1. AS 14 Accounting For Amalgamations

2. 2 Shareholders of X X Ltd Shareholders of Y What is Merger or Amalgamation? Y Ltd

3. 3 3 Option 1 Option 2 Shareholders of X & Y X Ltd Y Ltd New co Z Shareholders of X & Y Option 3 After … Based on the swap ratio, the shareholders of the transferor company are issued shares of transferee company

4. 4 Single management

5. 5 5 MERGERS, ETC - CRITICAL ISSUES Due Diligence Review Enterprise valuation and determination of share exchange ratio or cash consideration Documentation- Scheme Accounting Issues Merger Agreements Statutory Approvals

6. 6 6 Accounting for Amalgamations AS 14 is the relevant Accounting Standard Came into effect from April 1, 1995 Deals with: Accounting for Amalgamation & Treatment of any resultant Goodwill or Reserves Applicable only to Company form of organisation Does not deal with acquisition of the whole or part of a company by another In Amalgamation, one company loses its identity; In Acquisition, identities of companies are maintained

7. 7 7 Types of Amalgamation Amalgamation means an amalgamation as per the provision of Companies Act, 1956 or any other law applicable to Companies, Sections 391 to 394 of Companies Act, 1956 governs the provisions of amalgamation In the nature of MERGER In the nature of PURCHASE

8. 8 8 Conditions For Amalgamation in the nature of Merger: All Assets & Liabilities are transferred; At least 90% Share holders of transferor co. become share holders of transferee co;  Section 2(1B) of ITax Act requires 75 % Consideration for Amalgamation to be discharged by issue of Equity shares; Business of transferor co. is intended to be carried on; No Adjustments are intended to be made to the book value of assets and liabilities of transferor co

9. 9 9 Conditions … All the above 5 conditions should be satisfied simultaneously If any of the above conditions are not fulfilled it would be termed as Amalgamation in the nature of Purchase

10. 10 Accounting options Amalgamation in the nature of MERGER Amalgamation in the nature of PURCHASE Pooling of Interest Method Purchase Method

11. 11 Pooling of Interest Method All Assets, Liabilities & Reserves of Transferor company are taken over at their existing carrying values Identity of Reserves is preserved Uniform Accounting Policy to be adopted for both (or all companies) Difference between the Consideration and Share Capital of transferor company shall be adjusted in Reserves of the Merged company Actual treatment of such reserves is provided in the scheme (typical clause as per next slide)

12. 12 Pooling of Interest Method … Typical clause for treatment of reserves “Upon the coming into effect of this scheme, an amount representing the excess of the value of the assets over the liabilities of the Transferor Company after making such adjustment as the Board of Directors of the Transferee Company may decide, shall be reflected as the General Reserve in the books of the Transferee Company”.

13. 13 Illustrative Balance Sheet MERGER OF A LTD. INTO B LTD. LiabilitiesA LtdB LtdAssetsA LtdB Ltd Rs. Equity Share Capital 5080Fixed Assets40120 General Reserve1850Investments2040 Profit and Loss Balance-32 Capital Reserve (for subsidy received from State Govt.)2- Current Assets, Loans & Advances3580 Loans2038Profit and Loss Balance5- Current Liabilities & Provisions1040 Total100240Total100240

14. 14 Illustration … The share exchange ratio for the merger of A Ltd. into B Ltd. is: "For every 2 equity shares of Rs. 10 each fully paid up of A Ltd., 1 equity share of Rs. 10 each fully paid up of B Ltd."; This means that B Ltd. will issue equity share capital of Rs. 25 to the shareholders of A Ltd.

15. 15 a) POOLING OF INTEREST METHOD (AT BOOK VALUE) LiabilitiesB LtdAssetsB Ltd Equity Share Capital (25+80)105Fixed Assets (40+120)160 General Reserve (18+50+25 *)93Investments (20+40)60 Profit and Loss A/c (-5+32)27 Capital Reserve2 Current Assets, Loans & Advances (35+80) 115 Loans (20+38)58 Current Liabilities and Provisions (10+40) 50 Total 335 Total 335 * Balancing figure Illustration … Balance Sheet of B Ltd.

