IND AS 103

BUSINESS COMBINATION

UNIT 1:
BUSINESS VS ASSETS ACQUISITION VS
BUSINESS COMBINATION

BUSINESS COMBINATION
Under Ind AS 103, Business combination occurs when an entity obtains control of a
business by acquiring net assets or acquiring its significant equity interest. An entity can
obtain control of a business by contract only in which case the acquirer would neither have
acquired net assets nor equity interest. In such a case, while preparing balance sheet,
controlling interest would be zero and non-controlling interest will be 100%.
• As such, two elements are required for a transaction to be a business combination
under Ind AS 103:
 the acquirer obtains control of an acquiree (“control” as defined in Ind AS 110);
and
 the acquiree is a business
A business combination may be structured in a variety of ways for legal, taxation or
other reasons, which include but are not limited to:
 one or more businesses become subsidiaries of an acquirer or the net assets of
one or more businesses are legally merged into the acquirer;
 one combining entity transfers its net assets, or its owners transfer their equity
interests, to another combining entity or its owners;
 all of the combining entities transfer their net assets, or the owners of those
entities transfer their equity interests, to a newly formed entity (sometimes
referred to as a roll- up or put-together transaction); or
 a group of former owners of one of the combining entities obtains control of the
combined entity.

ELEMENTS OF BUSINESS
Definition of Business
As per paragraph B7 of the application guidance of Ind AS 103, a business consists of
inputs and processes applied to those inputs that have the ability to contribute to the
creation of outputs. Although businesses usually have outputs, outputs are not required for
an integrated set of activities and assets to qualify as a business.
Analysis: Ind AS 103 defines business as an integrated set of activities and assets that is
capable of being conducted and managed for the purpose of providing goods or services to
customers, generating investment income (such as dividends or interest) or generating
other income from ordinary activities.

Elements of Business
The three elements of a business are defined as follows:
(a) Input: Any economic resource that creates outputs, or has the ability to contribute
to the creation of outputs, when one or more processes are applied to it.
Example:
Non-current assets (including intangible assets or rights to use non-current assets),
intellectual property, the ability to obtain access to necessary materials or rights
and employees.
(b) Process: Any system, standard, protocol, convention or rule that when applied to an
input or inputs, creates output or has the ability to contribute to the creations of
outputs
Example:
Strategic management processes, operational processes and resource management
processes.
These processes typically are documented, but the intellectual capacity of an
organised workforce having the necessary skills and experience following rules and
conventions may provide the necessary processes that are capable of being applied to
inputs to create outputs. (Accounting, billing, payroll and other administrative
systems typically are not processes used to create outputs.)
(c) Output: The result of inputs and processes applied to those inputs that provide goods
or services to customers, generate investment income (such as dividends or interest)
or generate other income from ordinary activities.

Further Assessment
To be capable of being conducted and managed for the purpose identified in the definition
of a business, an integrated set of activities and assets requires two essential elements—
inputs and processes applied to those inputs.
Therefore, an integrated set of activities and assets must include, at a minimum, an input
and a substantive process that together significantly contribute to the ability to create
output.
Substantive Process:
To determine whether acquired process is substantive, following has to be considered:
(1) If a set of activities and assets does not have output at the acquisition date, an
acquired process (or group of processes) shall be considered substantive only if-
(a) It is critical to the ability to develop or convert an acquired input or inputs into
outputs; and
(b) The inputs acquired include both an organised workforce that has the necessary
skills, knowledge, or experience to perform that process (or group of processes)
and other inputs that the organised workforce could develop or convert into
outputs.
Those other inputs could include-
(i) Intellectual property that could be used to develop a good or service;
(ii) Other economic resources that could be developed to create outputs; or
(2) If a set of activities and assets has outputs at the acquisition date, an acquired
process (or group of processes) shall be considered substantive if, when applied to an
acquired input or inputs, it-
(A) is critical to the ability to continue producing outputs, and the inputs acquired
include an organised workforce with the necessary skills, knowledge, or
experience to perform that process (or group of processes); or
(b) Significantly contributes to the ability to continue producing outputs and-
(i) Is considered unique or scarce; or
(ii) Cannot be replaced without significant cost

QUESTION 1

Company X is a liquor manufacturer and has traded for a number of years. The company produces a
wide variety of liquor and employs a workforce of machine operators, testers, and other
operational, marketing and administrative staff. It owns and operates a factory, warehouse and
machinery and holds raw material inventory and finished products.
On 1st January 2011, Company Y pays USD 80 million to acquire 100% of the ordinary voting shares
of Company X. No other type of shares has been issued by Company X. On the same day, the
four main executive directors of Company X take on the same roles in Company Y.

Comment on given transaction whether it is a business acquisition or asset

acquisition?

SOLUTION

In this case, it is clear that Company X is a business. It operates a trade with a variety of assets
that are used by its employees in a number of related activities. These assets and activities are
necessarily integrated in order to create and sell the company’s products. As per definition the
above acquisition includes an input (including four executive directors of company X) and thus it can
be concluded as the significant process acquired along with the other inputs.

So, it can be said that Y limited as acquired a business.

QUESTION NO 2 (Investment in a development stage entity)

Company D is a development stage entity that has not started revenue-generating operations. The
workforce consists mainly of research engineers who are developing a new technology that has a
pending patent application. Negotiations to license this technology to a number of
customers are at an advanced stage. Company D requires additional funding to complete
development work and commence planned commercial production.

The value of the identifiable net assets in Company D is INR 750 million. Company A pays INR
600 million in exchange for 60% of the equity of Company D (a controlling interest).

SOLUTION

Although Company D is not yet earning revenues (an example of `outputs') there are a number of
indicators that it has a sufficiently integrated set of activities and assets that are capable of
being managed to produce a return for investors. In particular, Company D:

 Employs specialist engineers developing the know-how and design specifications of the
technology.

 Is pursuing a viable plan to complete the development work and commence production.

 Has identified and will be able to access customers willing to buy the outputs

So, company D should be presumed as business.

