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IND AS - Business Combinations, ICDS,CFS and Others
. . . few case studies
Accounting Standards – Indian and Global Scenario
Interplay of IND AS with ICDS and MAT03
Contents
01
IND AS 103 - Business Combination02
Consolidated Financial Statement04
2
Accounting in India have evolved from Kautilya’s Arthashastra in 321-296 BC to IND AS in 2015 AD.
Very early practices of accounting involved single entry techniques.
Double entry system of accounting was introduced by an Italian, Luca Pacioli in the year 1494.
Evolution of Accounting practices
Accounting
Standards –
Indian and
Global Scenario
GAAP & Accounting Standards
GAAP encompasses the conventions, rules and procedures necessary to define accepted
accounting practice at a particular time.
Accounting Standards by ASB set up in 1977, are derived from these conventions, rules and
procedures.
US GAAP & International Accounting Standards
In US, the accounting is governed by the US GAAP under the oversight of FASB, which are very
comprehensive, extensive and oldest among the accounting principles prevalent in USA.
International Accounting Standards Committee (now, International Accounting Standards Board or
IASB) was set up in 1973 in London to publish International Accounting Standards worldwide.
IASB in 2001 confirmed the status of International Accounting Standards (IAS). Standards issued
thereafter are called International Financial Reporting Standards (IFRS).
The first IFRS was published in June 2003
3
Accounting Standards followed worldwide:
About 120 nations (including European Union) permit IFRS for domestic listed companies.
About 90 countries out of them have fully conformed with IFRS as promulgated by the IASB.
Some countries have converged IFRS as per their local environment and business scenario;
Some other countries like Australia & New Zealand have adopted national Standards that they describe
as IFRS Equivalents.
Benefits of adopting IFRS :
- Muti-national businesses International businesses of a company are more reliably consolidated
- Investors Boosted confidence with decreased cost in terms of time & effort for converting
financials into comparable form
- Ease in fund raising from foreign markets at a lower cost
Accounting Standards and Indian Accounting Standards:
In 2015, India introduced IND AS for Indian Companies which were to be adopted in phases.
With the idea of making Indian Company’s accounting procedures at par with global practices,
Accounting Standard Board (ASB) constituted by ICAI considered IAS and IFRS as basis to issue IND AS.
IND AS is primarily based on IFRS & IAS, however, it provides necessary carve outs, clarification &
guidance as per the local environment and practices.
Accounting
Standards –
Indian and
Global Scenario
4
Introduction to IND AS 103 “Business Combination”
Case Studies….Business Combination02Business
Combination
IND AS 103 - Objective and Key Definitions
Accounting under IND AS 103 – Business Combination
Case Study 1 – Demerger of Business
Case Study 2 – Determining Control for Business Combination
Case Study 3 – Slump Exchange of Business
Case Study 4 – Amalgamation after acquisition
Case Study 5 – IND AS 103 and MAT
01
5
IND AS 103 provides principles and requirements for how the acquirer:
recognises and measures identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree;
recognises and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and
provides disclosure about the Business Combination
IND AS 103 - Objective and Key Definition
Objective of IND AS 103
Key Definitions
Business Combination A transaction or other event in which an acquirer obtains control of one or more businesses. Transactions
sometimes referred to as ‘true mergers’ or ‘mergers of equals’ are also business combinations as that term is used in this Indian
Accounting Standard.
Control An investor controls an investee when it is exposed, or has rights, to variable returns from its involvement withthe investee and has the ability to affect those returns through its power over the investee
Business An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing
goods or services to customers, generating investment income (such as dividends or interest) or generating other income from
ordinary activities.
Acquisition date The date on which the acquirer obtains control of the acquiree.
6
• No prescribed
Accounting Treatment
for Acquiree in IND AS
103.
• Accounting is carried
as per widely accepted
accounting practices
Business
Combination
Amalgamation
Demerger
Slump Sale/Exchange
Share Acquisition
Accounting under IND AS 103 – Business Combination
Accounting in books of
Acquiree Company
Accounting in books of
Acquirer Company
Common Control Transactions
Accounting as per Pooling of Interest Method as
given in Appendix C to IND AS 103:
• Assets / Liabilities received – Recorded at their
existing carrying amount;
• Reserves & Surplus – Reserves & Surplus related to
business are transferred.
• Capital Reserve – Difference transferred to Capital
Reserve.
*No concept of Goodwill recognition in case of
common control business combination, except
merger of acquired subsidiary.
Non-Common Control Transactions
Accounting as per Acquisition Method:
• Assets / Liabilities recognition –
recorded at fair value on the acquisition
date.
• Goodwill – Consideration & non-
controlling interest > value of net assets
taken over
• Capital Reserve – value of net assets
taken over > Consideration & non-
controlling interest
IND AS 103 is applicable on all
forms of Business
Combinations. However AS 14
deals only with
Amalgamation.
7
Case Study 1 Demerger of Business
Brief Facts of the Case
P Ltd is a listed public company engaged in Electricity distribution Business
(Regulated by Electricity Regulatory Commission) & electricity generation business
(Non Regulated).
To ring-fence Regulated Business from perceived risks of Non Regulated business, P
Ltd hived off its Non Regulated business to Q Ltd through a Scheme of Demerger.
Q Ltd to issue shares to shareholders of P Ltd as consideration for Business Transfer.
P Ltd & Q Ltd are non controlled entities
Key Issues addressed
Issue 1: Aligning business objectives with regulatory requirements
Issue 2: Determining Acquisition Date and Appointed Date
Issue 3: Accounting Treatment in the Books of Transferee (Q Ltd)
- Acquisition Method
- Business Commination effected post Balance Sheet date but before BOD
Approval date
Issue 4: Accounting Treatment in the Books of Transferor (P Ltd)
- Assets transferred at book value or fair value
Q Ltd.P Ltd.
