Acquisition-Related Costs: Capitalise or Expense?

A Comparative Analysis under Ind AS and IFRS (Standalone vs Consolidated Financial Statements)

1. Introduction

In mergers and acquisitions, companies often incur a range of transaction-related costs such as legal fees, due diligence expenses, and advisory charges. A critical accounting question arises:

Should these acquisition-related costs be capitalised as part of the investment, or expensed in the Profit & Loss statement?

The answer is not straightforward, it depends on:

• Whether financial statements are standalone or consolidated
• The accounting framework applied (Ind AS or IFRS)
• The measurement method elected

This article provides a comprehensive analysis of the treatment of acquisition-related costs under relevant accounting standards.

2. Background of the Case

Consider a scenario where an entity acquires 100% shares in another company. The acquisition is executed entirely in cash, and the company incurs the following costs:

• Stamp duty
• Legal fees
• Advisory and consultancy charges
• Due diligence costs
• Setup costs for the acquiring entity

The central issue is determining the accounting treatment of these costs across:

• Standalone financial statements
• Consolidated financial statements

3. Applicable Accounting Framework

The treatment of acquisition-related costs is governed by the following standards:

4. Accounting in Standalone Financial Statements

4.1 Measurement Options under Ind AS 27 / IAS 27

Investments in subsidiaries can be accounted for using:

• Cost method
• Financial instruments approach (Ind AS 109 / IFRS 9)
• (Equity method allowed only under IFRS, not Ind AS)

4.2 What Constitutes 'Cost'?

Although not explicitly defined in Ind AS 27 / IAS 27, “cost” generally includes:

The amount paid (cash or fair value) to acquire an asset, including directly attributable expenses.

This interpretation aligns with principles in standards such as:

• Ind AS 16 (PPE)
• Ind AS 38 (Intangible Assets)

4.3 Treatment of Transaction Costs

(A) When Cost Method is Applied

• Directly attributable costs are capitalised
• Examples:
  • Legal fees
  • Stamp duty
  • Advisory fees

(B) When Ind AS 109 / IFRS 9 is Applied

• FVTPL (Fair Value Through P&L):
  → Transaction costs expensed immediately
• FVTOCI / Amortised Cost:
  → Transaction costs included in carrying amount

4.4 Key Takeaway – Standalone

In standalone financials, acquisition-related costs are generally capitalised when the cost method is used, unless the investment is classified as FVTPL.

5. Accounting in Consolidated Financial Statements

5.1 Governing Standard: Ind AS 103 / IFRS 3

In consolidated financial statements, business combinations are governed by Ind AS 103 / IFRS 3.

5.2 Mandatory Treatment (Para 53)

Acquisition-related costs must be expensed in the period incurred .

Included Costs

• Legal and advisory fees
• Due diligence expenses
• Valuation and consulting fees
• Internal acquisition department costs

Exception

• Costs related to issuing debt or equity instruments
  → Accounted under Ind AS 32 / IFRS 9 (usually adjusted against equity)

5.3 Key Takeaway – Consolidated

All acquisition-related costs are expensed immediately, regardless of their nature.

6. Standalone vs Consolidated: The Critical Difference

Core Principle

The same cost may be capitalised in standalone financials but expensed in consolidated financials.

7. Practical Illustration: Infosys Case Study

The treatment adopted by Infosys (FY 2024–25) provides real-world clarity.

Transaction Overview

• Acquisition: InSemi Technology Services Pvt Ltd
• Consideration: ₹198 crore
• Transaction Costs: ₹2 crore

Accounting Treatment

Consolidated Financials (ref: page 287 of Infosys Annual Report 24-25)

• ₹2 crore expensed in P&L under administrative expenses

Standalone Financials (ref: page no. 215 of Infosys Annual Report 24-25)

• Investment recorded at ₹198 crore
• Transaction cost not capitalised (expensed instead)

Insight

Although standards permit capitalisation in standalone (cost method), companies may choose conservative accounting by expensing costs.

8. Decision Framework

9. Conclusion

The accounting treatment of acquisition-related costs depends heavily on the reporting context:

• Standalone financial statements allow flexibility—costs may be capitalised or expensed depending on classification.
• Consolidated financial statements follow a strict rule—costs must be expensed.