ACCOUNTING FOR COURT SCHEMES UNDER IND-AS & ON TRANSITION DATE

A first-time adopter choosing to apply this exemption is not required to restate business combinations to comply with Ind-AS 103, if control was obtained before the transition date. A first-time adopter taking advantage of this exemption will not have to revisit past business combinations to establish fair values and amounts of goodwill under Ind-AS. However, the application of the exemption is complex, and certain adjustments to transactions under Indian GAAP may still be required.

A first-time adopter may also choose not to use the exemption and restate previous combinations in accordance with Ind-AS 103. If a first-time adopter restates any business combination prior to its date of transition to comply with Ind-AS 103, it must restate all business combinations under Ind-AS 103 which occur after the date of that combination. In simple words, a first time adopter may choose a date and restate all business combinations from that date. Business combinations before that date are not restated by using the exemption.

Using the exemption not to restate business combinations under Ind-AS 103, does not mean that the entire accounting under Indian GAAP is kosher. The exemption is only with respect to fair value accounting. Thus, if a proper asset or liability was not recognised or written off in Indian GAAP, then the same will have to be properly accounted at the transition date and on a go forward basis in the Ind AS financial statements.

On 16th February 2015, the Ministry of Corporate Affairs (MCA) notified the Companies (Indian Accounting Standards) Rules, 2015 laying down the roadmap for application of IFRS converged standards (Ind-AS). As per general instructions in the MCA notification, notified Ind AS’s are intended to be in conformity with the provisions of applicable laws. However, if due to subsequent amendments in the law, a particular Ind AS is found to be not in conformity with such law, the provisions of the said law will prevail and the financial statements will be prepared in conformity with such law. Therefore, as per the Framework, law shall override the provisions of Ind-AS, unless clarified otherwise.

With the above background, let us consider two simple scenarios, for an acquirer company that is in phase 1, and has a transition date of 1st April, 2015. Prior to this transition date, the acquirer has made three acquisitions of businesses. Only Acquisition 2 was under a court scheme, in which two accounting concessions were made by the court. Acquisition 2 happened in 2009; when SEBI requirement to comply with accounting standards in a court scheme was not yet legislated. Since those acquisitions were of business divisions, rather than acquisition of an investment, those were accounted in the separate financial statements of the acquirer. The two scenarios are as follows:

1. Acquirer does not wish to restate past business combinations.

2. Acquirer wants to restate business combinations starting from acquisition 1.

Commentary on Scenario 1: Acquirer does not wish to restate past business combinations There is no issue with Acquisition 1 & 3. However, the question is with respect to Acquisition 2. Can the accounting ordered by the court be retained as it is both at the transition date and on a go forward basis? View 1 Yes, the court order is supreme and therefore it will trump the requirements of Ind-AS 101 and Ind-AS 103. Thus indefinite life intangible assets will not be resurrected in Ind-AS financial statements and impairment losses will be adjusted against reserves under Ind-AS on transition date and on a go forward basis. The court order is applicable to all statutory financial statements prepared under Indian law; and would be applicable to both Indian GAAP and Ind-AS financial statements. View 2 The court scheme was applicable to Indian GAAP financial statements and hence is not relevant for the purposes of preparing Ind AS financial statements. Therefore, on transition date the company will have to recognize intangible assets under Ind AS. Further any future impairment losses will be adjusted to P&L a/c rather than directly to reserves.

Commentary on Scenario 2: Acquirer wants to restate business combinations starting from acquisition 1

View 1
The acquirer can restate Acquisitions 1, 2 & 3. Though acquisition 2 was under a court scheme it can be restated under Ind-AS. This is on basis that the court scheme applied to Indian GAAP financial statements and not Ind-AS financial statements. When Acquisition 2 is restated in accordance with Ind AS 103, the accounting concessions provided by the court will have to be disregarded.

View 2
The acquirer can restate Acquisitions 1 & 3. However, Acquisition 2 cannot be restated because it is under a court scheme, and the court mandated accounting cannot be changed. This is on the basis that the court scheme is applicable to all statutory financial statements, and it does not matter whether those are prepared under Indian GAAP or Ind-AS.

View 3
The acquirer cannot restate acquisition 2, because it is under a court scheme. As a result, restating of Scquisition 1 is also tainted. This is because under Ind AS 101, if a first-time adopter restates any business combination prior to its date of transition to comply with Ind-AS 103, it must restate all business combinations under Ind-AS 103 which occur after the date of that combination. Therefore the acquirer can only restate acquisition 3. Acquisition 1 & 2, along with the court concession on the accounting will have to be retained under Ind AS.

Conclusion
The author believes that the current drafting of Ind AS and the MCA circular, provides a flexibility in the views that can be taken. However, the ICAI along with MCA may provide a more clear guidance and way forward on this major dilemma.