by Demerger refers to the transfer of one or more undertakings from a company to another, resulting in separate legal entities. The accounting treatment must reflect the fair and accurate transfer of assets, liabilities, and equity, ensuring transparency and adherence to statutory requirements.
Key Accounting Principles:
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Transfer at Book Value: Assets and liabilities are transferred at their book values unless revaluation is mandated.
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Recognition of Reserves: Reserves related to the demerged undertaking are proportionately transferred.
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Share Capital Adjustment: The resulting company issues shares to the shareholders of the demerged company, reflecting the value of the net assets transferred.
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Compliance with Standards: Accounting treatments align with applicable Indian Accounting Standards (Ind AS) and the Companies Act, 2013.
Journal Entries in the Books of the Demerged Company
| S.No. | Transaction | Journal Entry |
|---|---|---|
| 1 |
Transfer of Assets to Resulting Company |
Dr. Business Transfer A/c Cr. Various Asset A/cs |
| 2 |
Transfer of Liabilities to Resulting Company |
Dr. Various Liability A/cs
Cr. Business Transfer A/c |
| 3 | Transfer of Reserves (if specified) | Dr. Reserves A/c
Cr. Business Transfer A/c |
| 4 |
Consideration Received (Shares in Resulting Co.) |
Dr. Investment in Resulting Company A/c Cr. Business Transfer A/c |
| 5 | Profit on Demerger (if any) | Dr. Business Transfer A/c
Cr. Capital Reserve / General Reserve A/c |
| 6 |
Loss on Demerger (if any) |
Dr. Capital Reserve / General Reserve A/c
Cr. Business Transfer A/c |
| 7 |
Distribution of Shares to Shareholders |
Dr. Shareholders A/c
Cr. Investment in Resulting Company A/c |
Journal Entries in the Books of the Resulting Company
| S.No. | Transaction | Journal Entry |
|---|---|---|
| 1 |
Transfer of Assets to Resulting Company |
Dr. Business Transfer A/c
Cr. Various Asset A/cs |
| 2 |
Transfer of Liabilities to Resulting Company |
Dr. Various Liability A/cs
Cr. Business Transfer A/c |
| 3 | Transfer of Reserves (if specified) | Dr. Reserves A/c
Cr. Business Transfer A/c |
| 4 |
Consideration Received (Shares in Resulting Co.) |
Dr. Investment in Resulting Company A/c Cr. Business Transfer A/c |
| 5 | Profit on Demerger (if any) | Dr. Business Transfer A/c
Cr. Capital Reserve / General Reserve A/c |
| 6 | Loss on Demerger (if any) |
Dr. Capital Reserve / General Reserve A/c Cr. Business Transfer A/c |
| 7 |
Distribution of Shares to Shareholders |
Dr. Shareholders A/c
Cr. Investment in Resulting Company A/c |
Allocation of Assets and Liabilities
The allocation process involves:
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Identification: Determining which assets and liabilities pertain to the demerged undertaking.
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Valuation: Assessing the book value of these assets and liabilities.
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Transfer: Recording the transfer in both companies’ books, ensuring that the net assets transferred match the consideration received.
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Reserves: Proportionately transferring reserves related to the demerged undertaking.
Compliance and Disclosure
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Regulatory Approvals: Ensuring that the demerger scheme is approved by the National Company Law Tribunal (NCLT) and other regulatory bodies as required.
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Financial Statements: Presenting the demerger’s impact in the financial statements, including notes on the transfer of assets, liabilities, and reserves.
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Tax Implications: Considering the tax effects of the demerger, especially regarding the transfer of assets and issuance of shares.