16. 16 Illustration … ADDITIONAL ASSUMPTIONS For Capital Reserve representing subsidy received from the State Govt., the statutory period as per conditions has been completed. Scheme provides the same is to be treated as free reserve and included in general reserve Current Assets of A Ltd includes Rs. 14 receivable from B Ltd Loans of A Ltd include Rs 10 due to B Ltd Investments of B Ltd include Rs. 8 (at face value) in A Ltd As per the scheme, these investments are to be cancelled.

17. 17 CNK 17 a) POOLING OF INTEREST METHOD (AT BOOK VALUE) LiabilitiesB LtdAssetsB Ltd Equity Share Capital [(25- 4)+80)]101Fixed Assets (40+120)160 General Reserve (18+50+23 * )91Investments (20+40-8)52 Profit and Loss A/c (-5+32)27 Current Assets, Loans & Advances (35+80-14-10) 91 Loans (20+38-10)48 Current Liabilities and Provisions (10+40-14) 36 Total 303Total303 * Balancing figure Illustration … Revised BS of B Ltd...

18. 18 Disclosures required as per AS 14 For Amalgamation under Pooling of Interest Method Exchange ratio, description and number of shares Difference between consideration and net identifiable assets acquired and treatment of the same

19. 19 Purchase Method Assets taken either at existing carrying value or fair value, value can also be assigned to non existent assets/liabilities. In case of Statutory Reserves, the identity is maintained till the Statutory period is over. However, an equivalent amount is recorded by a corresponding debit to a suitable account head (e.g., 'Amalgamation Adjustment Account') which is disclosed as part of ‘Miscellaneous Expenditure‘ on the asset side.

20. 20 Purchase Method … When the identify of the statutory reserves is no longer required to be maintained, both the reserves and the aforesaid account are reversed. Difference between Net Assets and Consideration: If Positive – Capital Reserve If Negative - Goodwill

21. 21 Assumptions for Purchase method i) The share exchange ratio for the merger of A Ltd. into B Ltd. is: "For every 2 equity shares of Rs. 10 each fully paid up of A Ltd., 1 equity share of Rs. 10 each fully paid up of B Ltd."; ii) Market Value of Fixed Assets of A Ltd is Rs20 iii) Market Value of Investments of A Ltd25 iv) Capital Reserve represents a Statutory Reserve Illustration …

22. 22 a) PURCHASE METHOD LiabilitiesB LtdAssetsB Ltd Equity Share Capital [(25- 4)+80)]101Fixed Assets (40+120-20)140 General Reserve * 76Investments (20+40-8+5)57 Profit and Loss A/c (-5+32)27 Capital (Statutory) Reserve2 Current Assets, Loans & Advances (35+80-14-10) 91 Loans (20+38-10)48 Amalgamation Adjustment Account2 Current Liabilities and Provisions (10+40-14) 36 Total 290Total290 * Balancing figure Illustration … Balance Sheet of B Ltd.

23. 23 Disclosures required as per AS 14 For Amalgamation under Purchase Method Consideration for Amalgamation Treatment of Goodwill / Capital reserve, if any For all Amalgamations Name and general nature of the companies Effective date of amalgamation Method of accounting used Particulars of the scheme sanctioned under a statute

24. 24 Accounting for Cross Holding Situations of Cross Holdings: Transferee company holds shares in the Transferor company Transferor company holds shares in the Transferee company Transferor/Transferee companies both holds share of each other company In practice the treatment and / or accounting of cross holdings differ from company to company depending upon the provision as made in the scheme of amalgamation and approved by Court.

25. 25 Accounting for Cross Holding … Cross-holding amounts can be disposed off by: Cancelling the amount Selling off the shares Handing over the shares to a TRUST which in turn would sell it and utilize the proceeds for a particular purpose

26. 26 What is Goodwill ? Goodwill is an intangible asset that arises when the purchase price to acquire a another company is greater than the sum of the market value of that Company’s assets minus liabilities.