Electricity Distribution
business (Regulated)
Electricity Generation
business (Non Regulated)
Demerger of Non-
Regulated Business
8
Aligning Business objectives with Regulatory Requirements
A Business Combination restructuring is to be planned such that
end objective of the restructuring is met
within the legal framework (including IND AS requirements)
Direct
Tax
Indirect Tax
Company
Law Competition
Law
Stamp
Duty
Stock
Exchanges
Regulatory Aspects to be considered
SEBI
FEMA IND - AS
Industry Specific
Statutes & Policies
9
Determining Acquisition Date and Appointed Date
IND AS 103 prescribes that, from acquisition date, the
acquirer obtains control of the acquiree and shall
do accounting of Business Combination.
An acquisition date may precede the closing date if
a written agreement provides so.
(Applicable from 16 February, 2015)
Sec 232(6) of Companies Act prescribes that all
NCLT Scheme shall clearly indicate an appointed
date from which it shall be effective.
Scheme shall deemed to be effective from such
date and not at a subsequent date.
(Applicable from 15 December, 2016)
ITFG Clarification (Issued by ICAI) – If an appointed date approved by NCLT is different from an acquisition date as per IND AS
103, then such appointed date shall be considered as acquisition date [October 23, 2017]
Or
Acquisition Date
???
Appointed Date
MCA Clarification – ‘Appointed Date' as per scheme shall be deemed to be 'acquisition date' for the purpose of IND AS 103.
Such Appointed Date may be a specific calendar date or may be tied to the occurrence of an event. [21st August, 2019]
Illustration
Appointed Date of scheme 1st April, 2018
Shareholder Approval Date December, 2019
NCLT Approval & Scheme
effectiveMay, 2020
Board Approval Date April, 2019
- Control actually gets transferred upon NCLT approval &
effectiveness of Scheme in May 2020 but w.e.f. Appointed
Date of 1st April 2018
- Appointed date (1st April, 2018) approved by NCLT shall
be the deemed date for transfer of control.
- Thus accounts of P Ltd and Q Ltd. shall take effect of
Demerger scheme from 1st April 2018
10
Acquisition method (1 of 2)
• Assets & Liabilities
recorded at fair
values at acquisition
date.
• assets newly
identified (not
recognized
previously by
Transferor) also
recorded as
Intangible Assets
• Excess of
consideration
over net
assets..
• ..recorded as
Goodwill.
• Excess of net
assets over
consideration
recorded as
gain on
bargain/
purchase.
• During transaction
amongst non
controlled entities,
generally gain transferred to reserve directly through SOCIE (in
rare cases it routes through OCI where genuine gain is there as result of better negotiation)
• Goodwill recorded
pursuant to business
combination…
• … is eligible for
depreciation under
IT Act*, provided it
has underlying
business &
commercial
assets/rights
Tax depreciation claim needs to be lodged in the year of merger. By the time, the Scheme becomes effective, even if time limit
to file revise return has expired, as recently decided by the Apex Court, revised return can still be filed in case of Business
Combinations and the Revenue Authorities would have to take cognizance thereof.
1 2 3 4 5
* (Refer SC decision in case of Smifs Securities)
11
Q Ltd.P Ltd.
Electricity Generation Business
(Regulated)
Electricity Distribution Business
(Non Regulated)
Demerger of Non-
Regulated Business
Particulars
Pre Post
P Ltd
Q Ltd Q LtdTotal
Non
Regulated
A. Assets
Fixed Assets 70 30* 80 130
Current Assets 30 20 50 70
Goodwill & IA - - - 20
Total 100 50 130 220
B. Equity & Liabilities
Share Capital 10 - 20 30
Reserves 20 - 40 90
Borrowings 20 10 30 40
Current Liability 50 20 40 60
Total 100 30 130 220
Restructuring Step
Pre & Post Demerger Balance Sheet
* Fair Value = 50
Q Ltd.P Ltd.
Electricity Generation
Business (Regulated)
Resultant Structure
Electricity
Distribution Business
(Non Regulated)
• Demerger of Non-Regulated
Business of P Ltd. into Q Ltd.
• Q Ltd. to issue equity shares
to shareholders of P Ltd.
Accounting by Q Ltd as per Acquisition Method
(since P and Q are non-common control entities)
All assets & liabilities of transferred business to be
recorded at fair values (NW FV – 40 | NW BV - 20)
Equity shares issued as consideration accounted as
equity share capital & securities premium
(Consideration – 60 | Capital -10 | Premium -50)
Excess of consideration issued [60] over net assets
recorded [NW-40] recorded as Goodwill & IA
(Goodwill & IA - 20)
Transaction
Accounting
in Books of
Q Ltd
Acquisition method (2 of 2)
12
Business Combination effected after Balance Sheet date but before BOD Approval
# Particulars Case I Case II Case III
1 Transferor Co. TIFCO Holdings Ltd Reva Proteins Ltd TML Drivelines Ltd
2 Transferee Co. Indian Hotels Company Ltd Nitta Gelatin India Ltd Tata Motors Ltd
3 Transaction Amalgamation Amalgamation Amalgamation
4 Entities under common control? Yes Yes Yes
5 Effectiveness of Scheme 11th April, 2018 3rd April, 2019 30th April, 2018
6 Board approval date of financials 25th May, 2018 9th May, 2019 23rd May, 2018
Precedents where Companies have taken effect of Business Combination after Balance Sheet date considering ITFG clarification
Issue
Business combination approved & effective after Balance Sheet date (May 2020) but prior to approval of
financial statements by BOD for FY 2019-20.
Whether Business Combination shall be incorporated in financial statement for FY 2019-20 ?
NCLT order Date Q Ltd shall take effect of Business combination in the financials for FY 19-20 as the scheme is approved by
NCLT prior to approval of financials and the appointed date (1st April, 2018) is within reporting period.
Provisions
As per IND AS 10 (para 22) and IND AS 103 (appendix C, para 14), a business combination effective after the
reporting period is a non-adjusting event and only disclosures shall be given.
As per ITFG Clarification (issued by ICAI on 1 Feb, 2018), even though NCLT approval is pending at the end of
Reporting period but Scheme is approved before approval of financial statement by BOD & appointed date
falls within reporting period, effect Business Combination shall be taken in such financial statement.
13
Assets transferred at fair value upon Demerger
IND AS 103 doesn’t provide guidance for treatment of Business Combination in books of Transferor Company.
