Indian GAAP: A show stopper in achieving the overall objective of comparability and acceptability of Indian Financial Statements
In India, we have two different framework for preparing financials statements:
1. Indian GAAP (IGAAP)
2. Indian Accounting Standards (Ind AS)
Ind AS is applicable to companies having net worth more than INR 250 Crore. However, all other entities / Companies IGAAP is applicable. Currently, Ind AS is applicable to Companies only, hence any entities with more than INR 250 crore net worth has to prepare its financial statements under IGAAP. An entity may voluntarily opt for preparing its financial statements under Ind AS.
IGAAP is a two decades old standard, which recently amended by ICAI on certain specific accounting subjects i.e. Property, Plant and Equipment replacing Standard on Fixed Assets and Depreciation, Accounting for amalgamation etc. However, there are lot of areas, where IGAAP is silent on accounting of transactions, while detailed guidance is available under Ind AS.
One such accounting difference is acquisition of business under slump sale arrangement. We are going to discuss about business combination under IGAAP for understanding the differences:
Business Combination under Indian GAAP:
Existing IGAAP gives very limited guidance on acquisition and disposal of assets under AS 10 (R) – Property, Plant and Equipment, while AS 14 (R) – Accounting for Amalgamation covers entities where two entities merged with each other. Ind AS has specific standard Ind AS 103 – Business Combination, which gives detailed guidance on business acquisition. Hence, there is no concept of acquisition of business under IGAAP where seller does not merged with buyer, though AS 10 requires disclosure of an asset purchased through business combination.
In this article, we are going to discuss about acquisition of business under IGAAP.
Applicability of Standard for Accounting of Purchase:
From Buyers’ perspective:
When entity purchases business either under slump sale basis or through other means, IGAAP requires entity to account the underlying assets acquired as per AS 10 in absence of no specific guidance available, while corresponding liabilities acquired under business acquisition it need to account under general purpose framework, which requires recognition of liability in case an enterprise has present obligation.
In case net assets acquired less than the amount of consideration paid, excess amount may be towards identified/unidentified intangible assets or can be charge to Profit and Loss Account. AS 26 – Intangible Assets does not gives any specific guidance on intangibles acquired through slump sale/business combination including its amortization thereof. However, prudence view is possible where framework of preparation and presentation of financial statements allows recognition assets, if future economic benefit in the assets expected to receive or flow to the entity and controlled by the entity. In this case, if entity is able to demonstrate this, it is possible to bring goodwill in the buyer’s books of account on acquisition of business under slump sale. However, there is no guidance available for amortization of goodwill arising in acquisition of business through slump sale under AS 26, hence entity may not amortise it and test it for impairment purpose as required in AS 28 – Impairment of Assets.
Buyer can identify and apportion the fair value of the assets acquired and recognise in its financial statements.
IGAAP does not differentiate the transactions under Business Combination under Common Control as it has done under App C – Business Combination under Common Control of Ind AS 103. Also, there is a specific guidance available under Ind AS for goodwill arising on account of business combination.
From Sellers’ perspective:
IGAAP and Ind AS both gives guidance from sellers’ perspective under AS 24 – Discontinuing Operations and Ind AS 105 – Non-current Assets Held for Sale and Discontinued Operations with some differences in presentation and disclosure.
Accounting of transactions under IGAAP has very limited guidance being old standards with limited updation being over time. Ind AS, a replica of IFRS which is regularly updated, and adopted by India with certain carve outs gives significantly detailed guidance to various transactions. ICAI has recently started its mission to bring IGAAP to Ind AS with upgradation of existing ASs through publication of various Exposure Drafts (EDs) for converging IGAAP to Ind AS. Global Investor acquiring or already acquired entity having net worth less than of INR 250 crore has to converge its financial statements under IFRS for comparability and uniformity. Currently, India though has converged into Ind AS; more than 90% of total entities incorporated in India continued to prepare its financial statements under IGAAP, which signifies that the significant quantum of financial statements is still prepared under IGAAP, a significantly different from Ind AS. It is a barrier in fully achieving the mission of ICAI to increase the acceptability and transparency of the financial statements of the Indian entities on the global platform. I hope that ICAI shall able to converge existing IGAAP standards to Ind AS as early as possible with the common standards.