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Expert Advisory Committee
ICAI-Expert Advisory Committee
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Query No. 14

 Subject: 

Accounting for amalgamation after the balance sheet date.1

A. Facts of the Case

 

1. X Pvt. Ltd. (Transferor company) is amalgamating with Y Pvt. Ltd. (Transferee company) under the scheme of amalgamation filed with a High Court on 1st January, 20X1 pursuant to sections 391 to 394 and other relevant provisions of the Companies Act, 1956.  Financial year of both the companies ends on 31st March, 20 X1.

 

2. The querist has stated that as per the scheme of arrangement,

 

(i) Appointed date is – 1st December, 20 X 0,

 

(ii)Effective date is – date on which the authenticated copies or certified copies of orders sanctioning the scheme passed by the High Court or such other competent authority as may be applicable are filed with the Registrar of Companies.

 

(iii)Date of taking effect and operative date – The scheme shall be operative from appointed date but shall be effective from the effective date.

The scheme was filed with the Registrar of Companies (ROC) on 5th April, 20X1, which is the effective date. The date of approval of accounts by the Board of Directors of both such companies is 30th April, 20X1.

 

3.The querist has reproduced paragraph 46 of Accounting Standard (AS) 14, ‘Accounting for Amalgamations’ as follows:

 

“46. When an amalgamation is effected after the balance sheet date but before the issuance of the financial statements of either party to the amalgamation, disclosure should be made in accordance with AS 4, ‘Contingencies and Events Occurring After the Balance Sheet Date’, but the amalgamation should not be incorporated in the financial statements. In certain circumstances, the amalgamation may also provide additional information affecting the financial statements themselves, for instance, by allowing the going concern assumption to be maintained.”

 

According to the querist, it has been observed that even under above circumstances, several companies have given effect to the amalgamation in their balance sheet for 31st March, 20X1, even though the effective date is after such date and the auditors have also not qualified their opinion to this effect.

 

4. As per the querist, a view taken is that the meaning of the phrase ‘amalgamation is effected after the balance sheet date’ in paragraph 46 of AS 14 should be taken as ‘Appointed Date’ and not ‘Effective Date’ as defined in the Scheme.  However, if this is considered as a correct view, all the subsequent words in the above paragraph 46 become meaningless.  As per the querist, other arguments in favour of this treatment are manifold:

 

  •  The transferor company legally ceases to exist from the appointed date, once the High Court passes the order.  The effective date under the scheme in the present case is also falling before the date of approval of balance sheet by the Board of Directors of both the companies and hence, the effect of amalgamation should be given in the first balance sheet of the companies after such effective date.
  •  Such case is also squarely covered under Accounting Standard (AS) 4, ‘Contingencies and Events Occurring After the Balance Sheet Date’.  This Standard makes it mandatory to take cognizance of the event (of the crystallisation of the Effective Date) after the balance sheet date.
  • Both the companies are required to submit their Return of Income giving effect to the scheme from the appointed date.

4. According to the querist, the issue that arises is when the ‘Effective Date’ of amalgamation is after balance sheet date but before issuance of financial statements of either party to amalgamation, whether the companies are required or not to incorporate the effect of amalgamation in such balance sheet for the year ending on 31st March, 20X1 or only provide disclosure in accordance with AS 4.

 

5.The querist is of the view that in light of the above arguments, the effect of amalgamation needs to be given in such balance sheet.  Further, as per the querist, there appears to be a sort of conflict between the provisions of AS 14 and AS 4.  It is also essential to explain the correct meaning of the phrase ‘amalgamation is effected after the balance sheet date’ in paragraph 46 of AS 14.

 

B. Query

 

6.On the basis of the above, the querist has sought the opinion of the Expert Advisory Committee on the following issues:

 

(i) Clarity on the provisions of paragraph 46 of AS 14.

(ii) In case the companies incorporate the effect of amalgamation in the balance sheet for 31st March, 20X1, whether it is necessary for the auditor to qualify his report for non-compliance of AS 14.

 

C. Points Considered by the Committee

 

7. The Committee notes that the basic issue raised in the query relates to general interpretation of paragraph 46 of AS 14, which is beyond the purview of the Expert Advisory Committee.  Accordingly, the Committee has examined the issue only in the specific facts and circumstances of the extant case.  Further, the Committee has also not examined any other issue that may arise from the Facts of the Case, such as, accounting treatment in the books of transferor and transferee companies during the period starting from the date on which an enterprise entered into scheme of arrangement for amalgamation with another enterprise and till the date when the scheme is actually approved by the Court, legal meaning or interpretation of the terms ‘appointed date’, effective date’, etc. Further, the opinion expressed hereinafter is purely from accounting point of view and not from the angle of interpreting the provisions of any legal enactments.  The Committee also wishes to point out that to express an opinion on the financial statements is the prerogative of auditor.  Accordingly, the Committee has also not opined on the auditor’s qualification.

 

8. The Committee notes from the Facts of the Case that in the extant case, the scheme of amalgamation to amalgamate X Pvt. Ltd with Y Pvt. Ltd has been presumably approved by the High Court subsequent to the balance sheet date but prior to the approval of their annual accounts. The querist has also stated that the date from which the amalgamation was to be effective as per the scheme of amalgamation filed with the Court (viz., appointed date, as per the querist) is prior to the balance sheet date. The Committee notes that the Scheme of amalgamation may provide for vesting of assets and liabilities of the transferor company with the transferee company with retrospective effect. The Committee is of the view that the scheme of amalgamation cannot be considered to be finalised prior to Court’s approval being obtained because the Court’s approval is not merely a formality. The Court considers the scheme of amalgamation and either accepts the scheme (with or without certain modifications) or rejects the same. Accordingly, the amalgamation cannot be effected prior to the approval of the scheme by the Court for the purpose of paragraph 46 of AS 14.The Committee notes that the requirements of paragraph 43 of AS 14, notified under the Companies (Accounting Standards) Rules, 2006 (hereinafter referred to as the ‘Rules’) (reproduced below) also corroborate to this effect:

 

“43.For all amalgamations, the following disclosures should be made in the first financial statements following the amalgamation:

(a)  names and general nature of business of the amalgamating companies;
(b)  effective date of amalgamation for accounting purposes;

(c)  the method of accounting used to reflect the amalgamation; and
(d)  particulars of the scheme sanctioned under a statute.”