QUESTION NO 3 (Acquisition of an entity holding investment properties)

Company A acquires 100% of the equity and voting rights of Company P, a subsidiary of a
property investment group. Company P owns three investment properties. The properties are
single-tenant industrial warehouses subject to long-term leases. The leases oblige Company P
to provide basic maintenance and security services, which have been outsourced to third party
contractors. The administration of Company P's leases was carried out by an employee of its
former parent company on a part-time basis but this individual does not transfer to the new
owner.

SOLUTION

In most cases, an asset or group of assets and liabilities that are capable of generating
revenues, combined with all or many of the activities necessary to earn those revenues, would
constitute a business. However, Investment property is a specific case in which earning a
return for investors is a defining characteristic of the asset. Accordingly, revenue
generation and activities that are specific and ancillary to an investment property and its
tenancy agreements should therefore be given a lower `weighting' in assessing whether
the acquiree is a business.

Further process (i.e. Basic maintenance, security services and administration) is not critical to
the ability to continue producing outputs. Also process (i.e. Basic maintenance, security services
and administration) is not unique and it can be replaced easily without significant cost.

In our view the purchase of investment property with tenants and services that are purely
ancillary to the property and its tenancy agreements should generally be accounted for as an
asset purchase.
QUESTION NO 4 (Acquisition of an entity holding investment properties)

Company A acquires 100% of the equity and voting rights of Company Q, which owns three
investment properties. The properties are multi-tenant residential condominiums subject to short
term rental agreements that oblige company Q to provide substantial maintenance and security
services, which are outsourced with specialist providers. Company Q has five employees who deal
directly with the tenants and with the outsourced contractors to resolve any non-routine security
or maintenance requirements. These employees are involved in a variety of lease managements
tasks (eg identification and selection of tenenats; lease negotiation and rent reviews)_ and
marketing activities to maximize the quality of tenants and the rental income.

SOLUTIONS

In this case, Company Q consists of a group of revenue – generating assets, together with
employees and activities that clearly go beyond activities ancillary to the properties and their
tenancy agreements.

Further process (i.e. identification and selection of tenants: lease negotiation and rent reviews) is
critical to the ability to continue producing outputs (i.e. in terms to maximize quality of tenants
and the rental income)

These assets and activities are clearly integrated so Company Q is

considered a business.
QUESTION NO 5 (Seller retains some activities and assets)

Company S is a manufacturer of a wide range of products. The company’s payroll and accounting
system is managed as a separate cost centre, supporting all the operating segments and the head
office functions.

Company A agrees to acquire the trade, assets, liabilities and workforce of the operating
segments of Company S but does not acquire the payroll and accounting costs center or any head
office functions. Company A is a competitor of Company S.

SOLUTION

In this case, the activities and assets within the operating segments are capable of being
managed as a business and so Company A accounts for the acquisition as a business combination.
The payroll and accounting cost centre and administrative head office functions are typically not
used to create outputs and so are generally not considered an essential element in the
assessment of whether an integrated set of activities and assets is a business or not.

QUESTION NO 6

Company A is a pharmaceutical company. Since inception, the company had been conducting in house
research and development activities through its skilled workforce and recently obtained an
intellectual property right (IPR) in the form of patents over certain drugs. The Company’s has a
production plant that has recently obtained regulatory approvals. However, the Company has not
earned any revenue so far and does not have any customer contracts for sale of goods. Company B
acquires Company A.

Required:

Does Company A constitute a business in accordance with Ind AS 103?

Solution

The definition of business requires existence of inputs and processes. In this case, the
skilled workforce, manufacturing plant and IPR, along with strategic and operational
processes constitutes the inputs and processes in line with the requirements of Ind AS 103.

When the said inputs and processes are applied as an integrated set, the Company A will be
capable of producing outputs; the fact that the Company A currently does not have revenue
is not relevant to the analysis of the definition of business under Ind AS 103. Basis this and
presuming that Company A would have been able to obtain access to customers that will
purchase the outputs, the present case can be said to constitute a business as per Ind AS
103.
QUESTION NO 7

Modify the above illustration, if Company A had revenue contracts and a sales force, such
that Company B acquires all the inputs and processes other than the sales force, then
whether the definition of the business is met in accordance with Ind AS 103?

Solution

Though the sales force has not been taken over, however, if the missing inputs (i.e. sales
force) can be easily replicated or obtained by the market participant to generate output, if
may be concluded that Company A has acquired business. Further, if Company B is also into
similar line of business, then the existing sales force of Company B may also be relevant to
mitigate the m i s s i n g i n p u t . A s s u c h , t h e d e f i n i t i o n o f b u s i n e s s i s m e t i n
a c c o r d a n c e wi t h I n d AS 1 0 3 .

ASSETS ACQUISITION

A s p e r t h e p r o v i s i o n s o f I n d AS 1 0 3 , t h e f o l l o w i n g p o i n t s t o b e c o n s i d e r e d
wh i l e m a k i n g a c c o u n t i n g a d j u s t m e n t f o r a s s e t s a c q u i s i t i o n :

1. There will be no goodwill or capital reserve at the time acquisition for

the difference between price paid and fair value of assets.
2. The Purchase Price of assets will be allocated over the acquired
assets in the ratio of fair value of assets.

QUESTION NO 8

X Limited purchased from Y limited a group of assets comprising of plant and

machinery, furniture, equipment and software at a combined price of 400 lacs.
A s s e t s d o n o t c o n s t i t u t e b u s i n e s s a s p e r i n d a s 1 0 3 . H o w wo u l d X l i m i t e d
measure these assets for the purpose of initial recognition?

The fair value of these assets determined applying IND AS 113 fair value
measurement are:

Plant & Machinery 200 lakhs

Furniture 30 lakhs

Equipment 50 lakhs

License 70 lakhs

Total 350 lakhs

QUESTION 9 (ASSET ACQUISITION)

An entity acquires an equipment and a patent in exchange for ` 1,000 crore cash and land.
The fair value of the land is ` 400 crore and its carrying value is ` 100 crore. The fair
values of the equipment and patent are estimated to be ` 500 crore and ` 1,000
respectively. The equipment and patent to a product that has just recently been
commercialised. The market for this product is still developing.

Assumed the entity incurred no transaction costs. For ease of convenience, the tax
consequences on the gain have been ignored. How should the transaction be accounted for
?

