Mergers and acquisitions (M&A) have now become a reality for many corporates in India and are invariably part of any growth strategy document. Execution of an M&A transaction either on behalf of a prospective investor or investee requires significant involvement of the management right from formulation of the M&A strategy, identification of potential targets, negotiation of the valuation, execution of the transaction, closure of the transaction and streamlining of the financial reporting related function post closure of the transaction.
With Indian Accounting Standards (Ind AS) now being effective for companies with a net worth of more than Rs 500 crore (balance listed companies and unlisted companies with a net worth of more than Rs 250 crore are required to apply this from next year), financial reporting requirements for acquisitions are now much more comprehensive and often have far reaching implications for the transaction itself. Needless to say, this also means a lot more efforts from the financial reporting teams of such companies.
The transition from Indian Generally Accepted Accounting Principles (Indian GAAP) to Ind AS also requires a shift from the general approach of accounting for transactions based on legal form and not commercial substance. Accordingly, the conventional approaches to structuring for M&A transactions may also require a relook from this perspective.
Some of the financial reporting related areas requiring attention under the Ind AS
- From the perspective of the acquirer
- Structuring of the transaction
- Consolidation related considerations
- Allocation of the purchase price
- Preparation of the opening balance sheet
- From the perspective of the acquiree
- Structuring of the transaction
- Accounting for the divestment in shareholding or slump sale
- Alignment of accounting policies with those of the acquirer for ongoing group reporting
Business combinations are defined as a transaction or other event in which an acquirer obtains control of one or more businesses. The legal form of the transaction notwithstanding, any arrangement that meets the definition of a business combination, the arrangement is required to be accounted for accordingly. Mergers, amalgamations, acquisition through a slump sale arrangement, acquisition of a subsidiary etc. are examples of business combinations.
Accounting for business combinations involves the following steps from the perspective of the acquirer:
- Determination of control – Evaluation of control is no longer based purely on existence of control of majority voting rights and/or control of the composition of the board of directors. This becomes particularly important in case of acquisition of shares in another legal entity where companies are now required to consider the rights of other shareholders for determining whether they control the investee. Similarly, depending on the facts and circumstances (e.g. existence of potential voting rights), a company which owns less than majority voting rights in an investee may be able to demonstrate that it controls the investee.
Accordingly, companies now not only need to consider the above from a financial reporting perspective, but more importantly, consider some of these while negotiating for transactions. The traditional approach of evaluating potential structures only from a tax perspective may also undergo a change as companies may increasingly find it imperative to consider accounting implications of proposed structures before determining the way forward.
All views and opinions expressed herein are those of the author and do not necessarily represent the views of KPMG in India.
Venkateshwaran is partner and head, and Vishwanath, is director, Accounting Advisory Services, KPMG India
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