Why Amalgamation Needs a Standard

In one line

AS 14 exists because when one company's business passes into another, somebody has to decide at what figures it arrives, and left to itself each company would decide differently.

The two companies

From here on, two words do a lot of work and they are worth fixing now.

The transferor company is the one that is amalgamated into another. Its business goes; its books close.

The transferee company is the one into which the transferor is amalgamated. Its books absorb what arrives.

AS 14 defines both in paragraph 3, and a student who reverses them will reverse every entry. The transferee is the survivor. If a question says "A Ltd. was absorbed by B Ltd.", A is the transferor and B is the transferee.

What paragraph 1 says the standard is for

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

Two things are in that sentence.

Goodwill and reserves are named. They are named because they are where the money is. When a business changes hands the price rarely equals the book value of what is bought, and the difference has to go somewhere. Whether it becomes goodwill, or a capital reserve, or an adjustment inside reserves, is what the standard decides.

It is directed principally to companies. Amalgamation is a company law transaction, and the standard is written around it.

What paragraph 2 says it is not for

This is the paragraph students should be able to state.

Paragraph 2 provides that the standard does not deal with cases of acquisitions which arise when there is a purchase by one company of the whole or part of the shares, or the whole or part of the assets, of another company, in consideration for payment in cash or by issue of shares or other securities, or partly in one form and partly in the other.

And it gives the reason: the distinguishing feature of an acquisition is that the acquired company is not dissolved and its separate entity continues to exist.

Amalgamation and acquisition, which is the real distinction

A company that buys 80 per cent of another company's shares has made an acquisition. The other company still exists, still files its own accounts, and is now a subsidiary. That is consolidation territory, not AS 14.