 

The Committee notes that the above-reproduced paragraph 43(d) requires that the particulars of the scheme sanctioned should be disclosed in the first financial statements following the amalgamation, which implies that the first financial statements after amalgamation should be made only after the scheme is sanctioned by the competent authority (Court in the extant case).

 

9. As regards meaning of the phrase ‘amalgamation is effected’, the Committee notes paragraph 46 of AS 14, notified under the ‘Rules’, as reproduced in paragraph 3 above. The Committee is of the view that the date when amalgamation is effected as mentioned in paragraph 46 of AS 14 is different from the ‘effective date’ covered in the scheme of amalgamation, which, as per the querist, is the date on which the documents are filed with statutory authorities to give effect to the scheme of amalgamation. The Committee is of the view that the effective date for accounting purposes, which is also required to be disclosed as per paragraph 43 of AS 14, is the date on which the assets and liabilities of the transferor company vest with the transferee company as per the approved scheme of amalgamation. The said date can either be a date prior to or subsequent to a reporting date. Where the High Court approves the scheme of amalgamation with retrospective effect, the event dates back to the date mentioned in the scheme to determine the date for the purposes of accounting for amalgamations. Where this date is subsequent to the balance sheet date, the accounts of the transferor company as required by paragraph 46 of AS 14 should not be included in the accounts of the transferee company. However, disclosure shall be made in accordance with AS 4, notified under the ‘Rules’.

 

10.The Committee also notes the following paragraphs of AS 4, notified under the ‘Rules’:

“8.2 Adjustments to assets and liabilities are required for events occurring after the balance sheet date that provide additional information materially affecting the determination of the amounts relating to conditions existing at the balance sheet date. For example, an adjustment may be made for a loss on a trade receivable account which is confirmed by the insolvency of a customer which occurs after the balance sheet date.”

 

“8.4 Events occurring after the balance sheet date which do not affect the figures stated in the financial statements would not normally require disclosure in the financial statements although they may be of such significance that they may require a disclosure in the report of the approving authority to enable users of financial statements to make proper evaluations and decisions.

 

8.5 There are events which, although they take place after the balance sheet date, are sometimes reflected in the financial statements because of statutory requirements or because of their special nature. Such items include the amount of dividend proposed or declared by the enterprise after the balance sheet date in respect of the period covered by the financial statements.

 

8.6 Events occurring after the balance sheet date may indicate that the enterprise ceases to be a going concern. A deterioration in operating results and financial position, or unusual changes affecting the existence or substratum of the enterprise after the balance sheet date (e.g., destruction of a major production plant by a fire after the balance sheet date) may indicate a need to consider whether it is proper to use the fundamental accounting assumption of going concern in the preparation of the financial statements.”

“13. Assets and liabilities should be adjusted for events occurring after the balance sheet date that provide additional evidence to assist the estimation of amounts relating to conditions existing at the balance sheet date or that indicate that the fundamental accounting assumption of going concern (i.e., the continuance of existence or substratum of the enterprise) is not appropriate.”

“15. Disclosure should be made in the report of the approving authority of those events occurring after the balance sheet date that represent material changes and commitments affecting the financial position of the enterprise.” 

Based on the above paragraphs of AS 4 and paragraph 46 of AS 14, the Committee is of the view that in cases where the effective date for accounting, viz., when the assets and liabilities of the transferor company vest with the transferee company as per the approved scheme of amalgamation is subsequent to the balance sheet date but before the approval of financial statements, such a fact shall require disclosure in the report of the approving authority, which is generally a directors’ report included in the annual report of the company. However, where the court order approves a scheme of amalgamation with retrospective effect subsequent to the balance sheet date but before the approval of financial statements, the effective date for accounting is prior to the balance sheet date, wherein the courts’ approval is an event that provide additional evidence to assist the estimation of amounts of assets and liabilities that existed at the balance sheet date. As such, an adjusting event has occurred which requires adjustment to the assets and liabilities of the transferee/transferor company.

 

11.The Committee is of the view that paragraph 46 of AS 14 covers a situation where the effective date for accounting purposes as mentioned above, is subsequent to the balance sheet date and AS 4 is a general standard which covers cases not specifically dealt with by another Accounting Standard. Considering this, the Committee is of the view that there is no conflict between AS 4 and AS 14 and they complement each other.

 

D. Opinion

 

12. On the basis of the above, the Committee is of the following opinion on the issues raised in paragraph 6 above:

 

(i) In the extant case, amalgamation is effected from the date when the assets and liabilities of the transferor company vest with the transferee company as per the approved scheme of amalgamation. Refer paragraphs 9 and 10 above.

(ii) In the extant case, since the effective date for accounting would be prior to the balance sheet date, as discussed above, the incorporation of the effect of amalgamation in the balance sheet for 31st March. 20X1, would be in compliance with the requirements of AS 14.  The Committee has not opined on auditor’s qualification as discussed in paragraph 7 above.

______________________________

1 Opinion finalised by the Committee on 31.7.2012.