Accounting treatment – return on unquoted equity

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Querist : Anonymous

Querist : Anonymous (Querist)

19 September 2012 A Financial Services Company (FSC) has subscribed to equity shares of an infrastructure company (company) with share subscription and share buyback agreements providing that promoters of the company or certain other identified persons shall buy the shareholding of FSC at the end of specified tenure at such rate which provides a pre-determined/desired Internal Rate of Return (IRR) on the initial investment. The aforesaid agreements also provide that the identified persons shall make payment to FSC on quarterly basis, at a specified rate on the equity investment, as interim return. These interim returns shall also be taken into consideration for determination of buyback price of shares at the end of the tenure.
These proceeds are in the nature of part payments towards specified IRR and/or share buyback. There is an inherent uncertainty with respect to the final gains/losses in such transactions, at the time of actual buyback. Please advise as under :
(i) Whether the interim proceeds can be treated as income in the year of receipt and taxed accordingly; or
(ii) Whether the proceeds are to be treated as advance receipts in the accounts and accounted for as profit on investment/capital gains at the time of buyback.
(iii) If (i) is not possible and the buyback does not take place, what would be the accounting treatment of interim receipts, at the end of the tenure – to be treated as income or to be used for reduction of acquisition cost?

Amol S Joglekar

Amol S Joglekar (Expert)

19 September 2012 The SPV has a pre decided buy back price. (Whether with IRR or any other method is immaterial) The TRANSFER date of shares is the CRUX. The capital gain will arise at the instance of TRANSFER. Till that time it is only the mode of payment... say advance payment. If buy back does not take place, the recourse must have been defined in the SPV. Till then it is shown as advance received.

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