Query No. 19

Subject:

Capitalisation of certain expenses related to acquisition of an investment. ¹

A. Facts of the Case

1. A public limited company (hereinafter referred to as ‘the Indian company’) whose shares are listed on the Bombay Stock Exchange is engaged in the business of manufacture and sale of electrical and electronic items. During the financial year 2005–06, the company acquired a company in Europe carrying on similar business. The European company’s shares were acquired through a subsidiary of the Indian company in the Netherlands.

2. The acquisition was completed in May 2005 and the Indian company has incurred the following expenses upto May 2005, for the acquisition of the European company:

3. The Indian company has remitted an amount of US$ “x” to its subsidiary in the Netherlands for acquiring the shares. The Netherlands subsidiary actually incurred only US$ “y” for the acquisition of the shares of the European company and remitted back the balance US$ (x-y) to the Indian company. On account of this excess money returned, the Indian company has incurred an exchange loss of Indian Rupees 200 lakh (approx).

B. Query

4. The querist has sought the opinion of the Expert Advisory Committee on the following issues:

(a) Whether the amount of expenditure incurred by the Indian company can be treated as part of the cost of investment.

(b) Whether the exchange loss incurred by the Indian company on account of sending and receiving back excess US$ from its Netherlands subsidiary can be treated as part of the cost of investment.

(c) Any another points/issues which, in the opinion of the Committee, should be taken care of under any Law or Accounting Standards.

C. Points considered by the Committee

5. The Committee presumes from the Facts of the Case as supplied by the querist, that the subsidiary of the Indian company in the Netherlands acted only as an agent of the Indian company in the acquisition of shares of the European company.

6. The Committee notes paragraph 9 of Accounting Standard (AS) 13, ‘Accounting for Investments’, issued by the Institute of Chartered Accountants of India, which states that “the cost of an investment includes acquisition charges such as brokerage, fees and duties”. Keeping in view the nature of the items of acquisition charges mentioned in AS 13, the Committee is of the view that the cost of acquisition should include only those direct charges which are incurred ‘on’ acquisition of investment, i.e., the expenses, without the incurrence of which, the transaction could not have taken place such as share transfer fees, stamp duty, registration fees, and duties and levies by regulatory agencies and stock exchanges. The expenses incurred ‘before’ the acquisition, even though directly attributable to acquisition should not be added to the cost of acquisition of shares as these do not represent the worth of the shares acquired.

7. Keeping in view the above principles, the Committee is of the view that in the present case, the exchange loss incurred by the Indian company on sending and receiving back of foreign currency, travelling cost and due diligence cost should not form part of the cost of acquisition, rather, these should be expensed in the period in which these are incurred. The legal costs and ‘other expenses’ should form part of the cost of investment only if and only to the extent these costs meet the considerations for inclusion in the cost of investment as stated in paragraph 6 above.

8. The Committee answers only specific queries raised by the querist on accounting and/or auditing principles and allied matters and as a general rule, the Committee does not answer open- ended queries. Accordingly, the Committee has not examined the Facts of the Case in the light of any Law or other Accounting Standards.

D. Opinion

9. On the basis of the above, the Committee is of the following opinion on the issues raised by the querist in paragraph 4:

(a) The various items of expenses incurred by the Indian company as mentioned in paragraph 2 above, should be treated in the manner described in paragraphs 6 and 7 above.

(b) The exchange loss incurred by the Indian company on account of sending and receiving back excess US$ from its Netherlands subsidiary cannot be treated as part of the cost of the investment.

(c) This is not answered in view of paragraph 8 above.