ACCOUNTING ASPECTS OF CORPORATE RESTRUCTURING
Q1. The accounting treatment of Mergers and Acquisitions has undergone drastic change with the introduction of IND-AS 103 - Business Combination. Comment [Dec. 2019 - New Syllabus - 5 Marks] OR
Auditor of Jumbo Ltd. has informed following to the Board of directors:
(
(
i) Tax neutrality of a demerger may get affected on adoption of INDAS 103.
ii) Appointed Date has lost relevance if a company accounts the transaction accordance with IND-AS 103.
Examine the correctness of the observations made by the auditor. [Dec. 2022, 3 Marks]
Ans.
u Cor por at e r est r uct uri ng i mpli es a pr ocess wher e t he l e gal o wners hi p or oper ati o nal c o nt r ol or ot her st r uct ur es of t he c o mpa ny ar e r e orga ni z e d.
u
As per Secti on 232 of t he Co mpa ni es Act, 2013, t he acc o unti ng t r eat me nt f or c or por at e r est r uct uri ng s hall be i n acc or da nce w i t h t he acc o unti ng st a ndar ds pr es cri be d under Secti o n 133 of t he Co mpa ni es Act, 2013.
u
Earli er, acc o unti ng f or mer gers a nd a mal ga mati o n t r a ns acti o ns was de al t usi ng t he r ul es l ai d do wn by Acc o unti ng St a ndar d - 14‘ Acc o unti ng f or A mal ga mati o n ’ ( AS- 14)
u
Ho we ver, acc o unti ng t r e at me nt of mer gers a nd ac q ui si ti o ns ( M&A) have under g o ne a dr asti c c ha nge w i t h t he i nt r o d ucti o n of I ND AS- 103 - Busi ness Co mbi nati o n.
u
Busi ness Co mbi nati o ns i s a t r a ns acti o n or e ve nt wher e a n ac q ui r er o bt ai ns c o nt r ol of o ne or mor e b usi ness es. It i s t he pr ocess under whi c h t wo or mor e b usi ness or ga ni z ati o ns or t hei r net ass et s ar e br o ug ht under c o mmo n c o nt r ol i n a si ngl e b usi ness e nti t y.
TAXMANN ® 7.1
u
As per I ND AS 103, all b usi ness c o mbi nati o ns ar e acc o unt e d usi ng t he p ur c has e met ho d t hat c o nsi ders t he ac q ui si ti o n dat e f ai r val ues of all ass et s, li a bili ti es a nd c o nti nge nt li a bili ti es of t he Tr a nsf er or Co mpa ny.
u Cert ai n maj or di ff er e nces bet wee n AS- 14 a nd I ND AS- 103 ar e as f oll o ws -
(
a) Method of Accounting for business combination
Under AS- 14, c o mpa ni es wer e r ec or di ng f or b usi ness c o mbi na - ti o n bet wee n c o mmo nl y c o nt r oll e d e nt er pri s es usi ng p ur c has e met ho d. Due t o t hi s, t ax be nefi t f or g oo d will a morti z ati o n was avail a bl e whil e c o mp uti ng book pr ofi t f or MAT p ur pos e. Under I ND AS- 103, i t i s ma ndat or y t o us e pooli ng of i nt er est met ho d f or b usi ness c o mbi nati o n bet wee n c o mmo nl y c o nt r oll e d e nt er pri s es. As a r es ul t of t hi s acc o unti ng al t er nati ves get s r est ri cte d a nd t he c o ns e q ue nt t ax be nefi t s will al s o be not avail a bl e.
(
b) Appointed date v. Effective date
I n c o urt a ppr ove d mer ger, de mer ger a nd ot her r est r uct uri ng acc o unti ng was do ne f r o m t he a ppoi nt e d dat e o nce t he c o urt or der bec a me a ppli c a bl e. Ho we ver, w i t h t he i mpl e me nt ati o n of I ND AS- 103 Busi ness c o mbi nati o ns, acc o unti ng f or b usi ness c o mbi nati o n s ho ul d be do ne o n t he dat e o n whi c h t he ac q ui r er o bt ai ns c o nt r ol, i. e. f r o m eff ecti ve dat e.
(
c) Accounting for goodwill
AS- 14 pr ovi de d a n acc o unti ng c hoi ce t o c o mp ut e t he g oo d will at t he f ai r val ue of ass et s or at t he net ass et val ue. Ho we ver, t hi s c hoi ce i s not avail a bl e i n I ND AS- 103, as t he val ue of g oo d will has t o be c o mp ut e d usi ng t he f ai r val ue of t he ass et s t a ke n over. AS- 14 pr ovi des f or a morti z ati o n of g oo d will over a peri o d of fi ve ye ars. I ND AS- 103 pr o hi bi t s a morti z ati o n of g oo d will a nd i s r e q ui r e d t o t est g oo d will f or i mpai r me nt a nn uall y. Thi s will r es ul t i n a v ol atil e pr ofi t a nd l oss acc o unt Goo d will a morti z ati o n was avail a bl e as t ax de d ucti bl e i t e m whil e c o mp uti ng MAT li a bili t y. Thi s i s not avail a bl e i n t he I ND AS .
Q2. How goodwill and capital reserve are differentiated as per AS-14? [Dec. 2019 - New Syllabus - 3 Marks]
Ans. u The I nsti t ut e of Chart er e d Acc o unt a nt s of I ndi a ( I CAI) has f or mul at e d Acc o unti ng St a ndar d ( AS) - 14 ‘ Acc o unti ng f or A mal ga mati o n ’ .
