The CNC takes stock of mergers between companies
September 2021 – At the beginning of July, the CNC (french accounting standards committee) issued an opinion on the accounting treatment of mergers between companies. This clarification was necessary after the abolition of the notion of capital for cooperative and limited liability companies in the Companies and Associations Code (CSA). Notice 2021/10 replaces the CNC Notice 2009/6.
Definition of merger by absorption
In its opinion, the CNC focuses on merger by absorption, as this is the classic case. The accounting treatment of other forms of merger can be deduced from this opinion.
A merger by absorption is defined as the transfer of all the assets and liabilities of one or more companies by dissolution without liquidation, to another existing company, in exchange for the allocation of shares or units of the latter to the shareholders or partners of the absorbed company or companies and, if applicable, a cash payment.
An operation by which one or more companies transfer all their assets and liabilities to another company shall be deemed to be a merger by acquisition where all their shares and other securities conferring voting rights belong either to that other company or to intermediaries of that company. In this case, no new shares are issued. Such an operation is referred to as a silent merger or a short-form merger.
Where the acquiring company is a company with capital, the amount of this balancing payment may not exceed one tenth of the nominal value of the shares allotted, or in the absence of a nominal value, of their accounting par value. The par value per share of a company is calculated by dividing the capital of the company by the number of existing shares. The term "capital" is used here to mean the sum of
the shareholders' contribution to the capital,
where applicable, the capitalisation of share premiums and
where applicable, the capitalisation of revaluation surpluses or reserves, insofar as these have not been reimbursed or reduced through a capital reduction.
If the acquiring company has no capital, the notion of par value is assimilated to "the contribution value, as shown in the annual accounts, of all the contributions in cash or in kind made by the members or shareholders, other than contributions in kind, increased, where applicable, by the reserves which, by virtue of a provision of the articles of association, may only be distributed to the members or shareholders by amendment of the articles of association, the whole divided by the number of shares or units". The capital is therefore composed of the following
contributions (even if not fully paid up). Contributions which have been repaid as a result of a distribution shall not be included in the numerator of the above fraction. The same applies to contributions in kind, which are difficult to evaluate;
the reserves consisting of the portion of the equity capital which exceeds the value of the original contributions which have been made unavailable on a voluntary basis.
The own shares and the legal reserve of the former limited liability companies transferred to the unavailable reserves at the time of the transfer to the limited liability company are not included in the fraction serving as an accounting par value.
The acquiring company is deemed to continue the legal personality of the acquired company.
The principle of accounting continuity
In the accounting treatment of the transaction, the principle of continuity must be applied, both for the acquiring company and for the shareholder company of the acquired company.
What exactly does this mean?
As a general rule, the assets and liabilities of the company being acquired, including the various elements of its equity capital, depreciation, write-downs and provisions, rights and obligations as well as income and expenses for the financial year, are included in the accounts of the acquiring company at the value at which they appeared in the accounts of the company being acquired at the time when the merger is deemed to take place for accounting purposes.
Value adjustments may only be made by the company being acquired before or after the effective date of the merger.
If a merger takes place by absorption between two companies with capital or between two companies without capital, the various equity items (capital/contribution, revaluation surpluses, reserves, result carried forward and capital grants) are simply added together.
If a company with capital is taken over by a company without capital, the capital and legal reserve of the first company are converted into an available or unavailable contribution, while the following items are simply added together.
On the other hand, if a company with capital absorbs a company without capital, the contribution of the absorbed company is not necessarily converted into capital. It can just as well be added to the balance sheet under the item "Other in the contribution outside the capital". The merger deed must therefore specify to which balance sheet item the contribution of the absorbed company is to be transferred.
The Royal Decree implementing the CSA states that the transferred items must be entered in the accounts of the acquiring company at the value at which they appeared in the accounts of the acquired company at the time when the merger is deemed to have taken place for accounting purposes. This is the date from which the operations of the company being acquired are considered from an accounting point of view to have been carried out on behalf of the acquiring company. This date, which is also known as the accounting effective date or cut-off date, must be included in the draft terms of merger.
It may not be earlier than the first day following the end of the financial year for which the annual accounts of the companies involved in the transaction have already been approved. The last annual accounts of the company being acquired which precede the time of the merger shall include the transactions for the period between the closing date of the last financial year and the retroactive accounting date referred to above, while the transactions of the company being acquired which relate to the retroactive accounting period shall be included in the annual accounts of the acquiring company.
The principle of continuity in accounting also applies to the shareholder company of the acquired company, since the shares of the acquiring company were received in exchange for the shares it held in the acquired company.
The exchange ratio
If the exchange values used to determine the exchange ratio between the shares of the absorbed company and those of the absorbing company do not correspond to the book values, they will not be expressed in the accounts.
The CNC confirms that the value relationships between the companies before the merger determine the shareholder relationships after the merger. For this reason, a fair exchange ratio between the old shares of the merged company and the new shares of the acquiring company should be sought.
On the other hand, the treatment of the merger in the accounts must be guided by the accounting principles in the interests of continuity. For this reason, the CNC does not want the equity elements of the absorbed company to be converted into capital or into a contribution (and adjustments arising from value adjustments to assets and liabilities to be made to the result, which would alter the assessment of profitability) and the direction of the merger to be decisive for its accounting treatment.
The CNC also explains, with the help of various examples, how the continuity principle should be applied and in which cases it does not apply.
As the opinion of the CNC is to be considered as an interpretation of the law, it is effective immediately.
