Standards on combinations

MOHAN R. LAVI | Updated on August 30, 2011

The necessity of a standard on Business Combinations in India assumes importance considering the fact that Indian companies are increasingly shopping abroad for best-fit business combinations.

One of the sub-arguments that Vodafone presented before the Supreme Court supporting its stand that its acquisition of Hutch did not give rise to a tax liability in India was that the valuation of the deal was done as per International Financial Reporting Standards (IFRS). Though this may have little impact on the final ‘to tax or not' decision, it did generate enough curiosity for the apex court to enquire as to why India has not moved over to IFRS. IFRS-equivalent Ind-AS standards have been drafted by the Institute of Chartered Accountants of India (ICAI) and notified by the Ministry of Corporate Affairs (MCA), but the blessings of the Government have been delayed.


IFRS-3 and its Indian-equivalent Ind-AS 103 focus on Business Combinations. The Standard eliminates the now-optional pooling-of-interests method and mandates the Purchase Method in accounting for a Business Combination (BC).The Purchase Method entails assigning values to each and every asset/liability that have been acquired/assumed in a Business Combination. The values would have to be the acquisition-date fair values.

IFRS-3 permits recognition of previously unrecognised Intangible Assets in a BC and derecognition of previously recognised Intangible Assets that do not meet the tests of intangibility specified in IAS-38 on Intangible Assets.

On May 8, 2007, Vodafone completed the acquisition of 100 per cent of CGP Investments (Holdings) Ltd, a company with indirect interests in Vodafone Essar Ltd from Hutchison Telecommunications International Ltd for cash consideration of $10.9 billion. Following this transaction, Vodafone obtained a controlling financial interest in Vodafone Essar. Implementing IFRS-3, Vodafone made Fair Value additions of £3068 million largely consisting of licences and spectrum fees to the existing Intangible Assets of the acquiree. Fair Value Reductions were made for Property, Plant and Equipment, Inventory, short and long-term borrowings and trade and other payables. After adjusting minority interest, Goodwill of £3950 m was recognised primarily attributable to the expected profitability of the acquired business and the synergies expected to arise after the Group's acquisition of CGP.

IFRS-3 is more a Valuation Standard and relies on other IFRS-standards for guidance in certain situations such as determining control and recognising and impairing Goodwill. These standards take over once IFRS-3 ascertains the values to be allotted to assets/liabilities/Goodwill. IAS-38 warrants Annual Impairment tests. For the year ended March 31, 2010, Vodafone impaired the Goodwill of its India operations by £2300 million primarily due to intense price competition following the entry of a number of new operators into the market.

Glocal IFRS

Vodafone's initial recognition of Goodwill and its impairment in a couple of years gives indicators that IFRS standards are in tune with the times. We can no longer contend that the “Alice in Wonderland” accounting (as some opine) that frequent changes in fair value are termed would not be applicable in India as we have opted for a ‘glocal' adoption of the standards. The International Accounting Standards Board (IASB) has recently deferred implementing IFRS-9 on Financial Instruments by a couple of years as a hazy global environment may not be the ideal time to push-through radical reforms.

The necessity of a standard on Business Combinations in India assumes importance considering the fact that Indian companies are increasingly shopping abroad for best-fit business combinations. Such acquisitions are occurring in the small and medium sector also. Regulators abroad and anti-competition bodies would require IFRS-compliant financial statements from the combined entity.

The recent amendments to the Takeover Code by the Securities and Exchange Board of India (SEBI) — increasing the open offer size from 20 to 26 per cent, increasing the open-offer trigger limit from 15 to 25 per cent and eliminating the non-compete fee to ensure that all stakeholders get an equal slice of the cake - may not increase the quantity of acquisitions, but would ensure that quality acquisitions. In April 2010, SEBI permitted voluntary adoption of IFRS in presenting consolidated financial statements. The Government should end the ‘yes-no-may be' guessing-game on the introduction of Ind-AS in India by deciding on the date of convergence. Ironically, XBRL has been pushed through as the filing language for regulatory filing for chosen entities, but the accounting language in which a majority of financial statements abroad are written all over the world has been kept on the back-burner.

(The author is a Bangalore-based chartered accountant.)

Published on August 18, 2011

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