Accounting Standards
Paragraph 27 of AS-14
‘Accounting for Amalgamations’ states as follows :
When an amalgamation is effected
after the balance sheet date but before the issuance of the financial statements
of either party to the amalgamation, disclosure is made in accordance with AS-4,
‘Contingencies and Events Occurring After the Balance Sheet Date’, but the
amalgamation is not incorporated in the financial statements. 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.
It has been noticed that there
is a mixed accounting practice with regards to High Court orders for
amalgamation received after the balance sheet date but before the issuance of
the financial statements. Many companies incorporate them in the financial
statements, a few have not. The mixed practice has arisen because the term
effected after the balance sheet date can be interpreted in more than
one way. This can be explained with the help of a simple example.
Query :
Big Ltd. has a year end 31
December 2007. It had earlier filed an application with the High Court for
merging Small Ltd. with itself with an appointed date of 1 January 2006. The
High Court passed the merger order on 4 January 2008, and the same was
filed on the same day with the ROC at which point in time it became
effective. Accounts for the year ended 31 December 2007 were signed on 15
January 2008. Should Big Ltd. consider the merger in its financial statements
for the year ended 31 December 2007 ?
Response :
View 1 :
No. The effective date of
amalgamation is the date when the amalgamation order is filed with ROC, which in
this case is, 4 January 2008. Therefore, the amalgamation has become effective
after the balance sheet date. Hence, in the 31 December, 2007 financial
statements, appropriate disclosures are made but the amalgamation is not
incorporated in the financial statements.
View 2 :
Yes.
The reference to effective date in AS-14 could be interpreted to mean the
appointed date. In this case the High Court has passed an order for merger with
an effective date of 1 January 2006.
From a plain reading of AS-14 it
appears that View 1 is a more appropriate answer. AS-14, paragraph 27 when
applied in this case, seems to suggest that the merger event is an event after
the balance sheet date and hence should be recorded after the balance sheet
date. The actual merger takes place only when the order is passed by the High
Court and filed with the ROC. Those significant events (High Court order
and filing with the ROC) had not happened before or at the balance sheet date.
However practice seems to
suggest that View 2 is more prevalent. This is probably for the reason that the
effective date is interpreted to be the appointed date. Moreover, as the event
(High Court order and filing with ROC) has already happened prior to issuance of
financial statements, it would not be prudent not to incorporate them in the
financial statements merely because the order was passed and filed with ROC
after the balance sheet date. The disadvantage with View 2 is companies may
arbitrarily choose to time the issuance of the financial statements to either
account or ignore the amalgamation transaction in the financial statements.
The author believes that whilst the technically
right answer is View 1, at the present moment and in the absence of any contrary
opinion from the ICAI, both views may be sustainable.