SOLUTION

As per paragraph 2 (b) of Ind AS 103, the standard does not apply to the acquisition of an
asset or a group of assets that does not constitute a business. Such a transaction of event
does not give rise to goodwill in the given case, the acquisition of equipment and patent
does not represent acquisition of a business.

Thus, the fair value of the consideration given, i.e., ` 1,400 crore is allocated to the
individual assets acquired based on their relative estimated fair values. The entity should
record a gain of ` 300 corore for the difference between the fair value and carrying value
of the land.

The equipment is recorded at its relative fair value (` 500 / ` 1,500) x 1,400 = ` 467
crore).

The patent is recorded at its relative fair value (` 1,000 / ` 1,500) x ` 1,400, = ` 933
Crore).
OPTIONAL CONCENTRATION TEST (NEW CONCEPT ADDED IN AMENDMENT)
As per paragraph B7A of the application guidance of Ind AS 103, an optional test (the
concentration test) has been introduced to permit a simplified assessment of whether an
acquired set of activities and assets is not a business.
On the basis of the above test, following will be the consequences:

Test is met Test is not met

Further
Not a
assessment
business
to be made

No further
assessment is
needed

Following conditions should be present to meet concentration test:

As per paragraph B7A of the application guidance of Ind AS 103, the concentration test is
met if substantially all of the fair value of the gross assets acquired is concentrated in a
single identifiable asset or group of similar identifiable assets. For the concentration test:
(a) gross assets acquired shall exclude cash and cash equivalents, deferred tax assets,
and goodwill resulting from the effects of deferred tax liabilities;
(b) the fair value of the gross assets acquired shall include any consideration
transferred (plus the fair value of any non-controlling interest and the fair value of
any previously held interest) in excess of the fair value of net identifiable assets
acquired.
(c) a single identifiable asset shall include any asset or group of assets that would be
recognized and measured as a single identifiable asset in a business combination;
(d) if a tangible asset is attached to, and cannot be physically removed and used
separately from, another tangible asset (or from an underlying asset subject to a
lease, as defined in Ind AS 116, Leases), without incurring significant cost, or
significant diminution in utility or fair value to either asset (for example, land and
buildings), those assets shall be considered a single identifiable asset;
(e) when assessing whether assets are similar, an entity shall consider the nature of
each single identifiable asset and the risks associated with managing and creating
outputs from the assets (that is, the risk characteristics);
(f) the following shall not be considered similar assets:
(i) a tangible asset and an intangible asset;
(ii) tangible assets in different classes unless they are considered a single
identifiable asset in accordance with the criterion in subparagraph (d);
(iii) identifiable intangible assets in different classes
(iv) a financial asset and a non-financial asset;
(v) financial assets in different classes; and
(vi) identifiable assets that are within the same class of asset but have significantly
different risk characteristics.
Notes:
1) Concentration test is optional test and the decision to apply is made on a transaction
to transaction basis.
2) Does not prohibit an entity from performing a detailed test assessment using
definition of business given in this standard.
3) 3 Step process for concentration test:
a) Measure the Fair Value of Gross Assets acquired.
b) Identify the single identifiable assets or group of similar identifiable asset.
c) Determine if substantially all of the value determined in point (a) is
concentrated in the value determined in point (b) then it is an asset acquisition
otherwise needs to assess business definition as per Ind AS 103.
Fair value of gross assets shall be determined as follows ( i+ ii – iii):
i) Fair value of consideration transferred (including fair value of non-controlling
interest and fair value of previously interest held)
ii) Fair value of liabilities assumed.
iii) Cash and cash equivalent and deferred tax assets and goodwill resulting from
DTL’s.

(REFER LAST VIDEO ON THIS CONCEPT….NO NEED TO READ IT FROM

BOOK….JINDAL SIR HAS EXPLAINED IT IN VERY SIMPLE LANGUAGE….)
QUESTION 10 (CONCENTRATION TEST)

Entity A holds 20% interest in Entity B. Subsequently, Entity A further acquirers 50%
shares in Entity B by paying 300 crores.

The fair value of assets acquired and liabilities assumed are as follows:

Building: 1000 crores

Cash: 200 crores

Financial liabilities: 800 crores

DTL: 150 crores

Fair value of Entity B 400 crores and fair value of NCI is 120 crores (400x30%)

Fair value of Entity A previous holding is 80 crores (400x20%)

Identify the given transaction is asset acquisition or business acquisition as per

concentration test.
UNIT 2: ACQUISITION METHOD
(IF BUSINESS COMBINATION IS IN THE FORM OF
ACQUISITION OF NET ASSETS)
The following key steps are involved in the acquisition accounting for business combinations:

Step 1: Identifying the acquirer.

Step 2: Determining the acquisition date.
Step 3: Purchase Consideration

Step 4: Recognising and measuring the identifiable assets acquired, the liabilities assumed

Step 5: Recognising and measuring goodwill or a gain from a bargain purchase

Step 6: Recognition of other assets & liabilities

STEP 1: IDENTIFICATION OF ACQUIRER

As per the provisions of IND AS 103, identification of Acquirer is very important because
application of IND AS 103 is required to be made only on Acquirer. It means that IND AS 103 is
not applicable on Acquiree. It can also be said that this statement lays down principles only for the
controlling enterprise. The following cases can be considered for the identification of an acquirer:

CASE 1: Acquisitions through payment of cash or incurring of liability

In a business combination effected primarily by transferring cash or other assets or by

incurring liabilities, the acquirer is usually the entity that transfers the cash or other assets or
incurs the liabilities.

