Accounting Issues

8/2/2019 Accounting Issues

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Amalgamation in the nature of Merger

AS 14 prescribes fulfilment of five conditions:

› All the assets and liabilities of the transferor company becomethe assets and liabilities of the transferee company.

› Shareholders of the transferor company holding not less than

90% of the face value of equity shares, including subsidiaries,become the shareholders of the transferee company

› Consideration payable to the shareholders of the transferor company should be paid through issue of shares in thetransferee company. Fractional shares, if any, can however bepaid for in cash.

› Transferee has the intention of carrying on the business of thetarget

› The assets and liabilities of the transferor company areincorporated into the balance sheet of the transfereecompany. Also the assets and liabilities should be shown using

uniform accounting policies.



AS 14 states following features under pooling of interest method:

The assets, liabilities, and reserves of the transferor should berecorded at the value appearing in the books of accounts andin the same form as on the date of amalgamation.

Balance in the profit and loss account be transferred to thegeneral reserves

If purchase consideration is less than the paid up capital of thetransferor company the difference be recorded as capitalreserves.

Accounting policies should be uniform

Difference in the purchase consideration and the amount ofshare capital of the transferor be adjusted in reserves and nogoodwill or capital reserves be shown in the books of accounts



Shareholders of the company which is acquired donot continue to possess interest in the equity of thecombined entity in a proportion they held the sharesin the liquidated company

Salient features are:› The assets and liabilities of the transferor company at their

values on the date of amalgamation

› Non-statutory reserves, both capital and revenue, of thetransferor company are not included in the financialstatements of the transferee company

› If the purchase consideration exceeds the net assetsvalue, is recorded as goodwill. The amount of goodwillshould be amortized over a period not exceeding 5 years,unless a longer period can be justified



› If the purchase consideration is less than the netassets value, is recorded as capital reserves.

› Where statutes require statutory reserves to berecorded in the financial statements of the

transferee company, the statutory reserves arecredited and Amalgamation AdjustmentAccount is debited.

› Account shown under Miscellaneous

Expenditure on the assets side of the balancesheet

› If at a later stage this amount is no longer required then a reverse entry should be passed.



Non Cash Consideration:

› Purchase consideration may be discharged throughcash and non-cash elements.

› Non cash element includes securities or other non-cashelements.

› While these elements are being recorded, the followingaspects have to be kept in mind:

Non-cash component valued at fair value

In case of securities, fair value is one fixed by statutoryauthorities

For other assets, fair value is the market value of the assets

Where market values cannot be reliably assessed, assetsvalued at respective net book value



Future Events:

› Consideration may be payable at future date

and subject to occurrence of one or more futureuncertain events

› All events that are probable and where the

amount can be estimated, the same should beincluded

› On all other cases, the amount should be

recorded as soon as it is determinable.



Treatment of Reserves:

In certain cases of amalgamation, the approval ofthe court needs to be obtained

Court is empowered to impose conditions so thatthe scheme of amalgamation is fully andeffectively carried out

Order might include conditions pertaining to

treatment of reserves after amalgamation These need to be adhered to under all

circumstances.



Focus of Coverage: › Applied even when a segment or a profit centre of one entity

is acquired by another entity

› The acquiree company may continue to exist as a legalentity.

Types of Combinations:› Covers transactions between shareholders of two

independent entities or between entity and shareholders ofanother that result in:

Purchase of either the equity or

Part or whole of the assets or

Assumption of liabilities or New entity or restructuring of one or more of the

combining entities

Purchase consideration may be paid either throughequity or cash or both.



Measurement of Cost: › The acquirer measures the cost of business

combinations as an aggregate of:

› Fair values of assets taken over

› Value of liabilities assumed and

› Equity instruments issued by the acquirer in exchangefor control

› Any additional cost directly incurred for the businesscombination

Measurement of Consideration:

› The consideration is measured in terms of the carryingamount of the elements stated above.

› If the carrying amount and the fair value differ, then thedifference be recognized as profit or loss.



Allocation of Cost:

› Cost of the business should be allocated by recognizing theidentifiable assets, liabilities, and contingent liabilities thatsatisfy the recognition criteria i.e. whose fair value can bedetermined.

› If non-current assets held for sale are acquired - the sameshould be recognized at fair values less disposal costs.

› Fair value of assets and liabilities determined on the followingbasis: Tangible Assets: Probability of future economic benefits in accruing to

the acquirer and reliable measurement of fair values

Liabilities: Probability of outflow of economic benefits in future andreliable measurement of fair values

Intangible Assets: Reliable measurement of fair values

Contingent Liabilities: Reliable measurement of fair values. In casewhere fair values cannot be measured, the cost will be recognized asgoodwill.



Accounting for restructuring costs:

› Recognized only when the conditions for recognitionare satisfied as per the accounting principles laid downin IFRS 3.

Concept of Provisional Fair Values:› If at the end of the first reporting date, the acquirer is

unable to determine the fair value of the assets andliabilities acquired, the same can be accounted for onthe basis of provisional fair values. These are then to becrystallized over a twelve month period and arereflected as goodwill on a retrospective basis.

Measurement of Goodwill:

› Excess of cost of acquisition over the fair value of net

assets



Contingent Liabilities:

› If contingent liabilities assumed and recognized at fair values subsequently become liabilities, it is measured athigher of:

› The initial value at which the same was recognized

› Value if the amount had been recognized as per IAS 37

Deferred Tax Assets:

› May not be able to recognize a deferred tax asset

pertaining to tax loss carry forward at the time ofcombination.

› If at a subsequent date the deferred tax materializes,amount so realized recognized as a gain in P/L

› Goodwill be correspondingly reduced from P/L



Thank you!

Accounting Issues

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