -108 Credit - 4

Module – I Accounts of Insurance Companies – Insurance Companies – Special Terms – Final

Accounts of Life Insurance – Revenue Account - Profit and Loss Account and Balance Sheet (As
per IRDA Regulation Act, 2002) – Determination of Profit in Life Insurance Business –
Valuation Balance Sheet – Accounts of General Insurance Companies (Fire and Marine only) –
Revenue Account – Profit and Loss Account and Balance Sheet (as per IRDA Regulation Act)

(20 Hours)

Module – II Accounts of Banking Companies – Meaning – Important Provisions of Banking

Companies Act, 1949 – Preparation of Final Accounts of Banking Companies – Profit and Loss
Account, Balance Sheet – Transactions of Special Type – rebate on bills discounted- Asset
Classification and Provisions – Non Performing Assets- Capital Adequacy.

(20 hours)

Module – III Internal Reconstruction -Alteration of Share Capital- Capital Reduction –

Accounting procedure Surrender of Shares- Accounting Treatment – Revised Balance Sheet.

(20 Hours)

Module – IV Amalgamation, Absorption and External Reconstruction – Meaning-

Amalgamation in the nature of Merger, Purchase , External Reconstruction – Applicability of AS
14- Calculation of Purchase consideration (all methods) – Journal Entries in the books of
Transferor and Transferee Companies, Revised Balance Sheet (excluding inter - company
holdings) (34 Hours)

Module –V Liquidation of Companies – Meaning-Types – Contributories-Preferential

Creditors- Fraudulent Preference- Preparation of Liquidator’s Final Statement of Account
(Statement of Affairs excluded) .

(14 Hours)

Suggested Readings

1. Jain, S.P & Narang, K.L., Advanced Accountancy, Kalyani Publishers, New Delhi
2. Maheswari, S.N & Maheswari, S.K., Advanced Accounting, Vikas Publishing House, New Delhi
3. Shukla, M.C., & Grewal, T.S., Advanced Accountancy, S Chand and Company Pvt. Ltd, New Delhi
4. Shukla, S.M., & Gupta, S.P, Advanced Accounting , Sahitya Bhavan Publications, Agra.
5. MA Arulanandam and KS Raman, Advanced Accountancy, Himalaya Publishing House, Mumbai.
6. Raman B S, Corporate Accounting United Publishers
7. The Chartered Accountant (Journal), Institute of Chartered Accountants of India, New Delhi.

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 Module 4
AMALGAMATION, ABSORPTION AND EXTERNAL
RECONSTRUCTION

Definition of Amalgamation:
The following terms are used with specified meanings in the Accounting Standard 14 (AS –
14):
(a) Amalgamation means an amalgamation pursuant to the provisions of the Companies
Act 1956 or any other statute which may be applicable to companies.

(b) Transferor company means the company which is amalgamated into another
company.

(c) Transferee company means the company into which a transferor company is
amalgamated.

(d) Reserve means the portion of earnings, receipts or other surplus of an enterprise
(whether capital or revenue) appropriated by the management for a general or a specific
purpose other than a provision for depreciation or diminution in the value of assets or for
a known liability.

(e) Consideration for the amalgamation means the aggregate of the shares and other
securities issued and the payment made in the form of cash or other assets by the
transferee company to the share-holders of the transferor company.

(f) Fair value is the amount for which an asset could be exchanged by the mutual consent
of both the companies.

Amalgamation - Meaning
Two or more companies carrying on similar business go into liquidation and a new company is
formed to take over the business of the liquidating companies is called amalgamation.

“Amalgamation is the blending of two or more existing undertakings into the undertaking, the
shareholders of each blending company becoming substantially the shareholders in the company
which is to carry on the blended undertakings. There may be amalgamation either by transfer of
two or more companies to a new company or by the transfer of one or more company to an
existing company.” – Halsbury’s Law of England

Objectives of Amalgamation

1. Establishment and management charges are reduced.

2. Competitions among the amalgamating companies are eliminated.

3. Diversification

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4. Production can be carried on in large scale.

5. Capital amount is increased by combination of companies.

6. Manufactured products can be easily marketed.

7. All the advantages of combination are available.

8. Avoiding duplication of expenditure and reduction in cost.

9. Research and development facilities are increased.

10. Price maintenance can be regulated.

11. Managerial efficiency

12. Tax advantages

13. Increases goodwill

AS 14 – Accounting for Amalgamations

1. This standard deals with accounting for amalgamations and the treatment of any resultant
goodwill or reserves. This Standard is directed principally to companies although some of
its requirements also apply to financial statements of other enterprises.

2. This standard does not deal with cases of acquisitions which arise when there is a
purchase by one company (referred to as the acquiring company) of the whole or part of
the shares, or the whole or part of the assets, of another company (referred to as the
acquired company) in consideration for payment in cash or by issue of shares or other
securities in the acquiring company or partly in one form and partly in the other. The
distinguishing feature of an acquisition is that the acquired company is not dissolved and
its separate entity continues to exist.

 Amalgamation in the nature of merger is an amalgamation which satisfies all the

following conditions:

(i) All the assets and liabilities of the transferor company become, after amalgamation,
the assets and liabilities of the transferee company.

(ii) Shareholders holding not less than 90% of the face value of the equity shares of the
transferor company (other than the equity shares already held therein, immediately
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 before the amalgamation, by the transferee company or its subsidiaries or their
nominees) become equity shareholders of the transferee company by virtue of the
amalgamation.