CASE 2: Acquisitions through issue of equity instrument

In a business combination effected primarily by exchanging equity interests, the acquirer is

usually the entity that issue its equity interests. However, in some business combinations,
commonly called ‘reserve acquisitions’, the issuing entity is the acquiree. Reverse acquisition has
been dealt in a separate section of this chapter.
Other pertinent facts and circumstances shall also be considered in identifying the acquirer
in a business combination effected by exchanging equity interests, including:

a. The relative voting rights in the combined entity after the business combination:
The acquirer is usually the combining entity whose owners as a group retain or receive
the largest portion of the voting rights in the combined entity. In determining which
group of owners retains or receives the largest portion of the voting rights, an entity
shall consider the existence of any unusual or special voting arrangements and options,
warrants or convertible securities.
b. The existence of a large minority voting interest in the combined entity if no other
owner or organised group of owners has a significant voting interest—The acquirer is
usually the combining entity whose single owner or organised group of owners holds the
largest minority voting interest in the combined entity.
c. The composition of the governing body of the combined entity—The acquirer is usually the
combining entity whose owners have the ability to elect or appoint or to remove a
majority of the members of the governing body of the combined entity.
d. The composition of the senior management of the combined entity—The acquirer is
usually the combining entity whose (former) management dominates the management
of the combined entity.
e. The acquirer is usually the combining entity whose relative size (meas ured in, for
example, assets, revenues or profit) is significantly greater than that of the
other combining entity or entities. In a business combination involving more than
two entities, determining the acquirer shall include a consideration of, among
other things, which of the combining entities initiated the combination, as well
as the relative size of the combining entities.

QUESTION NO 11
Company A and Company B operate in power industry and both entities are operating
entities. Company A has much larger scale of operations than Company B. Company B
merges with Company A such that the shareholders of Company B would receive 1 equity
share of company A for every 10 shares held in Company B such issue of shares would
comprise 20%of the issued share capital of the combined entity. After discharge of
purchase consideration, the pre-merger shareholders of company A hold 80% of the
capital in Company A.
SOLUTION
In this transaction. Company A is the acquirer for the purposes of accounting for
business. Combination as per Ind AS 103. This is because, by merging the entire
shareholding of company B, Company A has acquired control over Company B. Further,
the shareholders of erstwhile Company B do not obtain control over Company A on
account of shares received as part of purchase consideration, as they hold only 20% of
the paid-up capital of Company A.
QUESTION NO 12
Company A and Company B operate in power industry and both entities are operating
entities. Company A has much smaller scale of operations than Company B. Company B
merges Company A such that the shareholders of Company B would receive 10 equity
share of Company A for every 1 Share held in Company B. Such issue of share would
comprise 70% of the issued share capital of the combined entity. After discharge of
purchase consideration, the pre-merger shareholders of Company A hold 30% of capital
of Company A. Post – acquisition, the management of Company B would manage the
operations of the combined entity.
SOLUTION
In this transaction, Company B is the acquirer for the purposes of accounting for
business combination as per Ind AS 103. This is because, after merger, the shareholders
of erstwhile Company B would have a controlling interest and management of the
combined entity. As such, in substance, Company B has acquired control over Company A.
Company B would be considered as an
It is important to note that the
acquirer for accounting purposes only (i.e., accounting acquirer), For
legal purposes as well as for reporting purposes, it is the Company A
that would be considered as an acquirer (i.e., legal acquirer) .
Appropriate identification of an acquirer is relevant, as the net assets of the accounting
acquire (rather than that of the accounting acquirer) are recognized at fair value.

QUESTION 13
ABC Ltd. incorporated a company super Ltd. to acquire 100% shares of another entity
Focus Ltd (and therefore to obtain control of the Focus Ltd.). To fund the purchase,
Supper Ltd. acquired a loan from XYZ Bank at commercial interest rates. The loan funds
are used by Super Ltd. to acquire entire voting share of Focus Ltd. at fair value in orderly
transaction. Post the acquisition, Super Ltd. has the ability to elect or appoint or to
remove a majority of the members of the governing body of the Focus Ltd and also Super
Ltd.’ management is in a power where it will be able to dominate the management of the
Focus Ltd. Can Super Ltd. be identified as the acquirer in this business combination?

SOLUTION

The key drivers of the accounting are identifying the party on whose behalf the new
entity has been formed and identifying the business acquired. In this scenario as Super
Ltd. the ability to elect or appoint or to remove a majority of the members of the
governing body of the Focus Ltd. and has the ability to dominate the management of
the Focus Ltd. Accordingly, Super Ltd. will be identified as the acquirer

QUESTION 14
Company A decided to spin off two of its existing businesses (currently housed in two
separate entities, Company B and Company C). To facilitate the spin off, company A
incorporate a new entity (company D) with nominal entity and appoints independent
directors to the board of company D. Company D signs an agreement to purchase
companies B & C in cash, conditional on obtaining sufficient funding. To fund these
acquisitions, company D issues a prospectus offering to issue shares for cash.
At the conclusion of the transaction, company D has owned 99% by the new investors with
Company A retaining only a 1% non-controlling interest.
In this situation, a set of new investors paid cash to obtain control of company D in an
arm’s length transaction. Company D is then used to effect the acquisition of 100%
ownership of companies B & C by paying cash. Company A relinquishes its control of
companies B & C to the new owners of company D.

SOLUTION
Although company D is a newly formed company, it is identified as the acquirer not only
because it paid cash that also because the new owners of company D have obtained control
of companies B and C from company A.

STEP II: DETERMINING THE ACUQISITION DATE

The acquirer shall identify the acquisition date, which is the date on which it obtains control of
the acquiree.

The date on which the acquirer obtains control of the acquiree is generally the date on
which the acquirer legally transfers the consideration, acquires the assets and assumes the
liabilities of the acquiree—the closing date. However, the acquirer might obtain contro l on a
date that is either earlier or later than the closing date. For example, the acquisition date
precedes the closing date if a written agreement provides that the acquirer obtains control
of the acquiree on a date before the closing date. An acquirer shall consider all pertinent
facts and circumstances in identifying the acquisition date.

The acquisition date is a very important step in the business combination

accounting because it determines when the acquirer recognises and measures the
consideration, the assets acquired and liabilities assumed. The acquiree's results are
consolidated from this date. The acquisition date materially impacts the overall acquisition
accounting, including post-combination earnings.

The acquisition date is often readily apparent from the structure of the business combinations
and the terms of the sale and purchase agreement (if applicable) but this is not always the case.

Acquisition date will be the date on which the acquirer obtains control.

