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Accounting Implications Valuations Share Exchange Ratio. Accounting Implications. Accounting Standard 14- - Pooling of interest method - Purchase method . Accounting implications . Amalgamation – Accounting - conflict of accounting policies - uniform set of accounting policies

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Presentation Transcript
slide1
Accounting Implications
  • Valuations
  • Share Exchange Ratio
accounting implications
Accounting Implications
  • Accounting Standard 14-

- Pooling of interest method

- Purchase method

accounting implications3
Accounting implications
  • Amalgamation – Accounting

- conflict of accounting policies

- uniform set of accounting policies

- Change in accounting policies reported in accordance with AS-5

accounting implications4
Accounting implications
  • Treatment of Reserves

- merger accounting - identity of Reserves

- purchase accounting - net assets value – consideration

= reserve

(Statutory reserve to be preserved)

- Treatment of goodwill

- implication of AS-26 Intangible asset

- Balance in Profit & Loss A/c

accounting implications5
Accounting Implications
  • Disclosure

(a) particulars of amalgamating companies

(b) effective date of amalgamation for accounting purpose

(c) method of accounting (pooling vs purchase)

(d) particulars of the Scheme

(e) description and number of shares issued

(f) exchange

(g) treatment of difference

valuation and determination of share exchange ratio
Valuation and determination of Share Exchange ratio
  • Valuations

- CA Valuations

- Merchants Bankers Review

- No two valuations are likely to be identical

- fairness

- a matter of opinion

valuations
Valuations
  • Book value method – net assets method
  • Market value method
  • Profit earning capacity method OR yield method

future maintainable profits

DCF method

  • Appropriate weightage
  • Average of the three methods
valuations8
Valuations

Who can object to Valuation

  • Members
  • Creditors
  • ROC
  • Employees
share ratio
Share Ratio
  • Share Exchange Ratio

- in the case of amalgamation

  • Share entitlement Ratio

- in the case of demerger/arrangement

  • Reduction of share face value in transferor Co. and issue of shares for the reduced value in transferee co.
share ratio10
Share Ratio
  • Court not to interfere with share exchange ratio
  • Public interest
  • Movement in market price during the intervening period not material
  • Share exchange in the case of holding and subsidiary co amalgamation
  • Extinguishment of intercompany shareholding
  • Trust holding
  • Method of valuation and resultant share ratio to be mentioned in explanatory statement
share ratio11
Share Ratio
  • No necessity that equity to be exchanged for equity
  • Equity can be exchanged for preference shares as option to shareholders
  • Shares to be live during the intervening period from appointed date to record date (after effective date)
demerger
Demerger
  • No specific accounting standard
  • AS 14 by and large applies
  • Valuation on the basis of identifiable business
  • Share entitlement ratio
  • Shares of demerging Co. not to be extinguished
amalgamation accounting an illustration
Amalgamation Accounting – an Illustration
  • Hind lever Chemicals Ltd. (HLC) with Tata Chemicals Ltd (TCL)
  • HLC – bulk chemicals & fertilizers
  • TCL - Chemicals & fertilizers
  • Scheme operative from 01-April-02
  • Bombay High Court sanctioned TCL scheme on 14-Oct-03
  • Punjab & Haryana High Court sanctioned HLC scheme on 19-May04
  • Effect given in 2003-04 accounts of TCL
illustration merger of hlc with tcl
Illustration - Merger of HLC with TCL
  • Notes to the Balance Sheet & P&L account of TCL 31.03.04

6) Scheme of Amalgamation

(a) understanding of HLC has been transferred to and vested into TCL retrospectively from 1st April 2002 (the appointed date). The Scheme has been given effect to in these accounts. The effective date of amalgamation is 01-06-04

(b) the operations of HCL include manufacturing and trading in fertilizers and Bulk Chemicals

(c) pooling of interests –method as prescribed by AS 14

illustration merger of hlc with tcl15
Illustration - Merger of HLC with TCL

Rs Cr Rs Cr

Fixed Assets 166.33

Investments 3.43

Net Current Assets 217.84

Total Assets 387.60

Less Loans 62.46

Deferred tax liability 21.36 (83.82)

303.78

illustration merger of hlc with tcl16
Illustration - Merger of HLC with TCL

303.78

  • Issue of shares 34464000 Equity Shares 34.46

in the ratio of TCL for every two HLC

Transfer of Share premium HLC to Share premium 162.73

Transfer of CRR of HLC to CRR 0.10

Transfer of Capital Reserve of HLC to Capital Reserve -

Transfer of P&L A/C of HLC to P&L A/C 45.30209.13

Balance transferred to General Reserve 60.19

illustration merger of hlc with tcl17
Illustration - Merger of HLC with TCL
  • Shares to be issued to HLC shareholders by TCL eligible for dividend declared by TCL
  • P%L Appropriation A/C of TCL to include dividend on shares pending allotment to HLC shareholders
  • Income and expenses during the period 01-04-02 to 31-03-03 incorporated in the Accounts 2003-04 as HLC carried on the existing business in “trust” on behalf of TCL
  • All vouchers documents for the period are in the name of HLC
illustration merger of hlc with tcl18
Illustration - Merger of HLC with TCL
  • P&L A/C 31.03.2004 Rs Cr

31.03.0431.03.03

Profit after tax 220.53 196.58

Balance brought forward 365.03 300.53

Amount transferred on amalgamation

of HLC:

Balance in P&L A/C 01.04.02 45.30

Profit after tax for 2002-03 30.03

75.33

Dividend (18.96)

Tax on dividend (2.43)

Transfer to General Reserve (5.00) 48.94

Amount available for appropriation 634.50497.11

illustration merger of hlc with tcl19
Illustration - Merger of HLC with TCL
  • Valuation

valuation carried out and recommended by N.M. Raiji & Co. CA s and Delloitte Haskins & Sells CA s

Board of Directors on the basis of their independent valuation and judgment accepts the recommendation

  • Share Exchange Ratio

Shareholders of HLC (transferor Co.) eligible to get 5 (five) fully paid up equity shares of Rs 10 each of TCL (transferee Co.) in respect of every 2 (two) equity shares of the face value of 10 each held in HLC

Share exchange to take place on a suitable record date