Query: Transfer of Reconstruction Reserve to General Reserve.

1. A company owned three separate industrial undertakings in three different locations and under a scheme of amalgamation/reconstruction as approved by the High Court of Judicature at Madras, the assets and liabilities of the holding company (transferor company) were transferred to and vested with its three subsidiary companies (transferee companies). While so vesting, there was an excess of assets over liabilities and such excess of assets over liabilities was represented by a reserve called “Reconstruction Reserve” in the balance sheet of the querist’s company which was one of the transferee companies. To represent this a similar reserve called “Reconstruction Reserve” under “Miscellaneous Expenditure” was created in the other two transferee companies. Thus, the reconstruction reserve is not a reserve created out of revaluation of assets. Now the querist’s company proposes to transfer the balance amount standing in the “Reconstruction Reserve” in its books of account to the general reserve account.

2. The querist has stated that as per the scheme of amalgamation/reconstruction, the three transferee companies issued shares to the share-holders of the transferor company as consideration for transfer of assets and liabilities. The querist company had issued 10,316 shares as fully paid up to the shareholders of the transferor company in consideration of the assets and liabilities of the transferor company. After such transfer of assets and liabilities, the transferor company was dissolved without winding up.

3. The querist has supplied the balance sheets of the three units of the transferor companies which have taken over the entire assets and liabilities of the transferor company on the date of amalgamation/reconstruction, viz., 31.12.1982, together with copies of the order of the High Court of Judicature at Madras, for the Committee’s consideration.

4. The querist’s company had sought a legal opinion in this regard wherein it was advised to transfer the amount from the reconstruction reserve account to the general reserve account, a copy of which has been submitted for the Committee’s consideration.

5. The querist has sought the opinion of the Expert Advisory Committee as to whether it can transfer the ‘Reconstruction Reserve’ to General Reserve.



Opinion July 14, 1995

1. The Committee has considered the treatment of ‘Reconstruction Reserve’ of the querist’s company only. It has not considered the treatment of ‘Reconstruction Reserve’ of the other two transferee companies. The Committee presumes that the amount of the Reconstruction Reserve has been arrived at after considering the value of shares transferred to the shareholders of the transferor company.

2. The Committee notes para 37 of Accounting Standard (AS) 14, on ‘Accounting for Amalgamations’, issued by the Institute of Chartered Accountants of India, which is reproduced as follows:

“37. Any excess of the amount of the consideration over the value of the net assets of the transferor company acquired by the transferee company should be recognised in the transferee company’s financial statements as goodwill arising on amalgamation. If the amount of the consideration is lower than the value of the net assets acquired, the difference should be treated as Capital Reserve.”

3. On the basis of the above, the Committee is of the view that, in view of the presumption made at para 1 above, since the equity shares issued to the shareholders of the transferor company is the consideration in the scheme of Amalgamation/Reconstruction, the Reconstruction Reserve is the excess of net assets (i.e., assets minus liabilities) over the consideration paid. This ‘Reconstruction Reserve’ is in the nature of a capital reserve. The Committee notes that Part I of Schedule VI to the Companies Act, 1956, requires disclosure of Capital Reserve separately.

4. Based on the above, the Committee is of the opinion that ‘Reconstruction Reserve’, being in the nature of capital reserve, cannot be transferred to General Reserve.