Total number of Merger and Acquisition (M&A) deals of Indian companies in 2014 rose to 1,177 - valuing at about $50 billion - the highest ever in a decade and the momentum is set to pick even higher this year, according to Economic Times. It is expected that 2015 deal-making will reach even higher levels.
However, the Merger and Acquisition (M&A) activities that have been growing at a fast pace in the past six months seems to have hit a speed bump due to the establishment of new accounting standard.
The new accounting standard called the Ind-AS would be effective from April 1, 2016. It would require companies to make changes in the way they report their revenue and taxes. On an average any deal takes eight months to a year to close, which means if a deal starts now, the new standard would be applicable by the time it is concluded.
As per the current accounting standard, there are no comprehensive set of rules that addressed accounting for business combinations and the current accounting is driven by the form of transaction, i.e. legal merger, share acquisition, etc. In Ind-AS all mergers and acquisition are recorded using the purchase method that considers the acquisition date fair value of all the assets and liabilities of the acquiree.
Unless the companies structure their deals taking this into account, the deals could damage their balance sheet rather than improving it. Thus the companies and PE firms have now started relooking into their deals and restructuring their deal terms. Some of the deals have been put on hold until there is more clarity on the implications of the new rules.
Definition of business:
The current accounting standard does not define the term business but th...
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...c. that are often used by PE funds will get classified as liabilities rather than equity, impacting both debt-equity ratio as well as EPS. Similarly, rights that are often given to PE investors in SPVs may lead to a conclusion that the SPVs are jointly controlled by the company and the PE, thereby preventing them from being consolidated.
We can conclude that Ind-AS will have significant bearing on various stages of acquisition such as planning the deal, execution of deal and post-acquisition. It is critical that companies consider Ind-AS accounting implications in each of the acquisition phases to avoid any problems in the future. Companies should warn all departments – legal, tax, Mergers & acquisition team and other relevant stakeholders about the variations in the accounting rules so that they are cautious and involve relevant experts in each phase of transaction.
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