Treatment of reserves arising on amalgamation in the nature of merger

A. Facts of the Case

Three subsidiary Companies, viz company A, B and C were merged into another company, viz company D with retrospective effect. The transferor (company A, B and C) and transferee company (company D) received approval from respective High court for merger. The amalgamation was in the nature of merger and would be accounted for under the “pooling of interests method” in the books of transferee company.

The difference between the amount recorded as share capital issued by the transferee company and the amount of share capital of the transferor companies shall be reflected in the reserves of the transferee company.

B. Issue

The Company has sought the opinion on the following issues arising from the above:

• Whether the reserves arising on amalgamation should be treated as capital or general reserve in the books of account of transferee company.
• Whether such reserves are available for distribution as dividends and/or bonus shares to shareholders

C. Opinion

On the basis of the above, the opinion in respect of the issues raised by the company:

• The correct accounting treatment as per AS 14 of the transaction would be to consider the reserves arising on amalgamation as capital reserves as the nature of transaction appears to be capital in nature, since it was akin to share premium. In case of amalgamation in the nature of merger, the merged company is considered to be existed from the beginning, thus net surplus arising on amalgamation would be of the nature of share premium.
• Reserves created on Amalgamation is not available for the purpose of distribution to shareholders as dividend and/or bonus shares.

The above opinion was affirmed by the ICAI-Expert Advisory Committee.

Swati Bansal, Audit Associate, SW India