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Accounting Standard (AS) 14

Accounting for Amalgamations

Bangalore Branch of SIRC of ICAI Study Circle Meeting - 08 September 2009

Agenda/Contents

Introduction Definitions Types of amalgamations Methods of accounting for amalgamations Consideration Treatment of reserves on amalgamation Treatment of goodwill arising on amalgamation Balance of profit and loss account Treatment of reserves specified in a scheme of amalgamation Disclosure Amalgamation after the balance sheet date Comparison with IFRS 3 Business Combinations

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Introduction

AS14 deals with accounting for amalgamations and the treatment of any resultant goodwill or reserves

AS14 does not deal with: Acquisition by purchase of shares; or Acquisition by purchase of assets; The distinguishing feature of an acquisition is that the acquired company is not dissolved and its separate entity continues to exist.
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Definitions

Key terms used in the standard

Amalgamation Transferor Company Transferee Company Reserves Amalgamation in the nature of merger Amalgamation in the nature of purchase Consideration for amalgamation Fair value Pooling of interest

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Types of amalgamations

Amalgamation fall in two broad categories

Amalgamation in the nature of merger

Conditions for amalgamation in the nature of merger:

Transfer of all the assets and liabilities of the transferor company;

At least 90% of equity shareholders of transferor company become equity shareholder of transferee company
Consideration is discharged wholly
Amalgamation in the nature of purchase

by issue of shares

(exception fractional shares)

business of the transferor company is intended to be carried on by transferee company

The

No adjustment is intended to be made to the book values of the assets and liabilities of the transferor company

(exception - uniformity of accounting policies )

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Methods of accounting for amalgamations

There are two main methods of accounting of amalgamation

Pooling of interests method

The use of the pooling of interests method is confined for an amalgamation in the nature of merger.

Purchase method

The object of the purchase method is to account for the amalgamation by applying the same principles as are applied in the normal purchase of assets. This method is used in accounting for amalgamations in the nature of purchase.

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Methods of accounting for amalgamations

Pooling of interests method

The assets, liabilities and reserves of the transferor company

are recorded by the transferee company at their existing carrying amounts.

Apply a uniform set of accounting policies for the transferor

and the transferee companies

Disclose effects of any changes in accounting policies in

accordance with AS 5, Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies.

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Methods of accounting for amalgamations

Purchase method: Two options to account for amalgamation

Carrying value basis

Incorporate the assets and liabilities at their existing carrying amounts

Fair value basis

Allocate the consideration to individual identifiable

assets and liabilities of the transferor company on the basis of their fair values at the date of amalgamation
The identifiable assets and liabilities, may include assets

and liabilities not recorded in the financial statements of the transferor company.

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Methods of accounting for amalgamations

Purchase method: Fair value basis

Fair value basis

Determination of fair values of assets and liabilities may be influenced by the intentions of the transferee company. For example, specialised use for an asset intention to change the activities of the transferor company planned employee termination plant relocation costs.

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Consideration

Consideration may consist of securities, cash or other assets In determining the value of the consideration, an assessment is made of the fair value of its elements. A variety of techniques is applied in arriving at fair value. the value fixed by the statutory authorities (when the consideration includes securities) the market value of the assets given up net book values (when market value cannot be reliably assessed) .
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Consideration

Consideration dependent on future events Adjustments may have to be made to the consideration in the light of one or more future events. When the additional payment is probable and can reasonably be estimated at the date of amalgamation, it is included in the calculation of the consideration. In all other cases, the adjustment is recognised as soon as the amount is determinable.

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Treatment of reserves on amalgamation

Treatment of reserves depends on nature of amalgamation

Amalgamation in the In case of amalgamation in the nature of merger, nature of merger the identity of the reserves is preserved

reserves appear in the financial statements of the transferee

company in the same form in which they appeared in the financial statements of the transferor company.
reserves which are available for distribution as dividend before

the amalgamation would also be available for distribution as

Amalgamation in the dividend after the amalgamation nature of purchase the difference between the amount recorded as share capital

issued (plus any additional consideration in the form of cash or other assets) and the amount of share capital of the transferor company is adjusted in reserves in the financial statements of the transferee company.

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Treatment of reserves on amalgamation

Example: amalgamation in the nature of merger

Transferor Co Transferee Co

Adjustments Post amalgamation

Share capital General reserves Capital reserve Sub-total Net fixed assets Net current assets Sub-total

100 150 50 300 100 200 300

200 50 20 270 170 100 270

-100 +150 -50 -

350 150 70 570 270 300 570

Consideration by issue of shares Rs.150

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Treatment of reserves on amalgamation

Treatment of reserves depends on nature of amalgamation

Amalgamation in the nature of merger

In case of amalgamation in the nature of purchase,

the identity of the reserves is not preserved except for

statutory reserves
The amount of the consideration is deducted from the

value of the net assets of the transferor company acquired by the transferee company. If the result of the computation is negative, the Amalgamation in the difference is debited to goodwill arising on nature of purchase amalgamation; If the result of the computation is positive, the difference is credited to Capital Reserve.

