Consolidation of business entities is a world-wide phenomenon. One of the tools for consolidation is mergers and acquisitions. Mergers and Acquisitions (abbreviated M&A) is an aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and rapidly in its sector or location of origin, or a new field or new location, without creating a subsidiary, other child entity or using a joint venture.(Wikipedia).
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It is not uncommon that two companies unite to achieve complete advantages. Similarly it is quite common that a company take over another company as part of its growth strategy. Usually such business combination improve productivity of resources and thus benefit shareholders of both companies. Still, we can find many evidences that their success is by no means assured. There are a number of challenges faced in case of mergers and acquisitions sometimes before they actually start to function(eg. merger between HP and Compaq) or even after the M&A. Few of the challenges faced in case of an M&A are legal contemplations ,compatibility problems, fiscal catastrophes, problems as a result of cultural dissimilarities, hospitality and hostility issues, risk management failure, obtaining the necessary votes (two-thirds (or even more) of the share votes) can be time-consuming and difficult, cooperation may not be easily or cheaply obtained, merger also may be creating a conflict of objective between different businesses ,diseconomies of scale if business becomes too large. In India ,in legal sense M&A is also known as Amalgamation. Accounting Standards -14 on accounting for amalgamation issued by ICAI which comes into effect in respect of accounting periods commencing on or after April 1st 1995 is mandatory. Merger and Acquisition Accounting is done either by Pooling of interest method Purchase method Amalgamation in the nature of Merger Amalgamation in the nature of purchase ACCOUNTING METHODS WITH THEIR CHALLENGES: 1.Pooling of Interests Method: In this method, transactions are considered as exchange of equity securities. Here, assets and liabilities of the two firms are combined according to their book value on the acquisition date. The total asset value of the joint company equals the sum of assets of the separate firms. In this case, the accounting income is found to be higher than in the purchase method, as the depreciation in the pooling method is calculated based on the historical book value of assets The drawbacks/challenges with pooling method are: Though popular in other countries, the pooling of interest is no longer allowed in some countries like Canada, U.S. Prior to the pooling, each companies must have been autonomous for at least two years and must have been independent in the sense that less than 10 percent of its stock was held by any individual investor. There must be maintenance for the ownership position in the surviving company.
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