Accounting Issues in Amalgamations

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Accounting Issues in Amalgamations

• CA Sundar R
• 10th September 2008

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Contents
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Presentation Scope
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Types of Amalgamations
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Methods of Accounting for Amalgamations
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Accountants role in amalgamation

• Heart Surgeons - The business its processes
  need to be alive through out the integration
  period and after
• Law Enforcers Ensuring compliance to laws and
  regulations, adherence to accounting standards
  and accounting policies
• Builders Architects Ensuring the financial
  foundations are strong for the merged entity
• Home Maker Ensuring the hearth goes on and
  the family is happy

Multi-tasking is a necessity for successful
amalgamations
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Dimensions to be considered
Amalgamation process is like playing a
multi-dimensional Rubik cube but then it is not
just fun!!!
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Dimensions to be considered
Amalgamation process is like playing a
multi-dimensional Rubik cube but then it is not
just fun!!!
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A practical approach

• Amalgamation cannot be done in isolation to the
  business processes
• A structured approach such as DFSS (Design for
  Six Sigma) must be used
• Amalgamation activities has to be Project
  Managed for success
• Accountants should either be the Project
  managers or should play an influencing role in
  the process A low key involvement may lead to
  disaster
• Poor engagement of other departments may lead to
  time delays errors

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DFSS Methodology Suggested steps
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An Example Procure to Pay process
Balances in accounts are the outcome of business
processes
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An Example Procure to Pay process

• Environment Management
• Whether the various requesting teams are also
  getting amalgamated on the same date?
• Whether there are standing instructions or
  just-in-time arrangements, by which the need for
  purchase requisitions and purchase orders are not
  there?
• Whether the requisition process is restricted to
  specific teams and members?
• Whether the request processing activities are
  centralized at a few offices or is it spread
  across all locations?
• Process
• Are there detailed process map for the
  requisition process (e.g. Capital Asset
  Requisition)
• Does the requisition process go through an
  approval mechanism? Is there well defined
  delegated authorities for approval?
• System
• Is the request processing system manual or
  automated?
• Is there an interface between the requesting
  system and the Transaction processing / GL / ERP
  system

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An Example Procure to Pay process

• Environment Management
• Whether order processing is centralized or is it
  spread across all locations?
• What is the normal time for conversion of
  requests to orders? Will there be instances of
  requests received but orders not made on the
  closing date? (Relevant in case advance need to
  be paid along with placing the order)
• In case the procurement functions are not going
  to be amalgamated on the date of amalgamation of
  accounts, whether the accounting process can
  handle inputs for multiple departments?
• Process
• Has advances been paid against orders? Are the
  balances in the advance accounts been reconciled?
• Has accruals been done in all cases where orders
  has been placed but supplies not received?
• Are there any bad advances? Are these being
  deducted from the sale consideration?
• System
• What is the level of integration between the TP
  and the GL system?

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An Example Procure to Pay process

• Environment Management
• What are the goods/services receiving locations
  and how are they interfaced with the procurement
  departments?
• What are the internal documents for confirming
  receipts? How will this process be post
  amalgamation?
• Process
• What is the methodology followed for inventory
  accounting?
• In the case of fixed assets, how is tracking
  mechanism put in place for installation, warranty
  and maintenance contracts.
• Has accrual been made for Goods received but
  invoices not received?
• How is compliance to laws such as for Customs,
  Excise and Sales tax ensured? Has all the
  benefits that may be available been brought into
  the accounts?
• System
• Is the goods/services receiving and inventory
  management system interfaced with the GL system?
• Is the inventory valuation system automated or
  is it manual?

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An Example Procure to Pay process

• Environment Management
• What are the cut-off dates for processing
  invoices at the present locations?
• If costs need to be allocated to multiple
  business units, how is it taken care during
  invoice processing. What is the recharge
  mechanism across entities?
• Process
• How are invoices transmitted to the accounting
  locations whether couriered or scanned or any
  other mode?
• What is the norm for accrual of expenses? In
  case there is a limit-based accrual, where-in
  invoices of a value below a particular amount may
  not be accrued, what is the process for
  accounting such invoices in the merged entity?
• System
• Is there interface between the invoice entry and
  accounting systems? Are there processes such as 2
  way match or 3 way match in the system, which
  need to be replicated?
• How are duplicate claims tracked? How can
  duplicates be avoided during the amalgamation
  period i.e. claimed once earlier and again
  later after amalgamation

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An Example Procure to Pay process

• Environment Management
• After going through the upstream process steps
  as above, to which entity can the changes be
  incorporated i.e. should journals be passed in
  the transferor entity or transferee entity?
• Will there be two accounts to be maintained
  till all transactions and departments are
  amalgamated?
• Process
• What is the control account through which the
  balances are going to be moved from one account
  to another?
• Whether prepaid expenses be absorbed or carried
  forward?
• How and who can knock off balances to Goodwill
  or Reserves?
• Are there items required to be capitalized still
  lying in CWIP?
• Has all assets been physically verified and has
  adjustments been made to the fixed asset
  balances?
• System
• Up to when has reconciliation been done between
  GL and sub-ledgers for advances, creditors, fixed
  assets and other such accounts?
• What is the level of automation available to
  ensure GL and sub-ledgers match real-time.

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An Example Procure to Pay process

• Environment Management
• Whether the account with the present bank be
  continued?
• What are the financial arrangements with the
  present bank. How are these arrangements going to
  be managed going forward?
• How has foreign currency transactions been
  handled?
• Process
• Has bank accounts been reconciled?
• How are abandoned property being treated?
• Who is going the be authorized to approve
  payments? What are their limits?
• System
• What is the payment engine are there systems
  for cheque printing, wire transfers and
  purchasing cards?
• Does the payment system have interface with the
  GL system?

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An Example Procure to Pay process
Accountants must have control over the movements
in the accounts for ensuring proper migration of
the balances
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• THANK YOU