TAXMANN ® 7.2 ACC OUNTI NG ASP ECTS OF C ORP ORATE REST RUCT URI NG
u
AS- 14l ays do wnt he acc o unti ng a nd di s cl os ur e r e q ui r e me nt s i n r es pect of a mal ga mati o n of c o mpa ni es, as well as t r e at me nt of r es ul t a nt of g oo d will or r es er ves.
u
u
As per AS- 14, g oo d will or c a pi t al r es er ve ar e cr e at e d/acc o unt e d wher e t he a mal ga mati o n i s i n t he ‘ nat ur e of p ur c has e ’ .
Goo d will ari si ng o n a mal ga mati o n i s a r es ul t of e xcess c o nsi der ati o n pai d as c o mpar e d t o t he net ass et s of Tr a nsf er or Co mpa ny. Goo d will r e pr es e nt s f ut ur e i nc o me e ar ni ng c a paci t y; he nce i t i s t r e at e d as a n i nt a ngi bl e ass et.
u
Ca pi t al r es er ve i s t he e xcess of t he f ai r val ue of t he net i de nti fi a bl e ass et s ac q ui r e d over t he p ur c has e pri ce. I n ot her wor ds, wher e t he val ue of net ass et s e xcee ds t he p ur c has e c o nsi der ati o n agr ee d, i t r es ul t s i n c a pi t al r es er ve.
Q3. Accounting Standard-14 is applicable to demerger.
[June 2019 - Old Syllabus - 3 Marks]
Ans.
u De mer ger i s a mo de of c or por at e r est r uct uri ng by whi c h a b usi ness uni t i s s e par at e d a nd t he n f or me d i nt o a n i nde pe nde nt e nti t y. He nce, de mer ger i s a c or por at e parti ti o n/ di vi si o n of a n e xi sti ng c o mpa ny i nt o t wo or mor e c o mpa ni es.
u
Acc o unti ng St a ndar d- 14 ( Acc o unti ng f or A mal ga mati o ns) i s a ppli c a - bl e o nl y i n c as e of a mal ga mati o n a nd not i n c as e of de mer ger. AS- 14 l ays do wn t he acc o unti ng a nd di s cl os ur e r e q ui r e me nt s i n r es pect of a mal ga mati o ns of c o mpa ni es a nd t r e at me nt of g oo d will or r es er ves.
u I n t he s c he me of arr a nge me nt bet wee n Sony India Private Limited (Sony India) and Sony Software Centre Private Limited (Sony Software) , t he Del hi H i g h Co urt, whil e a ppr ovi ng s c he me of arr a nge me nt cl ari fi e d t hat AS- 14 i s a ppli c a bl e o nl y t o a mal ga mati o ns a nd not t o de mer ger. Si mil ar r uli ng gi ve n by Guj ar at H i g h c o urt i n c as e of Gal-
lops Realty Pvt. Ltd .
Q4. “Accounting treatment under AS 14 is confined to Amalgamations unlike Ind AS 103.” Discuss how far Ind AS 103 can be distinguished with AS 14. [Dec. 2017, Dec 2018 - Old Syllabus - 5 Marks]
Ans.
u Cor por at e r est r uct uri ng i mpli es a pr ocess wher e t he l e gal o wners hi p or oper ati o nal c o nt r ol or ot her st r uct ur es of t he c o mpa ny ar e r e orga ni z e d.
TAXMANN ® ACC OUNTI NG ASP ECTS OF C ORP ORATE REST RUCT URI NG 7.3
u
As per Secti on 232 of t he Co mpa ni es Act, 2013, t he acc o unti ng t r eat me nt f or c or por at e r est r uct uri ng s hall be as per t he acc o unti ng st a ndar ds pr es cri be d u/s 133.
u
Earli er, acc o unti ng f or mer gers a nd a mal ga mati o n was de al t usi ng t he r ul es gi ve n by t he Acc o unti ng St a ndar d - 14‘ Acc o unti ng f or A mal ga mati o n ’ ( AS- 14). Ho we ver, acc o unti ng t r e at me nt of mer gers a nd ac q ui si ti o ns ( M&A) have under g o ne a dr asti c c ha nge w i t h t he i nt r o d ucti o n of I ND AS- 103 - Busi ness Co mbi nati o n.
Gi ve n bel o wi s t he di sti ncti o n bet wee n AS- 14 a nd I ND AS- 103:
u
Sr. AS - 14 IND AS 103
1. Deal s w i t h o nl y a mal ga mati o ns Deal s w i t h vari o us t y pes of busi ness c o mbi nati o ns
2 Busi ness c o mbi nati ons bet wee n c o m - monl y c ont r oll e d e nt er pri s es c o ul d be do ne usi ng p ur c has e met ho d
3. Ass et s a nd li a bili ti es ar e r ec or de d at book val ue or f ai r mar ket val ue
4. Goo d will i s a morti z e d over 5 years
5. Acc o unti ng i s do ne as per fig ur es as per Appoi nt e d Dat e
Busi ness c o mbi nati ons bet wee n c o mmo nl y c o nt r oll e d e nt er pri s es s hall be done usi ng pooli ng of i nt er est met hod
Ass et s, li a bili ti es ar e r ec or de d o nl y at f ai r mar ket val ue
Goo d will i s not a morti z e d but t est e d f or i mpai r me nt, a nnuall y
Acc o unti ng i s do ne as per fig ur es whe n Ac q ui r er o bt ai ns c o nt r ol
Q5. Is it possible to retain the same characters of various reserves of transferor Companies post amalgamation, mergers or demergers as per Standards of Accounting concepts or conventions?
