CS Professional · Corporate Restructuring, Valuation and Insolvency

Accounting in Corporate Restructuring: Concept and Accounting Treatment: formula sheet

Full chapter guide

Key formulas

Goodwill or capital reserve (acquisition method): Consideration transferred − Net identifiable assets at fair value = Goodwill (if positive) or Capital reserve (if negative); Used under Ind AS 103 and the purchase method of AS 14. Under Ind AS 103 a bargain purchase gain is first reassessed, then recognised as capital reserve.
Pooling of interests difference: (Share capital issued + any cash or other consideration, or the investment cancelled) − Share capital of transferor = Difference transferred to capital reserve; Under Ind AS 103 Appendix C, book values carry over and the transferor's reserves are retained at their carrying amounts and keep their identity. No goodwill is created. The difference goes to capital reserve, shown separately from other capital reserves. Appendix C makes no credit/debit split, so a debit difference (consideration or investment higher than the transferor's share capital) also goes to capital reserve, as a negative balance. It is not taken to the profit and loss account as a gain or loss. Adjusting the difference against reserves is the AS 14 pooling treatment, not the Ind AS 103 Appendix C treatment.
Net assets taken over: Net assets = Assets taken over − Liabilities taken over; Use fair value for the acquisition method and book value for pooling.
Which standard applies: Ind AS applicable company → Ind AS 103 (Appendix C if common control); Other companies → AS 14; Check applicability first. It decides the method.
Goodwill: Goodwill = (Consideration transferred + Non-controlling interest + Fair value of previously held equity interest) − Fair value of net identifiable assets acquired; Net identifiable assets = identifiable assets − liabilities assumed, all at acquisition-date fair value. A positive result is goodwill.
Bargain purchase gain: If net identifiable assets > (Consideration + NCI + previously held interest), the difference is a bargain purchase gain; Reassess identification and measurement first. Under Ind AS 103 the gain is recognised in other comprehensive income and accumulated in capital reserve, unless there is no clear evidence of a bargain purchase, in which case it goes directly to capital reserve.
Consideration transferred: Consideration = Fair value of cash + shares issued + other assets given + contingent consideration; Acquisition-related costs are excluded and are expensed.
Measurement of NCI: NCI at fair value, or at proportionate share of net identifiable assets; Choice is made transaction by transaction for NCI that are present ownership interests. Full-fair-value choice gives full goodwill.
Core principle: Identifiable assets and liabilities are measured at acquisition-date fair value; Exceptions exist, such as deferred tax and employee benefits, which follow their own standards.
Test for common control: Same party controls all combining entities before AND after, and control is not transitory; If this fails, use the acquisition method of Ind AS 103 instead.
Measurement of assets and liabilities: Recorded at carrying amounts in the transferor's books; no fair value remeasurement; No new goodwill is recognised. Items are carried as they appear in the transferor's books; policy alignment adjustments go to reserves.
Capital reserve on combination: Capital reserve = Share capital of transferor − (Face value of shares issued + other consideration paid); The difference always goes to capital reserve and is shown separately from other capital reserves. If the result is positive, it is a credit. If it is negative, it stays as a debit balance in capital reserve. It is not adjusted against other reserves. Reserves of the transferor are otherwise preserved in the same form.
Net assets taken over: Net assets = Book value of assets − Book value of liabilities; Use this to cross-check that the reserves and capital reserve entries balance.
Comparatives: Restate financials as if combined from the beginning of the preceding period presented; Use the later date if common control began later.
Combination costs: Expense as incurred; Do not add to assets or reserves.
Conditions for amalgamation in the nature of merger (all five must be met): 1) All assets and liabilities of transferor become those of transferee. 2) Shareholders holding at least 90% of the face value of transferor's equity shares (other than shares already held by the transferee or its nominees) become equity shareholders of the transferee. 3) Consideration to those shareholders is wholly by issue of equity shares in the transferee (cash only for fractional shares). 4) The business of the transferor is intended to be carried on by the transferee. 5) No adjustment is made to book values of assets and liabilities, except to ensure uniform accounting policies.; Fail any one and it is an amalgamation in the nature of purchase.
