AS – 14 Accounting for Amalgamations AS - 14 Accounting ... · PDF fileslump sale/ itemised Arising on amalgamation Arising on consolidation AS 26 - Internally generated goodwill

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AS - 14 Accounting for Amalgamation

AS – 14 Accounting for Amalgamations

CA. Manish Rathi

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Agenda

Types of amalgamations

Accounting treatment

Goodwill arising on amalgamation

Amalgamation after the Balance Sheet Date

Disclosures

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What is amalgamation?

An amalgamation pursuant to the provisions of the Companies Act, 1956 or any other statute which may be applicable to companies.

The term amalgamation has not been defined in the Companies Act, 1956

In common parlance : Amalgam

To unite, to come together as one, to blend Amalgamation

Dissolution of one or more entities and transfer of business of the those entities to the purchasing company.

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Scope

Acquisition of one entity by the other and the acquired entity ceases to exist.

In scope of AS-14

Acquisition of one entity by the other and the acquired entity continues to exist

Out of scope of AS-14

AS deals with accounting for amalgamations and treatment of any resultant goodwill or reserves

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Whether the following will be covered under AS 14

B Ltd (Acquirer)

A Ltd ( Acquired)

B Ltd (Resultant

entity)

A Ltd ( Acquired)

B Ltd (Acquired)

C Ltd (Resultant

entity)

A Ltd ( Acquired)

B Ltd (Acquirer)

Both A and B Ltd continue

to exist

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Modes of Business Restructuring

Amalgamation Demerger Slump Sale Itemised Sale

Merger of one or more companies or merger of

two or more companies to form another company

Defined in Income Tax Act - Transfer of a

business of a company to another company such that shares are

issued to shareholders of transferor company

Defined in Income Tax Act - Sale of business of a

company to another for a lump sum consideration –

no values assigned to individual assets/ liabilities

Sale of business assets of a company to another for a consideration –values

are assigned to individually identified

assets/ liabilities

AS 14 of ICAI prescribes the accounting for Amalgamation

-Pooling of Interest -Business Purchase

No Accounting mechanism

prescribed by ICAI - general accounting

principles and standards apply

Accounting is done as per AS 10 +

general accounting principles

Accounting is done as per AS 10 on

Fixed Assets / AS 26 on Intangibles/ other

applicable ASs

Scoped out – Acquisition of whole / part of shares/ assets of another company in consideration of cash/ shares of acquiring company

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Scope summary

Accounting of Amalgamation is governed by AS 14 which: Applies principally to companies Does not apply to acquisitions – where the acquired entity continues

to exist - like share purchase/ assets purchase

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Agenda

Scope




Disclosures

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Accounting method – Purchase method

Amalgamation

Nature of merger

Accounting method – Pooling interest method

Nature of purchase

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Amalgamation in the nature of merger

• Shareholders holding not less than 90% of the face value of the equity shares of the transferor company become equity shareholders of the transferee company

All assets and liabilities are taken over by the transferee company

• The business of the transferor is intended to be carried on after amalgamation by the transferee company

The consideration paid to equity shareholders of the transferor company is in the form of equity shares in the transferee company, except that cash may be paid in respect of fractional shares

Assets and liabilities are incorporated in the books of the transferee company at book values

All conditions described below are to be fulfilled for an amalgamation to be classified as amalgamation in the nature of merger:

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The 90% criteria mentioned for an amalgamation to be classified as

“amalgamation in the nature of merger” excludes equity shares held by: transferee company; or its subsidiaries; or their nominees immediately

before the amalgamation.

- Example: X Ltd takes over Y Ltd under the scheme of merger sanctioned by the Court.

Y Ltd ceases to exit. Consideration is discharged by way of issue of equity shares of X Ltd to the shareholders of Y Ltd in 1:1 ratio. X Ltd already held shares 5% in Y Ltd as an investment prior to the effective date of merger i.e. 1 October 2012. 86 % of the shareholders (by face value) of Y Ltd excluding X Ltd, agreed to be become shareholders of X Ltd.

- Whether the above case will qualify to be classified as merger as per AS 14?