QUESTION NO 15
On 9.4.20x2, Shyam limited a listed company started to negotiate with Ram Limited
which is an unlisted company about the possibility of merger. On 10.5.20x2, the board
of directors of Shyam authorized their management to pursue the merger with Ram
limited. On 15.5.20x2, management of Shyam limited offered management of Ram
limited 12,000 shares of Shyam limited against their total share outstanding. On
31.5.20x2, the board of directors of Ram limited accepted the offer subject to
shareholder vote. On 2.6.20x2 both the companies jointly made a press release about
the proposed merger.
On 10.6.20x2, the shareholders of Ram limited approved the terms of merger. On
15.6.20x2, the shares were allotted to the shareholders of Ram limited.
The market price of the shares of shyam limited as was follows:

DATE PRICE

9.4.20X2 70
10.5.20X2 75
15.5.20X2 60
31.5.20X2 70
2.6.20X2 80
10.6.20X2 85
15.6.20X2 90

What is the acquisition date and what is purchase consideration in the above scenario?
SOLUTION
As per paragraph 8 of this statement, the acquirer shall identify the acquisition date,
which is the date on which it obtains control of the acquiree. In the above scenario, the
acquisition date will the date on which the shares were allotted to the shareholders of
Ram limited. Although the shareholders’ approval was obtained on 10th june but the
shares were issued only on 15th june and accordingly the 90 will be considered as the
market price.

QUESTION 16
Can an acquiring entity account for a business combination based on a signed non-binding
letter of intent where the exchange of consideration and other conditions are expected to
be completed with 2 months?

SOLUTION
No as per the requirement of the standard a non-binding Letter of Intent (LOI) does not
effectively transfer control and hence this cannot be considered as the basis for
determining the acquisition date.

QUESTION 17
On 1st April, X Ltd. agrees to acquire the share of B Ltd. in an all equity deal. As per the
binding agreement X Ltd. will get the effective control on 1st April. However, the
consideration will be paid only when the shareholders’ approval is received. The
shareholders meeting are scheduled to happen on 30th April. If the shareholders’ approval
is not received for issue of new shares, then the consideration will be settled in cash
What is the acquisition date?

SOLUTION
The acquisition date in the above case is 1st April.This is because in the above scenario,
even if the shareholders don’t approve the shares, consideration will be settled through
payment of cash.

QUESTION 18
BUSINESS COMBINATION WITHOUT A COURT APPROVED SCHEME
ABC Ltd. acquired all the shares of XYZ Ltd. The negotiations had commenced on 1 st
January, 20X1 and the agreement was finalised on 1st March 20X1. While ABC Ltd. obtains
the power to control XYZ Ltd.’s operations on 1st March, 20X1 the agreement states that
the acquisition is effective from 1st January, 20X1 and that ABC Ltd. is entitled to all
profits after date. In addition. The purchase price is based on XYZ Ltd. s net asset
position as at 1st January, 20X1. What is the date of acquisition?

SOLUTION
Ind AS 103 provides that acquisition date is the date on which the acquirer obtains
control of the acquiree.

Further, Ind AS 103 clarifies that the date of which the acquirer obtains control of the
acquire is generally the date on which the acquirer legally transfers the consideration
acquires the assets and assumes the liabilities of the acquire the closing date. However,
the acquirer might obtain control on a date that is either earlier or later than the closing
date.

Therefore, in this case, notwithstanding that the price is based on the net assets at 1 st
January. 20X1 and it is only on 1st March, 20X1 and not 1st January 20X1 that ABC Ltd. has
the power to direct the relevant activates of XYZ Ltd. so as to affect its returns from its
involvement with XYZ Ltd. Accordingly, the of acquisition is 1st March, 20X1.
QUESTION 19 ACQUISITION DATE- REGULATORY APPROVAL

ABC Ltd. and XYZ Ltd. are manufacturers of rubber components for a particular type
of equipment. ABC Ltd. makes a bid for XYZ Ltd.'s business and the Competition
Commission of India (CCI) announces that the proposed transaction is to be scrutinized
to ensure that competition laws are not breached. Even though the contracts are made
subject to the approval of the CCI, ABC Ltd. and XYZ Ltd. mutually agree the terms of
the acquisition and the purchase price before competition authority clearance is
obtained. Can the acquisition date in this situation be the date on which ABC Ltd. and
XYZ Ltd. agree the terms even though the approval of CCI is awaited (Assume that the
approval of CCI is substantive)?

SOLUTION

Ind AS 103 provides that acquisition date is the date on which the acquirer obtains
control of the acquirer.
Further, Ind AS 103 clarifies that the date on which the acquirer obtains control of the
acquirer is generally the date on which the acquirer legally transfers the consideration,
acquires the assets and assumes the liabilities of the acquiree – the closing date.
However the acquirer might obtain control on a date that is either or later than the
closing date.
Since CCI approval is substantive approval for ABC Ltd. To acquirer of XYZ Ltd.’s
operations. The date of acquisition cannot be earlier than the date on which approval is
obtained from CCI. This is pertinent given that the approval from CCI is considered to
be a substantive process and accordingly, the acquisition is considered to be complete
only or receipt of such approval.

QUESTION 20
Veera Limited and Zeera Limited are both in the business of manufacturing and
selling of Lubricant. Shareholders of Veera Limited and Zeera Limited agreed to join
forces to benefit from lower delivery and distribution costs. The business
combination is carried out by setting up a new entity called Meera Limited that issues
100 shares to Veera Limited shareholders and 50 shares to Zeera Limited
shareholders in exchange for the transfer of the shares in those entities. The
number of shares reflects the relative fair values of the entities before the
combination. Also respective company’s shareholders get the voting rights in Meera
Limited based on their respective shareholdings.
Determine the acquirer by applying the principles of Ind AS 103 ‘Business
Combinations’
SOLUTION
The relative voting rights in the combined entity after the business combination -
The acquirer is usually the combining entity whose owners as a group retain or
receive the largest portion of the voting rights in the combined entity.
Based on above mentioned para, acquirer shall be the either of the combining entities
(i.e. Veera Limited or Zeera Limited) whose owners as a Group retain or receive the
largest portion of the voting rights in the combined entity.
Hence in the above scenario Veera Limited shareholder gets 67% Share [(100/150)
x100] and Zeera Limited shareholder gets 33.33% share in Meera Limited. Hence
Veera Limited is acquirer as per the principles of Ind AS 103.

