Financial Reporting and Ethics - The Institute of Chartered ...

FINANCIAL REPORTING AND ETHICSThis means that unlike amalgamation in which all the amalgamatingbusinesses lose their identities, only one (that is, the absorbed company)loses its identity in the case of absorption. The amalgamation methodis employed where relatively small scale businesses are concerned.Where large, complex businesses are involved, a holding company isusually established to acquire all, or majority of voting shares of thosecompanies which then continue in existence but as subsidiaries of theholding company. The acquisition of controlling interest can also arisewithout the establishment of a holding company for the purpose. Thisoccurs when an existing dominant company acquires a controllinginterest in one or more other companies.When one company takes over another company, two major mattersarise. These are:(a) Closing the books of the discontinuing business which is beingwound up.(b)Updating the records of the continuing business.3.8.2 Closing the Books of the Discontinuing CompanyTo close the book of the discontinuing company, the following ledgeraccounts are necessary:(i) Realisation account(ii) Absorbing company’s account(iii) Sundry members account(iv) Each liability account(v) Bank account(vi) Account for each component of purchase consideration.The operation of each of the ledger accounts mentioned above is similarto that of amalgamation except that all entries that are passed into thenew company’s account in amalgamation go to absorbing company’saccount.In essence, profit or loss on realisation is determined in the realisationaccount and transferred to sundry members ordinary shares account.All liabilities are either paid off by the absorbed company or taken overby the absorbing company.Each component of purchase consideration is transferred to sundrymembers ordinary or preference shares account.All adjustments are made to bank account before the balance istransferred to realisation account (i.e. bank/cash taken over byabsorbing company).40