Accounting for Corporate Acquisitions: Share and Asset Purchases without Dissolution of the Acquired Entity
Introduction
Corporate acquisitions involving the purchase of shares or assets of another company—while allowing the acquired entity to continue its separate legal existence—represent a specialised domain of accounting governed by ICAI standards, Ind AS 103 (Business Combinations), IFRS 3, and relevant guidance from regulatory bodies. Unlike mergers or amalgamations where the acquired company dissolves, acquisitions maintain the corporate identity of the acquired entity, requiring careful application of purchase accounting, valuation methodologies, recognition and measurement of identifiable assets and liabilities, and subsequent financial reporting. This article presents an expert-level analysis of factors, recognition rules, disclosures, and numerical illustrations relevant to such transactions.
Legal and Economic Characteristics of Acquisitions
In a share or asset purchase, the acquiring company obtains control by purchasing a threshold quantity of voting rights or acquiring substantial assets. However, since the acquired company continues to legally survive, the acquisition is not treated as a pooling of interest or statutory merger. The consideration may comprise cash, shares, debt instruments, or a hybrid structure. This continuing separate existence necessitates consolidation under Ind AS 110 and application of acquisition accounting under Ind AS 103.
ICAI and International Guidance
Ind AS 103 aligns substantially with IFRS 3 and requires recognition of identifiable assets and liabilities at fair value. The ICAI Guidance Note on Accounting for Acquisitions emphasises measurement of goodwill, acquisition-related costs, contingent consideration, and determination of control. Internationally, US GAAP ASC 805 also follows the acquisition method but differs in treatment of certain tax assets and measurement periods.
Initial Recording of Transactions
The acquiring company records the transaction using the acquisition method:
(1) Identify the acquirer;
(2) Determine the acquisition date;
(3) Recognise identifiable assets acquired and liabilities assumed at fair value;
(4) Recognise goodwill or a gain from bargain purchase.
Transaction costs are expensed immediately except costs to issue debt or equity instruments. Contingent consideration is recognised at fair value at the acquisition date.
Case Study: Share Acquisition of XYZ Ltd.
Suppose ABC Ltd. acquires 80% of XYZ Ltd. for ₹240 crore. Fair value of net identifiable assets is ₹250 crore. NCI (non-controlling interest) is valued at fair value of ₹55 crore. Goodwill = (240 + 55) – 250 = ₹45 crore. The acquisition requires recognition in consolidated statements while XYZ Ltd. continues as a separate entity. The acquired company will maintain its own books, but consolidation adjustments will be passed at group level.
Case Study: Asset Purchase without Dissolution
ABC Ltd. acquires a division of PQR Ltd. for ₹100 crore consisting of plant, inventory, customer relationships, and liabilities. PQR Ltd. continues as a separate legal entity. The acquisition requires identification of intangible assets such as customer lists and brand value using valuation techniques including income approach and relief-from-royalty method.
Numerical Illustration: Journal Entries
Journal entries in the books of ABC Ltd. at acquisition of shares:
Investment in XYZ Ltd. Dr. 240 crore
To Bank 240 crore
On consolidation: identifiable assets and liabilities recognised at fair value; goodwill capitalised
Disclosure Requirements
Disclosures under Ind AS 103 include: name and description of the acquiree; acquisition date; percentage of voting rights acquired; primary reasons for acquisition; qualitative factors; details of consideration; recognised goodwill; measurement of NCI; contingent considerations; revenue and profit contribution since acquisition; and pro forma impact.
Notes to Accounts
Notes require details of valuation methods, assumptions, fair value hierarchy classification, sensitivity analysis for goodwill impairment testing (Ind AS 36), and movement schedules of intangible assets recognised.
Complexities and Intricacies
Acquirers face practical challenges including: valuation of uncertain assets; recognition of contingent liabilities; harmonisation of accounting policies; identification of embedded leases; classification of employee benefit obligations; tax implications of share vs asset purchases; and treatment of deferred tax assets under Ind AS 12.
Corporate Example: Tata Steel–Corus Acquisition
Tata Steel acquired Corus Group through a share purchase, leaving Corus as a continuing entity within the group. The acquisition involved complex valuation of intangible assets like technology, brand, and customer contracts, and recognition of significant goodwill tested annually for impairment.
Corporate Example: Hindalco–Novelis Transaction
Hindalco purchased equity of Novelis, which continued operating as a separate entity. The acquisition required recognition of global intangible assets, long-term supply contracts, and fair valuation of environmental liabilities.
International Comparison
IFRS 3 emphasises full fair value measurement and prohibits amortisation of goodwill, relying on annual impairment testing. US GAAP permits optional pushdown accounting at acquired company level. India prohibits pushdown accounting under Ind AS, except in limited regulatory circumstances.
Conclusion
Acquisitions where the acquired entity continues to exist legally require rigorous application of acquisition accounting, fair value measurement, and comprehensive disclosure. Proper treatment enhances transparency and assists regulators, investors, and auditors in evaluating the economic impact of the acquisition.
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