Accounting for Business Purchase as Going Concern under E-Auction

[Hithik]

When a existing company under a commencement of liquidation acquired through e-auction as going concern, how such acquisition to be accounted for Non-Ind AS Client, as AS 14 deals with Amalgations only?., the company's status is active from liquidation status, and it is same company no formation of new company...wether the existing assets to be recorded at new fair value?.. pls guide.

[YAGAY and SUN]

In the absence of a specific standard governing acquisition of a company under liquidation as a going concern, and considering that AS 14 is inapplicable (no amalgamation and no transferor-transferee relationship), the transaction should be accounted for based on general accounting principles and applicable standards such as AS 1 and AS 10.

Where a company under liquidation is acquired through an e-auction as a going concern and continues as the same legal entity (without formation of a new company), the substance of the transaction is that of a business acquisition resulting in a change in ownership and control. Accordingly, the accounting treatment should reflect the economic reality rather than mere legal continuity.

The consideration paid by the acquirer should be treated as the aggregate purchase consideration for the business. The assets and liabilities of the company should be recognised at their fair values or estimated realisable values as on the acquisition date, as the historical carrying amounts cease to be relevant in the context of liquidation and subsequent revival.

The excess of consideration over the net fair value of identifiable assets and liabilities should be recognised as goodwill. Conversely, any surplus of net assets over the consideration should be credited to capital reserve. Pre-existing reserves, accumulated losses, and surplus balances pertaining to the period prior to liquidation should not be carried forward, as they do not represent the financial position of the entity post-acquisition.

The resulting financial statements should, in substance, reflect a fresh financial position of the company upon revival, ensuring a true and fair view.

Adequate disclosures shall be made regarding the nature of the transaction, basis of valuation adopted, treatment of reserves, and method of allocation of consideration, in accordance with AS 1.

[Hithik]

Thanks for this information..

So this would be case for acquiring co...and for the acquiree company would it be accounted as internal reconstruction??

[YAGAY and SUN]

For the acquiree company (i.e., the company under liquidation revived as a going concern), the transaction is not in the nature of "internal reconstruction" within the meaning of the Companies Act, 2013.

Legal Position:

1. Not Internal Reconstruction
   Internal reconstruction presupposes a reorganisation initiated by the company itself (typically under Sections 230-232 of the Companies Act), without transfer of ownership to an external party.
   In the present case, the revival arises pursuant to a sale through e-auction under liquidation proceedings (generally under Insolvency and Bankruptcy Code, 2016 / liquidation regulations), resulting in change in control to an external acquirer. Hence, it is not a voluntary capital reorganisation, and the doctrine of internal reconstruction is inapplicable.
2. Substance of Transaction (Acquiree Books)
   Although the legal entity continues, in substance there is:

• Extinguishment/settlement of prior claims and liabilities as per the approved liquidation distribution, and
• Fresh infusion of consideration by the acquirer.

Accordingly, the accounting in the books of the revived entity should be guided by Accounting Standard 1 (AS 1) (true and fair view) and Accounting Standard 10 (AS 10), applying substance over form.

1. Accounting Treatment (Acquiree Company)

• Assets and liabilities should be restated at fair value / realisable value as on the effective date of revival.
• Old reserves, accumulated losses, and surplus (pre-liquidation) shall not be carried forward, as they stand effectively extinguished in liquidation.
• The balancing figure shall be recognised as capital reserve or goodwill, depending on valuation outcome.
• The resulting financials represent a fresh financial position, though not a new legal entity.

1. GST Implications
   Under Central Goods and Services Tax Act, 2017, transfer of a business as a going concern is treated as a supply of service and is exempt (Notification No. 12/2017-CTR). Hence, no GST arises on the transaction, subject to satisfaction of "going concern" conditions.

Conclusion:

In law and accounting substance, the transaction for the acquiree company is a revival pursuant to external acquisition, not an internal reconstruction. The financial reporting should reflect a fresh start basis aligned with fair valuation principles, ensuring compliance with AS 1 and true and fair view requirements.

[Hithik]

Thanks for this information sir..

Sale certificate of such transaction is in month of sept 2024 and restructured BS as at 31.10.24 is approved by the NCLT in FY 2025, however the restructure BS has been done as per the agreed terms of business purchase, i.e. liabs w/off and all the fixed assests and financial assets are to be carried at Book Value,

1. whether such assets needs to check for impairment as per AS 28 and need for fair value presentation as at 31.03.25?

2. The effect of restructing to be given for financial statements for FY 2025 itself or in FY 2026 as approved in FY 2026?

3. Further as an auditor, the restructured BS or old BS needs to be audited for FY 25?

AI Summary

Going concern acquisition under liquidation requires fair value accounting, fresh financial position, and exclusion from internal reconstruction.
Acquisition of a company under liquidation through e-auction as a going concern is treated in substance as a business acquisition, not an amalgamation under AS 14. The assets and liabilities are recognised at fair value or estimated realisable value, with excess consideration treated as goodwill and surplus net assets credited to capital reserve. The transaction is not internal reconstruction; the revived entity should show a fresh financial position, with pre-liquidation reserves and losses not carried forward and proper disclosures under AS 1. Transfer of a business as a going concern is also described as an exempt supply for GST, subject to going concern conditions.