The first method is used in case of amalgamation in the nature of merger and the second method is used in case of amalgamation in the nature of acquisition.Under merger method, the assets, liabilities and reserves of the transferor company will be taken over by Transferee Company at existing current amounts unless any adjustment is required due to different accounting policies followed by these companies. As a result, the difference between the amount recorded as share capital issued (plus any additional consideration in the form of cash or other assets) and the amount of share capital of transferor company should be adjusted in reserves.Under merger method, the combined companies add the historical cost value of the underlying assets and liabilities together with no goodwill being recognized.
Under acquisition method, the assets and liabilities of the transferor company should be incorporated at their existing carrying amounts or the purchase consideration should be allocated to individual identifiable assets and liabilities on the basis of their fair values at the date of amalgamation. But no reserves, other then statutory reserves, of the transferor company should be incorporated in the financial statements of transferee company. Statutory reserves of the transferor company should be incorporated in the balance sheet of transferee company by way of the following journal entry.To Statutory ReservesWhen the above statutory reserves will no longer be required to be maintained by transferee company, such reserves will be eliminated by reversing the above entry.In acquisition method, any excess of the amount of purchase consideration over the value of the net assets of the transferor company acquired by the transferee company should be recognized as goodwill in the financial statement of the transferee company.
Under acquisition method, since the total price paid frequently exceeds the fair market value of the transferee company’s underlying assets and liabilities, the difference is generally considered “goodwill.” Any short fall should be shown as Capital Reserve. Goodwill should be amortized over period of five years unless a somewhat longer period can be justified.The purchase method or the acquisition method will allow investor to understand better how much was paid for an acquisition. Also, the acquisition method of accounting is more representative of how all other accounting transactions are recorded. The acquisition accounting method is more in line with international accounting standards.
The merger method of accounting is beneficial in the sense that reported earnings after the combination are not diluted by amortization of the goodwill. It is this reduction against future earnings that companies desire to avoid when they structure a merger deal.
