Finance & Accounting

Applicability of Accounting standards on Mergers & Acquisitions – Ind AS 103 and AS 14

There is no uniform accounting standard that governs accounting procedures and disclosures in situations where one business gains control of another. The accounting treatment of such a transaction is determined by the form and type of the acquisition under the existing Indian GAAP. If the acquired company is kept as a separate legal entity, accounting must be done in accordance with Ind AS 110 or AS 21, depending on the situation. If the Acquired entity is legally merged with the Acquirer, then accounting must be carried out in accordance with Ind AS 103 or AS 14, as the case may be.

Apart from the foregoing, if the acquired firm is merged with the acquirer via a court-approved arrangement, then the accounting will be done in accordance with the scheme, which may diverge from the Indian accounting standards to some extent. The Indian GAAP also allows for the use of the pooling of interest technique, which accounts for the entire transaction on carrying values with no scope for goodwill.

Following the transformation of IFRS to Ind AS, Ind AS 103, which is aligned with IFRS 3, addresses the global requirements in the event of a business combination. A business combination is a transaction in which one entity, called the acquirer, acquires control of another, called the acquiree.

Important provisions of Ind AS 103 and AS 14

Reverse acquisition

The issue of reverse acquisition is addressed in Indian AS 103, although it is not addressed in AS 14. When the entity that issues securities (or the legal acquirer) is designated as the acquiree for accounting purposes, this is known as a reverse acquisition. For the transaction to be regarded as a reverse acquisition, the entity of whom the equity interests are purchased (or the legal acquiree) must be designated as the acquirer for accounting reasons.

Accounting method in Ind AS 103 and AS 14

All business combinations are accounted for under Ind AS 103 employing the acquisition Method, which is an extension of the Purchase Method. With limited exceptions, all Identifiable Assets and Liabilities are recognized and measured at fair value at the acquisition date. Moreover, the Purchase Consideration is recognized at fair value at the date of acquisition, and Non-Controlling Interest (NCI) is either measured at fair value or at the NCI’s proportionate share in Identifiable Net Assets under this method.

The acquisition method is employed to account for business combinations, which entails identifying the acquirer (the entity that gains control of another entity); determining the acquisition date (the date on which the acquirer gains control); recognizing, evaluating, and measuring the identifiable assets acquired and liabilities assumed, as well as any non-controlling interest; and recognizing and measuring any goodwill or bargain.

To meet the criteria for recognition, the identifiable assets obtained and liabilities presumed by the acquirer at the date of acquisition must fit into the definitions of assets and liabilities as laid down in the Framework for the Preparation & Presentation of Company’s Financial Statements in accordance with Indian Accounting Standard. The identifiable assets acquired and liabilities presumed must be measured at their acquisition-date fair values by the acquirer.

In the case of AS 14, amalgamation in the nature of Purchase is to be accounted for using the Purchase Method, which requires identifiable assets and liabilities to be recognized at fair value or carrying amount on the date of amalgamation. Amalgamation in the nature of Merger is to be accounted for using the Pooling of Interest Method, which requires assets and liabilities to be accounted for using their carrying amount.

Non-controlling interest

The acquirer company must assess any non-controlling interest in the acquiree company at fair value or at the non-controlling interest’s proportional share of the acquiree’s identified net assets, according to IND AS 103, for each and every business combination. The minority interest, on the other hand, is defined by the existing AS 21 as the amount of equity that is attributable to minorities at the time of investment in a subsidiary.

Accounting for goodwill in Ind AS 103 and AS 14

The difference between the price provided in exchange for the acquisition-date values of the identified assets bought and the liabilities incurred is referred to as goodwill.

Under AS 14, the goodwill generated through an amalgamation in the nature of purchase is amortized over a maximum period of 5 years, but under Ind AS 103^[1], goodwill is not amortized rather it is evaluated for impairment in line with the rules of Ind AS 36.

