There are many instances where an entity distributes its assets e.g. Property, plant & equipments or unit of its business i.e. in a form of Demerging an entity or distributing an ownership interest in an entity (may be subsidiary) by way of dividend to its existing shareholders.
There is no specific guidance available under current accounting systems applicable in India which deals about accounting treatment of such transactions and as a matter of fact there are several variations available while capturing these type of Demergers, distribution of assets etc. to its shareholders.
A management generally considers some of its unit or assets or part of its investment which are to be given/ distributed to its shareholders in lieu of normal cash dividend and sometimes it has significant implications related to its real valuations which in other way to be accounted/ reflected correctly in the books of accounts.
After the applicability of Ind-As/ IFRS in India, there is a specific guidance given under Appendix A of Ind-As -10. The Appendix is known as “Distribution of non-cash assets to owners”. Below are some of the relevant provisions mentioned in this Appendix –
Para -3 –This Appendix applies to the following types of non-reciprocal distributions of assets by an entity to its owners acting in their capacity as owners:
(a) distributions of non-cash assets (eg items of property, plant and equipment, businesses as defined in Ind AS 103, ownership interests in another entity or disposal groups as defined in Ind AS 105; and
(b) distributions that give owners a choice of receiving either non-cash assets or a cash alternative.
Para -4– This Appendix applies only to distributions in which all owners of the same class of equity instruments are treated equally.
Para -5 – This Appendix does not apply to a distribution of a non-cash asset that is ultimately controlled by the same party or parties before and after the distribution. This exclusion applies to the separate, individual and consolidated financial statements of an entity that makes the distribution.
Para -11– An entity shall measure a liability to distribute non-cash assets as a dividend to its owners at the fair value of the assets to be distributed.
Let’s have a summary notes and matters which are worth to be noted to have an overall understanding about the provisions of this standard-
1. Let’s take an example – Company A is having a unit which constitutes a business (business as defined under Ind-As 103- Business Combinations) and as a per the decision taken by the management (or competent authority) the same is being distributed among shareholders equally by way of issuing shares. Now, there are some points to be noted here –
a. Company A has given dividend in kind to its shareholders which is other than normal cash dividend transactions,
b. Such dividend should be given equally to all shareholders in order to fall within this standard,
c. It should not be under common control transaction meaning same group of shareholder should not have control on the distributed unit or such investment. Example– If an entity is distributing any shareholding of its subsidiary/ unit to its existing shareholders those who are already controlling to the entity via contractual agreement then it will NOT fall In this standard and normal de recognition criteria will be applicable,
d. Such units which constitute business will be FAIR valued and that value will be recognize as dividend payable to the shareholders
2. When such demerger (unit sale) or assets (property, plant or equipments) etc. are being decided to distribute among shareholders (equally to all) then FAIR VALUE of such assets/ business will be recognized as dividend payable ONLY when it has been duly approved by competent authority e.g. Shareholder’s approval. The dividend payable will be then deducted from equity and a liability will be created in the financial statement on the date of such approval of non-cash dividend,
3. Suppose there is a next financial year in which this liability will actually be paid then it will be RE-MEASURED at fair value at each Balance Sheet and any changes will be adjusted towards equity,
4. Now, When this dividend will ACTUALLY be settled, that time this liability will again be re-measured at FAIR VALUE AND difference between the FAIR VALUE of the assets/ unit and its CARRYING VALUES (which reflected in the books) will be treated as GAIN (it will always be a Gain as if there would have been any situation where fair value of assets so distributed on this transaction was lower than its book value , an impairment would have been recognized) and then will be credited to PL of that year,
5. Standard also specifies that where an entity distributes its shareholding among its all shareholders equally when it loses CONTROL (loss in control is must), it means that if an entity distributes some shareholding in an investment to its existing shareholders while keeping control (Control as defined in Ind-As 103) with them will NOT fall within this standard,
6. Standards also specifies that in case an entity has given an option to its shareholders to get this distribution as cash alternative (equivalent amount in cash), then equivalent fair value will be payable accordingly and an entity then needs to calculate probability of opting these options by shareholders while creating provisions of these dividend at its initial recognition,
There could be a significant impact on the date when these non cash distribution actually will be settled (not at the time of booking of liability) to its shareholders and that time difference between book value of such assets and FAIR VALUE will be credited as GAIN into Profit and loss account whereas dividend payable at FAIR VALUE will be deducted from equity as dividend given (which we normally do in normal course of dividend payments).
A reader will appreciate about the main objective of the standard and an approach which one can follow while keeping in mind the basis of origin of such requirements. There could possibly be some specific situations or circumstances where the interpretation of any standard will be different as we should always keep in mind that IND-AS is principle based standards and lot more areas need management judgment in line with the standards relevant interpretation and best practices.
One has to look into all related facts and patterns before concluding this type of assessment based on this concept. Readers are requested not to take this article as any kind of advice (it is not exhaustive in nature) and should evaluate all relevant factors of each individual cases separately.
(Author of this article is an experienced chartered accountant who has specialization on various GAAP conversions assignments covering different industries around different part of the world including acting as IFRS advisor & corporate trainer. He can be reached via email at firstname.lastname@example.org or whatsapp +91-9634706933)