Amalgamation
When two or more companies carrying on similar business go into
liquidation and a new company is formed to take over their business, it is
called amalgamation. The company which go into liquidation are vendor or
amalgamating companies where as new company which is formed to take over the
business of liquidating company is called purchasing or amalgamated company.
Features of amalgamation
1.Two or more companies are liquidated
2. a new company is formed to take over the business of liquidating
companies.
3.the nature of business of existing companies is similar
4.generally, purchase consideration is discharged by equity shares of purchasing company
Absorption
Absorption is the process under which an existing large company purchase
of business of another small company doing similar business. In other words ,
when an existing company takes over the business of one or more existing
companies carrying on similar business, it is called absorption.
Features of absorption
1.one or more companies are liquidated
2. no new company is formed
3.nature of business of both companies are same
4.generally, large company absorbs the business of smaller company
Reconstruction
When a company is suffering from loss for past several years and
suffering from financial difficulties ,it may go for reconstruction. In other
words ,when a company ‘s balance sheet exhibits huge accumulated losses, heavy
fictitious and intangible assets or is in financial difficulties or is over
capitalized , and then process of reconstruction is restored. Reconstruction
may be internal and external
A. internal reconstruction :
internal reconstruction refers to
the internal re-organization of the financial structure of a company.
B .External reconstruction :when company is suffering loss from past
several years and facing financial crises, the company can sell business to
another newly formed company. Actually ,the new company is formed to take over
the assets and liabilities of the company. this process is called external
reconstruction.
Purchase consideration
In the procedure of two or more companies,the purchasing company has to
pay price to the vendor or liquidated company for taking over its business. The
price paid by the purchasing company to the liquidated company is called
purchase consideration. In other words it is the cost payable by purchasing
company to the vendor company for the ownership of net worth of vendor company
as a agreed between the concerned parties. There are various methods of
determining the purchase consideration as
* Lump sum method
*net payable method
*net assets method
*mixed method
*intrinsic value of share method
Holding company and subsidiary
company
A holding company is one which controls one or more other companies. This
is done by means of holding more than 50% shares in that company or companies
or by having power to appoint the whole or majority of the directors of those
companies. A company controlled by holding company is known as subsidiary
company. This is also form of business combination. In this type of combination
,the legal entity of the absorbed company is not to distribute.
Capital profit and revenue
profit
Profit earned by subsidiary company up to the date of acquisition of
shares by holding company are capital profits or pre-acquisition profits. Thus,
to decide whether profit/losses and reserve of the subsidiary company are the
capital profits, the date of purchase of shares by holding company is deciding
factors. Any increase or decrease in value of fixed assets will also be treated
as capital profits.
Profit earned by the subsidiary company after the purchase of shares by
the holding company are the revenue profits or post acquisition profits. If the
fall in the value of the assets occurs after the date of acquisition ,the loss
is treated as an ordinary revenue loss.
Minority interest :
The share of the outsiders in the subsidiary company is called minority interest .Minority interest consists
of the nominal value of shares held by the minority plus proportionate share in
company’s profits and minus their plus proportionate share of company’s losses.
the minority interest is calculated as follows
Paid-up value of equity shares held by outsiders = ***
Paid-up value of preference shares held by outsiders = ***
Add. Proportionate share in capital profit = ***
Add. Proportionate share in revenue profit =****
---------------
Minority
interest ****
Unrealized profit
When the holding company and its subsidiaries make transactions with one
another, some goods may remain unsold and shown in the balance sheet . In such
case, only the selling company shows the profit on the total goods where the
buying company does not show its profit on the goods unsold. Hence , the amount
on the unsold goods is called unrealized profit as the profit can be realized
only after the sales of the stock.
Corporate liquidation
Corporate liquidation is the legal procedure of a company by which the
corporate life of a company is brought to an end. In other words liquidation is
the process of law, where by a company’s affairs are wound up to the terminate
its corporate life. Hence , the termination of legal existence of company by closing its business is known as
liquidation.
Ineffective management, lack of proper material and quality control ,wrong
working site selection poor industrial relation are the internal reasons where
as financial constraints, change in demand and government ,civil unrest are the
external reasons for liquidation.
Condition of compulsory
winding-up of a company as per company act
According to company act 2063, a company maybe wound up by the registrar
office under the following circumstances
A .when the company passes a special resolution to be wound up by the
registrar office.
B.when the company has made defaults in delivering the statutory report
to the registrar or holding statutory meeting
c.when the company fails to commence its business within a year of its
incorporation or suspends its business for ayear
d.when the company is unable to pay debts
