Accounting of a Demerger Scheme that is Not a Common Control Transaction

In this article, we deal with the date and other aspects of accounting for a demerger scheme that is not a common control transaction in the books of the transferor and the transferee, and its interaction with the MCA General Circular 9/2019 dated 21st August, 2019 on clarification on “appointed date” referred to in section 232(6) of the Companies Act, 2013. FACT PATTERN a)    Oz Co (“transferor”) transfers one of the business divisions to a shell company, New Co (“transferee”). b)    Oz Co is a widely held company and there are no controlling shareholders. c)    New Co issues shares to the shareholders of Oz Co on a proportionate basis as a consideration for the demerger. d)    The demerger is undertaken through a court scheme that will need to be approved by the NCLT. e)    The appointed date in the scheme is dated 1st April, 20X2, though the scheme is filed later. f)    Oz Co and New Co follow the financial year. g)    NCLT approves the scheme on 1st May, 20X3, i.e., F.Y. 20X3-X4. The financial statements for year ended 31st March, 20X3, were approved and circulated to shareholders prior to 1st May, 20X3. How will the scheme be accounted for in the books of the transferor and transferee companies? At what date the transferor will account for the profit or loss from the transfer? RESPONSE Technical Literature MCA General Ci

Read More