Pooling of interests method: Assets, liabilities and reserves of transferor are recorded at existing book values. Reserves are preserved in the same form. Difference = Share capital issued by transferee − Share capital of transferor, adjusted in reserves.; If capital issued is more than transferor's capital, the excess reduces reserves. If less, the difference is added to reserves (capital reserve in the standard's wording).
Purchase method: Goodwill / (Capital reserve) = Purchase consideration − Net assets taken over (at book or fair value as the transferee decides); If consideration exceeds net assets, the excess is goodwill. If less, the shortfall is capital reserve.
Purchase consideration: Purchase consideration = Value of equity shares, preference shares, other securities and cash paid by transferee to the shareholders of the transferor; Do not include amounts the transferee pays to discharge the transferor's liabilities.
Statutory reserves in purchase method: Statutory reserves of transferor are recorded in the transferee's books by debiting an 'Amalgamation Adjustment Account' (shown as a reserve adjustment) and crediting the reserve, so they can be shown in the balance sheet.; Other reserves (general reserve, profit and loss) of the transferor are not carried over in the purchase method.
Goodwill treatment: Goodwill arising on amalgamation is amortised to income over a period not exceeding five years, unless a longer period can be justified.; Capital reserve is not amortised.
Net payment method: Purchase consideration = Shares issued (at issue price) + Cash paid + Other securities issued to the transferor's shareholders; Include only payments to shareholders. Exclude liabilities the transferee pays to outsiders.
Net asset method: Purchase consideration = Agreed value of assets taken over − Liabilities taken over; Take only the assets and liabilities the transferee actually takes over. Exclude fictitious assets and anything excluded by the scheme.
Purchase method difference: Goodwill (if consideration > net assets taken) or Capital reserve (if consideration < net assets taken); Net assets taken are at the values the scheme specifies. Statutory reserves are kept if the scheme requires.
Pooling of interests difference: Consideration − Share capital of transferor = adjustment in reserves; If consideration is less than share capital, the surplus is credited to reserves. If more, reserves are debited.
Main entries (purchase method): Business Purchase A/c Dr. (consideration) to Liquidator of Transferor / Equity Share Capital / Securities Premium; Assets Dr.; to Liabilities; to Business Purchase A/c; Goodwill Dr. or to Capital Reserve; Business purchase account records the consideration. Assets are debited and liabilities credited at agreed values.
Net book value transferred in demerger: Net book value = Book value of assets transferred − Book value of liabilities transferred; Use book values, not fair values, unless the scheme and applicable standard specify otherwise.
Resulting company: shares issued: Shares issued = Shares held in demerged company × Share entitlement ratio; The ratio is given in the scheme, based on a valuation report. Apply it to each shareholder's holding.
Capital reserve or adjustment in resulting company: Difference = Net assets taken over − Face value of shares issued (and any cash paid); Positive difference: Capital Reserve. Negative difference: adjust against reserves as per the scheme.
Capital Reduction Account balance: Balance = Total sacrifice credited − Total losses and assets written off; A credit balance goes to Capital Reserve. A debit balance should normally be nil in a properly drawn scheme.
Demerger entry in demerged company (typical): Dr Liabilities transferred; Dr Reserves / Share capital (balancing figure); Cr Assets transferred; The balancing debit is as per the scheme. Check it equals net book value transferred.
Resulting company entry (typical): Dr Assets taken over; Cr Liabilities taken over; Cr Share capital (face value); Cr Capital reserve (balance); If net assets are lower than the face value of shares issued, debit the shortfall to reserves instead.
Net assets transferred (seller): Net assets = Book value of assets transferred − Liabilities taken over by buyer; Use book values in the seller's books. Include only assets and liabilities actually transferred.
Profit or loss on slump sale (seller): Profit or (Loss) = Lump sum consideration − Net assets transferred; A positive result is a gain credited to the Statement of Profit and Loss. A negative result is a loss. Deduct any selling expenses borne by the seller.
Goodwill or capital reserve (buyer): Goodwill = Purchase consideration − Fair value of net identifiable assets acquired; if negative, the difference is capital reserve; Fair value is used by the buyer. Bargain purchase treatment depends on the standard applied.
Purchase consideration (buyer): Purchase consideration = Cash paid + Fair value of shares or other securities issued; If the price is paid in shares, value the shares at fair value, not face value, unless the question says otherwise.
Itemised sale (seller): Gain or loss on each asset = Sale price of that asset − Book value of that asset; Computed asset by asset. Sum them if the question asks for the total.