[Dec. 2018 - Old Syllabus - 5 Marks]
Ans.
u A s c he me of mer ger or a mal ga mati o ni mpli es a pr ocess wher e t he l e gal o wners hi p or oper ati o nal c o nt r ol or ot her st r uct ur es of t he c o mpa ny ar e r e or ga ni z e d.
u The I nsti t ut e of Chart er e d Acc o unt a nt s of I ndi a ( I CAI) has f or mul at e d Acc o unti ng St a ndar d ( AS) - 14 ‘ Acc o unti ng f or A mal ga mati o n ’ .
u AS- 14l ays do wnt he acc o unti ng a nd di s cl os ur e r e q ui r e me nt s i n r es pect of a mal ga mati o n of c o mpa ni es, as well as t r e at me nt of r es ul t a nt of g oo d will or r es er ves.
u As per AS- 14, a mal ga mati o n may be ei t her i n t he nat ur e of mer ger or i n t he nat ur e of p ur c has e.
u I n c as e of a mal ga mati o n i n t he nat ur e of mer ger, t he i de nti t y of t he r es er ves i s r et ai ne d a nd s hall be r efl ect e d i n t he fi na nci al st at e me nt s
TAXMANN ®
7.4 ACC OUNTI NG ASP ECTS OF C ORP ORATE REST RUCT URI NG
of t he Tr a nsf er ee Co mpa ny i n t he s a me f or mi n whi c h t he y a ppe ar e d i n t he bal a nce s heet of t he t r a nsf er or c o mpa ny pri or t o a mal ga mati o n.
u Ge ner al r es er ve of t he Tr a nsf er or Co mpa ny r e mai ns part of ge ner al r es er ve of t he Tr a nsf er ee Co mpa ny a nd si mil arl y, Ca pi t al Res er ve or Re val uati o n Res er ve f or ms part of t he Ca pi t al or Re val uati o n Res er ve of t he Tr a nsf er ee Co mpa ny.
u Co ns e q ue ntl y, r es er ves avail a bl e f or di st ri b uti o n of di vi de nds pri or t o a mal ga mati o n wo ul d al s o be avail a bl e f or di st ri b uti o n of di vi de nds post a mal ga mati o n.
u Wher e a mal ga mati o ni s i n t he nat ur e of p ur c has e, no ne of t he r es er ves ar e r et ai ne d i n t he books of t he Tr a nsf er ee Co mpa ny. I n ot her wor ds, no ne of t he r es er ves ar e r ec or de d i n t he books of t he Tr a nsf er ee Co mpa ny. Ho we ver, o nl y st at ut or y r es er ves r et ai n t he c har act er a nd r ec or de d i n t he Bal a nce Sheet of Tr a nsf er ee Co mpa ny
Q6. Describe the ‘pooling of interests method’ of accounting adopted by amalgamated company. [Dec. 2016 - Old Syllabus - 5 Marks]
Ans.
u A s c he me of mer ger or a mal ga mati o ni mpli es a pr ocess wher e t he l e gal o wners hi p or oper ati o nal c o nt r ol or ot her st r uct ur es of t he c o mpa ny ar e r e or ga ni z e d.
u AS- 14l ays do wnt he acc o unti ng a nd di s cl os ur e r e q ui r e me nt s i n r es pect of a mal ga mati o n of c o mpa ni es. As per AS- 14, a mal ga mati o n may be ei t her i n t he nat ur e of mer ger or i n t he nat ur e of p ur c has e.
u The pooli ng of i nt er est met ho d i s us e d i n c as e of a mal ga mati o n i n t he nat ur e of mer ger. Si nce mer ger i s a c o mbi nati o n of t wo or mor e e nti ti es, t her e i s no nee d t o r est at e t he c arr yi ng a mo unt s (i. e. book val - ues) of ass et s a nd li a bili ti es. Th us, o nl y m i ni mal c ha nges ar e ma de i n aggr e gati ng t he fi na nci al st at e me nt s of t he a mal ga mati ng c o mpa ni es.
u Foll o w i ng ar e t he acc o unti ng r ul es under t hi s met ho d -
- Ass et s a ndli a bili ti es of t he Tr a nsf er or Co mpa ny ar e i nc or por at e d at t hei r book val ue.
- I n pr e pari ng t he Tr a nsf er ee Co mpa ny ’ s fi na nci al st at e me nt s, t he ass et s, li a bili ti es a nd r es er ves ( c a pi t al a nd r e ve n ue) of t he Tr a nsf er or Co mpa ny s ho ul d be r ec or de d at t hei r exi sti ng carr yi ng a mo unt s, as o n t he dat e of a mal ga mati o n.
- The P &L A/c bal a nce of Tr a nsf er or Co mpa ny s ho ul d be c o mbi ne d w i t h P &L A/c bal a nce of t he Tr a nsf er ee Co mpa ny or t r a nsf err e d t o t he Ge ner al Res er ve, i f a ny.
TAXMANN ® ACC OUNTI NG ASP ECTS OF C ORP ORATE REST RUCT URI NG 7.5
- I f t her e ar e a ny c o nfli cti ng acc o unti ng poli ci es bet wee n t he c o mpa ni es, t he s a me s hall be r es ol ve d a nd a uni f or m s et of acc o unti ng poli ci es t o be a dopt e d aft er a mal ga mati o n. The eff ect s of c ha nges i n acc o unti ng poli ci es o n t he fi na nci al st at e me nt s s ho ul d be r e port e d as per Acc o unti ng St a ndar d ( AS- 5), ‘ Prior
Period Items and Changes in Accounting Policies ’ .
