This article deals with the
appropriate accounting in an interesting situation where a parent merges with
its own subsidiary. At present there is no direct guidance on this subject.
FACTS
OF THE CASE
* Entity X is a listed entity and has only two
subsidiaries; 35% in X is held by the Promoter Group and the remaining 65% is
widely dispersed. All entities have businesses.
* During the year, the Board of Directors of X
has decided to carry out a two-step restructuring plan.
* As part of the restructuring plan, first Y
will get merged into X and then X will be merged into Z (the surviving entity).
* Both Y and Z were acquired by X five years
ago and goodwill relating to the acquisition is appearing in the consolidated
financial statement (CFS) of X.
* The rationale for this plan is to utilise the
incentives / deduction under the Income Tax Act that Entity Z has and to create
greater operational synergies.
* After the merger, Z is the only surviving
entity and there will be no CFS to be prepared.
What is the accounting in
the books of Z, which is the surviving entity?
RESPONSE
Reference
to standards and other pronouncements
The relevant portion of
Appendix C, Business Combinations of Entities under Common Control of Ind AS
103 – Business Combinations, is reproduced below.
Paragraph 2 defines common
control business combination as – ‘Common control
business combination means a business combination involving entities or
businesses in which all the combining entities or businesses are ultimately
controlled by the same party or parties both before and after the business
combination, and that control is not transitory.’
‘8
Business combinations involving entities or businesses under common control
shall be accounted for using the pooling of interests method.
9 The
pooling of interest method is considered to involve the following:
i. The assets and liabilities of the combining
entities are reflected at their carrying amounts………’
ICAI’s Ind AS Transition Facilitation Group Bulletin 9 (ITFG 9),
Issue No 2, provides the following clarifications:
When two subsidiaries
merge, it requires the merger to be reflected at the carrying values of assets
and liabilities as appearing in the standalone financial statements of the
subsidiaries as follows:
In
accordance with the above, it may be noted that the assets and liabilities of
the combining entities are reflected at their carrying amounts. Accordingly, in
accordance with paragraph 9(a)(i) of Appendix C of Ind AS 103, in the separate
financial statements of C Ltd., the carrying values of the assets and
liabilities as appearing in the standalone financial statements of the entities
being combined, i.e., B Ltd. & C Ltd. in this case shall be recognised.
When a subsidiary merges
with the parent entity, it requires the merger to be reflected at the carrying
values of assets and liabilities as appearing in the consolidated financial
statements of the parent entity as follows:
In
this case, since B Ltd. is merging with A Ltd. (i.e., parent) nothing has
changed and the transaction only means that the assets, liabilities and
reserves of B Ltd. which were appearing in the consolidated financial
statements of Group A immediately before the merger would now be a part of the
separate financial statements of A Ltd. Accordingly, it would be appropriate to
recognise the carrying value of the assets, liabilities and reserves pertaining
to B Ltd. as appearing in the consolidated financial statements of A Ltd.
Separate financial statements to the extent of this common control transaction
shall be considered as a continuation of the consolidated group.
ANALYSIS
In our fact pattern,
because there is no change in the shareholders or their ownership, post
ultimate restructuring, this is a common control transaction. The accounting
will be done step-wise in the following manner:
Step
I: Merger of Y (Subsidiary) with X (Parent)
This transaction has been
dealt with in ITFG 9 Issue 2,
wherein it is concluded that it would be appropriate to recognise in separate
financial statements (SFS) of X the carrying value of the assets, liabilities
and reserves pertaining to Y as appearing in the consolidated financial statements
of X, as this merger transaction has changed nothing and the transaction only
means that the assets, liabilities, reserves, including goodwill and intangible
assets recognised upon acquisition of Y which were appearing in the
consolidated financial statements of Group X immediately before the merger,
would now be a part of the separate financial statements of X Ltd.
Step
II: Post Step I, merger of X (Parent) with Z (Subsidiary)
Drawing an analogy from the
ITFG 9 Issue 2, wherein it is concluded that
when subsidiary merges with parent, it is appropriate to use CFS numbers for merger accounting, a similar
conclusion can be drawn, where parent merges with subsidiary as direction of
merger (i.e., whether parent merges with subsidiary or vice versa), should not change the
conclusion. Besides, if X’s SFS is used in accounting for the merger, the
goodwill recognised for acquisition of Z would disappear, which will not be
appropriate.
In a nutshell, Z will account for this transaction by recording
assets, liabilities, reserves, including goodwill and intangible assets
recognised upon acquisition of Y and Z, by using the numbers appearing in the
CFS of X. This is the most appropriate thing to do because otherwise the
acquisition accounting reflected in the CFS for acquisition of Y and Z will
simply disappear, which will not be appropriate.
Today we live in a society in
which spurious realities are manufactured by the media, by governments, by big
corporations, by religious groups, political groups… So I ask, in my writing,
What is real? Because unceasingly we are bombarded with pseudo-realities
manufactured by very sophisticated people using very sophisticated electronic
mechanisms. I do not distrust their motives; I distrust their power. They have
a lot of it. And it is an astonishing power: that of creating whole universes,
universes of the mind. I ought to know.
I do the same thing
— Philip K. Dick