Cost related to the acquisition

As per Ind AS 103, acquisition-related expenditures must be charged to the statement of profit and loss, and costs to issue debt and equity securities must be reported in line with the rules of Ind AS 32 and 109, but there is no such particular guidance in AS 14 on acquisition costs.

Acquisition of assets

Transactions that do not fit the definition of amalgamation or purchase of a subsidiary are accounted for as asset acquisition with no recognition of goodwill or capital reserve. The consideration is to be divided among the assets acquired in proportion to their fair market value. Both standards provide a similar treatment.

Gain on bargain purchase in Ind AS 103 and AS 14

An acquirer may execute a bargain purchase in a business combination under extremely rare cases, where the worth of acquired identifiable assets and liabilities exceeds the money transferred; the acquirer will recognize a gain (bargain purchase).

If there is adequate information that indicates the appropriateness of the bargain purchase gain, then it is recognized in Other Comprehensive Income (OCI) on the date of acquisition under Ind AS 103, whereas it is classified as Capital Reserve under AS 14. If there is no convincing proof of the underlying reasons for designating the business combination as a bargain purchase, then the gain must be recorded as a capital reserve in equity directly.

In-process Research and Development

As per Ind AS 103, it is first recognized at purchase or fair value and then quantified in line with Ind AS 38, although there is no explicit guidance under AS 14 with respect to in-process research and development.

Measurement Period in Ind AS 103 and AS 14

If the first accounting for a business combination is not completed by the close of the concerned reporting period in which the business combination takes place, then the acquirer must report provisional amounts for the items or things for which the accounting is not completed in its financial statements.

Under Ind AS 103, the measuring period after the acquisition date is restricted to one year from the acquisition date and allows the acquirer to modify/reassess the provisional amounts recognized to reflect additional information that existed at the time of acquisition. As far as Accounting Standard 14 is concerned, there is no such particular instruction.

The measuring period finishes when the acquirer either receives the information it was looking for or discovers that more information is not available.

Business Combination in Stages

Any equity interest in the acquiree possessed by the acquirer immediately prior to taking control of the acquiree is adjusted to fair value at the acquisition date as per Ind AS 103, and any resultant gain or loss is reported in the profit and loss statement. According to AS 14, the equity of a subsidiary at the date of investment is normally established on a step-by-step basis when two or more investments are made over a period of time.

Contingent consideration

The consideration, according to IND AS 103, covers any asset or obligation arising from a contingent consideration arrangement. AS 14 does not, however, provide particular guidance on this topic.

Subsequent measurement and accounting

In general, depending on the form of the assets acquired, liabilities assumed or incurred, and equity instruments issued in a business combination, an acquirer must measure and account subsequently for those things in compliance with other applicable Ind AS. Ind AS 103, on the other hand, gives guidelines on measuring and accounting subsequently for the assets procured, liabilities presumed or incurred, and equity instruments issued in a business combination. This guidance is provided in respect of reacquired rights, contingent liabilities recognized as of the acquisition date, contingent consideration, and indemnification assets.

Business combination under common control

A business combination that is under common control is one in which all of the merging firms, businesses, or enterprises are finally owned, occupied & regulated by the same person or parties both before and after the merger, and this control is not transient. Here, the pooling of interests’ approach must be used to account for business combinations involving entities or businesses under common control.

Conclusion

Ind AS 103 and AS 14 contain provisions concerning mergers and acquisitions and their accounting treatments. Accounting Standard 14 addresses the accounting to be done in the transferee company’s books in the event of an amalgamation, as well as the treatment of any resulting goodwill or reserve. An amalgamation in the form of a merger is accounted for using the pooling of interests’ technique, while an amalgamation in the form of purchase is handled using the purchase method. Further, Ind AS 103 defines a business combination as a transaction or other occurrence in which one or more businesses (i.e., the acquiree) are acquired by a reporting organization (i.e., the acquirer).

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