Mergers and acquisitions have become increasingly large, and complex in today’s business environment. Under the current Indian-GAAP (I-GAAP), such transactions are accounted for under different methods such as pooling of interest or purchase (fair value) method.
Ind-AS will fundamentally change the way business combinations (i.e., mergers and acquisitions, demergers etc) will be accounted going forward. It is a single comprehensive standard that provides detailed guidance on accounting for business combinations irrespective of the nature, structure or legal form of the transaction. Ind-AS requires mandatory use of pooling of interest method (and not purchase method or fair value method) of accounting for business combination between group entities/ related parties (i.e., entities which are under common control)
Some broad tax implications of Ind-AS on business combination between related parties’:
Possible inability to recognize goodwill for tax & book depreciation purposes;
Possible impact on tax-cost for computing buy-back tax for any buy-back in the foreseeable future;
Possible inability to recognize intangibles (which were unrecorded earlier), and consequent impact on tax & book depreciation;
Significant impact while computing book profits for Minimum Alternate Tax; etc.
To overcome the above difficulties from a tax standpoint, is it possible to have a different accounting treatment (as against the one provided in Ind-AS) in order to claim possible tax benefits?
Analysis:
Accounting Standards are sacrosanct, and violations are generally not permitted while preparing the financial statements.
In fact, there is a statutory requirement as per Section 129(5) of the Companies Act, 2013, according to which if the financial statement do not comply with the accounting standards, the company concerned has to disclose the deviation, the reasons for deviation, and the financial effect, if any, arising out of the deviation.
As a corollary, the notification issued by the Ministry of Company Affairs dated December 7, 2006, which while notifying Accounting Standards, states under General Instructions that “Accounting Standards, which are prescribed, are intended to be in conformity with the provisions of applicable laws. However, if due to subsequent amendments in the law, a particular accounting standard is found to be not in conformity with such law, the provisions of the said law will prevail and the financial statements shall be prepared in conformity with such law”.
In other words, as per the scheme of things, while Accounting Standards are inviolate, they are however, subject to the law of the land. Accordingly, the Accounting Standards will be subject to the decision of the Courts (supreme Court or the High Courts) in India.
Accordingly, if in the Scheme presented before the High Court for a business combination between related parties’, a specific accounting treatment has been stated for the transaction then, once the Court approves the said scheme, the accounting treatment stated therein should prevail over the accounting specifically prescribed under Ind-AS. Being sanctioned by High Court, the treatment becomes mandatory in preparation of financial statements (with suitable disclosures).
Further, section 230 of the Companies Act, 2013 specifically provides that the Tribunal (alternative to the High Courts) shall not sanction the business combination if the arrangement is not compliant with the accounting standards. However, this section has not been notified as yet, and is accordingly, non-existent, and should not apply to any scheme for business combination.
Conclusion:
As it stands today, the accounting treatment sanctioned by the Court will prevail over the accounting treatment prescribed under Ind-AS. One should therefore evaluate this aspect from a tax efficiency stand-point, and may consider including specific accounting treatment in the Scheme presented before the Court to avail appropriate tax benefit. One will need to suitably factor in the pros & cons prior to having a specific accounting treatment sanctioned by the Court
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