Quick revision

Ind AS 103 uses the acquisition method for business combinations other than common control ones.
Goodwill = consideration transferred + amount of non-controlling interest + fair value of previously held equity interest in the acquiree, minus the net identifiable assets acquired at fair value.
If net assets exceed consideration, test the measurement first. After reassessment, if the bargain purchase is supported by clear evidence, the gain is recognised in other comprehensive income and accumulated in equity as capital reserve. If there is no clear evidence, the gain is recognised directly in equity as capital reserve.
Appendix C combinations are recorded using pooling of interests.
In pooling under Appendix C, assets and liabilities are taken at carrying amounts. The difference between the consideration and the transferor's share capital is adjusted in equity, as capital reserve or other reserves. No goodwill is recognised.
Under Appendix C the financial statements are restated as if the combination had occurred from the beginning of the earliest period presented.
AS 14 recognises the purchase method and the pooling of interests method.
Under AS 14 purchase method, identifiable assets and liabilities are incorporated at existing carrying amounts or at fair values of the consideration allocated to them, and the difference is goodwill or capital reserve. The transferor's reserves are not carried forward, except statutory reserves. Statutory reserves are recorded in the transferee's books as reserves, with a corresponding debit to the Amalgamation Adjustment Account.
Under AS 14 pooling method, assets, liabilities and reserves are generally taken at existing carrying amounts.
Purchase consideration is what the transferee gives to the shareholders of the transferor.
Always check the approved scheme and the standard before choosing the entries.
A slump sale is a transfer of an undertaking for a lump sum without assigning values to individual items.

Common mistakes

Applying AS 14 to a company that follows Ind AS. Fix: Check applicability at the start. Ind AS companies use Ind AS 103.
Creating goodwill in a common control combination. Fix: Under Appendix C of Ind AS 103, use pooling at book values. No goodwill arises. The difference between the consideration (or investment) and the transferor's share capital goes to capital reserve, shown separately from other capital reserves. A debit difference also goes there, as a negative balance. The transferor's reserves keep their identity. Setting the difference against reserves is the AS 14 pooling treatment, so do not use it for an Ind AS company.
Using book values of the target's assets instead of fair values Fix: Always replace book values with the fair values given for the acquisition date. Use book value only if no fair value is given.
Adding legal and advisory fees to the consideration Fix: Expense acquisition-related costs as incurred. Keep them out of the goodwill computation.
Recording the transferor's assets at fair value Fix: In pooling, use carrying amounts only. Use fair value only for the exchange ratio if asked.
Recognising goodwill or a bargain purchase gain Fix: No goodwill or gain arises. The difference goes to capital reserve.
Calling every amalgamation paid in shares a merger Fix: Test all five conditions. Shares-only payment is only one of them.
Treating goodwill as arising under pooling Fix: Under pooling no goodwill or capital reserve arises on the consideration. Only the share capital difference is adjusted in reserves.
Including liabilities paid directly to outsiders in the consideration. Fix: Count only what goes to the transferor's shareholders. Liabilities taken over are deducted under net assets, not added under net payment.
Taking fictitious assets such as preliminary expenses or the profit and loss debit balance as assets. Fix: Do not take them over under the purchase method. Leave them out of the asset list unless the scheme says otherwise.

Exam tips

Begin every answer by naming the standard and method. Examiners look for this first.
Link the accounting to the legal base: Section 133, Section 129 and the auditor's certificate under the proviso to Section 230(7).
Keep a short comparison ready: acquisition method versus pooling of interests, in terms of values used and goodwill.
In case-based questions, quote the appointed date and scheme terms before you apply any entry.
Round off with a one-line conclusion. It shows provision, analysis and conclusion in order.
Write the acquisition method steps as a numbered list first. Examiners reward the structure even if arithmetic slips.
Show the goodwill computation in a clear table of lines, with each fair value labelled.
State the treatment, not just the number: goodwill is tested for impairment, bargain gain goes to capital reserve after reassessment.