27. 27 Treatment of Goodwill Goodwill should be amortized over its useful Life, normally for not more than 5 years unless a longer period can be justified Factors to be considered for considering estimated life: foreseeable life of business/industry product obsolescence, change in demand, economic factors legal, regulatory or contractual provisions service life of key individuals or group expected actions by competitors or potential competitors

28. 28 Treatment of Reserves Para 23 & 42 of the standard provides that reserves should be treated as prescribed by the scheme sanctioned under the statute (over riding the earlier provisions of treatment to reserves). Where the treatment of reserves is different under a scheme from the treatment prescribed by the AS following disclosures are required:  Description of the treatment given & reasons for giving a different treatment.  Deviation in the accounting treatment  Financial effect, if any, due to such deviation

29. 29 Treatment of Reserves … Excess of the value of the assets over the liabilities in a merger is normally treated as part of Reserves. Tax department has, in some cases, treated these Reserves as “INCOME” !!

30. 30 Amalgamation after BS date Amalgamation effective from 1 st April 2007 Not yet approved (by HC) till BS date in June 2008 or even till due date for filing return 30 Sept 2008 Options would be: Amalgamated Co to defer its finalisation till HC approval Amalgamated Co to finalise accts with appropriate disclosures and reopen on receipt of approvals Give effect to the amalgamation in the next year. If amalgamation is effected after the balance sheet date disclosure is also required as per AS 4 (Contingencies & Events Occurring after the Balance Sheet Date).

31. 31 Illustrative Disclosures: Siemens Ltd (30-09-2008) Amalgamation with Siemens Industrial Turbomachinery Services Private Limited (SITS), a 100% subsidiary co.  Pursuant to scheme of amalgamation (‘the scheme’) of the erstwhile SITS with the company as approved in the Board Meeting held on 22 November 2007 and subsequently sanctioned by the Honourable High Court of Karnataka on 26 September 2008,the assets and liabilities of the erstwhile SITS were transferred to and vested in the Company with effect from 1 April 2008.Accordingly,the scheme has been given effect to in the accounts. 31

32. 32 Siemens Ltd.(30-09-2008)…  The amalgamation has been accounted for under the “pooling the interests” method as prescribed by AS-14 “Accounting for Amalgamations”. Accordingly, the assets, liabilities and other reserves of the erstwhile SITS as at 1 April 2008 have been taken over at their book values.  Net deficit of Rs.172,640 being the difference between the equity shares of SITS and the value of investments in SITS by the company, has been debited to profit and loss account.

33. 33 Other types of Restructuring Internal Reconstruction by reduction of capital By adjusting losses against share premium By adjusting losses and other assets (whose fair values are lower than book values) against share capital / reserves. By paying back part of the capital to shareholders by reducing the face value. Acquisition/Sale of a division or group of assets Conversion of partnership to limited company: Acquisition at book value or higher value Under Chapter IX of Companies Act

34. 34

35. 35 Accounting Treatment For demergers/acquisitions, similar to AS 14. If reduction of capital involved, to route all entries through Capital Reduction Account. To avoid Capital Reduction, additional shares can be issued in the Resultant Company to all shareholders of the Demerged Company Will effectively reduce the Book Value per share in each company Surplus or Deficit arising due to such restructuring is also treated as Goodwill or Capital Reserve respectively

36. 36 Illustrations on Demerger Reliance Industries Ltd (31-3-2006) The Company’s Scheme of Arrangement (Scheme), to demerge certain undertakings to four resulting companies was approved by the Hon’ble High Court of Mumbai on 9th Dec, 2005 and is effective from 21st Dec, 2005. In terms of the Scheme, the assets and liabilities relatable to the demerged undertakings have been transferred at values appearing in the books of accounts as on the close of business on 31st Aug, 2005. Accordingly, net assets of Rs. 19,119.55 crore were demerged to the four resulting entities i.e. Reliance Communication Ventures Ltd – Rs. 15,389.35 crores, Reliance Energy Venture Ltd – Rs. 2,921.02 crore, Reliance Capital Ventures Ltd – Rs. 512.41 crore and Reliance Natural Resources Ltd – Rs. 296.77 crore.

