M&A (Merger and acquisition) activity has hit the expressway in the last six months. But, the latest accounting standards could be a speed bump for the same for a short while. These new standards are called Ind-AS will require the companies to implement changes in their tax and revenue accounting practices. If these companies fail to structure their deals in accordance with the new standards Ind-AS, these deals might puncture in their balance sheets instead of boosting the same.
These new standards are expected to come into effect with the advent of the next fiscal year starting April 1, 2016. Average deals require between eight months and one year to be concluded. This means that if a company starts to discuss the deals now, these rules will come into effect around the end of the current fiscal year.
The private equity firms and companies have started re-looking the deal structures. Some have delayed plans as well, claim the experts. As per the tax experts, the companies might obtain a majority stake, but not completely. The rights of the minority shareholders will have an impact on the consolidation process. If these minority shareholders possess participative rights, the consolidation of the parent company will not be permitted as per the new standards.
Also, the payout of consideration is carried out depending on the target company’s performance. Some payouts could be considered as expenses tipping that the investor cannot claim the investment as an asset and make it a cost. Another impact that has made the investors worried is accounting for goodwill. As per the existing standards, goodwill cannot depreciate and it remains constant. Eventually, the value of the firm is higher than its financial value as the goodwill is also a part of the overall valuation. This will change with the implementation of the new accounting standards.
Besides these problems that will wipe the M&As’ values, the taxation might create new problems. The industry trackers claim that the deal structures become significant as ignoring the same might attract MAT (minimum alternate tax). The Indian law states that a company is accountable for MAT if it is paying a tax amount that is 18.5 percent of its book profit in a year.