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Home » Blog » Account & Audit » Impact of Ind-AS on M&A transactions – Watch with an eagle eye

Impact of Ind-AS on M&A transactions – Watch with an eagle eye

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  • Last Updated on 2 June, 2022

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In today’s era of financial inclusion and a competitive global market, several countries are adopting substance based universal accounting principles, i.e., International Financial Reporting Standards (IFRS), to make their accounting reports comparable with global players and facilitate comparative evaluation of their performances. India Inc., being no different, is adopting principles of IFRS in the form of the Indian Accounting Standards (Ind-AS). The adoption of Ind-AS and the resulting fair value accounting is bound to have far reaching implications on the M&A landscape. 
 
While the impact on M&A transactions can be imported out of different Ind-AS, Ind-AS 103 “Business Combination” deals specifically with M&As. The scope of Ind-AS 103 includes all transactions that would result in an acquirer obtaining control (by way of share purchase, amalgamation, demerger, slump sale, capital reduction, etc.) as opposed to the conventional Accounting Standard – 14, which dealt only with legal entity consolidation. 
 

Accounting for Business Combinations requires recognition of the identifiable assets acquired, liabilities assumed, non-controlling interests in an acquiree, previously held interest in an acquiree and contingent consideration at their acquisition date fair values. In case of a legal entity merger of unrelated companies, the assets, including intangibles and liabilities would be recorded at their fair value. Hence, when compared to accounting under the old regime, the fair value accounting of acquisitions could result in higher amortisation/ depreciation charge on the basis of fair value impacting the earnings per share (EPS) of the company, and thereby, impacting investor perception. From an income tax perspective, in case of an amalgamation or demerger, as per Explanation 2 / 2A to Section 43(6) of the Income Tax Act, 1961 (ITA), such fair valuation of tangible assets will be ignored and the written down value (WDV) of such depreciable assets as in the hands of amalgamating/ demerged company shall be the WDV for the amalgamated/ resulting company.

In case of a demerger of an undertaking into an unrelated company, the fair valuation is necessary under Ind-AS 103. Whereas under Section 2(19AA) of ITA, the assets are to be transferred at book value pursuant to demerger. In such case, one can allege that Section 2(19AA) of ITA is not complied with, and hence, the demerger is not tax neutral. However, the counter-argument could be that such fair valuation is required from the acquirer’s perspective to comply with Ind-AS and from tax perspective, the condition of transfer at book value is for the demerged company. However, the possibility of litigation cannot be ruled out in such cases. In addition, in such cases, WDV or the original cost for the acquirer will be the same as it was available to the previous owner, under Section 43 or under Section 49 of the ITA, as the case may be. 

In case of acquisition of intangible assets pursuant to merger or demerger, relying on the decision of Smifs Securities Ltd (2012 348 ITR 302 SC), one may claim depreciation on self-generated intangibles of the amalgamating/ demerged company recognised by the acquiring company pursuant to merger/ demerger under Ind-AS 103. However, such claim can still be litigative, especially reading Explanation 2 and Explanation 2A to Section 43(6) of the ITA. 
 
In case of a transaction by way of purchase of shares also, the recognition of fair value of each component of business of the acquired entity (including goodwill and other intangibles) in consolidated financial statement of the purchaser entity is must. Hence, on a consolidated basis, there could be impact on EPS due to higher amortisation/ depreciation. Subsequently, when the acquired subsidiary is merged with the parent company, as per reading of ITGF Clarification Bulletin 9, it seems that though it is a merger of common controlled entities, parent company in its standalone accounts post merger would need to recognize goodwill embedded in the acquisition cost of the subsidiary company. However, if such subsidiary is merged with fellow subsidiary, goodwill may not get recognized in the books of accounts of fellow subsidiary.
 
