Companies are legal entities that can control or be controlled by other entities. This feature allows them to be different from other forms of business.
Usually, companies have shareholders that acquire their shares. In exchange for those shares, they provide finance to the underlying company. Usually, these shareholders are individuals who purchase shares in the market.
However, companies may also offer their shares to other companies. More accurately, a company may acquire the stock of another company. In most cases, this process occurs for the acquirer to get control over the underlying company.
However, these transactions may form the investing strategy that companies follow. Either way, both companies enter into a new relationship based on the percentage of holdings.
The relationship between both companies can be highly crucial for various purposes. One of the links that may exist between both parties falls under amalgamation.
Usually, this process is different from mergers and acquisitions. On top of that, the definition of amalgamation in accounting may differ from its meaning in general. However, it is crucial to understand the term on its own.
What is Amalgamation?
An amalgamation is the combination of several companies into a new entity. Usually, this process requires two companies. Sometimes, however, it may also involve more than two parties.
In corporate finance, the term amalgamation represents the combination of several companies into a single company. It may be similar to a merger process. However, both of these differ in several aspects.
An amalgamation differs from a merger because none of the involved companies outlasts. In a merger, one company gets absorbed into another.
Therefore, at least one company within this process survives. However, in an amalgamation, both involved companies dissolve as legal entities. Due to this process, a new entity gets formed. This new entity holds the assets and liabilities of the underlying companies.
An amalgamation usually occurs between two or more companies. Both companies work in the same industry or share some similarities in operations.
Usually, the objective behind this process is for companies to combine their resources. Through this process, they can diversify their activities or expand their operations. This way, both companies benefit. However, these benefits belong to the new entity formed.
An amalgamation helps form a larger entity. Usually, it occurs between one larger company and a single or multiple smaller ones.
The weaker company gets absorbed into the stronger one. In this transaction, the smaller companies become the transferees. In contrast, the larger company becomes the transferor. Therefore, the newly formed entity is significantly different from both parties involved in the process.
Overall, an amalgamation is when two companies combine to form a new one. During this process, the underlying companies do not exist after the merger.
Therefore, it results in those companies dissolving to constitute a new one. This process differs from mergers, where one company remains operational while the other gets absorbed. In some aspects, however, both may be similar.
What are the types of Amalgamation?
In general, there are two types of amalgamation. These types fall under the methods for the process. In both cases, the legal entity of the underlying companies dissolves.
Similarly, a new company with the combined assets and liabilities gets formed. However, both methods of amalgamation differ in some regards. The accounting for these methods is also different.
The two types of amalgamation include the merger and purchase method. An explanation for each of these is as below.
Merger method
With the merger method of amalgamation, the process is similar to corporate mergers. As mentioned, however, the underlying amalgamation base still exists.
Therefore, the underlying companies vanish and get replaced by a new ones. These companies also combine their resources. These resources include shareholder interests, assets, and liabilities.
Within the merger method of amalgamation, companies do not adjust the book values for accounting. Once the amalgamation process gets completed, the company can carry on its business.
Similarly, the shareholders retain their equity. However, this equity gets incorporated into the newly formed entity after the amalgamation. This process differs from the purchase amalgamation method.
Purchase method
The purchase method of amalgamation is different from the merger method. Both processes differ in their structure and accounting. With the purchase method, the amalgamation conditions do not suffice for a merger.
In this process, the shareholders of the acquired company do not get proportionate equity in the newly formed entity. Likewise, the transferor’s business doesn’t continue, unlike the merger method.
For the purchase method of amalgamation, the recognition of goodwill will also apply. If the consideration paid for the process exceeds the transferor’s net assets, the difference will be the goodwill.
However, if it is lower, then it becomes capital reserves. This process falls under consolidation in accounting, which requires companies to record goodwill.
What is Amalgamation in Accounting?
The above definition of amalgamation applies to corporate finance in general. However, it does not cover the process of accounting. In that context, it relates to how companies account for the amalgamation. This term applies more in GAAP than in IFRS. In the latter, it is called consolidation. Therefore, amalgamation does not have a different meaning in accounting.
Amalgamation in accounting refers to a combination of financial statements. As mentioned, another name for this process is consolidation. Companies combine their financial statements for a consolidated view of resources. Usually, it involves combining all items within the balance sheet and income statement. However, it may also include other complex processes.
For companies to use amalgamation in accounting, they must meet several criteria. These criteria relate to how both companies in the process relate to each other.
Usually, one company must have a controlling interest to consolidate the financial statements. In the absence of that control, the amalgamation may not be suitable. Once the relationship gets established, the transferee deals with the accounting for the amalgamation.
Amalgamation in accounting is crucial in presenting a fair picture of operations. However, this process may differ based on the type of amalgamation performed by companies.
As mentioned, there are two methods within this process. These include the merger and purchase methods. Based on the type, the accounting process may differ.
What are the Advantages and Disadvantages of Amalgamation?
Amalgamation can have significant benefits for all parties involved. Through this process, companies can pool their resources. Similarly, it can be crucial to obtaining a competitive advantage.
When companies combine their operations, they can improve their competitiveness. This way, they can also eliminate or overtake any competitors.
Similarly, amalgamation can help companies save taxes. This process aids both companies in reducing their expenses.
Furthermore, amalgamation increases the economies of scale. It can help companies reduce their costs while also expanding operations. Overall, it can lead to a potential increase in shareholder value.
However, amalgamation can have some disadvantages as well. The elimination of competition in a market can lead to monopolistic behavior.
While it can be advantageous to have lower competition, it can also promote uncompetitiveness. Similarly, it can concentrate too much power on a single company.
Amalgamation can also be similar to mergers and acquisitions in some regards. Therefore, it can lead to some disadvantages from those processes as well.
In particular, it can lead to job losses and cause redundancy costs to increase. On top of that, it can increment a company’s debt load. In essence, companies combine their liabilities, which can be problematic.
Conclusion
An amalgamation is the combination of two companies into a new one. In accounting, it refers to the presentation of combined financial statements.
Another name used for this process is consolidation. There are two types of amalgamation based on which the accounting may differ. There are several advantages and disadvantages of this process, as mentioned above.