The Scope of AS 14, and What It Excludes

In one line

AS 14 covers every amalgamation in which the transferor is dissolved, and MU sets it on this paper without intercompany holdings and with the entries required for the purchase method only.

Three names, one transaction

MU's module heading uses three words and students treat them as three topics. They are not.

Amalgamation is the general word, and it is AS 14's own. Two or more companies combine and at least one of them is dissolved.

Absorption is what it is called when an existing company takes over another. Alpha Ltd., already trading, absorbs Beta Ltd. Only Beta is dissolved.

External reconstruction is what it is called when a new company is formed to take over an existing one, usually to escape accumulated losses.

AS 14 makes no distinction between the three. It asks only whether the conditions in paragraph 29 are satisfied. Absorption and external reconstruction are ordinary amalgamations that happen to have their own trade names, and both are accounted for by the same two methods.

What is inside the scope

Any transaction in which the undertaking of one company passes to another and the transferor is dissolved, whether that dissolution is by an order under the Companies Act or under any other statute applicable to companies.

Paragraph 3(a) defines amalgamation as one pursuant to the provisions of the Companies Act, 2013 or any other statute which may be applicable to companies, and includes 'merger'. The reference to any other statute matters: banking company amalgamations are made under the Banking Regulation Act, and they are still amalgamations for AS 14.

What is outside it

Acquisitions. Paragraph 2, dealt with in the previous chapter. The acquired company survives.

The bases for recognising interest, dividends and rentals, and operating or finance leases, which belong to other standards.

What MU has excluded, and what it means

Her module title excludes intercompany holdings.

An intercompany holding arises where, before the amalgamation, one of the companies already holds shares in the other, or they hold shares in each other. Alpha may already own 10,000 of Beta's 40,000 shares when it absorbs Beta.

That complicates two things. The purchase consideration must be computed only for the shares Alpha does not already hold, because Alpha cannot issue shares to itself. And Alpha's existing investment in Beta must be cancelled against what it receives, throwing up a further difference to be dealt with.