(iii) The consideration for the amalgamation receivable by those equity shareholders of
the transferor company who agree to become equity shareholders of the transferee
company is discharged by the transferee company wholly by the issue of equity shares
in the transferee company, except that cash may be paid in respect of any fractional
shares.

(iv) The business of the transferor company is intended to be carried on, after the
amalgamation, by the transferee company.

(v) No adjustment is intended to be made to the book values of the assets and liabilities
of the transferor company when they are incorporated in the financial statements of the
transferee company except to ensure uniformity of accounting policies.

 Amalgamation in the nature of purchase is an amalgamation which does not satisfy any
one or more of the conditions specified in sub-paragraph above.
Consideration for the amalgamation means the aggregate of the shares and other
securities issued and the payment made in the form of cash or other assets by the
transferee company to the shareholders of the transferor company.

Amalgamation in the Nature of Merger Vs. in the Nature of

Purchase

Nature of Merger Nature of Purchase

Genuine pooling- not merely of assets Mode by which one company acquires
and liabilities but also of the another and equity share holders of the
shareholders’ interest and of the business combining entities do not continue to have
of the two companies. proportionate share in the entity of
combined entity.

The business of the transferor company The business of the acquired company
is intended to be carried on, after may not intended to be continued.
amalgamation by transferee company.

The excess of purchase consideration The excess of purchase consideration over

over the share capital of transferor net assets is treated as goodwill and excess
company is debited to Reserve and the of net assets over purchase consideration
excess of share capital over purchase is treated as capital reserve.
consideration is credited to reserve.

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 Total incorporation of financial figures Partial incorporation of financial
– assets, liabilities, reserves and surplus of figures- only net assets taken over by the
the transferor company are all transferee company are incorporated in the
incorporated in the books of transferee books of the transferee company ignoring
company. reserves and surplus.

For carry forward of any statutory Amalgamation Adjustment a/c is not

reserve, by the transferee company, opened for the takeover of the statutory
Amalgamation Adjustment a/c is debited reserve.
and credit is given to concerned statutory
reserve a/c.

Absorption
Takeover of the business of one or more existing companies by an existing company is called
absorption. One or more existing companies go into liquidation. The business of liquidating
company is taken over by another existing company

Objectives:

 Elimination of competition

 Obtain economies of scale

 Secure larger share of market

 Reduce cost

 Creation of goodwill

 Promotion of research and development

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Amalgamation Vs Absorption

BASIS FOR
AMALGAMATION ABSORPTION
COMPARISON

Meaning The process in which two or more The process in which

than companies are wound up to one company takes
form a new company, which over the other company
acquires their business is known is known as
as Amalgamation. Absorption.

Act Voluntary Voluntary or hostile

Minimum number Three Two

of companies
involved

Creation of new Yes, a new company is formed No, new company is

company not formed

Size of entities The entities are of the same size. The bigger the entity
overpowers the smaller
entity.

How many Minimum 2 companies Only one, i.e. the

companies are merged company
liquidated?

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Internal Reconstruction
Internal reconstruction refers to the method of corporate restructuring wherein existing
company is not liquidated to form a new one. Recourse undertook by the enterprise, in which
substantial changes are made in the company’s capital structure, without resorting to the
liquidation of the existing company, is called internal reconstruction. It is the inner
rearrangement of the company’s financial structure, undergoing reconstruction continues to
exist.

The methods given below are generally employed to affect the internal reconstruction process:

 Alteration of Share Capital

 Sub-division and Consolidation of Shares
 Conversion of shares into stock or stock into shares.
 Variation of Shareholder’s rights
 Reduction of Share Capital
 Compromise/Arrangement
 Surrender of Shares.

In this process, the assets are restated, to represent fair values, and liabilities are restated to show
the settable amount, and thus the balance sheet shows a true picture. In this scheme, trading
losses and fictitious assets are written off, against the claim sacrificed by the debenture holders,
creditors, etc.

External Reconstruction

External Reconstruction is a process in which the company’s financial affairs are wound up, and
a new company is formed to take over the assets and liabilities of the existing company, after the
reorganization of the financial position. It requires the approval of shareholders, creditors and
National Company Law Tribunal (NCLT).

In external reconstruction, the undertaking is being continued by the company but is in substance
transferred to a company which is not an external one, but another entity that comprises of
almost same shareholders, to be carried on by the transferee company. The accounting treatment
of external reconstruction is same as the amalgamation in the nature of the purchase.

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Internal Reconstruction Vs. External Reconstruction

BASIS FOR INTERNAL EXTERNAL

COMPARISON RECONSTRUCTION RECONSTRUCTION

Meaning Internal reconstruction External reconstruction is

refers to the method of one in which the company
corporate restructuring undergoing reconstruction is
wherein existing company is liquidated to take over the
not liquidated to form a new business of existing
one. company.

New company No new company is formed. New company is formed.

Use of specific Balance Sheet of the No specific terms are used in

terms in Balance company contains "And the Balance sheet.
Sheet Reduced".

Capital reduction Capital is reduced and the No reduction in the capital

external liability holders
waive their claims.

Approval of court Approval of court is must. No approval of court is

required.

Transfer of Assets No such transfer takes place. Assets and liabilities of

and Liabilities existing company are
transferred to the new
company.

Purchase Consideration

It is the amount payable by the transferee company to the transferor company for the purchase
of business. It is the aggregate of securities issued and payment in cash by the transferee
company to the shareholders of the transferor company. The amount of liabilities assumed and
payments to creditors and debenture holders by the transferee company should not be considered
as part of purchase consideration.

Methods of Purchase Consideration:

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 Lump Sum method
 Net Assets or Net Worth method
 Net Payment method
 Shares Exchange method

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