The Accounting Standards issued by the Institute of Chartered Accountants of India, which are applicable from the next financial year, has brought in key changes in the accounting and recording of mergers and acquisitions.

The first of these relates to Ind AS-36, in respect of the method to be used for accounting the goodwill of the target company. According to the extant accounting standards, the goodwill is amortized over a period of five years. Under the new accounting standards, the goodwill will undergo an impairment test in each year. For the purpose of impairment testing, goodwill acquired in a business combination shall, from the acquisition date, be allocated to each of the acquirer’s cash-generating units, or groups of cash-generating units, that is expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the target company are assigned to those units or groups of units.

Thus goodwill will be tested for impairment at each level of allocation and this will reflect the way an entity manages its operations, with which the goodwill would naturally be associated. A cash-generating unit to which goodwill has been allocated shall be tested for impairment annually, and whenever there is an indication that the unit may be impaired, by comparing the carrying amount of the unit, including the goodwill, with the recoverable amount of the unit. If the recoverable amount of the unit exceeds the carrying amount of the unit, the unit and the good will allocated to that unit shall be regarded as not impaired. If the carrying amount of the unit exceeds the recoverable amount of the unit, the entity shall recognize the impairment loss. This method of measuring goodwill, as against the previous method of standard amortization, can affect the overall value of the company.

Under the extant accounting standards, control is assessed based on ownership of more than 50% of the voting power or control of the composition of the Board of Directors. However, under Ind AS-110, a new definition of control has been introduced as per which an investor controls an investee if it has all the following: (a) power over the investee (b) exposure, or rights, to variable returns from its involvement with the investee, and (c) the ability to use its power over the investee to affect the amount of the investor’s returns. An entity may own share warrants, share call options, debt or equity instruments that are convertible into ordinary shares, or other similar instruments that have the potential, when exercised or converted, to give the entity voting power or reduce another party’s votingpower over the financial and operating policies of another entity (potential voting rights).The existence and effect of  potential voting rights that are currently exercisable or convertible, including potential voting rights held by other parties, are to be considered when assessing whether an entity has the power to govern the financial and operating policies of another entity.

Further, under Ind AS-27, redeemable preference shares shall be classified and presented under‘liabilities’ as ‘long term borrowings’ and the disclosure requirements in this regard applicable to such borrowings shall be applicable mutatis mutandis to redeemable preference shares. Thus, companies that have outstanding preference share capital will now be required to capitalize such dividend costs as borrowing costs, which will affect the leverage ratio of these companies.

VA View

The new accounting standards, called IndAS, would need companies to make changes in the way they account for revenue and tax and the merger and acquisition deals will have to be structured taking into account the accounting standards which would be applicable from April 1, 2015