Appendix A to IND AS 10 provides that upon Demerger, issue of shares by a non-common control entity (here, Q Ltd) to
shareholder of Transferor (here, P Ltd) shall be considered as Dividend by Transferor (P) to its shareholders & a liability
shall be created, equivalent to fair value of net assets transferred.
Difference arising between carrying value and fair value of Net assets shall be recognized in profit and loss statement.
IND AS
provisions
Accounting
in Books of
P Ltd
Liability to pay dividend equal to fair value of assets to be transferred shall be created by P Ltd out of general reserves
(Dividend Payable to be created… 60)
Difference in Dividend payable and carrying amount of assets shall be transferred to Profit & Loss A/c .
(profit recorded….. 40)
Tax
Implications
Despite the above treatment, the demerger will be classified as eligible Tax Demerger [Proviso to sec 2(19AA)(iii))]
The amount recorded in the books as dividend by Demerged Company will not be considered as dividend for IT Act [Sec
2(22)(v)]
The amount of profit credited to P&L a/c as a result of demerger would not be treated as part of Book Profit for the
purpose of MAT [Sec 115 JB (2A)(d)]
14
Case Study 2
Common Control Business CombinationBrief Facts of the Case
In number of business combination involving group or associate companies not being
subsidiary, there may be an apparent feel that there is not common control & hence
acquisition method should apply, however, a dipper examination is necessary and if common
control is found on such examination, pooling of interest method should be applicable for
Business Combination
A Ltd & B Ltd are manufacturing Companies. A owns 41% in B Ltd
B Ltd is proposed to merge with A Ltd.
W Ltd, X Ltd, Y Ltd, Z Ltd & individuals [Mr G & Mr H] holds shares both in A Ltd & B Ltd
W Ltd, X Ltd, Y Ltd & Z Ltd are owned by P ltd, Q Ltd & R Ltd along with individuals [Mr G
& Mr H].
P Ltd, Q Ltd & R Ltd owned by individuals [Mr G & Mr H] & ABC Trust
Mr G & Mr H are beneficiaries and trustee of ABC Trust
ABC trust - both Trustees to vote in tandem w.r.t. shares of any company held by Trust.
Few common KMPs (including Mr. G & Mr. H) in both the entities
Key Issues addressed
Issue: Whether the transaction would fall under Common Control Business
Combination in the light of –
- Ultimate Control
- Presence of Contractual agreement
- Collective Power to govern policies
Determining Common Control
15
Determining Common Control for Business combination
What is Common Control Business Combination?
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 [Appendix C of IND AS 103 for Common control
Business Combination]
What is Common control?
An entity can be controlled by an individual, or by a group of
individuals acting together under a contractual
arrangement, and that individual or group of individuals may
not be subject to financial reporting requirements of IND AS.
Therefore, it is not necessary for combining entities to be
included as part of the same consolidated financial statements
for a business combination to be regarded as one having
entities under common control.
A group of individuals are regarded as controlling an entity
when, as a result of contractual arrangements, they
collectively have the power to govern its financial and
operating policies so as to obtain benefits from its activities,
and that ultimate collective power is not transitory.
Illustration – Group Structure
R Ltd.*Q Ltd.
ABC Trust
P Ltd.
Mr. H
W Ltd. X Ltd.
Mr. G
Z Ltd.Y Ltd.*
A Ltd.* B Ltd.*
Both are Managing Trustee
& Beneficiary (50%) each
41%
7%35%
7%
9%
23%
36%
39%
24%33%
37%53%100%
23%
54%
39% 19%
42% 89%64%
* Balance shareholding in these entities are held by public shareholders
16
Whether merger of B Ltd into A Ltd would be covered by Common Control Merger provisions even if A Ltd holds < 50% of B Ltd.?
In the given case, the business combination would qualify as Common Control Business Combination and accounting treatment
would be covered under Appendix C of IND AS 103 (i.e. Pooling of interest Method).
Determining Common Control for Business combination
Both combining entities are ultimately
controlled by same party both before & after
combination
ABC trust effectively holds majority portion of the shareholding
in A Ltd. and B Ltd., either directly or indirectly through its
holding in other controlled entities.
Group of individuals are regarded as controlling
if they have collective power to govern key
policies
Both entities have common KMPs including Mr. G & Mr. H & both
these individuals also have substantial indirect joint control over
both entities, thus they both have collective power to govern key
policies of both entities.
Presence of contractual agreement between
group of individuals to control the entities
ABC Trust deed provides for exercising voting rights on the joint
direction of the Managing Trustees and not at their individual
levels, i.e. both individuals vote in tandem with each other.
Combining entities may not necessarily be part
of the same consolidated financial statements
Even if B Ltd. being associate of A Ltd. is not part of CFS of A Ltd.
In such scenario, also the business combination of A Ltd. & B Ltd.
can qualify as common control business combination since both
entities are ultimately controlled by same party.
Analy
sis
of
Legal Pro
vis
ions
17
Case Study 3 Slump Exchange of Business Brief Facts of the Case
A Ltd holds 100% shares of B Ltd.
A Ltd transfers its substantial business to B Ltd through a Business Transfer Agreement
executed on 11 July 2019 to consolidate its businesses in B Ltd
B Ltd has issued its Equity shares to A Ltd as consideration on 30 Nov 2019.
Effect of Slump Exchange recorded by A Ltd & B Ltd in Q3 FY 2019-20
However, approval of some lenders approving the transfer was not received till 31
March 2020.
Key Issues addressed
Issue 1: Accounting Treatment in the Books of Transferee (B Ltd)
Common control business combination accounting
Issue 2: Accounting Treatment in the Books of Transferor (A Ltd)
Adjustment of gain or loss on Transfer
Issue 3: IND AS & Audit
B Ltd.
A Ltd.Transfer of
entire
Business
through
BTA
Issue of
Equity
shares100%
18
Common Control Business Combination Accounting (1 of 3)
• Accounting
treatment for
Common control
transactions is
provided in
Appendix C of IND
AS 103
• ..similar to pooling
of interest method
under AS 14.
• Corresponding IAS,
IFRS 3 doesn’t
provide any
separate treatment.
1 2 3 4
• 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.
• Consideration issued
in form of
securities..
