While working in the corporate world or reading corporate news, we came across many technical terms related to the business and industrial world. Amalgamation and absorption are two different terms used in the corporate world. But for a normal human, it is difficult to differentiate between two.
There are two types of amalgamation:
- Merging – In this type of amalgamation, two or more companies merge together and create a new company. The original and individual identities of both companies are lost and the new identity of the merged company takes place over them.
- Purchasing – In this type of amalgamation, a larger enterprise takes over a small enterprise by purchase.
Generally, the small enterprise loses its identity and fuse with the larger company.
What are the objectives of amalgamation?
The main objective of an amalgamation is to obtain those benefits that can only be obtained by the merging of two or more entities together and are not possible individually.
There are some other additional benefits of an amalgamation:
- Reduce the competition in the market along with the benefit of the customers or merged entities
- Create goodwill and share the risk through diversification
- Amalgamation provides an opportunity to share and discuss ideas between the directors and investors of merged companies.
This increases the chances of succeeding in the market with good management.
What is an amalgamation reserve?
Amalgamation reserve is an account that is created at the time of amalgamation. It includes the portion of earnings, surplus like capital and revenue or receipts that are appropriated by the management.
It acts as a provision for a known liability or for depreciation in the value of assets.
If x ltd. and y ltd. join to form xy ltd. it is Amalgamation and if x ltd. is acquired by y ltd. and x ltd. is no more there, now there is only y ltd. it is the process of Absorption.