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Acquisition
date v Appointed date
In India, merger and acquisition schemes that require a court/ tribunal
approval will have an appointed date, mentioned in the scheme, which is the
date from which the merger and acquisition is accounted. The scheme becomes effective when the court
order is passed and the order is filed with the Registrar of Companies. The appointed date is a very important date,
since from an income-tax legislation perspective, that is the date when the
amalgamation or acquisition accounting is done and the carry forward of any
business losses is allowed to the transferee.
The Indian GAAP accounting standards were also aligned to this
concept. AS-14, Accounting for Amalgamations, itself did not expressly contain any
discussion around the difference between the appointed date and effective
date. However, an EAC opinion required
the accounting of the combination from the appointed date mentioned in the
court scheme, once the court approval was received. From an income-tax perspective, the company
would need to file revised returns to reflect the combination from the
appointed date.
With the introduction of Ind AS, the Indian GAAP position is no longer
valid for companies that apply Ind AS.
As per paragraph 8 of Ind AS 103 Business
Combinations, the acquirer shall identify the acquisition date, which is
the date on which it obtains control of the acquiree.
An investor controls an investee when it is exposed, or has rights, to
variable returns from its involvement with the investee and has the ability to
affect those returns through its power over the investee. An investor shall consider all facts and
circumstances when assessing whether it controls an investee and the date of
obtaining control.
The date on which the acquirer
obtains control of the acquiree is generally the date on which the acquirer
legally transfers the consideration, acquires the assets and assumes the liabilities
of the acquiree—the closing date. However, the acquirer might obtain
control on a date that is either earlier or later than the closing date. For
example, the acquisition date precedes the closing date if a written agreement
provides that the acquirer obtains control of the acquiree on a date before the
closing date. An acquirer shall consider
all pertinent facts and circumstances in identifying the acquisition date.
Determination of acquisition date
under Ind AS may not always be straight-forward, particularly in a transaction
that involves a court scheme. Such court
schemes may involve common control transactions involving entities under common
control or acquisition that involves independent or non-related parties. Careful analysis of the facts and
circumstances and judgement would be necessary to determine the date of
acquisition.
When an independent party is
acquired, determining the acquisition date is important because at that date
the assets and liabilities are fair valued and goodwill and minority interest
is determined. From the acquisition date
the acquired entity results are included in the financial statements of the
acquirer.
Business combinations
involving entities or businesses under common control shall be accounted for
using the pooling of interests method. The pooling of interest method is carried
out as follows:
i. The
assets and liabilities of the combining entities are reflected at their
carrying amounts.
ii. No
adjustments are made to reflect fair values, or recognise any new assets or liabilities.
The only adjustments that are made are to harmonise accounting policies.
iii. The
financial information in the financial statements in respect of prior periods
should be restated as if the business combination had occurred from the
beginning of the preceding period in the financial statements, irrespective of
the actual date of the combination.
When a business
combination is effected after the balance sheet but before the approval of the
financial statements for issue by either party to the business combination,
disclosure is made in accordance with Ind AS 10 Events after the Reporting
Period, but the business combination is not incorporated in the financial
statements.
From an Ind AS perspective,
the business combination date in a common control transaction determines two
things:
i. The
year in which the combination is accounted.
Therefore, assuming the combination date is financial year 17-18, the
accounting will be done in the financial year 17-18. However, the financial information for the
financial year 16-17, will be restated as if the business combination had
occurred from the beginning of the financial year 16-17.
ii.
If
the business combination date falls after the balance sheet but before the
approval of the financial statements for issue by either party to the business
combination, disclosure is made in accordance with Ind AS 10 Events after
the Reporting Period, but the business combination is not incorporated in
the financial statements.
Agreements or court schemes may
provide a retrospective date of business combination. Irrespective of such date, the date for
business combination under Ind AS 103 is the date on which the control is
actually obtained. This may or may not
correspond to the date specified in the agreement or the appointed date in a
court scheme.
