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Query regarding accounting treatment of due diligence cost

kalpesh (student) (57 Points)

24 November 2010

There are 3 companies

A - Indian company

B-foreign company

C-foreign company

Now A wants to acquire C but instead of acquiring it directly , due to some complexities , A acquires B and then B acquires C. And to check out the feasibility of the acquisition ,A incurs certain costs as Due diligence Costs for company C

The question is what will be the accounting treatment for the due diligence costs incurred by A in connection with C in the books of A.

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9 Replies

gurdeep singh (CA Article Assistant ) (60 Points)
Replied 24 November 2010

Good Question Mr Kalpesh Jain . I got totally confused. Need Experts Comments

kalpesh (student) (57 Points)
Replied 24 November 2010

It would be of a great help, even if u suggest a source for searching this topic...

Thanks

Bhargava Raju Dommaraju (Chartered Accountant) (24 Points)
Replied 24 November 2010

it should be charged off to the P&L Ac.

kalpesh (student) (57 Points)
Replied 26 November 2010

If u could quote any reference for the same...

Suresh Prasad (www.aubsp.com) (15630 Points)
Replied 29 November 2010

This May Heip You

AS 13, Accounting for investments allows acquisition charges such as brokerage, fees and duties to be capitalised as cost of the investment. There is, however, an Expert Advisory Committee (EAC) Opinion which requires that cost related to due diligence incurred to acquire a business should be expensed immediately in the period in which it is incurred. In the absence of any further specific guidance, current practice in IGAAP is to capitalise directly attributable acquisition charges and to expense all other charges. An element of divergence in accounting practice is introduced here due to varied interpretations of which costs are directly attributable’ and which are not.

Though earlier IFRS allowed costs directly related to acquisitions to be included as part of the purchase consideration and, therefore, within the calculation of goodwill, the revised IFRS 3 (revised 2008) has been amended and requires such costs (e.g., investment banker fee, legal and due diligence fee) be charged to the income statement as incurred. However, cost relating to the issue of debt or equity securities need to be recognised in accordance with IAS 32, Financial Instruments: Presentation and IAS 39, Financial Instruments: Recognition and Measurement.

Bhargava Raju Dommaraju (Chartered Accountant) (24 Points)
Replied 29 November 2010

Due Diligence Cost can't be part of cost of acquisition and effect goodwill calculation. It is the expense to be charged off in the income statement. As per IFRS C also needs to be consolidated with A as A being the ultimate parent Company.

Only share issue cost can be adjusted against security premium of ordinary shares and the same will form part of statement of change in equity.

All other cost viz; Manpower cost of directors on share issue, due diligence cost are charge against income statement and cant effect goodwill calculation.

Bhargava Raju Dommaraju (Chartered Accountant) (24 Points)
Replied 29 November 2010

But again here I have a doubt.

Since the expense incurred by 'A' is on behalf of the 'B', I think 'A' should not book this expense in its books and it should pass it on to 'B' by a debit note.

Can someone clarify this.

Thanks,

Bhargava