Transferor and Transferee: Reading the Question Correctly
Chapter Twenty-Three
Syllabus topic 1, "Types of amalgamation - merger and purchase"
Pages 57 to 58 of 85
In one line
Identify which company dies and which survives, then classify the amalgamation against the five conditions, and only then begin computing.
The two definitions, once more
Transferor company: the company which is amalgamated into another company. It is dissolved.
Transferee company: the company into which a transferor company is amalgamated. It survives and its books absorb the business.
The six ways a question says the same thing
| The question says | Transferor | Transferee |
|---|---|---|
| "A Ltd. was absorbed by B Ltd." | A | B |
| "B Ltd. took over the business of A Ltd." | A | B |
| "B Ltd. acquired the undertaking of A Ltd." | A | B |
| "A Ltd. went into liquidation and its business was purchased by B Ltd." | A | B |
| "A Ltd. and C Ltd. amalgamated to form D Ltd." | A and C | D |
| "A new company, D Ltd., was formed to take over A Ltd." | A | D |
The transferor is always the one that is wound up. If the question mentions a liquidator, that company is the transferor. If a new company is formed, the new one is always the transferee.
Classify before you compute
Run the five conditions from [Amalgamation in the Nature of Merger: the Five Conditions] against the facts and write down the answer before anything else. The classification changes what you do at every later step.
| If merger | If purchase | |
|---|---|---|
| Assets and liabilities recorded at | Book values | Existing carrying amounts, or fair values |
| Transferor's reserves | Carried into the transferee | Not carried in, except statutory reserves |
| Balance of Profit and Loss | Aggregated, or to General Reserve | Not carried in |
| Difference on consideration | Adjusted in reserves | Goodwill or Capital Reserve |
| Method | Pooling of interests | Purchase |
The three signals that decide it fastest
Rather than testing all five conditions in every question, look first at the three that fail most often. If none of them fails, then test the remaining two properly.
Is any part of the consideration in cash, or in anything but equity shares? If yes, and it is not merely cash for fractional shares, condition (iii) fails and it is a purchase.
Are any assets or liabilities being taken over at values different from book values? If yes, condition (v) fails and it is a purchase.
Is anything being left behind? If some asset or liability is not taken over, condition (i) fails and it is a purchase.
A question that answers no to all three, states that 90 per cent or more of the equity shareholders become shareholders in the transferee, and says the business will be continued, is a merger.
The order to work in
- Name the transferor and the transferee, and write them at the top of the answer.
- Classify: merger or purchase, naming the condition that fails if it is a purchase.
- Compute the purchase consideration, from what goes to the shareholders only.
- Compute the net assets taken over, at the values the classification requires.
- Find the difference: goodwill or capital reserve under purchase, an adjustment in reserves under pooling.
- Pass the entries in the transferee's books.
- If asked, close the transferor's books through the Realisation Account.
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