MERGER ACCOUNTING:

It may happen that, during a "take-over" of one company (A) by another company (B), shares in the latter company are issued to shareholders of the former company in exchange. Company A would then be dissolved and Company B would acquire its shares. Should a share premium account be established by company B when the assets of Company A exceed the nominal value of Company A's shares? If a share premium account is opened the pre-acquisition profits of Company A would not be distributed by Company B. It may therefore be decided that no share premium account is to be opened. Further this method of accounting is called as "merger accounting".

AQUISITION ACCOUNTING AND "MERGER RELIEF"

In SHEARER V BERCAIN (1980) it was held that "merger accounting" is illegal and that a "true value" must be attributed to the non-cash assets acquired and the excess of the "true value" over the nominal value of the shares must be transferred to a share premium account. This method of accounting is known as "acquisition accounting" and means that the pre-acquisition profits of Company A cannot be distributed by Company B. It is yet unclear as to whether Kenya courts will adopt the decision in Shearer v Bercain. The Kenya Companies Act does not provide "merger relief" that was introduced by the English Companies Act of 1981.