Control under Ind AS Framework and its effect on Financial Reporting

At the inception, I want to recall the definition of a Subsidiary under Companies Act 2013, because the more we are able to understand the meaning of control, more will be the effect of telling concept of business combination to you under the Ind AS framework.

As per section 2(87) A subsidiary means a company in which another company:

1. Holds more than 51% of Total voting power or;
2. Controls the composition of board of directors of the company.

For the purpose of control the entity should control another company either directly or through another subsidiary. (A Ltd > Z Ltd) or (A Ltd > C Ltd > Z Ltd).

Where '>' signifies 'control';

For Example Company A Ltd is the holding of Company C Ltd, if company A Ltd wants to control Company Z Ltd it should control the company either by acquiring shares of Company Z Ltd directly or it can pass a special resolution in the general meeting of C Ltd to acquire the shares of Z Ltd and become parent entity of Z Ltd through holding shares in C Ltd. The relation will be A Ltd > C Ltd > Z Ltd.

This is the definition of control within the purview of Companies Act 2013, however there is no concept of reverse acquisition in Corporate Laws as given under Ind AS.

The concept of control is far more different than Legal aspects of the companies act 2013. Actually the word 'control' is projected to indicate who is going to consolidate the entity and prepare entire group financial statements.

Consider in the above case if Z Ltd issued its shares to A Ltd, the legal acquirer would have been Z Ltd because it is issuing shares and giving consideration but under Ind AS we have to assess which entity is going to control the entire group operations. The Entity which is going to control the Board of both entities or all entites will be going to be known as Aquirer as per Ind AS and not according to the legal concept of control as given under companies Act 2013. The Entity which is Aquirer as per Legal Transaction is not necessarily the Aquirer as per Ind AS. Under Ind AS we should examine as per facts and circumstances of the case about who is the Accounting Aquirer under Ind AS which shall consolidate all entities and present financial statements of entire group holdings.

The main reason for this treatment is to present all kinds of mergers, amalgamations, acquisitions according to the business deal and business scenarios which are very well broader than the meaning given under Companies Act.

That is why there are certain instances given under the Ind AS which helps us to consider which kind of merger, amalgamation, or acquisition is occurring among the two or more companies.

The Transactions which looks as simple as the legal effect is not in substance has such an effect, rather it is going change the entire system of control and authority under the given scenario.

You would not imagine how much a corporate group can manage to transfer its control and effect of its legal transactions in order to expand its business operations. Such as a company which issued its shares to another company is a transferor company as per company law, however, in substance, if the main shareholders who are controlling the combined entity after amalgamation belongs to the same company then the company shall become Accounting Aquirer as per Ind AS framework.

A Question arises here that how many number of instances there can be to decide whether a company is Aquirer or Aquiree under the Ind AS framework, the answer is actually unlimited. But a number of Scenarios are given under Ind AS 110 Consolidation through which we can decide the concerned matter.

The following assumptions as per para B14-B18 of Ind AS 110 are required to consider whether the Aquirer under merger or amalgamation is Transferor company or Transferee Company :

• if the company transfers cash or other assets.
• if the entity that issues the equity interest.
• if the shareholders of the entity receives largest portion of the combined entity.
• if the shareholders of entity has largest minority comparing with other minority in the combined entity.
• if entity is able to elect or appoint majority of Directors in the combined entity.
• if entity dominates the management of combined entity.
• if entity pays premium price over the pre-combination fair value of the equity interest of the other combining entity or entities.
• if entity's size is significantly greater than size of the combined entity.
• If entity initiated the combination.
• if the new entity is formed to issue equity instruments, one of the existing combined entity.
• if the new entity transfers cash or other assets or incurs liabilities, the new entity may be the aquirer.

The company satisfying the any of the major criteria shall be considered the Accounting Aquirer under the Ind AS Framework despite the legal aquirer is the transferee company.

The author is an Accountant, Auditor and a Tax Professional since 2015 in Moradabad, and have interest in explaining various concepts in Accounting Profession.