- The di ff er e nce bet wee n t he a mo unt r ec or de d as s har e c a pi t al i ss ue d by Tr a nsf er ee Co mpa ny ( pl us a ny a ddi ti onal c onsi der ati on) a nd t he a mo unt of s har e c a pi t al of t he Tr a nsf er or Co mpa ny s ho ul d be a dj ust e d i n r es er ves.
- I f t he c o nsi der ati o n pai d by Tr a nsf er ee Co mpa ny i s l ess t ha n t he s har e c a pi t al of Tr a nsf er or Co mpa ny, s uc h di ff er e nce i s a dde d i n Ca pi t al Res er ves of t he Tr a nsf er ee Co mpa ny. Suc h a ddi ti o n t o c a pi t al r es er ve i s not avail a bl e f or t he p ur pos e of di st ri b uti o n of di vi de nds t o s har e hol ders a nd/ or bo n us s har es.
- I f t he c o nsi der ati o n pai d by Tr a nsf er ee Co mpa ny e xcee ds t he s har e c a pi t al of Tr a nsf er or Co mpa ny, f oll o w i ng s hall ar e t he acc o unti ng r ul es -
n
The di ff er e nti al a mo unt i s c a pi t al l oss a nd r e d uce d f r o m Res er ves. Suc h l oss i s a dj ust e d agai nst c a pi t al r es er ves a nd t he n agai nst r e ve n ue r es er ves, i f r e q ui r e d.
n
n
Ho we ver, i f c a pi t al r es er ves a nd r e ve n ue r es er ve ar e i ns uf - fi ci e nt, P &L A/c s hall be us e d.
But, P &L A/c c a nnot be us e d di r ectl y f or s uc h a ppr opri ati o n, a nd t he di ff er e nce a mo unt i s t r a nsf err e d f r o m P &L A/c t o t he r e ve n ue r es er ves. Th us, no di r ect de bi t t o t he P &L A/c
n
I f t her e i s i ns uffi ci e nt bal a nce i n t he P &L A/c, t he di ff er e nce s ho ul d be r efl ect e d o n t he ass et s si de of t he bal a nce s heet i n a s e par at e he a di ng.
Q7. What is meant by ‘goodwill on amalgamation’? Which factors are to be taken into account in estimating useful life of goodwill?
[Dec. 2016 - Old Syllabus - 5 Marks]
Ans.
u The I nsti t ut e of Chart er e d Acc o unt a nt s of I ndi a ( I CAI) has f or mul at e d Acc o unti ng St a ndar d ( AS) - 14 ‘ Acc o unti ng f or A mal ga mati o n ’ . AS- 14 l ays do wn t he acc o unti ng a nd di s cl os ur e r e q ui r e me nt s i n r es pect of a mal ga mati o n of c o mpa ni es.
u As per AS- 14, g oo d will i s acc o unt e d wher e t he a mal ga mati o n i s i n t he ‘ nat ur e of p ur c has e ’
TAXMANN ® 7.6 ACC OUNTI NG ASP ECTS OF C ORP ORATE REST RUCT URI NG
u
u
Goo d will ari si ng o n a mal ga mati o n i s a r es ul t of e xcess c o nsi der ati o n pai d as c o mpar e d t o t he net ass et s of Tr a nsf er or Co mpa ny.
Goo d will ari si ng o n a mal ga mati o n r e pr es e nt s a pay me nt ma de i n a nti ci pati o n of f ut ur e i nc o me. He nce, g oo d will i s a morti z e d agai nst f ut ur e i nc o me o n a s yst e mati c basi s, over i t s us ef ul li f e. It i s a morti z e d over a maxi mu m peri o d of fi ve ye ars, unl ess a l o nger peri o d c a n be j usti fi e d.
u
The f oll o w i ng f act ors ar e t o be t a ke n i nt o acc o unt i n esti mati ng t he us ef ul li f e of g oo d will:
n t he f ut ur e esti mat e d li f e of t he b usi ness or i nd ust r y;
n t he eff ect s of pr o d uct o bs ol es ce nce, c ha nges i n de ma nd a nd ot her ec o no m i c f act ors;
n t he s er vi celi f e expect e d of keyi ndi vi dual s or gr o ups of e mpl oyees;
n e x pect e d acti o ns by c o mpeti t ors or pot e nti al c o mpeti t ors;
n l e gal, r e g ul at or y or c o nt r act ual pr ovi si o ns aff ecti ng t he us ef ul li f e
Q8. “Certain disclosures are required to be made in the first financial statements prepared after the amalgamation orders.” Mention such disclosures. [June 2016 - Old Syllabus - 5 Marks]
Ans.
u The I nsti t ut e of Chart er e d Acc o unt a nt s of I ndi a ( I CAI) has f or mul at e d Acc o unti ng St a ndar d ( AS) - 14 ‘ Acc o unti ng f or A mal ga mati o n ’ . AS- 14 l ays do wn t he acc o unti ng a nd di s cl os ur e r e q ui r e me nt s i n r es pect of a mal ga mati o n of c o mpa ni es.
