QUERY
- A has control over its100%
subsidiary B.
- There are 5 investors
(shareholders – X, X1, X2, X3 and X4) in A. No investor controls or jointly
controls or has significant influence on A.
- A, B and all the investors in
A follow Ind AS. All the investors measure their investment in A at FVTPL. A’s
accounting policy is to measure investments in subsidiary and associates at
cost in separate financial statements.
- Due to certain regulatory
issues, A should not be controlling B.
- Consequently, B issues its
shares to the investors in A without any consideration, which will reduce A’s
shareholding in B to 40%. Accordingly, B becomes A’s associate.
- The number of shares which A
held in B, pre and post the transaction has not changed, as shares have been
distributed by B directly to the shareholders of A. However, A’s holding in B
is reduced to 40%.
- Investor X, one of the 5
investors, is holding 100 shares in A at fair value of INR 200. Investor X
continues to hold 100 shares and has received shares of B for no consideration.
- All investors are treated
equal in proportion to their shareholding.
- The decision to undertake the
above transaction had the unanimous approval of the board of directors of B.
Pre- and post-restructuring shareholding pattern is depicted in the
diagram below:
How shall A, B and investor X account for this transaction in their Ind
AS separate financial statement (SFS)?
RESPONSE
Accounting
in SFS of investor X
View 1 – There is no change in X’s situation except that now X is directly
holding in B instead of through A. Consequently, X will simply split the fair
value of its holding in A into A’s share and B’s share on relative fair value
basis. Under this view, there is no P&L impact.
To support
this view, one may draw an analogy from ITFG 20 issue 4. In that fact pattern,
there is transfer of a business division from an associate to fellow associate.
ITFG concluded that there is no ‘exchange’ of investments. Investor continues
to hold the same number and proportion of equity shares in A Limited
(Transferor associate) after the demerger as it did before the demerger.
Therefore, applying this principle, the ‘cost’ of the new shares received in B
is represented by the amount derecognised by X Limited in respect of its
investment in A Limited. The accounting is presented below, with assumed
figures. However, one should be mindful that in ITFG’s case, investment is
carried at cost, whereas in the given case these investments are carried at
fair value. Consequently, if the fair value of shares in A pre-transaction is
less than the aggregate fair value of shares in A and B post-transaction, this
accounting may result in subsequent gains to investor X, which needs to be
recognised in the P&L.
|
In X’s SFS
|
|
Particulars
|
Dr. (INR)
|
Cr. (INR)
|
|
Investment in A (relative fair value)
Investment in B (relative fair value)
To investment in A (pre-receipt of B’s share)
|
80
120
|
200
|
View 2 – X is having investment in financial instrument, which are carried at
FVTPL. Post the transaction, X shall fair value its investment in A and B; if
there is any gain due to unlocking of value or other factors, gain should be
recognised in P&L immediately.
|
In X’s SFS
|
|
Particulars
|
Dr. (INR)
|
Cr. (INR)
|
|
Investment in B(@ fair value) Dr
To Investment in A (change in fair value)
To gain on exchange – P&L (if any)
|
140
|
110
30
|
Note: Fair value of
investment in B and change in fair value of investment in A are hypothetical
and for illustrative purposes only. The gain of INR 30 reflects unlocking of
value in the hands of investors.
Accounting
in the SFS of A
View 1 – The number of shares which A held in B pre and post the transaction
has not changed. As the cost of investment for holding the same number of
shares has not changed and A has not received or distributed any shares, the
investments will continue to be recorded at the same cost, even though the
investment is now an associate. However, A will test the investment for
impairment as per Ind AS 36 and record the impairment charge to P&L, if
any. Analogy can be drawn from transactions wherein subsidiary issues shares to
outside unrelated shareholders and thereby the parent loses control and that investment
becomes as associate. In such a case, the common practice in SFS of parent is
that the investment continues to be recorded at cost (subject to impairment).
- Additionally, at the ultimate
shareholders level per se nothing has changed. Therefore, it cannot be
inferred that any dividend has been distributed to the shareholders by A. The
decision is taken by the ultimate shareholders, and A does nothing substantial.
At best, A is merely a pass through; that, too, indirectly rather than
directly. Consequently, A is neither receiving any dividends nor distributing
any dividends. However, due to the dilution, its investment in B will be tested
for impairment.
- To support View 1, there can be
multiple ways of looking at this transaction:
• A is giving up the value of its
underlying investment in subsidiary B to its shareholders. A has not declared
and is not obliged to distribute any dividends (hence Ind AS 10 Appendix A Distribution
of Non-cash Assets to Owners does not apply). Neither is there a demerger
from A’s perspective. Consequently, A’s Investment in B will be credited at
fair value, book value, or brought to its post impaired value, with the
corresponding impact taken to equity.
• This is merely a restructuring
arrangement where the subsidiary is now split between A and the ultimate
shareholders. There are no dividends received or paid. The decision of
splitting the shares is taken by ultimate shareholders, rather than A. A does
nothing. Consequently, A’s investment in B will be only tested for impairment.
In View 1, there is no credit to the P&L in the SFS of A.
View 2 – A
has not declared and is not obliged to distribute any dividends, but there is
an indirect distribution by A to its shareholders. In the absence of any
specific guidance to this unique fact pattern, and based on Ind AS 8
Paragraph10, A may draw analogy from Appendix A to Ind AS 10. Accordingly,
applying the guidance on distribution of non-cash assets to the owners, A shall
create a dividend payable liability out of its reserves, and then record the
distribution of non-cash asset (indirect receipt of shares of B) in its books
at fair value of the assets distributed, and the difference between dividend
payable (at fair value) and the investment in B (at proportionate cost of
deemed dilution) would be recorded as a gain in the P&L.
|
In SFS of A
|
|
Particulars
|
Dr. (INR)
|
Cr. (INR)
|
|
On creation of dividend
payable
liability at fair value
Equity Dr
To Dividend Payable
|
1000
|
1000
|
|
On distribution of dividend
Dividend payable (@ fair
value)
To Investment in B
(@Proportionate Cost)
To P&L (Gain) [Balancing
figure]
|
1000
|
900
100
|
Note: Fair value of dividend
payable and proportionate value of investment in B are hypothetical and for
illustrative purposes only.
Accounting
in the SFS of B
From B’s perspective, additional shares are being issued to ultimate
shareholders for which no consideration is received. Consequently, B will
credit share capital and debit equity. Essentially, the debit and credit is
reflected within the equity caption and there is no P&L impact.
CONCLUSION
Had A
directly distributed its investment in B to its shareholders, so that its
shareholding in B is reduced to 40%, the application of Ind AS 10 Appendix A
would result in View 2 only, from the perspective of SFS of A. However, in the
absence of any specific guidance under Ind AS with respect to SFS, the author
believes that different views have emerged. Moreover, it is unfair that a
restructuring transaction to comply with regulations should result in a P&L
gain. The ITFG may provide necessary clarifications.