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Treatment of reserves on amalgamation

Treatment of reserves depends on nature of amalgamation

Amalgamation in the nature of merger

Where assets and liabilities are restated on the basis of their fair values, the determination of fair values may be influenced by the intentions of the transferee company.

For example, specialised use for an asset, intention to effect changes in the activities of the Amalgamation in the transferor company nature of purchase planned employee termination
plant relocation costs.

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Treatment of reserves on amalgamation

Example: amalgamation in the nature of purchase

Transferor Co Transferee Co Adjustments Post amalgamation

Share capital General reserves Capital reserve Sub-total Net fixed assets Net Current assets Sub-total

100 150 50 300 100 200 300

200 50 20 270 170 100 270

-100; +150 -150; -50; +200* +50 * Total assets Rs.350

350 50 220 620 320 300 620

Consideration by issue of shares Rs.150 Fair value of net fixed assets Rs.150

less consideration Rs.150

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Treatment of reserves on amalgamation

Treatment of statutory reserves

Amalgamation in the In case of amalgamation in the nature of purchase, nature of merger the identity of the reserves is not preserved except for statutory

reserves
reserves created by the transferor company pursuant to the

requirements of any statute

the transferor company is required to comply with requirements

of the relevant statute

Amalgamation in the nature of purchase Such reserves retain their identity in the financial statements of

the transferee company in the same form in which they appeared in the financial statements of the transferor company, so long as their identity is required to be maintained to comply with the relevant statute. (AS14.18)

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Treatment of goodwill arising on amalgamation

Goodwill arising on amalgamation should be amortised over a period not exceeding 5 years
Amortization period to exceed 5 years only if longer period can be justified Factors to be considered in estimating useful life of Goodwill: (a) the foreseeable life of the business or industry; (b) the effects of product obsolescence, changes in demand and other economic factors; (c) the service life expectancies of key individuals or groups of employees; (d) expected actions by competitors or potential competitors; and (e) legal, regulatory or contractual provisions affecting the useful life.

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Balance in profit and loss account

Treatment of balance in profit and loss account depends on nature of amalgamation

Amalgamation in the aggregate with the corresponding balance appearing nature of merger the financial statements of the transferee company.

in

Alternatively,
transfer to the General Reserve, if any.

Amalgamation in the nature of purchase

balance of the Profit and Loss Account, whether debit or credit, loses its identity.

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Treatment of reserves specified in a scheme of amalgamation

Where the treatment is so prescribed, the same is followed

Statute may prescribe the treatment to be given to the reserves of the transferor company after its amalgamation. Where the treatment is so prescribed, the same is followed. Where treatment prescribed is different from the requirements of AS14, following disclosures are to be made in the first financial statements following the amalgamation:
description of the accounting treatment given to the reserves reasons for following the treatment different from that prescribed in this Standard. deviations in the accounting treatment as compared to the requirements of AS14. the financial effect, if any, arising due to such deviation.

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Disclosure

General disclosures

For all amalgamations, the following disclosures to be given in the first financial statements following the amalgamation:
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 particulars of the scheme sanctioned under a statute.

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Disclosure

Additional disclosures in the first financial statements following the amalgamation

For amalgamations accounted for under the pooling of interests method:

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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Disclosure

Additional disclosures in the first financial statements following the amalgamation

For amalgamations accounted for under the purchase method:

consideration for the amalgamation and a description of the

consideration paid or contingently payable

the amount of any difference between the consideration and the

value of net identifiable assets acquired, and the treatment thereof

the period of amortization of any goodwill arising on

amalgamation.

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Amalgamation after the balance sheet date

When an amalgamation is effected after the balance sheet date but before the issuance of the financial statements of either party to the amalgamation,
the amalgamation is not incorporated in the financial statements disclosure is made in accordance with AS 4

In certain circumstances, the amalgamation may also provide additional information affecting the financial statements themselves, for instance, by allowing the going concern assumption to be maintained.
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Comparison with IFRS 3 Business Combinations

AS 14 is presently under revision to bring it in line with IFRS 3

There are significant and fundamental differences IFRS 3 provides extensive guidance on accounting of business

combinations.
All business combinations are accounted using purchase

method
There are significant differences in application of purchase

method
IFRS 3 goes beyond legal form IFRS 3 applies to all business combinations while AS 14

applies to only amalgamations

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Questions

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