u Foll o w i ng det ail s of a mal ga mati o ns ( of e ver y t y pe) s hall be di s cl os e d i n t he fi rst fi na nci al st at e me nt s aft er t he a mal ga mati o ns:
n na mes a nd ge ner al nat ur e of b usi ness of t he a mal ga mati ng c o mpa ni es;
n eff ecti ve dat e of a mal ga mati o n f or acc o unti ng p ur pos es;
n t he met ho d acc o unti ng us e d t o r efl ect t he a mal ga mati o n; a nd
n parti c ul ars of t he s c he me s a ncti o ne d under a st at ut e
u For a mal ga mati o n under t he pooling of interest method , f oll o w i ng a ddi ti o nal di s cl os ur es ar e r e q ui r e d t o be ma de i n t he fi rst fi na nci al st at e me nt s f oll o w i ng t he a mal ga mati o n:
n des cri pti o n a nd n u mber of s har es i ss ue d, t oget her w i t h t he perce nt age of e ac h c o mpa ny ’ s e q ui t y s har es e xc ha nge d t o c arr y- o ut t he a mal ga mati o n;
TAXMANN ® ACC OUNTI NG ASP ECTS OF C ORP ORATE REST RUCT URI NG 7.7
u
n
t he a mo unt of a ny di ff er e nce bet wee n t he c o nsi der ati o n a nd t he val ue of net i de nti fi a bl e ass et s ac q ui r e d, a nd t he t r e at me nt t her e of.
For a mal ga mati o ns under t he purchase method, f oll o w i ng a ddi ti o nal di s cl os ur es ar e r e q ui r e d t o be ma de i n t he fi rst fi na nci al st at e me nt s f oll o w i ng t he a mal ga mati o ns:
n
c o nsi der ati o n f or t he a mal ga mati o n a nd a des cri pti o n of t he c o nsi der ati o n pai d or paya bl e,
n t he a mo unt of a ny di ff er e nce bet wee n t he c o nsi der ati o n a nd t he val ue of net i de nti fi a bl e ass et s r e q ui r e d, a ndt he t r eat me nt t her e of i ncl udi ng t he peri o d of a morti z ati o n of a ny g oo d will ari si ng o n a mal ga mati o n.
Q9. Briefly explain the provisions regarding accounting treatment in the books of the Transferee Company on amalgamation where Indian Accounting Standard - 103 (Business Combinations of Entities under Common Control) is applicable. [Dec. 2021 - New Syllabus - 5 Marks]
Ans.
u
Busi ness Co mbi nati o n i s a t r a ns acti o n or e ve nt wher e a n ac q ui r er o bt ai ns c o nt r ol of o ne or mor e b usi ness es. It i s t he pr ocess under whi c h t wo or mor e b usi ness or ga ni z ati o ns or t hei r net ass et s ar e br o ug ht under c o mmo n c o nt r ol i n a si ngl e b usi ness e nti t y.
u As per I ndi a n Acc o unti ng St a ndar d 103, ( AS 103) all b usi ness c o m - bi nati o ns ar e acc o unt e d usi ng t he p ur c has e met ho d t hat c o nsi ders t he ac q ui si ti o n dat e f ai r val ues of all ass et s, li a bili ti es a nd c o nti nge nt li a bili ti es of t he Tr a nsf er or Co mpa ny u Co mmo n c o nt r ol b usi ness c o mbi nati o n me a ns a b usi ness c o mbinati o n i nv ol vi ng e nti ti es or b usi ness es i n whi c h all t he c o mbi ni ng e nti ti es or b usi ness es ar e ul ti mat el y c o nt r oll e d by t he s a me part y, bot h bef or e a nd aft er t he b usi ness c o mbi nati o n. Co mmo n c o nt r ol b usi ness c o mbi nati o ns i ncl ude t r a ns acti o ns s uc h as t r a nsf er of s ubsi di ari es or b usi ness es, bet wee n e nti ti es w i t hi n gr o up.
u
As per I ND AS- 103, b usi ness c o mbi nati o ns i nv ol vi ng e nti ti es or b usiness es under c o mmo n c o nt r ol s hall be acc o unt e d f or usi ng t he pooli ng of i nt er est met ho d.
u
As per t he pooli ng of i nt er est met ho d, f oll o w i ng s hall be acc o unti ng t r e at me nt i n books of t he Tr a nsf er ee c o mpa ny:
( a ) The ass et s a nd li a bili ti es of t he c o mbi ni ng e nti ti es ar e r efl ect e d at t hei r c arr yi ng a mo unt s
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(b ) No a dj ust me nt s ar e ma de t o r efl ect f ai r val ues or r ec og ni z e a ny ne w ass et s or li a bili ti es. The o nl y a dj ust me nt s t hat ar e ma de ar e t o har mo ni z e acc o unti ng poli ci es.
( c ) The fi na nci al i nf or mati o n i n t he fi na nci al st at e me nt s i n r es pect of pri or peri o ds s ho ul d be r est at e d as i f t he b usi ness c o mbi nati o n ha d occ urr e d f r o mt he be gi nni ng of t he e arli est peri o d pr es e nt e d i n t he fi na nci al st at e me nt s, i rr es pecti ve of t he act ual dat e of t he c o mbi nati o n.
(d ) The c o nsi der ati o n f or t he b usi ness c o mbi nati o n may c o nsi st of s ec uri ti es, c as h or ot her ass et s. Sec uri ti es s hall be r ec or de d at f ace val ue. I n det er m i ni ng t he val ue of t he c o nsi der ati o n, ass et s ot her t ha n c as h s hall be c o nsi der e d at t hei r f ai r val ues.
( e ) The r et ai ne d e ar ni ngs a p pe ari ng i n t he Bal a nc e She et of Tr a nsf er or c o mpa ny i s aggr e gat e d w i t h t he c orr es po ndi ng bala nce a ppe ari ng i n t he Bal a nce Sheet of t he Tr a nsf er ee c o mpa ny. Al t er nati vel y, i t i s t r a nsf err e d t o Ge ner al Res er ve, i f a ny.