37. 37 Recent Illustrations on Demerger … The net assets transferred have been appropriated against the Revaluation Reserve, pursuant to the Court order. The Company, based on the report by international valuers, has revalued plant, Equipment and buildings situated at Patalganga, Hazira and Jamnagar as at 1st August, 2005 by an amount of Rs. 22,497.34 crore and an equivalent amount has been credited to Revaluation Reserve Account. Consequent to the revaluation, there is an additional charge for depreciation of Rs. 1,409.08 crore for the year and an equivalent amount has been withdrawn from Revaluation Reserve and credited to the Profit and Loss Account.

38. 38 Recent Illustrations on Demerger … The Gross Block of Fixed Assets includes Rs. 2,725.22 crores (Previous Year Rs. 2,729.88 crores) on account of revaluation of Fixed Assets carried out in the past. Consequent to the said revaluation there is an additional charge of depreciation of Rs. 43.74 crores (Previous Year Rs. 61.07 crores) and an equivalent amount, which was hitherto being withdrawn from General Reserves, has now been withdrawn from Revaluation Reserve and credited to the Profit and Loss Account. This has no impact on the profit for the year.

39. 39 Reliance Industries Limited (100 FV 10) Reliance Industries Limited (100 FV 10) Reliance Energy Ventures Limited (100 FV 10) Reliance Energy Limited (7.5 FV 10) Reliance Capital Ventures limited (100 FV 10) Reliance Capital Limited (5 FV 10) Reliance Communication Ventures Limited (100 FV 5) Reliance Communications Limited (100 FV 5) Reliance Natural Resources Limited (100 FV 10) 39 RIL Demerger and Amalgamation

40. 40 Acquisition Blue Star Ltd. (31-3- 2008) Acquisition of unit on Slump Sale Basis  Pursuant to the Scheme of Arrangement, approved by the shareholders at the Extra-ordinary General Meeting held on March 4, 2008 and duly approved by the Hon’ble High Court at Bombay vide its order dated April 11, 2008, the Company acquired the electrical contracting business of Naseer Electricals Pvt Ltd.(NEPL) on a slump sale basis for Rs.4809.77 lacs from January 24, 2008. The scheme was given effect in the financial statements of 2007-08.  After adjusting the value of tangible fixed assets acquired of Rs.116.65 lakhs and liabilities of Rs.603.91, the balance consideration along with the incidental expenses have been allocated towards various intangible assets and goodwill.  As per the Scheme, the Company has, adjusted against the General Reserve of the Company the intangible assets of Rs. 41,18.62 lakhs and Goodwill of Rs.8,32.32 lakhs arising on acquisition of electrical contracting business of NEPL.

41. 41 Accounting as per IAS/IFRS – Accounting for Business Combinations Relevant Standard in IAS/IFRS is: IFRS 3 Business Combinations A business is defined as an “integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return directly to investors or other owners, members or participants”.

42. 42 A business combination is a transaction or event in which an acquirer obtains control of one or more businesses. Basic principle of IFRS 3 is “An acquirer of a business recognises the assets acquired and liabilities assumed at their acquisition-date fair values and discloses information that enables users to evaluate the nature and financial effects of the acquisition”. IFRS 3 –Business Combinations …

43. 43 IFRS 3 - Business Combinations … Steps for accounting Determining whether the transaction or event is a business combination Identify an Acquirer Determine the acquisition date Determine the cost of the business combination - consideration paid Allocate the cost of the business combination to various assets and liabilities and determine non-controlling interest Fair Values to be used for such allocation Deal with residual goodwill or gain from bargain purchase Subsequent measurement and accounting

44. 44 Cost Allocation in a Purchase Business Combination Determine the fair values of all identifiable tangible and intangible assets acquired and liabilities assumed. Investment Cost Total fair value of identifiable assets less liabilities

45. 45 Cost and Fair Value Compared Investment costNet Fair value Identifiable net assets according to their fair value Goodwill If Allocate to > 1 2

46. 46 Accounting as per IAS/IFRS….. Method of Accounting Must use Purchase Method. Uniting of Interests Prohibited Assets & Liabilities Acquired All identifiable assets, Liabilities & Contingent Liabilities acquired are measured at 100% of Fair Values GoodwillNot Amortised, but tested for Impairment annually Negative GoodwillRecognized in Profit & Loss immediately Restructuring CostsOnly recognized to the extent that a liability exists at acquistion Date