What’s In A Date? Is It Another Ind AS Carve Out?
A recent MCA clarification, if not interpreted or applied properly, may widen the gap between IFRS and Ind AS accounting in India.
The Ministry of Corporate Affairs in its latest general circular dated Aug. 21, 2019 clarified various aspects around the enigmatic concept of an “Appointed Date” involving schemes of mergers and amalgamations. In a welcome move, MCA clarified that Section 232(6) of the Companies Act, 2013, allows parties to a scheme of merger to identify an Appointed Date which could be linked to the occurrence of a future event(s). This could be based on business considerations, fulfilment of legal requirements such as procurement of license from a competent authority or other conditions agreed between the parties and relevant to the scheme.
This part of the clarification is helpful in ensuring alignment with Ind AS, as going forward, merging companies will be able to define Appointed Date as the Effective Date instead of a specific calendar date. Generally, the Effective Date of a scheme is when the merger is completed in all material respects – i.e. fulfilment of closing conditions agreed between the parties, exchange of consideration, and most importantly, receipt of substantive shareholder and regulatory approvals, including NCLT’s sanction (‘future/event-linked date’).
However, the MCA has also stated, that the Appointed Date identified in the scheme could be a specific calendar date and shall be deemed to be the ‘Acquisition Date’ and date of ‘transfer of control’ for the purpose of conforming to accounting standards (including Ind AS 103, Business Combinations). The clarification goes on say that if the Appointed Date is significantly ante-dated beyond a year from the date of filing the scheme, it should be justified and not against public interest.
These aspects of the clarification, if not appropriately interpreted or applied, could result in unanticipated outcomes for the compilers of financial statements and their auditors, diversity in practice and most notably divergence from global IFRS i.e. potentially another Ind AS carve out.
What Is All The Controversy About?
As per Ind AS 103, a business combination is to be accounted for on the acquisition date, which is the point in time when the acquirer gains control of another business/entity. Generally, this is the date when the acquirer transfers consideration, acquires the assets, assumes the liabilities of the acquiree and substantive closing conditions are completed, including necessary approvals.
As one would expect, the date on which control passes is a matter of fact, and it cannot be backdated or artificially altered by the parties specifying a different date. Simply put, an entity should consolidate the business and results of operations of another entity beginning only from the date when control is obtained.
When a scheme of merger/amalgamation is filed with NCLT, during the intervening period, the merging entities have to wait it out until the receipt of substantive regulatory approvals and consequential completion of closing conditions, before being able to consolidate another entity. Until then, the amalgamating companies function independently – a fact also acknowledged in the related Press Information Bureau note.
On the contrary, it would not appear logical and certainly inconsistent with IFRS/Ind AS principles for determining the acquisition date, if the merging companies previously waiting to get to the closing date milestone, are allowed to say when they get there, that the control was actually obtained and the acquisition should be accounted for from a chosen ante-dated ‘Appointed Date’.
This has various other unintended implications and added complications. For example, it is not clear whether in such situations, the acquiring entity will need to go back, open-up and restate the previously reported financial statements to now include the operations of the acquired entity from an ante-dated Appointed Date.
What is the date to be considered for determining the fair value of assets acquired, liabilities assumed and consideration transferred for goodwill/capital reserve computation? Is it the chosen ante-dated Appointed Date in the scheme or the later date when actually the control is transferred and closing occurs? The current accounting framework does not address these matters.
Let’s try and illustrate this by way of some commonly encountered issues in practice.
Business Acquisitions Between Unrelated Parties
Entity B intends to acquire entity C (unrelated party) by legally merging it. Both parties agree, that completion of transaction and exchange of consideration will occur when approvals from shareholders and regulatory authorities (for example, the Competition Commission and NCLT) are obtained – “substantive closing conditions”.
However, the merger scheme filed in September 2019 also mentions a calendar specific appointed date of April 1, 2019. Now let’s consider that substantive closing conditions are fulfilled by Dec. 15, 2019.
Under Ind AS/IFRS, the acquisition date would be Dec. 15, 2019, being the date from when entity B is able to control C’s operations. Retrospective/ante-dated calendar specific Appointed Date of April 1, 2019 in this example would not be the appropriate acquisition date for accounting purposes.
However, in a plain reading of the MCA clarification, such an Appointed Date may get interpreted to be the ‘Acquisition Date’.
Common Control Business Combinations
In such transactions, the acquirer already controls another entity/business or is under common control due to parent-subsidiary/fellow subsidiary relationships (part of a group). Entities already part of a group may subsequently legally merge or transfer entities/businesses within the group driven by reasons such as operational efficiencies, taxation etc. These are considered common control transactions within related entities. Appendix C to Ind AS 103, already prescribes using the pooling of interest method to account for such transactions i.e. irrespective of the actual date of the legal merger/business transfer, the results, assets and liabilities of the acquired entity/business are incorporated as if both entities/businesses had always been combined from when they joined the group.
In other words, the prior period financial statements of the transferee company is restated as if the common control business combination had occurred from the beginning of the preceding period in the financial statements, irrespective of the actual date of the transaction.
Therefore, an ante-dated specific calendar Appointed Date may not have a significant effect from an accounting perspective, because the Ind AS is very clear on how such transactions are to be accounted/presented.
Also in these situations, there is nothing preventing merging entities from specifying a future/event-linked Effective Date to be the Appointed Date in the scheme. But if not done, then merging entities may need to prepare separate tax accounts to fulfil the requirements of tax laws without disturbing compliance with Ind AS for statutory financial reporting and clearly bringing out the Appendix C accounting in the scheme.
What Next?
Globally, under IFRS and also under Ind AS, which is substantially converged with IFRS, it is a well settled principle that to faithfully represent an acquirer’s financial position and results, business combinations should be accounted from the actual acquisition date when control is obtained – not before it is obtained by picking an ante-dated calendar-specific Appointed Date. It is like saying the marriage of two parties is consummated today, but they are effectively married from an ante-dated Appointed Date!
The recent clarification, if not interpreted or applied properly, may widen the gap between global IFRS and Ind AS accounting in India, rendering certain key concepts of Ind AS 103 redundant.
Viewing it holistically, and with an intent to harmoniously comply with the spirit of the MCA circular and Company Law notified Ind AS rules, merging entities could define the Appointed Date as the Effective Date linked to occurrence of future events and compliance with substantive closing conditions relevant to the parties to coincide with the actual date of transfer of control. Further, this does not have to be an ante-dated calendar specific Appointed Date as acknowledged by MCA in its Clarification. Finally, it will be most helpful if the MCA can clarify these issues, thereby preventing any unintended accounting consequences and risk another Ind AS carve out with global IFRS.
Sumit Seth is a chartered accountant. Views expressed are personal.
The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its editorial team.