• … shall be recorded
at Nominal Value
• Assets &
• Liabilities..
• …are recorded at
carrying values
at acquisition
date.
• Identity of
Reserves shall be
Preserved
• Excess or shortfall
of share capital
issued and share
capital of
Transferor
Company
• ..recorded as
Capital Reserve.
5
19
Particulars
Pre Post
A Ltd
B Ltd B LtdTotal Transferred
A. Assets
Fixed Assets 70 60* 80 140
Current Assets 30 20 50 70
Total 100 80 130 210
B. Equity & Liabilities
Share Capital 10 - 20 50
Reserves 20 15 40 45
- Capital Reserve - - 5 -
- Retained Earnings 20 15 35 45
Borrowings 20 10 30 40
Current Liabilities 50 35 40 75
Total 100 60 130 210
Pre & Post Slump Exchange Balance Sheet
Transfer of business undertaking by A Ltd to its WOS, B Ltd
through Business Transfer Agreement (BTA). B Ltd issues equity
shares as consideration.
B Ltd.
A Ltd.
Transfer of
Business
Undertaking
through BTA
Issue of
Equity
shares100%
Accounting
in Books of
B Ltd
Transaction
Accounting in B Ltd as per Pooling of interest method
(since A and B are commonly controlled entities)
All assets & liabilities of transferred business to be
recorded at carrying values including reserves (BV of
assets (net of liabilities & reserves recorded) - 20)
Equity shares issued as consideration is accounted as
equity share capital at nominal value (nominal share
capital recorded – 30 | FV of Consideration - 40)
Difference of share capital recorded (30) and value of
net assets (including reserve) recorded (20) shall be
adjusted with Capital Reserve (5) and Retained Earnings
(5)
Capital Reserve shall not be negative and therefore
excess loss over the balance of capital reserve adjusted
with revenue reserves like Retained Earnings.
*Fair Value 80
Common Control Business Combination Accounting (2 of 3)
20
Sl.
No.Transferor Company Transferee Company Transaction Accounting in the Book of Transferor Co.
1. Network 18 Media &
Investments Ltd.
Media 18 Distribution Services
Limited, Web 18 Digital Services
Limited and Digital 18 Media
Services Limited
Slump Sale of Business
Undertaking
Difference of the consideration & net value of
assets adjusted with Capital Reserve.
2. Jindal Poly films Limited Jindal Photo Imaging Limited Demerger of Photo Films Business Excess of Book Value of assets over liabilities
adjusted with reserves of company as may be
decided by the board
3. Aurionpro Solutions
Limited
Trejhara Solutions Limited Demerger of Enterprise Security
and Banking & Fintech business
Excess of Book Value of assets over liabilities
adjusted against (i) Capital Reserve; (ii) General
Reserve and (iii) Profit & Loss account
De-recognize net assets and liabilities (including reserves) at their book value of 20
Slump exchange gain [difference in consideration (40) & carrying value of net assets & reserves (20)] is recorded
in Capital Reserve. Loss, if any, would have been adjusted with Capital Reserve & balance if any against Retained
Earnings
No guidance prescribed by IND AS 103 on Accounting Treatment to be followed by Transferor Company for Business
Combination.
GAAP suggests that adjustment of loss or gain on transfer of capital assets shall be against reserves of capital
nature such as capital reserve, securities premium, etc. Such treatment when approved by Court/NCLT shall be a
valid accounting treatment.
Precedents of Accounting Treatment in the books of Transferor Co (Like A Ltd here) is tabled below:
Issue
Accounting
in Books of
A Ltd
Common Control Business Combination Accounting (3 of 3)
21
IND AS & Audit
1. Case Brief 3. Regulations, Expert Opinion & Recording of Transaction2. Pending lenders’ approval
• 11 July 2019 - A & B
entered into Business
Transfer Agreement (BTA)
for transfer of business
undertaking
• 1 Oct 2019 - Effective
date for transfer of
Business as per BTA
• Q3 FY 19-20 - Effect of
Slump Exchange given in
the books
• Lenders approval
pending as on 31st March,
2020 for transfer of loan
books
• Approval of Lenders of A is
required for t/f its
borrowings.
• Post Slump Exchange, B
started servicing loan re-
payment & interest
payment on loan
transferred from A.
• Lenders of A accepted such
payment by B.
• Whether B is correct in
accounting Slump
Exchange w.e.f. 1st Oct
2019 pending Lenders
approval
• IND AS 109 states that
financial obligations shall
be derecognized only when
the obligation specified in
the contract is discharged
or cancelled or expires.
• Such discharge can be
either by process of law or
by the creditor.
• Lenders’ acceptance of
payment from B can be
considered as acquiescence
to transaction.
• Slump Exchange recorded
by A & B in their books
w.e.f. 1st Oct 2019
• Opinion from Legal &
Accounting experts
obtained that
- transaction is legally
completed &
- liability can be
construed to be legally
released in terms of
contractual substance of
the Transaction
IND AS shouldn’t be interpreted in isolation.
It rather requires pragmatic approach and comprehensive application of other applicable laws.
22
Case Study 4 Recording of Intangible Assets on
Merger of acquired Subsidiary with
Parent
23
PublicPromoters
A Ltd. B Ltd.
60% 40%Acquisition of
60% stake in B
Step 1: A Ltd. acquired 60% stake in B Ltd from Promoters of B Ltd.
Promoters
Step 2: Merger of Subsidiary into Parent (after sometime)
PublicA Ltd.
B Ltd.
60% 40%Merger
Promoters
Exploring possibility of recording Acquired Intangible Assets of B
Ltd. in Standalone Financial Statements of A Ltd. pursuant to
merger.
Prescribed Accounting Treatment
- Acquisition Method for preparing Consolidated Financial
Statements of A Ltd.
- Assets (including newly identifiable intangible assets not
previously recorded by B Ltd.) and liabilities of B Ltd. shall be
recorded at fair values resulting in recording of Goodwill.
Recording of Intangible Assets on Merger of Acquired Subsidiary with Parent
Prescribed Accounting Treatment
- Pooling of Interest Method
- Assets and liabilities of B Ltd. shall be recorded in the books of A
Ltd. at their carrying amounts.
