It is quite common where an entity provides some amounts as Share Application Money for the sake of allotment of such shares in future. The amount in substance will be advance given for such investment and the entity is waiting for the same to be converted into an Equity in future. Now, there was a query which has been sent to the Expert Advisory Committee (EAC) of ICAI to know about the treatment of such amounts to be shown in the books of accounts and its impairment etc.
EAC received the below query for the pending allotment money -
i. Whether share application money is to be considered for making provision for diminution in the value of investments even though the shares for the same are yet to be allotted.
ii. Whether share application money, in respect of which shares are allotted subsequent to the end of the financial year but before the adoption of accounts of the company, should be considered as share capital for the purpose of making the provision for diminution in the value of Investments.
iii. For making provision for diminution in the value of investments, whether the company can consider the fact that the revaluation of assets is under progress and that the fair market value of assets would be higher than the historical value/cost of assets?
Reader can refer this opinion in detail by using this link http://resource.cdn.icai.org/33930eac23624-10.pdf related to "Opinion finalised by the committee on 21.5.2013 and 22.5.2013"
In this case EAC has given the opinion of which relevant text is reproduced here" since the money would not be refundable to the company, share application money pending for allotment should be considered as long-term investment while making provision for diminution in the value of investments. Even if the share application money would have been refundable and as such, shown as 'advances', an appropriate provision should be made based on their recoverability.
Now,
After the applicability of Ind-AS the situation will be different and one needs to refer different interpretation and classification of such amounts in contrast to the existing practices which can briefly be noted as below (for reader to have more practical way of thinking)-
1. As per the guidelines prescribed by Ind-AS 32-Financial Instruments-Presentations if such pending allotment is legally giving all powers/ rights/ entitlements to the investor and it's just a matter of procedure/time to allot such shares (shares has been identified in numbers as well and non-refundable advance given) then this pending amount for allotment will be treated in substance as Equity Investment (whether it is Investment for trading purposes, Investment in associates/ Joint ventures etc) unlike in present practice it will never be classified as equity unless actual allotment of shares happened (refer EAC opinion above),
2. Now, one can argue that what this would change after its equity classification, Firstly the equity treatment will affect both investor and investee in same way hence investee (who needs to issue such shares) will also need to treat these shares as its capital issued even share certificates has not been issued, Secondly once we have identified that this is equity investment then it will be analysed for its impairment testing based on the category in which such investment has been classified.
Example-
a. Where such Investment is valued at fair value through PL / OCI then it will not be required for separate impairment testing,
b. If the investment is treated as associate/ JV investment then it will further be classified in two scenarios where separate financial statements is being prepared then these investments will be measured at cost as per Ind-AS 27- "Separate Financial Statements" and will be subject to impairment testing as per Ind-AS 36 - "Impairment of Assets", However if such investment is for consolidated financial statements then equity accounted balances will be used and impairment losses will be analyzed by using reference from Ind-AS 28 para 40 to 43 unlike in current accounting practice it is being tested for impairment other than temporary,
3. Now, another situation could be where the amount is being treated just as advance given then it will be recognized as Financial Asset which requires it to be measured at fair value at its initial recognition and one needs to look at all other relevant facts if this can be treated as receivable then "Expected credit loss model" (applicable for amortized cost instruments) will also be applicable as defined in Ind-AS-109,
4. Another thought would be that where such pending allotment meets equity investment classification and does not fall into either associate/ JV or subsidiary investment then it has to be fair valued (no exception for equity investments other than fair valuation under Ind-AS 109) unlike in current accounting where simply these can be shown at cost,
Here the idea is to provide an approach towards some of the changes that is happening because of new accounting standards applicable in India and reader can take this as a tool to navigate standards as per its own specific requirements.
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.
The author can also be reached at anujagarwalsin@gmail.com
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