Some business
combinations cannot be finalized without a regulatory approval or a court
approval. An investor controls an investee when it is exposed,
or has rights, to variable returns from its involvement with the investee and
has the ability to affect those returns through its power over the
investee. It is necessary to consider
the nature of regulatory approval in each case, to determine the date when
control is passed.
To illustrate, consider a business
combination involving three telecom companies, under a court scheme. Though the court may approve the scheme, it
does not become effective till the transaction is approved by the Department of
Telecom (DOT)/ TRAI and the Competition Commission and the final order is filed
with ROC. In this scenario, the last of
the date of final approval from DOT/ TRAI and the Competition Commission may be
the acquisition date. Consider another business
combination, involving entities under common control. Essentially two 100% subsidiaries of the
parent are merging to form one company.
The shareholder of the companies, which is the parent company, has
approved the merger in the annual general meetings. There are no creditors and no minority
shareholders. No approval is required of
the Competition Commission or any other regulator, and there are no
complexities in the transaction.
Essentially in such circumstances, the court order may be deemed to be a
formality, and the date of shareholders resolution approving the combination
may be the date of business combination.
In a transaction between two
independent parties, the date the control passes is the date when the
unconditional offer is accepted. When
the agreement is subject to substantive preconditions, the date of acquisition
will be the date when the last of the substantive precondition is fulfilled.
The Madras High Court by way of its
order dated 6 June, 2016 in the case of Equitas
passed a very interesting order. In
the said case, the holding company had applied to the RBI for in-principle
approval to establish a Small Finance Bank (SFB). The RBI granted an in-principle approval
subject to the transfer of the two transferor companies into the transferee
company, prior to the commencement of the SFB business.
The Regional Director (RD) raised a
concern that the scheme did not mention an appointed date, and that the
appointed date was tied to the effective date.
Further, even the effective date was not mentioned and it was defined to
be the date immediately preceding the date of commencement of the SFB
business. The court observed that under
section 394 of the Companies Act such a leeway was provided to the
Company. Further, section 394 did not
fetter the court from delaying the date of actual amalgamation/merger. This judgement would provide a leeway to the
Company to file scheme of mergers/amalgamation with an appointed date/effective
date conditional upon happening or non-happening of certain events.
The two examples below explain how
the requirements of Ind AS and the court scheme can be aligned.
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Acquisition of an
Independent Party
Company
A (Acquisitive) wants to acquire Company B (Willing). Acquisitive and Willing are involved in
running some business. The acquisition
requires several important formalities to be completed including the approval
of the court. One of the pre-condition
of the acquisition is the completion of all formalities and the receipt of
court approval. Acquisitive follows
the financial year. Acquisitive and
Willing enter into a binding agreement (subject to the above pre-condition) on
1 April 2016. The appointed date
mentioned in the court scheme is 1 April 2016. The formalities and the final court approval
for Willing to be subsumed in Acquisitive are received on 1 September 2016.
Under
Ind AS 103, the acquisition date is 1 September 2016. This is the date when Acquisitive will do a
fair value accounting and determine goodwill and minority interest. Acquisitive will fair value the assets and
liabilities of Willing at 1 September 2016.
Legally, for normal income tax computation, Acquisitive will consider
the profits of Willing for the full financial year 16-17. However, in Ind AS financial statements,
Acquisitive will not account for Willings profits from 1 April 2016 to 31
August 2016 as its own profits; rather the profits for that period would
increase the fair value of net assets of Willings and reduce the amount of goodwill
recognized by Acquisitive.
In
order to comply with the requirements of Ind AS, Acquisitive may consider the
following two options:
- Acquisitive
relies on the Madras High Court judgement in Equitas. Consequently, the
appointed date and the effective date could be set out in the court scheme,
as the date when the court passes the final order approving the acquisition,
1 September 2016. The appointed date cannot be 1 April, 2016, because it
would not be in compliance with Ind AS.
- Appointed
date for tax purposes and tax financial statements can be 1 April 2016.
