Is Accounting Standard 14 Applicable to Demerger explain with case law
Posted on 13-05-2016
Is Accounting Standard 14 Applicable to Demerger explain with case law?
Case 1 – Scheme of arrangement between Sony India Private Limited (Sony India) and Sony Software
Centre Private Limited (Sony Software) with reference to transfer of software undertaking of Sony
India to Sony Software
The Delhi High Court (the High Court), while approving scheme of arrangement between Sony India and Sony Software in 2012 has clarified that. AS-14 (i.e., accounting standards issued by the Institute of Chartered Accountants) is applicable only to amalgamations and not to demerger. As per the scheme of arrangement, ‘Software Undertaking’ of Sony India is proposed to be transferred to Sony Software under Sections 391 to 394 of the Companies Act, 1956. One of the conditions of the scheme was that any excess in the value of net assets of software undertaking transferred to the resulting company shall be applicable for distribution to the shareholders of the resulting company
Regional Director of Northern Region, Ministry of Corporate has raised objection in his affidavit filed with the High Court stating that excess if any, in the value of the net assets of the software undertaking should be adjusted to the capital reserve as prescribed in AS-14 and not to the general reserve as proposed in the scheme of arrangements.
Case 2 - Gujarat,Gallops Realty (P.) Ltd
In Case of High Court of Gujarat, Gallops Realty (P.) Ltd., In re v. K.A. PUJ, J. (2010), under Section 391, read with sections 394 and 100, of the Companies Act, 1956 Petitioner-companies, i.e., demerged company and resulting company, sought for sanction of composite scheme of arrangement in nature of purchase of shares and demerger of hotel business of demerged company to resulting company and consequent reconstruction of share capital of demerged company under section 391, read with sections 394, 78 and 100 consisting of reduction of paid-up share capital as well as utilization of share premium account. Regional Director stated that as per scheme, capital profit on demerger would be transferred to general reserve in books of resulting company which was not in consonance with generally accepted
accounting principles as also Accounting Standard - 14