Introduction
A Merger Reserve, also referred to as Merger Capital Reserve, arises in scenarios where a company undertakes a merger relief. It serves as an account that is credited in lieu of a share premium account during such mergers. The primary advantage of a merger reserve lies in its flexibility to write off Goodwill on consolidation, which is not permissible with the share premium account.
Examples
- Company A merges with Company B: If Company A issues shares to Company B’s shareholders and applies merger relief, the difference between the nominal value of the shares and their fair market value is recorded in the merger reserve account.
- Goodwill Adjustment: After consolidating financial statements during a merger, the acquiring company recognizes Goodwill. This goodwill can be written off against the merger reserve, providing a more favorable accounting treatment.
Frequently Asked Questions (FAQs)
What is the purpose of a merger reserve?
A merger reserve is designed to capture the premium arising from the issue of shares during a merger, which would otherwise be credited to a share premium account. It provides flexibility in accounting for goodwill and other intangibles.
How does a merger reserve differ from a share premium account?
While both accounts capture the premium over the nominal value of issued shares, a merger reserve allows for the write-off of goodwill on consolidation, unlike a share premium account, which does not.
When can a company utilize merger relief?
Merger relief is available when a company issues shares in exchange for shares of another company, typically during a merger or acquisition. Specific conditions must be met to qualify for this relief, as outlined in corporate tax laws.
Can a merger reserve be used for dividend distributions?
No, a merger reserve is not available for dividend distributions. It is usually retained for accounting adjustments related to goodwill and other merger/acquisition accounting treatments.
What impact does a merger reserve have on a company’s financial statements?
A merger reserve impacts the balance sheet by increasing equity without affecting the share premium account. It also facilitates the write-off of goodwill, which can positively influence the financial health indicators of the company.
Related Terms
- Merger Relief: A tax relief that allows a company to avoid immediate recognition of a share premium when issuing shares in exchange for shares of another company during a merger.
- Goodwill: An intangible asset recognized when one company acquires another, representing the excess of the purchase price over the fair value of the identifiable net assets.
- Share Premium Account: An equity account that captures the amount received for issuing shares above their nominal value.
Online References
- Investopedia - Merger
- Corporate Finance Institute - Goodwill
- Accounting Tools - Share Premium Account
Suggested Books for Further Studies
- “Accounting for Mergers and Acquisitions” by Gabriel A. Hawawini and Claude Viallet
- “Accounting for Mergers, Acquisitions, and Reconstructions” by Richard Gittings
- “Mergers and Acquisitions from A to Z” by Andrew J. Sherman
Accounting Basics: “Merger Reserve” Fundamentals Quiz
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