A company, say P Ltd. is a parent company of two companies, say Q Ltd. & R Ltd. Q Ltd. & R Ltd. are under common control of P Ltd. In case of common control business combination, the assets, liabilities and reserves of the transferor (acquired) company is recognised at their book values in the books of the transferee(acquiree) company in accordance with Appendix C of Ind AS 103, Business Combinations.
Now, CBDT has notified new Rule 10CB which prescribes computation of interest income pursuant to secondary adjustment. Rule 10CB also provides that repatriation of excess money shall be made on or before 90 days from the:-
(A) Whether the book values should be as per the books of the companies merged or as per the consolidated books of parent company in following situations:
1. Q Ltd. merges with R Ltd.
2. Q Ltd. merges with P Ltd.
(B) Further, whether P Ltd. shall require to eliminate the effect of business combination in above two situations in the consolidated financial statement?
Situation 1 : Appendix C, Business Combinations of Entities under Common Control of Ind AS 103 provides that accounting of merger of common control companies should be done as per the pooling of interest method. Under this method, assets, liabilities and reserves of the transfer or should be recognised in the books of the transferee at their carrying amounts without any adjustments except harmonisation of accounting policies of both companies in accordance with para 9 of Appendix C.
Para 11 of Appendix C states that the balance of retained earnings of the transferor is aggregated with that of the transferee. Further, the name of reserves, like general reserve, revaluation reserve etc. of the transferor should remain same in the book of transferee also in accordance with para 12 of Appendix C. Any difference between purchase consideration and share capital of the transferor is recognised as capital reserve separately from other capital reserves.
Accordingly, the book values or carrying amounts of assets, liabilities and reserves should be combined on the basis of standalone books of Q Ltd. and R Ltd., i.e. the merged companies.
Situation 2 : P Ltd. is holding company of Q Ltd. So, merger of P Ltd. with Q Ltd. will not have any effect. The assets, liabilities and reserves which were appearing in the consolidated financial statement of P Ltd. will not be part of standalone financial statement of P Ltd. Therefore, it would be appropriate to take carrying amounts of assets, liabilities and reserves of Q Ltd. as appearing in the consolidated financial statement of P Ltd.
As per para B86 of Ind AS 110, Consolidated Financial Statements, in consolidation procedure intra group assets and liabilities, equity, income, expense and cash flows relating to transactions between group companies should be eliminated in full. So, in the present case in both situations, P Ltd. should eliminate all effects of mergers in its consolidated financial statement.
Issue 2 of Ind AS Transition Facilitation Group Clarification Bulletin 9