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- Even if we exclude the shares of Y Ltd already held by X Ltd, consequent to the allotment of shares pursuant to merger, 90% criteria for amalgamation to be classified as merger is being met. Since 90% of the remaining shares i.e. 95% comes out to 85.5% shareholders, Thus the threshhold is being met.

- Hence the above case will qualify as merger.

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Agenda

Scope




Disclosures

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Pooling of interests method

Assets and liabilities

• Assets and liabilities except share capital of the transferor company to be recorded by the transferee company at the existing carrying amounts. Identity of reserves (including Revaluation Reserve) is also maintained.

Accounting policies

• Uniform set of accounting policies to be adopted following the amalgamation.

Share capital

• Share capital (equity + preference) should be compared with the purchase consideration paid. Any difference should be adjusted to the reserves.

No Goodwill

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Purchase method

Assets and liabilities

• Assets and liabilities, except share capital, reserves and surplus and fictitious assets, of the transferor company to be recorded by the transferee company at their respective fair values/ book values.

Goodwill/ capital reserve

• Net assets acquired should be compared with the purchase consideration (PC) paid. If the PC paid exceeds the net assets acquired, then the difference is attributable to goodwill. If the PC paid is less than the net assets acquired, then such deficit is termed as capital reserve.

Asset and liabilities not recorded in FS of the transferor company may also be recognised

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Purchase Consideration

Forms of consideration : Securities/ cash/ other assets Fair value of each element is considered

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Contingent Consideration

Contingent consideration - Additional payment is probable and can be reasonably be estimated at the date of

amalgamation

AS – 14 does not deal with such issues

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Contingent Consideration

Example: The net book value of the assets of the Target entity is valued at INR 200

million, for which the total consideration paid by the client is as follows: • INR 170 million on Day 1. • INR 10 million at the end of year 1. • INR 10 million at the end of year 2 • INR 10 million at the end of year 3

All the assets and ownership in the assets will transfer to the Client on Day 1 against receipt of upfront payment. The balance will be a deferred payment mechanism conditional on fulfillment of certain parameters, as mutually agreed between the two parties. Based on facts and circumstances, management reasonably expects the

performance parameters to be met

subject to achieving the defined parameters of Revenues and EBITDA on a yearly basis and on a cumulative basis

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Acquisition - related costs

Not specifically dealt with in AS 14 Examples of such costs include –

stamp duty cost, registration charges, fee paid to lawyers/ investment bankers in relation to acquisition etc General practise - Expensed as

incurred since definition of the term ‘consideration’ does not include such cost

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Example on cost of acquisition During the year A Ltd acquired B Ltd . A Ltd have incurred the following

expenses for the acquisition of B Ltd. B Ltd ceases to exist . Amounts in Cr a) Travelling 200 b) Legal 100 c) Due Diligence 100 d) Other Expenses 50 Which of the following is correct with regard to cost of acquisition in the above case? 1) Due Diligence cost Rs 100 cr will be included as part of consideration since it directly relates to acquisition, all other cost will be expensed off 2) The entire cost of Rs 450 cr will be expensed off 3) The entire cost of Rs 450 cr will be included as part of consideration as it directly relates to acquisition

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Example on cost of acquisition

Solution: 2) The entire cost of Rs 450 cr will be expensed off

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Statutory Reserves

Required to be maintained as per law for a specific period of time.

In case these reserves are appearing in the books of the transferor, then

the identity of these reserves are to be preserved at the time of amalgamation in the books of the transferee company.

Accounting entry to be passed:

Amalgamation adjustment account Dr Statutory reserves Cr

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Scheme of amalgamation

In a scheme of amalgamation, if different treatment is prescribed to be given to the reserves under the statute (e.g. Companies Act), then the following disclosures are required: Description of the accounting treatment adopted and the reasons for

departing from the treatment mentioned in AS 14. Deviations in the accounting treatment given to the reserves as

prescribed by the scheme of amalgamation sanctioned under the statute as compared to the requirements of this Standard that would have been followed had no treatment been prescribed by the scheme.

