Accounting in Corporate Restructuring

In preparing the transferee company’s financial statements, the assets and liabilities of the transferor company should be incorporated at their fair value or, alternatively, the consideration should be allocated to individual identifiable assets and liabilities on the basis of their fair values at the date of amalgamation. Any excess of the amount of the consideration over the fair value of the net assets of the transferor company acquired by the transferee company should be recognized in the transferee company’s financial statements as goodwill arising on amalgamation in the nature of purchase. If the amount of the consideration is lower than the negotiated value of the net assets acquired, the difference should be treated as Capital Reserve.

Total amount of purchase consideration in this case is Rs.120 lakhs i.e. (Rs. 80/- + Rs. 40/-)*1,00,000 Shares

In the given case, the excess of the amount of the consideration i.e Rs.120 lakhs over the fair value of the net assets i.e. (150-50=100 lakhs) of the Y, (the transferor company) should be recognized in the transferee company’s financial statements as goodwill. The assets and liabilities taken over from company Y (the transferor company) should be incorporated at their fair values and Rs. 20 lakhs will be recorded as goodwill in the books of company X.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2025, Q. 2(b) (Syllabus 2022).

The matter is similar to the case of 2010 1CLJ 351 titled Gallops Realty (P) Ltd. v. State of Gujarat as decided by the Gujarat High Court.

The petitioners contended that AS-14 is applicable only to amalgamations and not to demerger. It was clarified that AS-14 is applicable only to amalgamations and not to demerger. On a plain reading of the accounting standard under reference, it is clear that the same is applicable only in case of an amalgamation and not in case of demergers.

High Court of Gujarat in the case of Gallops Realty (P) Ltd., In re v. K.A. PUJ, J.(2010), under Section 391, read with sections 394 and 100, of the Companies Act, 1956 Petitioner-companies, i.e., demerged company and resulting company, sought for sanction of composite scheme of arrangement in nature of purchase of shares and demerger of hotel business of demerged company to resulting company and consequent reconstruction of share capital of demerged company under section 391, read with sections 394, 78 and 100 consisting of reduction of paid-up share capital as well as utilization of share premium account. Regional Director stated that as per scheme, capital profit on demerger would be transferred to general reserve in books of resulting company which was not in consonance with generally accepted accounting principles as also Accounting Standard-14 which provide that any profit arising out of a capital transaction ought to be treated as capital profit and, hence, would be transferred to capital reserve and not to general reserve. It was held that the observation of Regional Director was not in consonance with accounting principles in general and Accounting Standard-14 in particular, as Accounting Standard-14 is applicable only in case of amalgamation and not in case of demerger, as envisaged in instant scheme.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2025, Q. 2A(i) (Syllabus 2022).

Scheme of merger or amalgamation implies a process where the legal ownership or operational control or other structures of the company are reorganized.

•The Institute of Chartered Accountants of India (ICAI) has formulated Accounting Standard (AS) -14 ‘Accounting for Amalgamation’.

•AS-14 lays down the accounting and disclosure requirements in respect of amalgamation of companies, as well as treatment of resultant of goodwill or reserves.

•As per AS-14, amalgamation may be cither in the nature of merger or in the nature of purchase

•In case of amalgamation in the nature of merger, the identity of the reserves is retained and shall be reflected in the financial statements of the Transferee Company in the same form in which they appeared in the balance sheet of the transferor company prior to amalgamation.

•General reserve of the Transferor Company remains part of general reserve of the Transferee Company and similarly, Capital Reserve or Revaluation Reserve forms part of the Capital or Revaluation Reserve of the Transferee Company.

•Consequently, reserves available for distribution of dividends prior to amalgamation would also be available for distribution of dividends post amalgamation.

Where amalgamation is in the nature of purchase, none of the reserves are retained in the books of the Transferee Company. In other words, none of the reserves are recorded in the books of the Transferee Company. However, only statutory reserves retain the character and recorded in the Balance Sheet of Transferee Company.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 1(d) (Syllabus 2017).

Calculation of purchase consideration

(i)21,000 equity shares Rs. 10 =2, 10,000

(ii)15% preference shares of Rs.200000*110% =2,20,000

Total =4, 30,000

(iii)Not to be included in purchase considered as it is payment to debenture holders.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 3(c) (Syllabus 2017).

