AS 14

Accounting For Amalgamations

2

Shareholders of Shareholders of XX

X LtdX Ltd

Shareholders of Shareholders of YY

What is Merger or Amalgamation?

Y LtdY Ltd

3

3

Option 1Option 1 Option 2Option 2

Shareholders Shareholders of X & Yof X & Y

X LtdX Ltd Y LtdY Ltd New co ZNew co Z

Shareholders Shareholders of X & Yof X & Y

Shareholders Shareholders of X & Yof X & Y

Option 3Option 3

After …After …

Based on the swap ratio, the shareholders of the transferor company are issued shares of transferee company

4

Single management

5

5

MERGERS, ETC - CRITICAL ISSUES

Due Diligence Review Enterprise valuation and determination of share

exchange ratio or cash consideration Documentation- Scheme

Accounting Issues Merger Agreements Statutory Approvals

6

6

Accounting for Amalgamations AS 14 is the relevant Accounting Standard Came into effect from April 1, 1995 Deals with:

Accounting for Amalgamation & Treatment of any resultant Goodwill or Reserves

Applicable only to Company form of organisation Does not deal with acquisition of the whole or part of

a company by another In Amalgamation, one company loses its identity; In Acquisition, identities of companies are maintained

7

7

Types of Amalgamation

Amalgamation means an amalgamation as per the provision of Companies Act, 1956 or any other law applicable to Companies, Sections 391 to 394 of Companies Act, 1956 governs

the provisions of amalgamation

In the nature of MERGER

In the nature of PURCHASE

8

8

Conditions For Amalgamation in the nature of Merger:

All Assets & Liabilities are transferred; At least 90% Share holders of transferor co. become

share holders of transferee co;Section 2(1B) of ITax Act requires 75 %

Consideration for Amalgamation to be discharged by issue of Equity shares;

Business of transferor co. is intended to be carried on; No Adjustments are intended to be made to the book

value of assets and liabilities of transferor co

9

9

Conditions …

All the above 5 conditions should be satisfied simultaneously

If any of the above conditions are not fulfilled it would be termed as Amalgamation in the nature of Purchase

10

10

Accounting options

Amalgamation in the nature of

MERGER

Amalgamation in the nature of PURCHASE

Pooling of Interest Method

Purchase Method

11

11

Pooling of Interest Method All Assets, Liabilities & Reserves of Transferor

company are taken over at their existing carrying values

Identity of Reserves is preserved Uniform Accounting Policy to be adopted for both

(or all companies) Difference between the Consideration and Share

Capital of transferor company shall be adjusted in Reserves of the Merged company

Actual treatment of such reserves is provided in the scheme (typical clause as per next slide)

12

12

Pooling of Interest Method …

Typical clause for treatment of reserves

“Upon the coming into effect of this scheme, an amount representing the excess of the value of the assets over the liabilities of the Transferor Company after making such adjustment as the Board of Directors of the Transferee Company may decide, shall be reflected as the General Reserve in the books of the Transferee Company”.

13

13

Illustrative Balance SheetMERGER OF A LTD. INTO B LTD.

Liabilities A Ltd

B Ltd Assets A Ltd

B Ltd

  Rs. Rs.   Rs. Rs.

Equity Share Capital 50 80 Fixed Assets 40 120

General Reserve 18 50 Investments 20 40

Profit and Loss Balance - 32    

Capital Reserve (for subsidy received from State Govt.) 2 -

Current Assets, Loans & Advances 35 80

Loans 20 38Profit and Loss

Balance 5 -

Current Liabilities & Provisions 10 40  

Total 100 240 Total 100 240

14

14

Illustration …

• The share exchange ratio for the merger of A Ltd. into B Ltd. is: "For every 2 equity shares of Rs. 10 each fully paid up of A Ltd., 1 equity share of Rs. 10 each fully paid up of B Ltd.";

• This means that B Ltd. will issue equity share capital of Rs. 25 to the shareholders of A Ltd.

15

15

a) POOLING OF INTEREST METHOD (AT BOOK VALUE)

Liabilities

B Ltd Assets

B Ltd

Equity Share Capital (25+80) 105 Fixed Assets (40+120) 160

General Reserve (18+50+25 *) 93 Investments (20+40) 60

Profit and Loss A/c (-5+32) 27

Capital Reserve 2Current Assets, Loans &

Advances (35+80)  115

Loans (20+38) 58

Current Liabilities and Provisions (10+40)  50

Total 335 Total 335

* Balancing figure

Illustration … Balance Sheet of B Ltd.