The financial effect, if any, arising due to such deviation

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Example on Accounting for Amalgamation Illustration : Accounting under AS 14

Liabilities A Ltd. B Ltd. Assets A Ltd. B Ltd. Equity Share Capital 100 25 Fixed Assets 150 90 General Reserves 40 20 Debtors 50 10 Revaluation Reserve 5 2 Statutory Reserves 10 3 P&L Account 20 10 Secured Loan - 15 Current liabilities 25 25 TOTAL 200 100 TOTAL 200 100

INR in Cr. Balance Sheet of A & B Ltd as on 31.3.2010

1. B Ltd. merges into A Ltd. w.e.f. 01.04.2010 and consideration is discharged by issue of 9 cr shares for Rs.10 each

2. Statutory reserves required to be maintained by A Ltd. post merger 3. Fair value of fixed assets of B Ltd. as on 31.03.2010 is 100 cr.

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Example on Accounting for Amalgamation

Particulars Dr./ Cr.

Pooling of interests

Purchase method : Book values

Purchase method : Fair values

Fixed Assets Dr. 90 90 100 Debtors Dr. 10 10 10 General Reserves Dr. 35 - - Amalgamation adjustment

Dr. - 3 3

Goodwill Dr. - 30 20 Current liabilities Cr. 25 25 25 Secured Loan Cr. 15 15 15 Statutory Reserves Cr. 3 3 3 Revaluation Reserve Cr. 2 - - P&L Account Cr. - - - Share Capital Cr. 90 90 90

INR in Cr. Accounting entries on amalgamation (in books of A Ltd.)

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Agenda

Scope




Disclosures

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Treatment of Goodwill

Represents a payment made in anticipation of future income

To be amortised over its estimated useful life.

Useful life to be estimated on prudent basis, over a period not exceeding

five years unless longer period can be justified. Requirements regarding AS 26 – Intangible assets shall not be applicable to

the amortisation of such goodwill.

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Treatment of Goodwill

Goodwill

Acquired Self - Generated

Arising on demerger/ slump sale/ itemised

Arising on amalgamation

Arising on consolidation

AS 26 - Internally generated goodwill not to be recognised as an asset, as it is not an identifiable resource that can be measured reliably at cost.

AS 14 - Represents payment made in anticipation of future income and is treated as an asset - to be amortised to income on a systematic basis over its useful life, (generally not exceeding five years)

AS 21 - Represents excess payment made by parent over its share of net worth in subsidiary on date of making such investment - disclosed only in preparing the consolidated financial statement

AS 10 – Recorded only when consideration has been paid for it - represents intangible benefits to the payer

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Agenda

Scope




Disclosures

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When amalgamation is effected after the balance sheet date but before the issuance of the financial statements of either party

Amalgamation should not be incorporated but disclosure is required as per AS 4 Disclosure required in the Board report – nature of event and estimate of

financial effect

However, it may be treated as an adjusting event as per AS 4

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Agenda

Scope





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Disclosures

Disclosures required in the first financial statements following the amalgamation

General disclosures applicable to both amalgamation in the nature of purchase / merger

names and general nature of business of the amalgamating companies;

effective date of amalgamation for accounting purposes;

the method of accounting used to reflect the amalgamation; and

particulars of the scheme sanctioned under a statute

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Disclosures

Additional Disclosures required in case of amalgamation in the nature of merger

description and number of shares issued, together with the percentage of each

company’s equity shares exchanged to effect the amalgamation

the amount of any difference between the consideration and the value of net

identifiable assets acquired, and the treatment thereof

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Disclosures

Additional Disclosures required in case of amalgamation in the nature of purchase

consideration for the amalgamation and a description of the consideration paid or

contingently payable; and

the amount of any difference between the consideration and the value of net identifiable

assets acquired, and the treatment thereof including the period of amortisation of any

goodwill arising on amalgamation

Thank You

Documents

AS – 14 Accounting for Amalgamations AS - 14 Accounting ... · PDF fileslump sale/ itemised Arising on amalgamation Arising on consolidation AS 26 - Internally generated goodwill