QUESTION 21
Company A acquired Business ofCompany B for cash consideration. The relevant dates are
as under:
 Date of shareholder agreement 1st June, 20X1
 Appointed date as per shareholder agreement 1st April, 20X1
 Date of obtaining control over the board representation 1st July, 20X1
 Date of payment of consideration 15th July, 20X1
 Date of transfer of shares to Company A 1st August, 20X1
SOLUTION
In this case, as the control over financial and operating policies are acquired through
obtaining board representation on 1st July, 20X1, it is this date that is considered as
the acquisition date. It may be noted that the appointed date as per the agreement is not
considered as the acquisition
date, as the Company A did not have control over Company B as at that date.

STEP III: DETERMINATION OF THE PURCHASE CONSIDERATION

The consideration transferred in a business combination shall be measured at fair

value, which shall be calculated as the total of the acquisition-date fair values of the
assets (including cash) transferred by the acquirer, the liabilities incurred by the
acquirer to former owners of the acquiree and the equity interests issued by the
acquirer. Examples of potential forms of consideration include cash, other assets, a
business or a subsidiary of the acquirer, contingent consideration, ordinary or
preference equity instruments, options, warrants and member interests of mutual
entities.
The consideration transferred may include assets or liabilities of the acquirer that have
carrying amounts that differ from their fair values at the acquisition date (for example, non-
monetary assets or a business of the acquirer). If so, the acquirer shall remeasure the
transferred assets or liabilities to their fair values as of the acquisition date and recognise
the resulting gains or losses, if any, in profit or loss.

This means that if the acquirer has transferred a land as a part of the business combination
arrangement to the owners of the acquiree then the fair value of the land will be considered in
determining the fair value of the consideration. Consequently, the land will be de-recognised in
the financial statements of the acquirer and the difference between the carrying amount of the
land and the fair value considered for purchase consideration will be recorded in profit and loss.

STEP IV: RECOGNITION OF ASSETS & LIABILITIES ACQUIRED ON ACQUISITION

DATE

The assets and liabilities recognized based on the aforesaid recognition principles has to be
measured based on the following principle:

The acquirer shall measure the identifiable assets acquired and the liabilities assumed at
their acquisition – date fair values.

EXCEPTIONS (MEASUREMENT PERIOD)

Ind AS 103 provides a measurement period window wherein if all the required information
is not available on the acquisition date then the entity will be required to do the purchase
price allocation on a provision basis.
During the measurement period, the acquirer shall retrospectively adjust the provisional
amounts recognised at the acquisition date to reflect new information obtained about
facts and circumstances that existed as of the acquisition date and, if known, would have
affected the measurement of the amounts recognised as of that date.
During the measurement period, the acquirer shall also recognise additional assets or
liabilities if new information is obtained about facts and circumstances that existed as of
the acquisition date.
The measurement period ends as soon as the acquirer receives the information it was
seeking about facts and circumstances that existed as of the acquisition date or learns
that more information is not obtainable. However, the measurement period shall not
exceed one year from the acquisition date.
Any change i.e. increase or decrease in the net assets acquired due to new
information available during the measurement period which existed on the
acquisition date will be adjusted against goodwill.
However, after the measurement period ends, any change in the value of assets and
liabilities due to an information which existed on the valuation date will be accounted as an
error as per Ind AS 8, Accounting policies, Changes in Accounting Estimates and Errors.

Whether information pertaining

to business acquisition obtained
within 1 year of acquisition
date?
Yes No

No
Whether conditions existed on Recognise
acquisition date? increase/decrease in asset
or liability as error as per
Yes applicable Ind AS.

Then recognise
increase/decrease in identifiable
asset or liability by giving
corresponding effect in Goodwill.

QUESTION 22
Entity X acquired 100% shareholding of Entity Y on 1st April, 20X1 and had complete the
preliminary purchase price allocation and accordingly recorded net assets of ₹ 100 million
against the purchase consideration of 150 million. Entity Y had significant carry forward
losses on which deferred tax asset was not recorded due to lack of convincing evidence on
the acquisition date. However, on 31st March, 20X2, Entity Y won a significant contract
which is expected to generate enough taxable income to recoup the losses. Accordingly,
the deferred tax asset was recorded on the carry forward losses on 31st March, 20X2.
Whether the aforesaid losses can be adjusted with the Goodwill recorded based on the
preliminary purchase price allocation?

SOLUTION
No, as per the requirement of Ind AS 103, changes to the net assets are allowed which
results from the discovery of a fact which existed on the acquisition date. However,
change of facts resulting in recognition and de-recognition of assets and liabilities after
the acquisition date will be accounted in accordance with other Ind AS. In the above
scenario deferred tax asset was not eligible for recognition on the acquisition date and
accordingly the new contract on 31st March, 20X2 will tantamount to change of estimate
and accordingly will not impact the Goodwill amount.

QUESTION 23
ABC Ltd. acquires XYZ Ltd. in a business combination on 15th January, 20X1. Few days
before the date of acquisition, one of XYZ Ltd.'s customers had claimed that certain
amounts were due by XYZ Ltd. under penalty clauses for completion delays included in the
contract.
ABC Ltd. evaluates the dispute based on the information available at the date of
acquisition and concludes that XYZ Ltd. was responsible for at least some of the delays in
completing the contract. Based on the evaluation, ABC Ltd. recognises ₹ 1 crore towards
this liability which is its best estimate of the fair value of the liability to the customer
based on the information available at the date of acquisition.
In October, 20X1 (within the measurement period), the customer presents additional
information as per which ABC Ltd. concludes the fair value of liability on the date of
acquisition to be ₹ 2 crore.
ABC Ltd. continues to receive and evaluate information related to the claim after October,
20X1. Its evaluation doesn’t change till February, 20X2 (i.e. after the measurement
period). ABC Ltd. determines that the amount that would be recognised with respect to
the claim under Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets as at
February, 20X2 is ₹ 2.2 crore.
How should the adjustment to the provisional amounts be made in the financial statements
during and after the measurement period?
SOLUTION
The consolidated financial statements of ABC Ltd. for the year ended 31st March, 20X1
should include ₹ 1 crore towards the contingent liability in relation to the customer claim.
When the customer presents additional information in support of its claim, the incremental
liability of ₹ 1 crore (₹ 2 crore – ₹ 1 crore) will be adjusted as a part of acquisition
accounting as it is within the measurement period.
Therefore, it will disclose that the comparative information for the year ending on 31st
March, 20X1 is adjusted retrospectively to increase the fair value of the item of liability
at the acquisition date by ₹ 1 crore, resulting in a corresponding increase in goodwill.
The amount determined in accordance with Ind AS 37 subsequently exceeds the previous
estimate of the fair value of the liability, then ABC Ltd. recognises an increase in the
liability. As the change has occurred after the end of the measurement period, the
increase in the liability amounting to ₹ 20 lakh ( ₹ 2.2 crore – ₹ 2 crore) is recognised in
profit or loss.