Business Combinations (IND AS-103) does not apply to the following:

(a)The formation of a joint venture

(b)The acquisition of an asset or a group of assets that does not constitute a business. In such cases the acquirer shall identify and recognise the individual identifiable assets acquired (including those assets that meet the definition of, and recognition criteria for, intangible assets in Ind AS 38 Intangible Assets) and liabilities assumed. The cost of the group shall be allocated to the individual assets and liabilities on the basis of their relative fair values at the date of purchase. Such a transaction or event does not give rise to goodwill.

(c)Accounting for combination of entities or business under common control.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 3(d) (Syllabus 2017).

Since the purchase consideration is payable in shares of the transferee company and all the assets and liabilities are taken over at their carrying amounts, the amalgamation is in the nature of merger, i.e., pooling of interests’ method.

To compute the “Goodwill” or “Capital Reserve” for DNF Ltd., we need to compare the purchase consideration (the amount paid for acquiring the business) with the net assets (share capital) of the companies acquired, which in this case are ABC Ltd. and XYZ Ltd.

1.For ABC Ltd. Acquisition:

Purchase consideration = ₹ 45 crores

Share capital of ABC Ltd = ₹ 35 crores

Net Assets of ABC Ltd.= ₹ 35 crore (since assets and liabilities are taken over at their carrying amounts) Goodwill or Capital Reserves for ABC Ltd. acquisition= Purchase consideration less Net Assets i.e. ₹ 45 cr - ₹ 35 cr = 10 cr

Since the purchase consideration is higher than Net Assets, Goodwill of ₹ 10 cr is created for ABC Limited.

2.XYZ Ltd Acquisition

Purchase consideration for XYZ Ltd.= ₹ 38 cr

Share capital of XYZ Ltd. = ₹ 45 cr

Net Assets of AXYZ Ltd. = ₹ 45 cr (again, assets and liabilities are taken over at their carrying amounts)

Goodwill of Capital Reserves for XYZ Ltd

= ₹ 38cr- ₹ 45 cr= - ₹ 7 cr

Since the purchase consideration is lower than the net assets, a Capital Reseve of ₹ 7 cr is to be created for XYZ Ltd.

3.Total Goodwill or Capital Reserves for DNF Ltd.

Goodwill from ABC Ltd.= ₹ 10 cr

Capital Reserve from XYZ Ltd.= ₹ 7 cr

Thus, the net Goodwill or Capital Reserve for DNF Ltd. = ₹ 10 cr- ₹ 7 cr= ₹ 3 cr (Goodwill)

Conclusion:

Goodwill of ₹ 3 cr will be created for DNF Ltd. after taking over the businesses of ABC Ltd. and XYZ Ltd.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 2(a) (Syllabus 2022).

In this case the control over financial and operating policies are acquired through obtaining TRAI permission. This was obtained on 1st July, 2022. Since, TRAI approval is a substantive issue 1 st July 2022 is considered as the acquisition date. It may be noted that the appointed date as per the agreement is not considered as the acquisition date, because the Company ABC did not have control over Company XYZ as at that date due to non-approval by TRAI.

Section 232(6) of the Companies Act, 2013 states that the scheme under this section shall clearly indicate an appointed date from which it shall be effective and the scheme shall be deemed to be effective from such date and not at a date subsequent to the appointed date.

In view of the above, it was clarified vide MCA Circular in 2019 that:

(a)The provision of section 232(6) of the Companies Act, 2013 enables the companies in question to choose and state in the scheme an ‘appointed date’. This date may be a specific calendar date or may be tied to the occurrence of an event such as grant of license by a competent authority or fulfilment of any preconditions agreed upon by the parties, or meeting any other requirement as agreed upon between the parties, etc., which are relevant to the scheme.

(b)The ‘appointed date’ identified under the scheme shall also be deemed to be the ‘acquisition date’ and date of transfer of control for the purpose of conforming to accounting standards including IndAS 103 Business Combinations.

(c)where the “appointed date’ is chosen as a specific calendar date, it may precede the date of filing of the application for scheme of merger/amalgamation in NCLT. However, if the ‘appointed date’ is significantly ante-dated beyond a year from the date of filing, the justification for the same would have to be specifically brought out in the scheme and it should not be against public interest.