In case of demerger of an undertaking into an unrelated company, the demerged entity has to record the distribution of non-cash assets to its shareholders as per provisions of Appendix A of Ind-AS 10. A question arises, whether such an accounting treatment can create litigation risk in terms of dividend distribution tax on recognition of such notional distribution to the shareholders by the demerged company. Section 2(22) of the ITA provides that any distribution of shares to the shareholders of the demerged company pursuant to demerger by the resulting company shall not be treated as deemed dividend. Since such exception is created for the shares distributed by the resulting company, it creates confusion over the tax implications, as the accounting treatment for recognition of distribution is prescribed for the demerged company. It may be possible to take a view is that such notional distribution should not trigger dividend distribution tax implications.
 
The shareholder (being a company covered under Ind-AS) of amalgamating company/ demerged company receiving shares of the unrelated amalgamated company/ resulting company should record investments in the amalgamated company/ resulting company at their respective fair value. As per Ind-AS 109 Financial Instruments, the difference between the fair value and cost recorded in books of accounts of the shareholders will be credited to the profit and loss account and not routed through the other comprehensive income (OCI). Hence, the tax department can claim that such corporate shareholders are liable to pay MAT on such notional profit.
 
In many acquisition transactions, the sellers continue to own a non-controlling stake in the company. However, the acquirer company and sellers usually bind themselves contractually by way of call or put options. Under the Ind-As, when acquiring a controlling stake, the acquirer company will be required to recognise the liability on account of such options agreed to under the transaction agreements. This liability has to be fair valued at the end of every reporting period and the difference on account of such revaluation will be adjusted in the profit and loss account. Such revaluation could have an impact on the EPS as well as MAT computation of the acquirer company. In addition, as per Ind-AS 110 -Consolidated Financial Statements, upon loss of control in an entity, it is imperative to recognise the non-controlling interest at its fair value and recognise the difference in the profit and loss account of the seller entity.
 
There could be many other peculiarities in each transaction and the aforesaid discussion is just an illustrative list of some of them. In addition, the determination of fair value for each transaction and its individual component could be very complex owing to different techniques and different principles under different situations. One also needs to consider whether the impact is on standalone financial statements or consolidated financial statements. Some of these peculiar areas under the Ind-AS have notional impact on the profitability of companies and consequent tax implications, and hence, could prove to be a key factor in many M&A transactions. 

Authors: Hiten Kotak, Leader – M&A Tax, PwC India and Jayesh Sanghvi, Director – M&A Tax, PwC India 

Disclaimer: Views expressed in this article are the personal views of the author. Article includes inputs from Raina Sakhale, Associate, M&A Tax – PwC India. This article attempts to provide general guidance on matters of interest only and does not constitute professional advice. No one should act upon the information contained in this article without obtaining specific professional advice. 

Tags:account management accounts Ind-AS

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Author: Taxmann

Taxmann Publications has a dedicated in-house Research & Editorial Team. This team consists of a team of Chartered Accountants, Company Secretaries, and Lawyers. This team works under the guidance and supervision of editor-in-chief Mr Rakesh Bhargava.

The Research and Editorial Team is responsible for developing reliable and accurate content for the readers. The team follows the six-sigma approach to achieve the benchmark of zero error in its publications and research platforms. The team ensures that the following publication guidelines are thoroughly followed while developing the content:

  • The statutory material is obtained only from the authorized and reliable sources
  • All the latest developments in the judicial and legislative fields are covered
  • Prepare the analytical write-ups on current, controversial, and important issues to help the readers to understand the concept and its implications
  • Every content published by Taxmann is complete, accurate and lucid
  • All evidence-based statements are supported with proper reference to Section, Circular No., Notification No. or citations
  • The golden rules of grammar, style and consistency are thoroughly followed
  • Font and size that's easy to read and remain consistent across all imprint and digital publications are applied
View all posts by Taxmann

Author TaxmannPosted on October 4, 2017June 2, 2022Categories Account & Audit, BlogTags account management, accounts, Ind-AS

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