STEP V: GOODWILL/BARGAIN PURCHASE

Goodwill – Recognition and Measurement

The acquirer shall recognize Goodwill as of the acquisition date measured as the excess of (a)
over (b) below:

a) The purchase consideration transferred at acquisition – date fair value;

b) The net of the acquisition – date amounts of the identifiable assets acquired and the
liabilities assumed measured in accordance with this Ind AS.

Bargain Purchase

In extremely rate circumstances, an acquirer will make a bargain purchase in a business

combination in which the net assets value acquired in a business combination exceeds the
purchase consideration.

The acquirer shall recognise the resulting gain in other comprehensive income on the acquisition
date and accumulate the same in equity as capital reserve, if the reason for bargain purchase
gain is not clear. The gain shall be attributed to the acquirer and there will no allocation to the
non-controlling shareholders.

A bargain purchase might happen, for example, in a business combination that is a forced sale in
which the seller is acting under compulsion.

The Ind AS standard itself acknowledges that it is very rare that a bargain purchase in a
business combination will arise and accordingly the standard re-emphasis the above point by
requiring the entities to reassess and identify the clear reason why it is a bargain purchase
business combination. For e.g. acquisition of business in a bankruptcy sale, or sale of business
due to a regulatory requirement

QUESTION 24

Entity X is one of the largest liquor manufacturing company in the world and it acquires another
Entity Y which has significant presence in India and UK. However, the competition commission in
UK has issued orders to sell one division of the UK assets of Entity Y in order to comply with the
local competition regulation in UK within a specified timeline. Entity Z another boutique liquor
manufacturer realizes the opportunity and Purcahse the assets of Entity Y from Entity X.
SOLUTION

In the given case above it is more likely than not that there could be an element of bargain
Purchase as the entity X was under compulsion to sell the assets within a specified timeline.

STEP VI: TREATMENT OF OTHER ASSETS & LIABILITIES

CONCEPT 1: PAYMENT FOR FUTURE SERVICES

If an acquirer has committed to management of acquiree a payment for future services which
may be required for smooth running of business then such type of payment will be expensed over
the period of service in future but it will not be considered as a part of business combination. It
will be treated as an entity is paying remuneration to its employees or management for their
normal services.

QUESTION 25
X Ltd. plans to acquire Y Ltd. It identifying assets acquired and liability assumed. The
company agrees to pay Y Ltd.’s existing management ` 10 million for running the business
of acquired business under the aegis of X Ltd. for I year during the post-acquisition
period and harmonization of post-acquisition activated. Should this agreement be treated
as liability assumed in a business combination?

CONCEPT 2: INDEMNIFICATION OF LIABILITIES & ASSETS

The seller in a business combination may contractually indemnify the acquirer for the outcome of
a contingency or uncertainty related to all or part of a specific asset or liability. For example, the
seller may indemnify the acquirer against losses above a specified amount on a liability arising
from a particular contingency; in other words, the seller will guarantee that the acquirer's
liability will not exceed a specified amount. As a result, the acquirer obtains an indemnification
asset. The acquirer shall recognise an indemnification asset at the same time that it recognizes
the indemnified item measured on the same basis as the indemnified item, subject to the need
for a valuation allowance for uncollectible amounts.

QUESTION 26
Company A acquires Company B in a business combination on April 1, 2011. B is being sued by
one of its customers for breach of contract. The sellers of B provide an indemnification to A
for the reimbursement of any losses greater than 100. There are no collectability issues
around this indemnification. At the acquisition date, Company A determined that th ere is a
present obligation and therefore the fair value of the contingent liability of 250 is
recognised by A in the acquisition accounting.
SOLUTION

In the acquisition accounting A also recognizes an indemnification asset of 150 ( 250 -

100)

50 (₹ 250 – ₹ 100).

QUESTION 27
ABC Ltd. acquired a beverage company PQR Ltd. from XYZ Ltd. At the time of the
acquisition, PQR Ltd. is the defendant in a court case whereby certain customers of PQR
Ltd. have alleged that its products contain pesticides in excess of the permissible levels
that have caused them health damage.
PQR Ltd. is being sued for damages of ₹ 2 crore. XYZ Ltd. has indemnified ABC Ltd. for
the losses, if any, due to the case for amount up to ₹ 1 crore. The fair value of the
contingent liability for the court case is ₹ 70 lakh.
How should ABC Ltd. account for the contingent liability and the indemnification asset?
What if the fair value of the liability is ₹ 1.2 crore instead of ₹ 70 lakh.

SOLUTION
In the current scenario, ABC Ltd. measures the identifiable liability of entity PQR Ltd. at
₹ 70 lakh and also recognises a corresponding indemnification asset of ₹ 70 lakhs on its
consolidated balance sheet. The net impact on goodwill from the recognition of the
contingent liability and associated indemnification asset is nil.
However, in the case where the liability’s fair value is more than ₹ 1 crore ie. ₹ 1.2 crore,
the indemnification asset will be limited to ₹ 1 crore only.

QUESTION 28
ABC Ltd. pays ₹ 50 crore to acquire PQR Ltd. from XYZ Ltd. PQR Ltd. manufactured
products containing fiber glass and has been named in 10 class actions concerning the
effects of these fiber glass. XYZ Ltd. agrees to indemnify ABC Ltd. for the adverse
results of any court cases up to an amount of ₹ 10 crore. The class actions have not
specified amounts of damages and past experience suggests that claims may be up to ₹ 1
crore each, but that they are often settled for small amounts.
ABC Ltd. makes an assessment of the court cases and decides that due to the potential
variance in outcomes, the contingent liability cannot be measured reliably and accordingly
no amount is recognised in respect of the court cases. How should indemnification asset be
accounted for?
SOLUTION
Since no liability is recognised in the given case, ABC Ltd. will also not recognise an indemnification
asset as part of the business combination accounting.

