The Purchase Method :

The object of the purchase method is to account for the amalgamation by applying the same principles as are applied in the normal purchase of assets. This method is used in accounting for amalgamations in the nature of purchase. Following rules are adopted in this method:

• The assets and liabilities of the transferor company should be incorporated either 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 in the books of the transferee company.

• Identity of statutory reserves whether capital or revenue or arising on revaluation of the transferor company is not preserved and hence these reserves should not be included in the transferee company.

• If purchase consideration is more than the value of net assets of the transferor company, it should be treated as goodwill arising on amalgamation and should be debited to Goodwill Account. On the other hand, if the consideration is lower than the value of net assets acquired, the difference should be credited to Capital Reserve Account.

• The goodwill arising on amalgamation should be amortised to income on a systematic basis over its useful life. The amortisation period should not exceed five years unless a somewhat longer period can be justified.

• The statutory reserves of the transferor company which are required to be maintained for legal compliance e.g, Export Profit Reserve should be included in financial statements of the transferee company by crediting the relevant Statutory Reserve Account and corresponding debit should be given to ‘Amalgamation Adjustment Account’.

The Amalgamation Adjustment Account should be disclosed as a part of Miscellaneous Expenditure in the balance sheet. Where the identity of the Statutory Reserve is no longer required to be maintained, both statutory Reserve Account and Amalgamation Adjustment Account should be reversed.