(f ) The i de nti t y of t he r es er ves s hall be pr es er ve d a nd s hall a ppe ar i n t he fi na nci al st at e me nt s of t he Tr a nsf er ee c o mpa ny i n t he s a me f or mi n whi c h t he y a ppe ar e d i n t he fi na nci al st at e me nt s of t he t r a nsf er or c o mpa ny.
( g ) The e xcess, i f a ny, bet wee n t he a mo unt r ec or de d as s har e c a pi t al i ss ue d pl us a ny a ddi ti o nal c o nsi der ati o n i n t he f or m of c as h or ot her ass et s a nd t he a mo unt of s har e c a pi t al of t he t r a nsf er or i s r ec og ni z e d as good will i nt he fi na nci al st at e me nt s of t he Tr a nsf er ee c o mpa ny; i n c as e of a ny defi ci e nc y, t he s a me s hall be t r e at e d as c a pi t al r es er ve.
OTHER IMPORTANT QUESTIONS
Q10. Distinguish between Pooling of Interest Method and Purchase Method
Ans. u The I nsti t ut e of Chart er e d Acc o unt a nt s of I ndi a ( I CAI) has f or mul at e d Acc o unti ng St a ndar d ( AS) - 14 ‘ Acc o unti ng f or A mal ga mati o n ’ . AS- 14 l ays do wn t he acc o unti ng a nd di s cl os ur e r e q ui r e me nt s i n r es pect of a mal ga mati o n of c o mpa ni es.
u Ther e ar e t wo met ho ds of acc o unti ng f or a mal ga mati o ns: i t he pooli ng of i nt er est met ho d - us e d i n a mal ga mati o n i n nat ur e of mer ger,
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ii . t he p ur c has e met ho d - us e d i n a mal ga mati o n i n nat ur e of p urc has e.
Sr. Pooling of Interest Method Purchase Method
1. Thi s met ho d i s us e d whe n all five c o ndi ti o ns as per AS- 14 ar e s ati s fie d
2. Wher e p ur c has e c o nsi der ati o n i s mor e t ha n val ue of net ass et s, t he di ff er e nce i s a dj ust e di nt he Res er ves of t he Tr a nsf er ee Co mpa ny
3. All ass et s &li a bili ti es ar e t r a nsf err e d a nd r ec or de d at book val ue
4. All Res er ves of Tr a nsf er or Co mpa ny ar e t r a nsf err e d t o t he Tr a nsf er ee Co mpa ny
5 Pr o fit & Loss Acc o unt of Tr a nsf er or Co mpa ny i s t r a nsf err e d t o t he Tr a ns - f er ee Co mpa ny
Thi s met ho d i s us e d whe n a ny or all five c o ndi ti o ns as per AS- 14 ar e not s ati s fie d.
Wher e p ur c has e c o nsi der ati o n i s mor e t ha n val ue of net ass et s, t he di ff er e nce i s r ec or de d as Goo d will i n t he books of t he Tr a nsf er ee Co mpa ny
All ass et s & li a bili ti es may not be t r a nsf err e d, as well as r ec or de d at di ff er e nt val ues
Onl y St at ut or y Res er ves of Tr a nsf eror Co mpa ny ar e t r a nsf err e d t o t he Tr a nsf er ee Co mpa ny
Pr o fit & Loss Acc o unt of Tr a nsf er or Co mpa ny i s not t r a nsf err e d t o t he Tr a nsf er ee Co mpa ny
Q11. Is external reconstruction superior to internal reconstruction? [Dec. 2020 - New Syllabus - 5 Marks]
Ans. u Cor por at e Rec o nst r ucti o n me a ns r e- arr a ngi ng b usi ness of a c o mpany f or i ncr e asi ng i t s effi ci e nc y a nd pr ofi t a bili t y It i nv ol ves dr a mati c
c ha nges i n a c o mpa ny t o ac hi e ve i t s o bj ecti ves.
u Rec o nst r ucti o n i s a pr ocess of si g ni fi c a ntl y c ha ngi ng a c o mpa ny ’ s
b usi ness mo del, ma nage me nt t e a m or fi na nci al st r uct ur e t o meet t he
c hall e nges a nd i ncr e as e s har e hol ders’ val ue.
u Foll o w i ng ar e t y pes of r ec o nst r ucti o n -
(1) External Reconstruction
- Ext er nal r ec onst r ucti oni s a pr ocess wher e a c o mpa ny undergoes a c ha nge, t hr o ug h mer gers, a mal ga mati ons ac q ui si ti ons et c.
- It i s a n arr a nge me nt wher e by t he ass et s a nd li a bili ti es of t wo or mor e c o mpa ni es c o me under t he c o nt r ol of ne w l y f or me d c o mpa ny
- Ext er nal r ec o nst r ucti o n i s a si t uati o n wher e a n e xi sti ng c o mpa ny i s li q ui dat e d a nd t a ke n over by a not her c o mpa ny a nd t her e i s t r a nsf er of ass et s a nd li a bili ti es.
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ECTS OF C
7.10 ACC OUNTI NG ASP
ORP ORATE REST RUCT URI NG
- Shar e hol ders of t r a nsf er or c o mpa ny ar e i ss ue d s har es i n t he ne w l y f or me d Tr a nsf er ee c o mpa ny, bas e d o n agr ee d s har e e xc ha nge r ati o.
- Ext er nal r ec o nst r ucti o n f acili t at es gr o wt h of a c o mpa ny, t hr o ug h ec o no m i es of s c al e, r e d uci ng c o mpeti ti o n, t ec hno - l ogi c al a dva nt age, hi g her pr ofi t a bili t y, s y ner gy be nefi t et c.
