The Hindu Business Line : Accounting for demerger is uniform across the globe

Demergers are suddenly in the news, with the most significant recent announcement being industry major Bajaj Auto Ltd's (BAL) decision to split itself into three separate companies.

In spite of lack of guidance in accounting standards, accounting for demerger is uniform across the globe, according to Asish K. Bhattacharyya, professor of finance and control, IIM-Calcutta.

Speaking to Business Line on the implications of the BAL demerger from an accounting perspective, he said that neither International Financial Reporting Standards (IFRS)-3 — `Business Combinations' — nor AS-14 — `Accounting for Amalgamations' — specifically deals with accounting for demergers.

But accounting for demerger "is quite simple," he said. "It does not result in a purchase or sale transaction but is just a division of an existing entity, the demerged company."

According to him, there is no reason to restate the carrying amount of assets and liabilities.

"Therefore, demerger is accounted for at the recorded book values of the assets and liabilities transferred to the new entity."

In the case of BAL, the board of directors on May 17 approved a demerger scheme that split the company into three separate companies: Bajaj Holdings and Investment Ltd or BHIL (erstwhile BAL), the new BAL and Bajaj Finserv Ltd.

BHIL will be the investment company, maintaining "arm's-length relationship" with the other two companies, which will have access to its cash pool.

"The new BAL will focus on the auto business, while Bajaj Finserv will focus on wind energy, insurance, consumer finance, etc."

Prof Bhattacharyya likened the demerger to dividing a cake into three pieces. "A shareholder may retain all the three pieces or may sell one or more pieces."

Pointing out that this provides flexibility to each shareholder to adjust the portfolio according to their choice, he said that in the case of Bajaj Auto the shareholders will hold 70 per cent of net assets of each of the new entities directly and 30 per cent through the investment company.

This is because the investment company will hold 30 per cent shares of each of the auto and finserv companies.

"The face value of new shares has no economic significance," he added.

In a demerger, the new company issues shares to all shareholders of the demerged company without receiving cash.

"On issuance of shares by the new company, for all practical purposes the share of the demerged company is split into two shares."

In the case under review, the share of the old BAL is split into three shares.

"For every share in the old BAL, a shareholder will hold one share in BHIL, one in the new BAL and one share in Bajaj Finserv Ltd."

He added that the total of the book value of the three shares is equal to the book value of one share in the old BAL at the time of demerger.

Prof Bhattacharyya also said that demerger is the reverse of "uniting of interest" or "amalgamation in the nature of merger."

In a demerger, a new company is formed and all the assets and liabilities of an undertaking of the demerged company are transferred to the new company.

"This new company, which has an economic and legal identity separate from the demerged company, issues shares to shareholders of the demerged company. As a result, a substantial number of shareholders of the demerged company become shareholders of the new company."

D. Murali
C. Ramesh

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