Amalgamation adjustment account is used for recording:
Statutory Reserve in the books of the transferee company
Understanding Amalgamation Adjustment Account in Accounting
The Amalgamation adjustment account is a specific account used in the accounting treatment of amalgamations, particularly when the amalgamation is in the nature of purchase. This account plays a crucial role in ensuring that certain statutory requirements related to reserves are met by the transferee company (the company acquiring the other company).
Purpose of Amalgamation Adjustment Account
When companies merge or are acquired (amalgamation), assets and liabilities of the transferor company (the company being acquired) are taken over by the transferee company. In an amalgamation in the nature of purchase, the assets and liabilities are recorded at their purchase consideration or agreed values, and reserves of the transferor company are generally not brought into the books of the transferee company, except for statutory reserves.
However, there's an exception for certain reserves that are required by law or statute to be maintained for a specific period or purpose. These are known as statutory reserves. Examples might include Development Rebate Reserve, Export Profit Reserve, Investment Allowance Reserve, etc., depending on the applicable laws and regulations at the time.
Handling Statutory Reserves in Amalgamation (Purchase Method)
According to accounting standards (like AS 14, and similar principles in Ind AS 103 although specific account names might differ slightly), if an amalgamation is in the nature of purchase, the transferee company does not incorporate the general reserves or revenue reserves of the transferor company. However, if the transferor company has created statutory reserves that are required to be continued for a certain period, the transferee company must maintain these reserves.
Since these statutory reserves cannot be simply added to the transferee company's own reserves (as they are specific reserves created under certain conditions), they are brought into the books of the transferee company by a corresponding debit to an account specifically created for this purpose: the Amalgamation Adjustment Account.
The journal entry to record the statutory reserve in the books of the transferee company typically involves:
- Debit: Amalgamation Adjustment Account
- Credit: (Relevant) Statutory Reserve Account
This Amalgamation Adjustment Account is shown on the assets side of the balance sheet, often under the head 'Miscellaneous Expenditure' or a similar category, until the statutory reserve is no longer required to be maintained. Once the statutory reserve's purpose is fulfilled or the required period expires, both the statutory reserve and the corresponding balance in the Amalgamation Adjustment Account are written back.
Why Other Reserves are Not Handled This Way
- Capital Reserve: Capital Reserve in the transferee company arises from capital profits (e.g., profit on revaluation of assets, profit on sale of fixed assets, premium on issue of shares, etc.). Reserves from the transferor company in a purchase amalgamation are generally not transferred to the Capital Reserve of the transferee unless they represent capital profits identifiable and measurable upon acquisition. The Amalgamation Adjustment Account is not used for this purpose.
- General Reserve & Revenue Reserve: In an amalgamation in the nature of purchase, revenue reserves (like General Reserve, Profit & Loss Account balance) of the transferor company are typically not transferred to the transferee company. They are considered part of the net assets acquired, the value of which is reflected in the purchase consideration and ultimately goodwill or capital reserve arising from the purchase. The Amalgamation Adjustment Account is not used for revenue reserves.
- Statutory Reserve: As explained, statutory reserves are a special case requiring continued maintenance, and the Amalgamation Adjustment Account is specifically used to incorporate them into the transferee's books without affecting its own profit and loss account or general reserves initially.
Therefore, the Amalgamation adjustment account is used for recording Statutory Reserves in the books of the transferee company.
| Type of Reserve | Treatment in Amalgamation (Purchase Method) | Use of Amalgamation Adjustment Account |
|---|---|---|
| Capital Reserve (Transferor) | Generally not transferred, or adjusted against Goodwill/Capital Reserve on acquisition. | No |
| General Reserve (Transferor) | Generally not transferred, reflected in purchase consideration. | No |
| Revenue Reserve (Transferor) | Generally not transferred, reflected in purchase consideration. | No |
| Statutory Reserve (Transferor) | Required to be maintained by Transferee. | Yes, used as a corresponding debit for bringing the statutory reserve into books. |
Revision Table: Key Concepts
| Term | Definition/Purpose |
|---|---|
| Amalgamation | Combination of two or more companies into a new entity or one absorbing the other. |
| Transferee Company | The company into which another company is amalgamated; the acquiring company. |
| Transferor Company | The company which is amalgamated into another company; the acquired company. |
| Amalgamation in the Nature of Purchase | An amalgamation where the transferee company acquires the assets and liabilities of the transferor company, and the shareholders of the transferor company typically receive cash or shares in the transferee company, but not usually such that they become a major shareholder group in the transferee company. Reserves are generally not merged. |
| Statutory Reserves | Reserves required to be maintained by law or specific statutes for a prescribed period or purpose. |
| Amalgamation Adjustment Account | An account debited in the transferee's books when statutory reserves of the transferor are brought in during an amalgamation in the nature of purchase. It's a balancing figure asset account. |
Additional Information on Amalgamation Accounting
Accounting for amalgamations is guided by specific accounting standards. In India, AS 14 dealt with accounting for amalgamations, categorizing them into 'Amalgamation in the nature of Merger' and 'Amalgamation in the nature of Purchase'. Ind AS 103 (Business Combinations) under the Indian Accounting Standards convergence with IFRS now governs business combinations, including amalgamations, though the specific treatment of reserves and the use of accounts like 'Amalgamation Adjustment Account' might be detailed in the context of applying Ind AS 103 or related guidance.
In an Amalgamation in the Nature of Merger, the reserves of the transferor company are generally taken over and merged with the corresponding reserves of the transferee company. In this method, an Amalgamation Adjustment Account is typically not used for reserves; differences might be adjusted in General Reserve or Capital Reserve. The use of the Amalgamation Adjustment Account is specific to the Purchase method for statutory reserves.
The requirement to maintain statutory reserves after amalgamation is often linked to fulfilling the conditions under which tax benefits or other incentives related to the creation of those reserves were obtained by the transferor company. The transferee company assumes this obligation.
Important Questions from Miscellaneous
A stone is thrown horizontally from the top of a 20 m high building with a speed of 12 m/s. It hits the ground at a distance R from the building. Taking g = 10 m/s2 and neglecting air resistance will give :
A sphere of volume V is made of a material with lower density than water. While on Earth, it floats on water with its volume f1V (f1 < 1) submerged. On the other hand, on a spaceship accelerating with acceleration a < g (g is the acceleration due to gravity on Earth) in outer space, its submerged volume in water is f2V. Then:
A railway wagon (open at the top) of mass M1 is moving with speed v1 along a straight track. As a result of rain, after some time it gets partially filled with water so that the mass of the wagon becomes M2 and speed becomes v2. Taking the rain to be falling vertically and the water stationery inside the wagon, the relation between the two speeds v1 and v2 is :
Consider the following statements:
1. Distance between the longitudes becomes zero on North Pole and South Pole.
2. Distance between the longitudes is maximum on the Equator.
3. Number of longitudes is more than number of latitudes.
Which of the statements given above is/are correct?
One block of 2⋅0 kg mass is placed on top of another block of 3⋅0 kg mass. The coefficient of static friction between the two blocks is 0⋅2. The bottom block is pulled with a horizontal force F such that both the blocks move together without slipping. Taking acceleration due to gravity as 10 m/s2, the maximum value of the frictional force is :