(2) Internal Reconstruction
- I nt er nal r ec onst r ucti oni s a met hod wher e a n arr a nge me nt i s ma de by a c o mpa ny t oi mpr ove i t s fi na nci al posi ti o n w i t ho ut g oi ng t hr o ug h li q ui dati ng.
- Whe n a c o mpa ny i nc urs l oss f or n u mber of ye ars, t he bala nce s heet does not r efl ect t he t r ue posi ti o n of t he b usi ness. Ge ner all y, a hi g her net wort h i s de pi ct e d, t ha n t he r e al o ne.
- Her e, t he ass et s ar e over val ue d a nd i t has ma ny i nt a ngi bl e ass et s a nd fi cti ti o us ass et s. Suc h a si t uati o n does not de pi ct a t r ue pi ct ur e of fi na nci al st at e me nt s.
- I nt hi s cas e of i nt er nal r ec onst r ucti on , t he ass et s ar e r eval ue d , li a bili ti es ar e ne g oti at e d, a nd l oss es s uff er e d ar e wri tt e n- off by r e d uci ng t he pai d- up val ue of s har es a nd/ or var yi ng t he ri g ht s att ac he d t o di ff er e nt cl ass es of s har es.
- Ho we ver, t he e xi sti ng c o mpa ny i s not li q ui dat e d.
- I nt er nal r ec o nst r ucti o n may be do ne t hr o ug h c ost r e d ucti o n t hr o ug h cl os ur e of uni t s, t er m i nati o n pr ogr a ms, or or ga niz ati o nal r est r uct uri ng i nv ol vi ng dece nt r ali z ati o n et c u
We o bs er ve t hat e xt er nal r ec o nst r ucti o ni s a muc h w i der a nd c o mpl e x acti vi t y as c o mpar e d t o i nt er nal r ec o nst r ucti o n. Basi c all y, e xt er nal r ec onst r ucti oni s gr o wt h- ori e nt e d pr ocess wher eas i nt er nal r ec onst r uc - ti o n i s s ur vi val - ori e nt e d pr ocess. Bot h ar e vi t al f or s peci fi c b usi ness s ce nari o.
Q12. There are certain departures in accounting aspects dealing with amalgamations or mergers as per IFRS-3 in comparison to IND-AS 103. Enlist such variations briefly. [June 2021 - New Syllabus - 5 Marks]
Ans. u
Cor por at e r est r uct uri ng i mpli es a pr ocess wher e t he l e gal o wners hi p or oper ati o nal c o nt r ol or ot her st r uct ur es of t he c o mpa ny ar e r e orga ni z e d. u
As per s ecti o n 232 of Co mpa ni es Act, 2013, t he acc o unti ng t r e at me nt f or c or por at e r est r uct uri ng s hall be as per t he acc o unti ng st a ndar ds pr es cri be d under s ecti o n 133.
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u
Earli er, acc o unti ng f or mer gers a nd a mal ga mati o n was de al t usi ng t he r ul es gi ve n by t he Acc o unti ng St a ndar d - 14‘ Acc o unti ng f or A mal ga mati o n ’ ( AS- 14).
u
Ho we ver, acc o unti ng t r e at me nt of mer gers a nd ac q ui si ti o ns ( M&A) have under g o ne a dr asti c c ha nge w i t h t he i nt r o d ucti o n of I ND AS103 - Busi ness Co mbi nati o n.
u
u
The pri nci pl es of I ND- AS 103 Busi ness c o mbi nati o n a nd I F RS – 3 ar e si mil ar i n nat ur e.
Ho we ver, t her e ar e o nl y f e w di ff er e nces bet wee n i n I ND – AS 103 a nd I F RS – 3, whi c h ar e gi ve n bel o w –
( a ) I F RS- 3 does not c over b usi ness c o mbi nati o ns of e nti ti es under c o mmo n c o nt r ol Ho we ver, I ND- AS 103 pr ovi des g ui da nce i n t hi s r es pect.
(b ) I F RS- 3 r e q ui r es bar gai n p ur c has e gai n ari si ng o n b usi ness c o mbi nati o n t o be r ec og ni z e d i n Pr ofi t & Loss Acc o unt Ho we ver, I ND- AS 103 r e q ui r es t hat t he bar gai n p ur c has e gai n t o be r ec og ni z e d i n ot her c o mpr e he nsi ve i nc o me a nd acc u mul at e d i n e q ui t y as c a pi t al r es er ve.
Ho we ver, wher e t her e i s cl e ar e vi de nce of t he b usi ness c o mbi - nati o n as a bar gai n p ur c has e, i t s hall be r ec og ni z e d di r ectl y i n e q ui t y as c a pi t al r es er ve.
u The mai n r e as o n f or t hi s di ff er e nce i s t hat t he r ec og ni ti o n of s uc h gai ns i n Pr ofi t & Loss Acc o unt wo ul d r es ul t i nt o r ec og ni ti o n of unr e ali z e d gai ns as t he val ue of net ass et s i s det er m i ne d o n t he basi s of f ai r val ue of net ass et s ac q ui r e d.
Q13. When does goodwill arise on amalgamation? Comment on its amortization. How will you estimate the useful life of the goodwill? Differentiate goodwill and capital reserve as per AS-14.