(d)The scheme may identify the ‘appointed date’ based on the occurrence of a trigger event which is key to the proposed scheme and agreed upon by the parties to the scheme. This event would have to be indicated in the scheme itself upon occurrence of which the scheme would become effective.

However, in case of such event-based date being a date subsequent to the date of filing the order with the Registrar under section 232(5), the company shall file an intimation of the same with the Registrar within 30 days of such scheme coming into force.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 2(b) (Syllabus 2022).

An amalgamation should be considered to be an amalgamation in the nature of merger when Shareholders holding not less than 90% of the face value of the equity shares of the transferor company (other than the equity shares already held therein, immediately before the amalgamation, by the transferee company or its subsidiaries or their nominees) become equity shareholders of the transferee company by virtue of the amalgamation.

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 threshold is being met. Hence the above case will qualify as merger.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2024, Q. 2(d) (Syllabus 2022).

Transferor Company - Existing Shareholding

Shares allotted to Shareholders of Transferor Company - Purchase Consideration

Post-Merger Capital Structure

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2023, Q. 2(a) (Syllabus 2017).

(i)Tax neutrality of Demerger on Adoption of IND AS 103

In the context of demergers, tax benefits are available only if the conditions of demerger provided in section 2(19AA) of the Income-Tax Act, 1961 are met. One such condition is that assets and liabilities are to be recorded by the transferee company at the book value of the transferor company.

However, under IND-AS 103, the requirement is to record assets and liabilities at fair value in case of non-common control business combination which may create problem in achieving a most tax efficient demerger.

(ii)Relevance of Appointed date under IND-AS 103

Appointed date refers to the date with effect from which the assets and liabilities of the transferor company vests in the transferee company. The appointed date is specified in the scheme of merger itself and once the scheme is approved with the approval of the NCLT, the accounting takes place with effect from the appointed date.

As per IND-AS 103 accounting for business combination should be done on the date on which the acquirer obtains control. Thus appointed date may not have relevance if IND AS 103 is adopted.

Accordingly, the observations of the auditor appear to be correct.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2022, Q. 3(a) (Syllabus 2017).

Under AS-14, an amalgamation would be considered to be an amalgamation in the nature of merger when the following conditions are satisfied:

(i)All the assets and liabilities of the transferor company become, after amalgamation, the assets and liabilities of the transferee company.

(ii)Shareholders holding not less than 90% of the face value of the equity shares of the transferor company (other than the equity shares already held therein, immediately before the amalgamation, by the transferee company or its subsidiaries or their nominees) become equity shareholders of the transferee company by virtue of the amalgamation.

In the given case, only 85% of shareholders of the face value of equity shares of A Ltd. will become equity shareholders of B Ltd. Hence, the amalgamation would fall under the category of amalgamation in the nature of purchase. In the case of purchase method, while preparing the transferee company's financial statements, the identity of the reserves, other than the statutory reserves is not preserved Hence, only Investment Allowance Reserves (being in the nature of statutory reserve) would retain its identity in the financial statements of B Ltd, in the same form in which they appeared in the financial statements of A Ltd, so long as the identity is required to be statutorily maintained. As regards Capital Reserves and Revaluation Reserves are concerned, their identity will not be preserved.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2021, Q. 2(c) (Old syllabus).

There are certain disclosures that are required to be made in the first financial statements for every type of amalgamations. However, in the case of amalgamation accounted for under the pooling of interests method, the following additional disclosures are required to be made in the first financial statements following the amalgamations:

(i)Description and number of shares issued, together with the percentage of each company's equity shares exchanged to effect the amalgamation.

(ii)The amount of any difference between the consideration and the value of net identifiable assets acquired, and the treatment thereof.

In the case of amalgamations accounted for under the purchase method, the following additional disclosures are required to be made in the first financial statements following the amalgamations:

(i)Consideration for the amalgamation and a description of the consideration paid or contingently payable; and

(ii)The amount of any difference between the consideration and the value of net identifiable assets required, and the treatment thereof including the period of amortization of any goodwill arising on amalgamation.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2021, Q. 3(c) (Old syllabus).