16

16

Illustration … ADDITIONAL ASSUMPTIONS For Capital Reserve representing subsidy received from the

State Govt., the statutory period as per conditions has been completed. Scheme provides the same is to be treated as free reserve

and included in general reserve Current Assets of A Ltd includes Rs. 14 receivable from B

Ltd Loans of A Ltd include Rs 10 due to B Ltd Investments of B Ltd include Rs. 8 (at face value) in A Ltd

As per the scheme, these investments are to be cancelled.

17CNK17

a) POOLING OF INTEREST METHOD (AT BOOK VALUE)

Liabilities

B Ltd Assets

B Ltd

Equity Share Capital [(25-4)+80)] 101 Fixed Assets (40+120) 160

General Reserve (18+50+23 *) 91 Investments (20+40-8) 52

Profit and Loss A/c (-5+32) 27

Current Assets, Loans & Advances (35+80-14-10)  91

Loans (20+38-10) 48

Current Liabilities and Provisions (10+40-14)  36

Total 303 Total 303* Balancing figure

Illustration … Revised BS of B Ltd ...

18

18

Disclosures required as per AS 14

For Amalgamation under Pooling of Interest Method Exchange ratio, description and number of shares Difference between consideration and net

identifiable assets acquired and treatment of the same

19

19

Purchase Method

Assets taken either at existing carrying value or fair value, value can also be assigned to non existent assets/liabilities.

In case of Statutory Reserves, the identity is maintained till the Statutory period is over. However, an equivalent amount is recorded by a corresponding debit to a suitable account head (e.g., 'Amalgamation Adjustment Account') which is disclosed as part of ‘Miscellaneous Expenditure‘ on the asset side.

20

20

Purchase Method …

When the identify of the statutory reserves is no longer required to be maintained, both the reserves and the aforesaid account are reversed.

Difference between Net Assets and Consideration: If Positive – Capital Reserve If Negative - Goodwill

21

21

Assumptions for Purchase method

i) The share exchange ratio for the merger of A Ltd. into B Ltd. is:

"For every 2 equity shares of Rs. 10 each fully paid up of A Ltd., 1 equity share of Rs. 10 each fully paid up of B Ltd.";

ii) Market Value of Fixed Assets of A Ltd is Rs 20

iii) Market Value of Investments of A Ltd 25

iv) Capital Reserve represents a Statutory Reserve

Illustration …

22

22

a) PURCHASE METHOD

Liabilities

B Ltd Assets

B Ltd

Equity Share Capital [(25-4)+80)] 101

Fixed Assets (40+120-20) 140

General Reserve * 76Investments (20+40-

8+5) 57

Profit and Loss A/c (-5+32) 27

Capital (Statutory) Reserve 2

Current Assets, Loans & Advances (35+80-14-10)  91

Loans (20+38-10) 48Amalgamation

Adjustment Account 2

Current Liabilities and Provisions (10+40-14)  36

Total 290 Total 290* Balancing figure

Illustration … Balance Sheet of B Ltd.

23

23

Disclosures required as per AS 14 For Amalgamation under Purchase Method

Consideration for Amalgamation Treatment of Goodwill / Capital reserve, if any

For all Amalgamations Name and general nature of the companies Effective date of amalgamation Method of accounting used Particulars of the scheme sanctioned under a

statute

24

24

Accounting for Cross Holding Situations of Cross Holdings:

Transferee company holds shares in the Transferor company

Transferor company holds shares in the Transferee company

Transferor/Transferee companies both holds share of each other company

In practice the treatment and / or accounting of cross holdings differ from company to company depending upon the provision as made in the scheme of amalgamation and approved by Court.

25

25

Accounting for Cross Holding …

Cross-holding amounts can be disposed off by:

Cancelling the amount Selling off the shares Handing over the shares to a TRUST which in

turn would sell it and utilize the proceeds for a particular purpose

26

What is Goodwill ?

Goodwill is an intangible asset that ariseswhen the purchase price to acquire aanother company is greater thanthe sum of the market value of that Company’s assets minus liabilities.