24
• Pursuant to Step 1, B Ltd would become a subsidiary of A Ltd.
• Accordingly, A Ltd. & B Ltd. would be considered as entities under common control and proposed
amalgamation of A Ltd & B Ltd would be considered as a ‘Common Control Business Combination’.
• Hence, Merger under Step 2 would be required to be accounted for under Pooling of Interest Method as under:
“9. The pooling of interests method is considered to involve the following:
(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 recognize any new assets or liabilities.
The only adjustments that are made are to harmonize accounting policies.”
• While the above requires the assets to be recorded at carrying values, it has not been expressly mentioned
whether the carrying amount of the assets & liabilities of the combining entities should be reflected as
per:
(a) the consolidated financial statements of the ultimate parent; or
(b) the standalone financial statements of the transferor entity.
Analysis of Appendix C of IND AS 103A
ccounti
ng f
or
Am
alg
am
ati
on
of
A L
td &
B L
td
25
Recording of assets & liabilities of B Ltd. at carrying values reflected in CFS of A Ltd. upon merger can be justified on account of the following:
Based on above, a view may be taken that upon merger of a subsidiary with parent, carrying values of assets & liabilities of
Subsidiary as appearing in the CFS can be considered for the recording of merger in books of Parent.
This view was subsequently also concurred by the IND AS Technical Facilitation Group in its Clarification Bulletin 9
dated May 15, 2017.
Accordingly, intangible assets recorded in CFS at the time of acquisition of subsidiary may be recorded in the SFS which may
be considered to be eligible for tax depreciation subject to compliance with Income Tax Laws.
CFS of the parent entity reflects the combined financial statements of both the parent and its subsidiary.
Upon merger of the subsidiary into the parent, the assets and liabilities which were held by the Parent through the subsidiary
would now be directly held by the Parent.
Consequently, pursuant to the merger, assets and liabilities which were earlier reflected in the CFS of parent would now be
recorded in the SFS of parent.
Accordingly, the SFS would be reflective of the assets and liabilities of the consolidated group and hence the same should be
reflected at their values appearing in the CFS for fair and consistent presentation of the assets and liabilities in books of parent.
ITFG Clarification on the issue…..
26
Case Study 5Adoption of IND AS
&
MAT Implications
27
Adoption of IND AS & MAT Implications
Relevant Facts of the case:
Company A
Investment Trading
Company
Voluntarily
adopted IND
AS
Fair Valued its Assets
and Liabilities
including investments
from transition date
01.04.2016
Entered into a share
sale transaction
Cost of Acquisition 20 Cr
Fair Value on
Transition Date70 Cr
Sale Price 75 Cr
Fair Valuation Gain 50 Cr
Profit (FY 17-18) 5 Cr
Book
Profit
15 Cr.
(10+5)
Book
Profit
10
Cr.
01.04.2017 2017-18 01.12.2017 31.03.2018(FY 17-18)
31.03.2019(FY 18-19)
2019-20
Company A
shifted to
New Regime
1/5th Amount transferred to
retained earnings [INR 10 Cr
each year] shall be
transferred to book profits
for 5 years (Section
115JB(2C)
Observation & Discussions
Upon shifting to new regime, balance Book Profit of INR 30 Cr, hitherto liable to MAT, payable in equal installment in next 3 years shall not be
taxable anymore as the company has shifted to the new tax regime in FY 19-20 and MAT is then not applicable at all.
Cost of Acquisition 20 Cr
Fair Value on
Transition Date70 Cr
Fair Valuation Gain
(transferred to
retained earnings)
50 Cr
28
Interest Income on Stage 3 Loans by
NBFCCase Study 1
Classification of financial assets based on credit risk as per IND AS 109
Accounting under current Indian GAAP & IND AS 109
Treatment of interest income of NBFC under normal provisions & MAT
29
Interplay of
IND AS with
ICDS and MAT
CH
AR
AC
TER
IST
ICS O
F
ST
AG
E 3
ASSET
S
03
01
04
02
Credit Quality
Asset is credit-impaired - objective
evidence of impairment
Recognition of income
Life time expected credit loss
recognised.
Criteria
Interest Income on Stage 3 Loans by NBFC
Stage 1
Stage 2
Stage 3
In terms of IND AS 109, financial assets are
classified in different stages according to the
credit risk associated with a particular asset or a
group of assets.
According to the assessment of credit risk, a
financial asset is moved from one stage to
another.
Net basis – Gross carrying amount
minus loss allowance.
Asset is considered credit-impaired on
occurrence of certain events considered
detrimental to future cash flows.
Expected Credit Loss
30
Accounting Treament under IGAAP read
with Prudential Norms
NBFCs classified their loan assets into
various categories as per RBI Regulations.
A non-performing asset (NPA) is an asset on
which either the interest or principal or
both are overdue for a period of more
than 90 days.
Recognition of income on NPA accounts is
governed by RBI Regulations.
Income on NPA Accounts recognised on
receipt basis instead of Accrual Basis.
Income recognised for 90 days till an asset
became NPA subsequently reversed in
Statement of Profit and Loss (SPL).
RBI vide Circular dated 13-03-2020 has
clarified that NBFCs covered by IND AS are
required to comply with IND AS for the
preparation of their financial statements.
As per IND AS 109 – Financial Instruments, Loan
Assets classified in 3 stages according to the
associated credit risk. Assets classified under
Stage 3 are similar to NPA accounts.
Interest income on Stage 3 loans calculated
on the amortized cost (i.e. after deducting
allowance for expected credit loss).
No provision for reversal of interest income
already recognised for 90 days.
Unrecognised interest income on loans
outstanding on the date of transition to IND AS,
credited to Opening Equity.
In contrast to accounting treatment followed under IGAAP, interest income on Stage 3 loans (NPA Accounts) gets
credited to Statement Profit & Loss (SPL) on accrual basis under IND AS.
Accounting Treament under Ind AS
Interest Income on Stage 3 Loans by NBFC
31
Interest Income on Stage 3 Loans by NBFC
Pre-ICDS
regime (till
AY 2016-17)
ICDS IV ‘Revenue Recognition’ [Para 8(1)] requires that interest shall accrue on time basis and determined by
amount outstanding and the applicable rate.