Computation of Purchase Consideration:

Computation of Capital of Max Limited after Takeover :

Treatment of debentures in purchase consideration : Issue of debentures will not form part of purchase consideration as these are issued to debenture holders. Further, Increased number of debentures are issued to debenture holders of Mini Ltd, as there is reduction in rate of interest on debentures.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2021, Q. 2(a) (Syllabus 2017).

Goodwill arising on amalgamation represents a payment made in anticipation of future income and it is appropriate to treat it as an asset to be amortised to income on a systematic basis over its useful life.

Due to nature of goodwill, it is difficult to estimate its useful life, but estimation is done on a prudent basis. Accordingly, it should be appropriate to amortise goodwill over a period not exceeding five years unless a somewhat longer period can be justified.

The following factors are to be taken into account in estimating the useful life of goodwill:

i.the forcible life of the business or industry;

ii.the effects of product obsolescence, changes in demand and other economic factors;

iii.the service life expectancies of key individuals or groups of employees;

iv.expected actions by competitors or potential competitors; and

v.legal, regulatory or contractual provisions affecting the useful life.

Goodwill Vs. Capital reserve as per AS-14:

Goodwill is the excess of the price paid in a purchase over the fair value of the net identifiable assets acquired.

Capital reserve is the excess of the fair value (agreed value) of the net identifiable assets acquired over the purchase price.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2021, Q. 2(b) (Syllabus 2017).

Accounting treatment in the books of the transferee company on amalgamation where Indian Accounting Standard 103 (Business Combinations of Entities under Common Control) is stated as under:

1.All the assets and liabilities recorded in the books of Transferor Company shall be transferred to and vested in the books of Transferee Company pursuant to the scheme and shall be recorded by Transferee Company at their respective book values as appearing in the books of Transferor Company.

2.The identified of the reserves of Transferor Company shall be preserved and they shall appear in the financial statements of Transferee Company in the same form and manner, in which they appeared in the financial statements of Transferor Company prior to this scheme being effective.

3.The investments in the equity capital of Transferor Company as appearing in the financial statements of Transferee Company shall stand cancelled.

4.Inter-company balances, loans and advances if any, will stand cancelled.

5.In case of any differences in accounting policy between Transferor Company and Transferee Company, the accounting policies followed by Transferee Company will prevail and the difference till the appointed date shall be adjusted in capital reserves of Transferee Company, to ensure that the financial statements of Transferee Company reflect the financial position on the basis of consistent accounting policy.

6.Subject to any corrections and adjustments as may, in the opinion of the Board of Directors of the Transferee Company, be required and except to the extent otherwise by law required, the reserves of the Transferor Company, if any, will be merged with the corresponding reserves of the Transferee Company.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2021, Q. 2A(ii) (Syllabus 2017).

The principles of IND-AS 103 Business Combination and IFRS -3 are same to a very great extent.

There are only few crave out in IND-AS 103 when compared to IFRS 3. They are as follow:

IFRS-3 excludes from its scope business combinations of entities under common control. IND- AS 103 gives the guidance in this regard.

IFRS-3 requires bargain purchase gain arising on business combination to be recognised in profit or loss account. IND-AS 103 requires that the bargain purchase gain to be recognised in other comprehensive income and accumulated in equity as capital reserve, unless there is no clear evidence for the underlying reason for classification of the business combination as a bargain purchase, in which case, it shall be recognised directly in equity as capital reserve.

The main reason for this carve out is, the recognition of such gains in profit or loss would result into recognition of unrealised gains as the value of net assets is determined on the basis of fair value of net assets acquired.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2021, Q. 2(c) (Syllabus 2017).

Accounting treatment of mergers and acquisitions (M&A) have undergone a drastic change with the introduction of IND AS-103 - Business Combination and Companies Act, 2013. Section 232 of the Companies Act, 2013 provides that accounting treatment prescribed in the court approved scheme for merger, demerger, amalgamation or group restructuring should be in accordance with the accounting standards prescribed under section 133 of the Companies Act, 2013.

Certain other developments in M&A accounting are as under:

(a)Method of Accounting for business combination

Under AS-14 many companies were able to account for business combination between commonly controlled enterprises using purchase method. As a result of this, tax benefit for goodwill amortisation was available while computing book profit for MAT purpose. Under IND AS-103 it is mandatory to use pooling of interests method for business combination between commonly controlled enterprises. As a result of this accounting alternatives gets restricted and the consequent tax benefits will also be not available.

