When two companies decide to combine into one, we call it amalgamation. Think of it like this: Rajesh & Co. Pvt. Ltd. and Sharma Industries Ltd. merge, and either a brand new company is formed, or one absorbs the other. The company being absorbed is the transferor company; the one that survives (or is newly formed) is the transferee company. This topic regularly appears as a 16-mark journal entry problem or a 8-mark purchase consideration question in Paper 1.
AS 14 (Accounting Standard 14 — Accounting for Amalgamations) governs all of this. It recognises two types of amalgamation. The first is Amalgamation in the Nature of Merger, where the combining is so complete that shareholders of both companies become co-owners of the combined entity. For this, all five strict conditions must be met: (1) all assets and liabilities of the transferor are taken over, (2) shareholders holding at least 90% of the face value of equity shares in the transferor become equity shareholders of the transferee, (3) consideration is paid entirely in equity shares (cash only allowed for fractional shares), (4) the business of the transferor is intended to be continued, and (5) no adjustments are made to book values of assets/liabilities except to ensure uniform accounting policies. If even one condition fails, it automatically becomes an Amalgamation in the Nature of Purchase.
The accounting method follows the type. For a merger, use the Pooling of Interests Method — assets, liabilities, and reserves are recorded at existing book values, and the difference between purchase consideration and share capital of transferor is adjusted in reserves. Statutory reserves (like Development Rebate Reserve) are maintained by creating a 'Amalgamation Adjustment Account' on the assets side. For a purchase, use the Purchase Method — assets and liabilities are recorded at agreed/fair values, and the excess of purchase consideration over net assets acquired is Goodwill (amortised); if consideration is less, it's a Capital Reserve (do not amortise). Reserves of the transferor (other than statutory) are not carried forward under the purchase method.