As per ICDS IV [Para 4], Revenue shall be recognized when there is reasonable certainty of its ultimate collection.
CBDT has clarified that interest accrues on time basis and subsequent non recovery can be claimed as deduction
in view of amendment to Section 36 (1)(vii). Further, the provision of the Act (e.g. Section 43D) shall prevail over
the provisions of ICDS [Q No. 13 of Circular no. 10/2017, dated 23-03-2017 ].
However, Sec. 5 of I.T. Act provides that what can be taxed is only the income which has accrued or arisen in the
previous year. Hence, where reasonable certainty of recovery of revenue is lacking, it will be appropriate to say
that interest on stage 3 has not accrued.
Correspondingly write off in SPL out of interest income credited in Opening Equity as per IND AS has to be offered
to tax.
Under ICDS
regime (AY
2017-18 to
AY 2019-20)
Interest on Stage 3 Loans represents hypothetical income which is not chargeable to tax [CIT –vs.- Shoorji
Vallabhadas & Co. (1962) 46 ITR 144 (SC)].
In CIT -vs.- Vasisth Chay Vyapar Ltd. (2011) 330 ITR 440 (Del), it has been held that where recovery of inter
corporate deposits (ICD) itself had become doubtful due to precarious financial position of the borrower and ICD
had become a nonperforming asset as per the Directions of the RBI, then interest thereon could not be said to have
accrued to the assessee. View has been affirmed in CIT -vs.- Vasisth Chay Vyapar Ltd. (2018) 163 DTR 169 (SC).
Interest on NPA accounts offered to tax on receipt basis. Since the income is not credited in SPL, the same is also
not taxed under MAT computation.
32
Interest Income on Stage 3 Loans by NBFC
Sec. 43D was amended vide Finance Act, 2019 w.e.f from 01-04-2020 to cover certain categories of
NBFCs (deposit taking and systemically important non-deposit taking NBFC) whereby interest
income on certain prescribed categories of bad and doubtful debts shall be taxable on receipt basis
or credit to SPL, whichever is earlier.
Rules 6EA which provides for category of bad and doubtful debts has not been amended to include
NBFCs.
Interest on Stage 3 Loans being hypothetical in nature, taxing it on credit basis on account of Ind AS
implications would defeat the very purpose of introduction of Sec. 43D.
Further clarification is expected from RBI regarding applicability of its regulations over Ind AS
accounting treatment.
Ind AS has not yet been made applicable to banks and hence interest income on NPA by them shall
be taxed on receipt basis.
Post Sec.
43D
amendment
(AY 2020-21
onwards)
Memorandum to Finance Bill 2019 provides that Sec. 43D is being amended with a view to provide a level playing field to certain
categories of NBFCs as against public financial institutions, scheduled banks & cooperative banks.
However, this intent has not been achieved as banks not yet governed by Ind AS will be subject to tax on interest income on receipt
basis whereas NBFC will be taxed on accrual basis.
33
Introduction to IND AS 110 “Consolidated Financial
Statements”
Case Studies - Consolidated Financial Statements02
Consolidated
Financial
Statements
IND AS 110 :
- Objective and Key Definitions
- Exemptions
- Control
- Procedure and Other Requirements
- Difference between IGAAP And Ind AS
Case Study 1 – Control Through Voting Rights
Case Study 2 – De Facto Control
Case Study 3 – Re-assessment of Control
01
34
IND AS 110 - Objective and Key Definitions
IND AS 110 establishes principles for the presentation and preparation of consolidated financial statements when an entity controls one or
more other entities. To meet this objective, IND AS 110 :
requires an entity (the parent) that controls one or more other entities (subsidiaries) to present consolidated financial statements;
defines the principle of control, and establishes control as the basis for consolidation;
sets out how to apply the principle of control to identify whether an investor controls an investee and should consolidate it;
sets out the accounting requirements for the preparation of consolidated financial statements; and
defines an investment entity and sets out an exception to consolidating particular subsidiaries of an investment entity.
Control of an Investee An investor controls an investee when the investor 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.
Investment Entity An entity that: (a) obtains funds from one or more investors for the purpose of providing those investor(s) with
investment management services; (b) commits to its investor(s) that its business purpose is to invest funds solely for returns from capital
appreciation, investment income, or both; and (c) measures and evaluates the performance of substantially all of its investments on a
fair value basis.
Non-controlling Interest Equity in a subsidiary not attributable, directly or indirectly, to a parent.
Power Existing rights that give the current ability to direct the relevant activities.
Relevant activities For the purpose of this Ind AS, relevant activities are activities of the investee that significantly affect the investee’s
returns.
Objective of IND AS 110
Key Definitions
35
It is a wholly owned/ partially owned subsidiary of another parent and its owners are informed of and do not object to
non- consolidation
Its ultimate or any intermediate parent produces financial statements that are available for public use and comply with
Ind AS 110
Its debt/equity instruments are not traded in public market
It did not file, nor is in the process to file, its financial statements with a securities commission or other regulatory
organization for the purpose of issuing any instrument in a public market
Other Entities on whom Ind AS 110 does not apply
Entities on whom, post-employment benefit plans or other long-term employee benefit plans to which Ind AS 19,
Employee Benefits, applies.
An investment entity need not present consolidated financial statements if it is required, in accordance with paragraph
31 of Ind AS 110, to measure all of its subsidiaries at fair value through profit or loss.
IND AS 110 - Exemptions to Parent Company from preparing CFS
36
POWER over investee – Existing rights to direct relevant activities
Exposure to or right over variable returns from its involvement with
the investee – Possible variability to positive and negative returns
Ability to use its power over the investee to affect the amount of
variable return – Necessary to determine who ‘makes decisions’ is an
Principal or Agent .03
02
01
CONTROL (IND AS 110)
A control of an Investor on an investee is established, if and only if, the Investor has all the following :
What is Control….
37
Procedure – Consolidation of Subsidiary:
Combine assets, liabilities, income, expenses, cash flows of the subsidiary with parent.
Eliminate parent’s investment in each subsidiary with its portion of the subsidiary’s equity.
Fully eliminate intra group transactions and balances.
