Firms may keep goodwill under new post-M&A accounting
Acquisition-hungry companies will soon have to deal with new rules for preparing financial statements of the combined entity.
By Gireesh Chandra Prasad, TNN |
NEW DELHI: Acquisition-hungry companies will soon have to deal with new rules for preparing financial statements of the combined entity. Corporate houses will face an accounting regime where the profits of the merged entity would be different from what an entity merging may now have.
The new regime will kick in as the country harmonises its accounting standards with international norms.
Presently, a merged entity is expected to write off goodwill — which is the amount by which the payment exceeds the value of the assets of the target company — over a period of five years. This is a burden on the profit & loss account.
Once India switches to the International Financial Accounting Standards Board (IASB) standards, merged entities will not be required to write off goodwill unless it gets impaired, that is, when the company believes it will not be able to recover the premium over the assets by doing business.
“Under the existing regime, goodwill amortisation affects the profit & loss accounts of the company. Under IFRS, this will not happen,” said ICAI president Sunil Talati. The merged entity would be able to show higher profits compared to what it would have shown under the current regime. This would be the case if two companies that are open to exercising their option to revalue their assets before a merger, postpone the plan to the new regime.
Showing higher profits in the books of account, however, does not mean the company’s profitability has gone up in the economic sense. Besides, the tax liability will not be affected in any manner as the higher figure is only a book entry, said Mr Talati.
Industry experts, however, say a large number of companies now do not exercise this option. “Right now, a large number of companies prepare the financial statements as per historical cost, although fair-value accounting is permitted. For them, the merged entity’s profitability may be significantly lower because tangible and intangible assets and inventory would be valued at fair market prices in the new regime.
Therefore, the residual goodwill comes down, but higher depreciation and inventory value will result in the combined entity showing lower profits than it would have under the existing method,” said Grant Thornton partner Sai Venkatesh. Companies adopt different accounting approaches based on their requirements and once the court approves it, it has more sanctity than accounting standards.
Mr Talati added that companies have the option to revalue their assets before merging. “The existing regime is conservative, and the new regime more realistic,” he said. According to KPMG executive director Vikram Utamsingh, the profits of a merged entity may be higher under the new regime. IFRS allows entities to test the impairment every year and write off accordingly. If there is no impairment, no write-off is required, he said.
Mr Venkatesh said that harmonisation will take co-ordinated efforts by the government and tax regulators besides the accounting regulator.
The new regime will kick in as the country harmonises its accounting standards with international norms.
Presently, a merged entity is expected to write off goodwill — which is the amount by which the payment exceeds the value of the assets of the target company — over a period of five years. This is a burden on the profit & loss account.
Once India switches to the International Financial Accounting Standards Board (IASB) standards, merged entities will not be required to write off goodwill unless it gets impaired, that is, when the company believes it will not be able to recover the premium over the assets by doing business.
“Under the existing regime, goodwill amortisation affects the profit & loss accounts of the company. Under IFRS, this will not happen,” said ICAI president Sunil Talati. The merged entity would be able to show higher profits compared to what it would have shown under the current regime. This would be the case if two companies that are open to exercising their option to revalue their assets before a merger, postpone the plan to the new regime.
Showing higher profits in the books of account, however, does not mean the company’s profitability has gone up in the economic sense. Besides, the tax liability will not be affected in any manner as the higher figure is only a book entry, said Mr Talati.
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Industry experts, however, say a large number of companies now do not exercise this option. “Right now, a large number of companies prepare the financial statements as per historical cost, although fair-value accounting is permitted. For them, the merged entity’s profitability may be significantly lower because tangible and intangible assets and inventory would be valued at fair market prices in the new regime.
Therefore, the residual goodwill comes down, but higher depreciation and inventory value will result in the combined entity showing lower profits than it would have under the existing method,” said Grant Thornton partner Sai Venkatesh. Companies adopt different accounting approaches based on their requirements and once the court approves it, it has more sanctity than accounting standards.
Mr Talati added that companies have the option to revalue their assets before merging. “The existing regime is conservative, and the new regime more realistic,” he said. According to KPMG executive director Vikram Utamsingh, the profits of a merged entity may be higher under the new regime. IFRS allows entities to test the impairment every year and write off accordingly. If there is no impairment, no write-off is required, he said.
Mr Venkatesh said that harmonisation will take co-ordinated efforts by the government and tax regulators besides the accounting regulator.
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