27

27

Treatment of Goodwill Goodwill should be amortized over its useful Life,

normally for not more than 5 years unless a longer period can be justified

Factors to be considered for considering estimated life: foreseeable life of business/industry product obsolescence, change in demand, economic factors legal, regulatory or contractual provisions service life of key individuals or group expected actions by competitors or potential competitors

28

28

Treatment of Reserves Para 23 & 42 of the standard provides that reserves

should be treated as prescribed by the scheme sanctioned under the statute (over riding the earlier provisions of treatment to reserves).

Where the treatment of reserves is different under a scheme from the treatment prescribed by the AS following disclosures are required: Description of the treatment given & reasons for

giving a different treatment. Deviation in the accounting treatment Financial effect, if any, due to such deviation

29

29

Treatment of Reserves …

Excess of the value of the assets over the liabilities in a merger is normally treated as part of Reserves.

Tax department has, in some cases, treated these Reserves as “INCOME” !!

30

30

Amalgamation after BS date Amalgamation effective from 1st April 2007 Not yet approved (by HC) till BS date in June 2008 or even

till due date for filing return 30 Sept 2008 Options would be:

Amalgamated Co to defer its finalisation till HC approval

Amalgamated Co to finalise accts with appropriate disclosures and reopen on receipt of approvals

Give effect to the amalgamation in the next year. If amalgamation is effected after the balance sheet date

disclosure is also required as per AS 4 (Contingencies & Events Occurring after the Balance Sheet Date).

31

Illustrative Disclosures: Siemens Ltd (30-09-2008)

Amalgamation with Siemens Industrial Turbomachinery Services Private Limited (SITS), a 100% subsidiary co.

Pursuant to scheme of amalgamation (‘the scheme’) of the erstwhile SITS with the company as approved in the Board Meeting held on 22 November 2007 and subsequently sanctioned by the Honourable High Court of Karnataka on 26 September 2008,the assets and liabilities of the erstwhile SITS were transferred to and vested in the Company with effect from 1 April 2008.Accordingly,the scheme has been given effect to in the accounts.

31

32

32

Siemens Ltd.(30-09-2008)…

The amalgamation has been accounted for under the “pooling the interests” method as prescribed by AS-14 “Accounting for Amalgamations”. Accordingly, the assets, liabilities and other reserves of the erstwhile SITS as at 1 April 2008 have been taken over at their book values.

Net deficit of Rs.172,640 being the difference between the equity shares of SITS and the value of investments in SITS by the company, has been debited to profit and loss account.

33

33

Other types of Restructuring Internal Reconstruction by reduction of capital

By adjusting losses against share premium By adjusting losses and other assets (whose fair values are

lower than book values) against share capital / reserves. By paying back part of the capital to shareholders by

reducing the face value. Acquisition/Sale of a division or group of assets Conversion of partnership to limited company:

Acquisition at book value or higher value Under Chapter IX of Companies Act

34

34

35

Accounting Treatment For demergers/acquisitions, similar to AS 14. If reduction of capital involved, to route all

entries through Capital Reduction Account. To avoid Capital Reduction, additional shares

can be issued in the Resultant Company to all shareholders of the Demerged Company Will effectively reduce the Book Value per

share in each company Surplus or Deficit arising due to such

restructuring is also treated as Goodwill or Capital Reserve respectively

36

36

Illustrations on DemergerReliance Industries Ltd (31-3-2006) The Company’s Scheme of Arrangement (Scheme), to demerge

certain undertakings to four resulting companies was approved by the Hon’ble High Court of Mumbai on 9th Dec, 2005 and is effective from 21st Dec, 2005.

In terms of the Scheme, the assets and liabilities relatable to the demerged undertakings have been transferred at values appearing in the books of accounts as on the close of business on 31st Aug, 2005.

Accordingly, net assets of Rs. 19,119.55 crore were demerged to the four resulting entities i.e. Reliance Communication Ventures Ltd – Rs. 15,389.35 crores, Reliance Energy Venture Ltd – Rs. 2,921.02 crore, Reliance Capital Ventures Ltd – Rs. 512.41 crore and Reliance Natural Resources Ltd – Rs. 296.77 crore.