(b)Appointed date v. Effective date In court approved merger, demerger and other restructuring accounting was done from the appointed date once the court order became effective. However, with the implementation of IND AS-103 Business combinations this is going to change. As per IND AS-103 accounting for business combination should be done on the date on which the acquirer obtains control.

(c)Accounting for goodwill AS-14 provided an accounting choice to compute the goodwill at the fair value of the assets taken over or at the net asset value of the assets taken over. However, this choice is not available in IND AS-103, as the value of goodwill has to be computed using the fair value of the net assets taken over. AS-14 provides for amortisation of goodwill over a period of five years. IND AS- 103 prohibits amortisation of goodwill and is required to test goodwill for impairment annually. This will result in a volatile profit and loss account.

Goodwill amortisation was available as tax deductible item while computing MAT liability. This is not available in the IND-AS regime.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2019, Q. 1(b) (Syllabus 2017).

As per Accounting Standard – 14, goodwill is the excess of the price paid in a purchase over the fair value of the net identifiable assets acquired.

Capital reserve is the excess of the fair value of the net identifiable assets acquired over the purchase price.

The concept of Goodwill or capital reserve will arise only when amalgamation is in the nature of purchase.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2019, Q. 3(c) (Syllabus 2017).

Accounting Standard-14 (Accounting for Amalgamations) is applicable only in case of amalgamation and not in case of demerger. Accounting Standard-14 lays down the accounting and disclosure requirements in respect of amalgamations of companies and the treatment of any resultant goodwill or reserves.

In the scheme of arrangement between Sony India Private Limited (Sony India) and Sony Software Centre Private Limited (Sony Software), the Delhi High Court, while approving scheme of arrangement between Sony India has clarified that AS-14 is applicable only to amalgamations and not to demerger. The same was also upheld by Gujarat High court in the case of Gallops Realty Private Limited.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2019, Q. 3(e) (Old syllabus).

Computation of purchase consideration

The conversion ratio for equity share holders is 40:50 and for preference shares is 5:6

(Rs. in ‘000)

A.Payment to preference shareholder of Mentos Ltd:

(Rs.)

Preference share capital of Mentos

B.Payment to equity shareholders of Mentos Ltd:

1.No. of equity share of Mentos Ltd. 10,00,000

2.Intrinsic value of one share of Mentos Ltd. Rs. 40

3.Total intrinsic value of equity shares of Mentos

issued on the basis of intrinsic value (400,00,000/50) of Rs.10 each (as per terms

consideration as per AS-14. The same will be taken over by Zeus Ltd. and then discharged.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2019, Q. 2A(ii) (Syllabus 2017).

Ind AS-103 deals with accounting treatment in case of each and every kind of combinations unlike AS-14 that confine only to amalgamations. Even there are judicial pronouncements stating AS-14 is not applicable even for mergers. AS-14 describes two methods of amalgamation i.e. pooling of interests method and purchase method whereas Ind AS-103 prescribes only the acquisition method for each business combination. There is no amortisation of goodwill under Ind AS-103 but tested for impairment on annual basis as per Ind AS-36 but AS-14 requires goodwill to be amortised within a maximum period of five years. Reverse acquisitions are also dealt with under Ind AS-103 but not under AS-14. Under Ind AS-103, the consideration the acquirer transfers in exchange to the acquiree includes any asset or liability resulting from a contingent consideration arrangement but this aspect is not dealt with under AS-14.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2018, Q. 1(d) (Old syllabus).

Amalgamation may be either in the nature of merger or purchase as per Accounting Standards prescribed. In case of merger, the identity of the Reserves is retained and shall be reflected in the financial statements of the transferee company in the same form in which they appeared in the balance sheet of the transferor company prior to amalgamation.

General reserve of the transferor company remains part of general reserve of the transferee company and similarly, capital reserve or revaluation reserve forms part of the Capital or Revaluation Reserve of the transferee company. Consequently, reserves available for distribution of dividends prior to amalgamation would also be available for distribution of dividends post amalgamation. However, in case of purchase only statutory reserves retain the character for the unexpired period.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2018, Q. 2(c) (Old syllabus).