Some Other Requirements :
Uniformity in accounting policies of all the entities being consolidated
Non- Controlling Interest to be shown separately
The reporting dates of all the companies should be same for the purpose of consolidation, otherwise, additional financial
information needs to be given to align the dates with that of the parent, until its impracticable to do so. In case of impracticability,
the latest financial statements should be used after making appropriate adjustments for significant events between the two dates.
In any case, the difference between the reporting date of the subsidiary and the parent should not be more than three months.
IND AS 110 - Consolidation
38
Some of the differences between IGAAP And IND AS - CFS
Sl
No.
Particulars IGAAP
(AS 21)
Ind AS
(Ind AS 110)
Remarks
1. Definition of
Control
Control is:
• more than one-half of the
voting power of an
enterprise; or
• control of the composition
of the board of directors.
Control is based on whether an
investor has
• power over the investee
• exposure to variable return and
• the ability to use its power over
the investee to affect the
amounts of the returns.
Under Ind AS 110, an entity needs to be
Consolidated even with less than
majority voting power or no voting
power. Control over Associate may
require the parent to consolidate it like
a subsidiary and remove other
investor’s share through Non controlling
Interest.
2. Investment Entity Not specified New concept Investment entity
has been defined and accordingly
exemption from CFS and exclusion
to these exemption has been
specified.
Under Ind AS 110, assessment needs to
be done whether entity is an
Investment entity or any of its
subsidiary is an Investment entity to
apply exemption from CFS after
considering all exclusion to exemption.
CONSOLIDATION - Difference between IGAAP and IND AS
39
Sl No. Particulars IGAAP
(AS 21)
Ind AS
(Ind AS 110)
Remarks
3. Potential Voting
Rights
Potential voting rights are not considered
in assessing control.
Potential voting rights are
considered only if the rights
are substantive.
Under Ind AS 110, at every balance
sheet date for consolidation, an
entity needs to evaluate its
potential rights
4. Uniform
accounting
policies
If not practicable to use uniform
accounting policies in the preparation of
CFS, that fact should be disclosed
together with the proportions of the
items in the CFS to which different
accounting policies have been applied.
CFS should be prepared using
uniform accounting policies.
Under Ind AS 110, appropriate
adjustments in financials of
member of group needs to be done,
while preparing CFS to ensure
conformity with the Group
accounting policy.
5. Reporting Dates The difference between the reporting
date of the subsidiary and that of the
parent should be not more than six
months
The difference between the
reporting date of the
subsidiary and that of the
parent should be not more
than three months
CONSOLIDATION - Difference between IGAAP and IND AS
40
Sl No. Particulars IGAAP
(AS 21)
Ind AS
(Ind AS 110)
Remarks
6. Non-controlling
interests (NCI)
Minority interests are presented in the
consolidated balance sheet separately
from liabilities and the equity of the
parent’s shareholders.
NCI are presented in the
consolidated statement of
financial position within
equity, separately from the
equity of the owners of the
parent.
Under Ind AS 110, it has to be
presented below Equity and Other
Equity separately from owners.
7. Allocation of
losses to non-
controlling
interests
Excess of loss applicable to minority to be
absorbed by parent unless any binding
obligation for minority to make good the
losses.
Profit/Loss and each
component of other
comprehensive income should
be attributable to the non-
controlling interests, even if
this results in the NCI having a
deficit balance.
Under Ind AS 110, a NCI can have a
negative balance which was not a
possibility under AS 21.
8. Exclusion of
subsidiaries,
associates and
joint ventures
Excluded from consolidation, if control is
temporary, investment in another entity
is acquired with intent to be disposed off
in nearer future; or if another entity
operates under severe long-term
restrictions to transfer funds to the
parent/ investor/venturer.
No such exemption for
‘temporary control’, or for
operation under severe long-
term funds transfer
Restrictions.
Under Ind AS 110, parent need to
consolidate all entities on which it
has control even those which were
not consolidate previously due to
exclusion under AS 21.
CONSOLIDATION - Difference between IGAAP and IND AS
41
Case Study 1 Control Through Voting
Rights
42
Contractual arrangement that
these 2 shareholders will vote in
the same manner as ABC Ltd
Relevant Facts of the case:
ABC Ltd owns 39% of the equity shares of XYZ Ltd.
It also has a contractual arrangement with 2 Other Shareholders holding together 40% equity shares of XYZ Ltd (i.e. 20% each) that they
will always vote in the same manner as ABC Ltd.
The relevant activities of XYZ Ltd’s are controlled through voting rights and a simple majority vote is required on all decisions about the
relevant activities.
Key Issue :
Whether the voting rights owned by ABC Ltd together with its contractual arrangement with the 2 Other Shareholders referred to above
give control of XYZ Ltd to ABC Ltd ?
ABC Ltd
XYZ Ltd
Holds 39% equity shares
2 Other
Shareholders
Many Other
Shareholders (more
than 1000 in nos)
Holds together 40 % equity
shares (i.e. 20% each)Holds 21 % equity shares
Control through Voting Rights
43
Legal Provision :
Paragraph B39 of Ind AS 110 states that, “a contractual arrangement between an investor and other vote holders can give the investor
the right to exercise voting rights sufficient to give the investor power. Even if the investor does not have voting rights sufficient to give
it power without the contractual arrangement, a contractual arrangement might ensure that the investor can direct enough other vote
holders on how to vote to enable the investor to make decisions about the relevant activities”.
In the present case, even though ABC Ltd holds 39% equity shares of XYZ Ltd but its rights as the single largest shareholder can be affected
if the 2 Other Shareholders holding 40% equity shares of XYZ Ltd (i.e. 20% equity shares each) enters into a contractual agreement with
each other to vote together in the same manner. However, as per facts of the case, the contractual arrangement of ABC Ltd with 2 Other
Shareholders holding 40% of voting rights in aggregate (i.e. 20% of voting rights each) and its own holding of 39% voting rights entitles it to
majority voting rights, i.e., 79%. Thus, ABC Ltd has power to direct the relevant activities of XYZ Ltd.