37

37

Recent Illustrations on Demerger … The net assets transferred have been appropriated against

the Revaluation Reserve, pursuant to the Court order. The Company, based on the report by international valuers,

has revalued plant, Equipment and buildings situated at Patalganga, Hazira and Jamnagar as at 1st August, 2005 by an amount of Rs. 22,497.34 crore and an equivalent amount has been credited to Revaluation Reserve Account. Consequent to the revaluation, there is an additional charge for depreciation of Rs. 1,409.08 crore for the year and an equivalent amount has been withdrawn from Revaluation Reserve and credited to the Profit and Loss Account.

38

38

Recent Illustrations on Demerger … The Gross Block of Fixed Assets includes Rs.

2,725.22 crores (Previous Year Rs. 2,729.88 crores) on account of revaluation of Fixed Assets carried out in the past. Consequent to the said revaluation there is an additional charge of depreciation of Rs. 43.74 crores (Previous Year Rs. 61.07 crores) and an equivalent amount, which was hitherto being withdrawn from General Reserves, has now been withdrawn from Revaluation Reserve and credited to the Profit and Loss Account. This has no impact on the profit for the year.

39

Reliance Industries Limited

(100 FV 10)

Reliance Industries Limited

(100 FV 10)

Reliance Energy

Ventures Limited

(100 FV 10)

Reliance Capital

Ventures limited

(100 FV 10)

Reliance Communication Ventures

Limited(100 FV 5)

Reliance Natural

Resources Limited

(100 FV 10)

Reliance Capital Limited

(5 FV 10)

Reliance Energy Limited

(7.5 FV 10)

Reliance Communications Limited(100 FV 5)

39

RIL Demerger and Amalgamation

40

40

Acquisition Blue Star Ltd. (31-3-2008)

Acquisition of unit on Slump Sale Basis Pursuant to the Scheme of Arrangement, approved by the

shareholders at the Extra-ordinary General Meeting held on March 4, 2008 and duly approved by the Hon’ble High Court at Bombay vide its order dated April 11, 2008, the Company acquired the electrical contracting business of Naseer Electricals Pvt Ltd.(NEPL) on a slump sale basis for Rs.4809.77 lacs from January 24, 2008. The scheme was given effect in the financial statements of 2007-08.

After adjusting the value of tangible fixed assets acquired of Rs.116.65 lakhs and liabilities of Rs.603.91, the balance consideration along with the incidental expenses have been allocated towards various intangible assets and goodwill.

As per the Scheme, the Company has, adjusted against the General Reserve of the Company the intangible assets of Rs. 41,18.62 lakhs and Goodwill of Rs.8,32.32 lakhs arising on acquisition of electrical contracting business of NEPL.

41

41

Accounting as per IAS/IFRS – Accounting for Business Combinations

Relevant Standard in IAS/IFRS is: IFRS 3 Business Combinations

A business is defined as an “integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return directly to investors or other owners, members or participants”.

42

A business combination is a transaction or event in which an acquirer obtains control of one or more businesses.

Basic principle of IFRS 3 is “An acquirer of a business recognises the assets acquired and liabilities assumed at their acquisition-date fair values and discloses information that enables users to evaluate the nature and financial effects of the acquisition”.

IFRS 3 –Business Combinations …

43

IFRS 3 - Business Combinations …

Steps for accounting Determining whether the transaction or event is a business

combination Identify an Acquirer Determine the acquisition date Determine the cost of the business combination -

consideration paid Allocate the cost of the business combination to various

assets and liabilities and determine non-controlling interest Fair Values to be used for such allocation Deal with residual goodwill or gain from bargain purchase Subsequent measurement and accounting

44

Cost Allocation in a PurchaseBusiness Combination

Determine the fair values of all identifiable tangible and intangible assets acquired and liabilities assumed.

Investment Cost

Total fair value of identifiable

assets less liabilities

45

Cost and Fair Value Compared

Investment cost Net Fair value

Identifiable net assets according to their fair value

Goodwill

If

Allocate to

>

1

2

46

Accounting as per IAS/IFRS…..

Method of Accounting

Must use Purchase Method. Uniting of Interests Prohibited

Assets & Liabilities Acquired

All identifiable assets, Liabilities & Contingent Liabilities acquired are measured at 100% of Fair Values

Goodwill Not Amortised, but tested for Impairment annually

Negative Goodwill Recognized in Profit & Loss immediately

Restructuring Costs Only recognized to the extent that a liability exists at acquistion Date