What AS 14 Does, and Does Not, Govern
Chapter Three
Syllabus topic 2 and 3, "Types of amalgamation" and "Accounting for amalgamation"
Pages 8 to 10 of 168
In one line
Take the vocabulary and the method from the standard, and do not claim the standard as your authority, because a partnership firm has no shareholders and no equity shares.
What the standard says about its own reach
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.
Read the middle clause carefully. It does not say the standard applies to partnerships; it says it is directed principally to companies, and that some of its requirements also apply to other enterprises. That is a statement of limited and uncertain reach, not of application.
Why the conditions cannot simply be applied to a firm
Look at what the merger test actually requires.
| The condition | Why a firm cannot satisfy it as written |
|---|---|
| Holders of not less than 90 per cent of the face value of the equity shares of the transferor become equity shareholders of the transferee | A firm has no equity shares and no shareholders. It has partners and capital accounts |
| The consideration is discharged wholly by the issue of equity shares, cash being paid only for fractional shares | A firm cannot issue shares. There are no fractions to pay for |
| The assets and liabilities of the transferor company become those of the transferee company | The vocabulary throughout is of companies |
Two of the five conditions are literally impossible for a partnership, and the other three are written in company terms. A student who writes "this satisfies AS 14 condition (ii)" of a firm has written something that cannot be true.
What may properly be taken from it
Three things, and each is a fact about the standard rather than an application of it.
The names of the two methods. AS 14 says there are two main methods of accounting for amalgamations, the pooling of interests method and the purchase method. MU uses those names, so the book uses them.
The content of each method. The standard says that under pooling the assets, liabilities and reserves of the transferor are recorded at their existing carrying amounts, and that the object of the purchase method is to account for the amalgamation by applying the same principles as are applied in the normal purchase of assets. Those descriptions transfer intact to firms, because neither depends on there being shares.
The idea behind the merger test. Continuity of ownership, of business and of measurement is a sound test wherever it is applied, and it can be restated for partners and capital accounts without distortion.
What AS 14 Does, and Does Not, Govern
How to write it in an answer
One sentence does the whole job, and it earns marks rather than costing them:
The two methods take their names and their content from AS 14, Accounting for Amalgamations, which states that it is directed principally to companies; applied to the amalgamation of firms the conditions are read as requiring that the partners continue as partners of the new firm and are settled by capital in it rather than in cash.
What that sentence does. It shows you know the source, it shows you know its limits, and it tells the examiner you are applying the test by analogy deliberately rather than by mistake.
What to avoid. Do not write "as per AS 14, this amalgamation of the firms is in the nature of merger", flatly, as though the standard governed. It does not, and the sentence is checkable.
Where AS 14 does govern
It governs the amalgamation of companies, and that is Financial Accounting - III on this same line, in Semester V, where the transferor and transferee are companies and the consideration is discharged in shares.
Keep the two apart. This module's firms have partners, capital accounts and a realisation account. That paper's companies have shareholders, share capital and an amalgamation adjustment. The methods share their names and little else about the paperwork.
What it does NOT mean
The standard is not irrelevant. It supplies the vocabulary MU examines and the content of both methods.
Its text is not off limits. It is notified and therefore Gazette matter, so it may be quoted with attribution.
The five conditions are not useless for firms. They are translated, and the answer says it is translating.
Quick revision
- AS 14 states that it "is directed principally to companies" although some requirements also apply to other enterprises.
- Two of its five merger conditions are impossible for a firm: ninety per cent of equity shareholders, and discharge wholly by the issue of equity shares.
- Take from it: the names of the two methods; the content of each, pooling at existing carrying amounts and purchase on normal purchase-of-assets principles; and the idea of continuity.
- Do not take from it: the claim that it governs. Say you are applying the test by analogy.
- It does govern the amalgamation of companies, which is a different paper.
Test yourself
1. What does AS 14 say about its own scope? That it is directed principally to companies, although some of its requirements also apply to the financial statements of other enterprises.
2. Which two merger conditions cannot be satisfied by a firm, and why? The condition requiring holders of ninety per cent of the face value of the equity shares to become equity shareholders of the transferee, and the condition requiring the consideration to be discharged wholly by the issue of equity shares, because a firm has neither shares nor shareholders.
What AS 14 Does, and Does Not, Govern
3. What may properly be cited from the standard? The names of the pooling of interests and purchase methods, the content of each, and the underlying idea of continuity of ownership, business and measurement.
4. Write the sentence that should appear in an answer. That the two methods take their names and content from AS 14, which states that it is directed principally to companies, and that applied to firms its conditions are read as requiring the partners to continue as partners settled by capital rather than cash.
5. Where does AS 14 actually govern? The amalgamation of companies, which is examined in Financial Accounting - III in Semester V, where there are shareholders and shares to issue.
Answer in one sentence
What is the standing of AS 14 in this module? It supplies the vocabulary and the content that MU examines, the names of the pooling of interests and purchase methods and the description of each, and the underlying test of continuity in ownership, business and measurement; but it states in its own opening words that it is directed principally to companies, and two of its five merger conditions, requiring ninety per cent of equity shareholders to continue and the consideration to be discharged wholly by the issue of equity shares, are impossible for a partnership firm which has neither shares nor shareholders, so the standard is cited for what it says and the test is applied to firms by an analogy that the answer should state it is making.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.