However, the scheme should clearly provide that for accounting purposes in
Ind AS financial statements, date determined under Ind AS 103 will be used. In this fact pattern, the said date would
be 1 September, 2016. Some legal
luminaries have opined that it is possible to follow this path and that the
courts have an unfettered power to do so.
The
author believes that in general, the first alternative should be preferred as
it ensures consistency between tax and accounting treatment. Also, there will
be no need to file revised tax return for past periods or maintain two set of
financial statements, one for tax purposes and another for Ind AS purposes.
It
may be noted that for MAT purposes, the financial statements are required to
be in compliance with accounting standards.
Therefore, for MAT purposes the financial statements should be
prepared with 1 September 2016 as the date of acquisition. In other words, the Ind AS compliant
financial statements will be the relevant financial statements for the
purposes of MAT. From an income tax
computation perspective for the carry forward of losses or acquisition
accounting, the tax financial statements prepared with an appointed date 1
April, 2016 may be acceptable.
For
normal income tax computation purposes, legal merger is from 1 April 2016.
Profits from 1 April 16 to 31 August 16 has to be offered to tax in hands of Acquisitive
even though it reflects as goodwill in Acquisitives’ Ind AS financial
statements. Specific provisions of the Income tax Act will govern tax
treatment of items like tax WDV of assets, allowance of certain expenses on
actual payment basis, disallowance for TDS default, etc. Transition of
business loss/unabsorbed depreciation will be of amounts as determined till
31 March 16. Normal income tax computation is generally not impacted by
accounting treatment in Ind AS financial statements.
However,
if the court scheme contains any unusual adjustments that are not consistent
with tax policies, those may not be acceptable. For example, if the court scheme allows
derivative profits to be recognized by Acquisitive directly into reserves in
the tax financial statements, and the auditor has modified the audit report,
the derivative profits will be taxable under income-tax laws.
Business Combination
between Common Control Entities
Company
A (Acquisitive) and Company B (Willing) are in the business of manufacturing
and selling cement. Both Acquisitive
and Willing have a common parent. The combination
of Acquisitive and Willing requires several important formalities to be
completed such as approval from the competition commission, clearance from
minority shareholders and creditors, other regulatory approvals, and the
final approval of the court.
Acquisitive follows the financial year. Acquisitive and Willing enter into a
binding agreement on 1 April 2016, subject to completion of all
formalities. A resolution has been
passed by shareholders of both the companies, prior to that date, for
approving the transaction. The
appointed date mentioned in the court scheme is 1 April 2016. The formalities are completed and the final
court approval is received on 1 April 2017.
Under Ind AS 103, the combination
date is 1 April, 2017. This is the
date when Willing will merge into Acquisitive. The combination is accounted by Acquisitive
in the financial year 2017-18, using the pooling of interest method. However, the financial information of
Acquisitive for the financial year 16-17, will be restated as if the business
combination had occurred from the beginning of the financial year 16-17, ie
from 1 April 2016.
If the formalities are
completed and the final court approval is received on 1 April 2018, the
combination is accounted by Acquisitive in the financial year 2018-19.
However, the financial information of Acquisitive for the financial year 17-18,
will be restated as if the business combination had occurred from the beginning
of the financial year 17-18, ie from 1 April 2017.
In
order to comply with the requirements of Ind AS and ensure tax consistency as
discussed in previous example, Acquisitive would need to rely on the Madras
High Court judgement in Equitas. Essentially the appointed date and the
effective date could be set out in the court scheme, as the date when the
court passes the final order approving the combination transaction. The appointed date may not be 1 April,
2016, because it would not be in compliance with Ind AS.
However,
Acquisitive may consider an option whereby it prepares separate accounts for tax purposes with an appointed
date of 1 April, 2016. For MAT
purposes, Ind AS compliant financial statements will be the relevant
financial statements. These aspects
are discussed in the previous example.
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Conclusion
The ICAI should
provide appropriate clarification on the above subject. However, in the meanwhile, the principles
established in this article may be used to ensure compliance with Ind AS and
also fulfill the requirements of section 394 of the Companies Act.