[Dec. 2021 - New Syllabus - 5 Marks]
Ans.
u The I nsti t ut e of Chart er e d Acc o unt a nt s of I ndi a ( I CAI) has f or mul at e d Acc o unti ng St a ndar d ( AS) – 14 ‘ Acc o unti ng f or A mal ga mati o n ’ . AS- 14 l ays do wn t he acc o unti ng a nd di s cl os ur e r e q ui r e me nt s i n r es pect of a mal ga mati o n of c o mpa ni es.
u
As per AS- 14, g oo d will i s acc o unt e d wher e t he a mal ga mati o n i s i n t he ‘ nat ur e of p ur c has e ’ . Goo d will ari si ng o n a mal ga mati o n i s a r es ul t of e xcess c o nsi der ati o n pai d as c o mpar e d t o t he net ass et s of Tr a nsf er or Co mpa ny
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Good will ari si ng on a mal ga mati on r e pr es e nt s a pay me nt ma dei n a nti c - i pati o n of f ut ur e i nc o me. He nce, g oo d will i s a morti z e d agai nst f ut ur e i nc o me o n a s yst e mati c basi s, over i t s us ef ul li f e. It i s a morti z e d over a maxi mu m peri o d of 5 ye ars, unl ess a l o nger peri o d c a n be j usti fi e d u
The f oll o w i ng f act ors ar e t o be t a ke n i nt o acc o unt i n esti mati ng t he us ef ul li f e of g oo d will:
n t he f ut ur e esti mat e d li f e of t he b usi ness or i nd ust r y;
n t he eff ect s of pr o d uct o bs ol es ce nce, c ha nges i n de ma nd a nd ot her ec o no m i c f act ors;
n t he s er vi celi f e expect e d of keyi ndi vi dual s or gr o ups of e mpl oyees;
n e x pect e d acti o ns by c o mpeti t ors or pot e nti al c o mpeti t ors;
n l e gal, r e g ul at or y or c o nt r act ual pr ovi si o ns aff ecti ng t he us ef ul li f e
u
AS- 14 di ff er e nti at es bet wee n g oo d will a nd c a pi t al r es er ve, gi ve n as under –
n Goo d will ari si ng o n a mal ga mati o n i s a r es ul t of e xcess c o nsi der ati o n pai d as c o mpar e d t o net ass et s of Tr a nsf er or Co mpa ny. Goo d will r e pr es e nt s f ut ur e i nc o me e ar ni ng c a paci t y; he nce i t i s t r e at e d as a n i nt a ngi bl e ass et.
n Ca pi t al r es er ve i s t he e xcess of t he f ai r val ue of t he net i de nti fi a bl e ass et s ac q ui r e d over t he p ur c has e pri ce. I n ot her wor ds, wher e t he val ue of net ass et s excee ds t he p ur c has e c o nsi der ati o n agr ee d, i t r es ul t s i n c a pi t al r es er ve
Q14. X Ltd. is considering the proposal to acquire Y Ltd. and their financial information is given below :
X Ltd. intend to pay ` 1,40,00,000 in cash for Y Ltd., if Y Ltd.’s market price reflects only its value as a separate entity, calculate the cost of merger :
(
(
i) When merger is financed by cash.
ii) When merger is financed by stock. (Assume that X Ltd. agrees to exchange 5,00,000 shares in exchange of shares in Y Ltd. instead of payment of cash of ` 1,40,00,000).
[June 2022 - New Syllabus - 5 Marks]
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u
Particulars X Ltd. Y Ltd. No. of Equity Shares 10,00,000 6,00,000 Market price per share (`) 30 18 Market Capitalization (`) 3,00,00,000 1,08,00,000
ACC OUNTI NG ASP ECTS OF C ORP ORATE REST RUCT URI NG
7.14
Ans. Cal c ul ati o n of Cost of Mer ger: As per AS- 14, t he c o nsi der ati o n f or t he a mal ga mati o n s ho ul d i ncl ude a ny no n- c as h el e me nt at f ai r val ue. The f ai r val ue may be det er m i ne d by a n u mber of met ho ds. For e xa mpl e, i n c as e of i ss ue of s ec uri ti es, t he val ue fi xe d by t he st at ut or y a ut hori ti es may be t a ke n t o be t he f ai r val ue. I n c as e of ot her ass et s, t he f ai r val ue may be det er m i ne d by r ef er e nce t o t he mar ket val ue of t he ass et s gi ve n up, a nd wher e t he mar ket val ue of t he ass et s gi ve n up c a nnot be r eli a bl y ass ess e d, s uc h ass et s may be val ue d at t hei r r es pecti ve net book val ues.
(i) When merger financed in Cash: Cost of Mer ger = A mo unt X Lt d. i nt e nds t o pay Y Lt d. I n Cas h = I NR 1, 40, 00, 000.
(ii) When merger financed by stock:
Given;
1. Mar ket Val ue of Y Lt d. ( Tar get Co mpa ny): I NR 18 per s har e;
2. Mar ket Val ue of X Lt d. ( Ac q ui ri ng Co mpa ny): I NR 30 per s har e .
3. S wa p Rati o = 18/30 = 0. 60 per s har e.
4. Co nsi der ati o n ( No. of Shar es) of Y Lt d. = 6, 00, 000 × 0. 60 = 3, 60, 000 s har es.
I n n ut s hell, st oc k i s no n- c as h el e me nt val ue d at f ai r val ue. Ther ef or e, ass u mpti o n of f ai r val ue i s r e q ui r e d t o c al c ul at e c ost of mer ger. Ass u m i ng t he f ai r val ue of I NR 100 per s har e, t he Cost of mer ger = 3, 60, 000 s har es × I NR 100
= I NR 3, 60, 00, 000.
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