Conclusion :
By virtue of the contractual arrangement that ABC Ltd has with the 2 Other Shareholders, ABC Ltd controls XYZ Ltd, even though the 2
Other Shareholders together holds more voting rights than ABC Ltd.
ABC Ltd
(Holds 39% equity
shares of XYZ Ltd)
2 Other Shareholders
(Holds 40 % equity shares of
XYZ Ltd (i.e. 20% each))
Contractual arrangement that these 2
shareholders will vote in the same manner
as ABC Ltd
XYZ Ltd
By virtue of the contractual arrangement between
ABC Ltd and 2 Other Shareholders, ABC Ltd indirectly
enjoys a majority voting rights of 79% (39%+ 40%)
Control through Voting Rights
44
Case Study 2 De Facto Control
45
Relevant Facts of the case:
ABC Ltd holds 47% of the voting shares in XYZ Ltd. As ABC Ltd neither controls the composition of the Board of Directors of XYZ Ltd nor it
exercises nor controls more than one-half of the total voting power of XYZ Ltd therefore XYZ Ltd does not qualify as a subsidiary of ABC
Ltd within the meaning of the Companies Act, 2013.
The voting rights in XYZ Ltd other than those held by ABC Ltd are held by thousands of shareholders, none individually holding more than
1 per cent of the voting rights.
None of the shareholders has any arrangements to consult any of the others or make collective decisions. On the basis of the relative
size of the other shareholdings, ABC Ltd has determined that a 48 per cent interest is sufficient to give it ‘de facto control’ over XYZ Ltd
within the meaning of this term under Ind AS 110.
Key Issue :
Whether XYZ Ltd qualifies to be subsidiary of ABC Ltd under Ind AS 110 ? While preparing its consolidated financial statements, should
ABC Ltd consolidate XYZ Limited even though XYZ Ltd does not qualify as a subsidiary of ABC Ltd under the Companies Act,2013 ?
ABC Ltd
XYZ Ltd
Holds 47% equity shares
Other Shareholders
(More than 1000 in
nos)
Holds 53 % equity
shares
De Facto Control
46
Legal Provision :
The financial statements shall be in the form specified in Schedule III to the Companies Act, 2013 and comply with Accounting Standards
or Indian Accounting Standards, as applicable.
Provided that the items contained in the financial statements shall be prepared in accordance with the definitions and other
requirements specified in the Accounting Standards or the Indian Accounting Standards, as the case may be.
Thus, it is clear from the above that for the purposes of preparation of financial statements, the definitions and other requirements
specified under Ind AS should be applied.
As per Ind AS 110, Investor controls investee as there is no contractual arrangement between other small shareholders so that they can
exercise collective action. Hence, in the present case ABC Ltd having 47% of shareholding of XYZ Ltd de facto controls XYZ Ltd.
Conclusion :
As per Ind AS 110, since ABC Ltd has de facto control over XYZ Ltd, hence, XYZ Ltd qualifies to be the subsidiary of ABC Ltd under Ind AS
110. So, ABC Ltd should consolidate XYZ Ltd while preparing its consolidated financial statements.
De Facto Control
47
Case Study 3 Re-assessment of Control
48
Relevant Facts of the case:
A Ltd holds 85% equity shares, having an aggregate face value of Rs. 85,000, in XYZ Ltd out of its (XYZ Ltd’s) total issued and (fully) paid
up equity capital of Rs. 1,00,000. The relevant activities of XYZ Ltd are decided upon by a simple majority vote and thus A Ltd exercises
control over XYZ Ltd.
B Ltd holds 90% preference shares, having an aggregate face value of Rs. 1,80,000, in XYZ Ltd out of its (XYZ Ltd’s) total issued and
(fully) paid-up preference share capital of Rs. 2,00,000. In the facts of the case, the voting rights of B Ltd as a preference shareholder
are governed exclusively by the provisions of the Companies Act 2013.
The second proviso to section 47(2) of the Companies Act, 2013 provides that where the dividend in respect of a class of preference
shares has not been paid for a period of two years or more, such class of preference shareholders shall have a right to vote on all the
resolutions placed before the company. As per, the first proviso to section 47(2), the proportion of the voting rights of equity
shareholders to the voting rights of the preference shareholders shall be in the same proportion as the paid-up capital in respect of the
equity shares bears to the paid-up capital in respect of the preference shares.
XYZ Ltd has not made the payment of dividend on its preference shares for the last two years.
Key Issue : Whether the resulting voting rights available to B Ltd require reassessment of A Ltd’s control?
XYZ Ltd
A Ltd B Ltd
Holds 85% of Equity Shares
(aggregate Face Value Rs
85,000)
Holds 90% of Preference Shares
(aggregate Face Value Rs
1,80,000)
Re-assessment of Control
49
Legal Provision :
Ind AS 110 requires an investor to reassess whether it controls an investee if facts and circumstances indicate that there are changes to
one or more of the three elements of control i.e.
(a) Power over investee
(b) Exposure to or right over variable returns from its involvement with the investee
(c) Ability to use its power over the investee to affect the amount of variable return
In the present case, upon non-payment by XYZ Ltd of dividend on preference shares for two years, as per the second proviso to section
47(2) of the Companies Act, 2013, B Ltd gets the right to vote on all the resolutions placed before XYZ Ltd and as per first proviso to
section 47(2) of the Companies Act, 2013, the proportion of the voting rights of equity shareholders to the voting rights of the
preference shareholders shall be in the same proportion as the paid-up capital in respect of the equity shares bears to the paid-up
capital in respect of the preference shares.
Hence, in the present case on non-payment by XYZ Ltd of the dividend on preference shares for two years, the total paid-up capital for
the purpose of calculation of voting rights comes to be 3,00,000 (i.e. 1,00,000 of equity + 2,00,000 of preference). B Ltd becomes entitle
to 60% of total voting rights over XYZ Ltd (1,80,000/3,00,000) and voting rights of A Ltd in XYZ Limited stand reduced from 85% to 28.33%
(85,000/3,00,000).
Conclusion:
Hence in the given case, in view of the change in the percentage holding of voting rights and considering other factors of control as
enunciated under Ind AS 110, A Ltd and B Ltd should reassess control over XYZ Limited.
Re-assessment of Control
50
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