QUESTION 29
X Ltd. Acquires Y Ltd. Y Ltd. Has trade receivable of 50,00,000 in its books. X limited
estimates 40,00,000 as fair value of Y’ trade receivable. But Y guarantee’s minimum
collection of 45,00,000. Comment.

SOLUTION
X limited will recognize indemnified assets of 5,00,000 in the given case.

CONCEPT 3 : RECOGNITION OF CONTINGENT LIABILITIES

Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets, defines a contingent
liability as:

(a) A possible obligation that arises from past events and whose existence will be
confirmed only by the occurrence or non-occurrence of one or more uncertain future
events not wholly within the control of the entity; or
(b) A present obligation that arises from past events but is not recognized because:
i. It is not probable that an outflow of resources embodying economic benefits
will be required to settle the obligation; or
ii. The amount of the obligation cannot be measured with sufficient reliability
The requirements in Ind AS 37 do not apply in determining which contingent liabilities to
recognise as of the acquisition date. Instead, the acquirer shall recognise as of the acuqiisiton
date a contingent liability assumed in a business combination if it is a present o bligation that
arises from past events and its fair value can be measured reliably. Therefore, contrary to Ind
AS 37, the acquirer recognizes a contingent liability assumed in a business combination at the
acquisition date even if it is not probable that an outflow of resources embodying economic
benefits will be required to settle the obligation.

QUESTION 30
A suit for damages worth 10 million was filed on Company B for alleged breach of certain
contract provisions. Company B had disclosed the same as a contingent liability in its financial
statements, as it considered that it is a present obligation for which it was not probable tha t
the amount would be payable. Company A acquire Company B and determines the fair value of
the contingent liability to be 2 million.

SOLUTION

Company A would recognise 2 million in its financial statements as part of acquisition

accounting, even if it is not probable that payment will be required to settle the obligation.
QUESTION 31
X Ltd. plans to acquire Y Ltd. it was identifying assets acquired and liabilities assumed. It
has analyzed the pending warranty claims. It is observed that that
Warranty Claim of ` 2 million may mature based on claims of certain customers. There is
remote chance of other claims amounting ` 5 million (as on acquisition date) to mature and
fair value which cannot be reliably measured.

SOLUTION

In the given case, reliable estimate of ` 2 million can only be made due to which it can be
incorporated as liability, but other claims of 5 million for which reliable estimate is not
available should not be recognized as liability.

QUESTION 32
X Ltd. plans to acquire Y Ltd. It was identifying assets acquired and liabilities assumed. It
has analysed the pending tax cases_

(i) Y Ltd. recognised 20 pending cases amounting to ` 15 million as contingent

liability of which ` 3 million has been provided for; and

(ii) Y Ltd. did not recognise another 2 cases as it could not measure fair value of
out of these cases.

X Ltd. assessed that ` 5 million should be the obligation out of 20 pending tax cases.
Although it is unlikely that liability against 2 cases would mature but the claim is ` 1
million as on the acquisition date. How should X Ltd. recognise contingent liability?

CONCEPT 4: ACQUISITION COST INCURRED IN BUSINESS

ACQUISITION

The direct cost of acquisition is not included in determination of the purchase

consideration. Cost which include like finder’s fees, due diligence cost accounting, legal
fees, investment banker fees, even bonuses paid to employees for doing a successful
acquisition will not be included in the cost of acquisition.
QUESTION 33
Should stamp duty paid on acquisition of land pursuant to a business combination be
capitalised to the cost of the asset or should it be treated as an acquisition related cost
and accordingly be expensed off?
SOLUTION
As per Ind AS 103, the acquisition-related costs incurred by an acquirer to effect a
business combination are not part of the consideration transferred.
Ind AS 103 states that, acquisition-related costs are costs the acquirer incurs to effect a
business combination. Those costs include finder’s fees; advisory, legal, accounting,
valuation and other professional or consulting fees; general administrative costs, including
the costs of maintaining an internal acquisitions department; and costs of registering and
issuing debt and equity securities. The acquirer shall account for acquisition related costs
as expenses in the periods in which the costs are incurred.
Accordingly, stamp duty incurred in relation to land acquired as part of a business
combination transaction are required to be recognised as an expense in the period in which
the acquisition is completed and given effect to in the financial statements of the
acquirer.

QUESTION 34
ABC Ltd. acquires PQR Ltd. on 30th June, 20X1. The assets acquired from PQR Ltd.
include an intangible asset that comprises wireless spectrum license. For this intangible
asset, ABC Ltd. is required to make an additional one-time payment to the regulator in
PQR’s jurisdiction in order for the rights to be transferred for its use. Whether such
additional payment to the regulator is an acquisition-related cost?
Solution
As per Ind AS 103, the acquisition-related costs incurred by an acquirer to effect a
business combination are not part of the consideration transferred.
Paragraph 53 of Ind AS 103 states that, acquisition-related costs are costs the acquirer
incurs to effect a business combination. Those costs include finder’s fees; advisory, legal,
accounting, valuation and other professional or consulting fees; general administrative
costs, including the costs of maintaining an internal acquisitions department; and costs of
registering and issuing debt and equity securities. The acquirer shall account for
acquisition-related costs as expenses in the periods in which the costs are incurred and
the services are received.
The payment to the regulator represents a transaction cost and will be regarded as
acquisition related cost incurred to effect the business combination. Applying the
requirements of para 53 of Ind AS 103, it should be expensed as it is incurred.
It may be noted that had the right been acquired separately (i.e. not as part of business
combination), the transaction cost is required to be capitalised as part of the intangible
asset as per the requirements of Ind AS 38, Intangible Assets.
CONCEPT 5: PRE EXISTING RELATIONSHIPS

The acquirer and the acquiree may have a pre-existing relationship or other arrangement
before negotiations for the business combination began, or they may enter into an
arrangement during the negotiations that is separate from the business combination. In
either situation, the acquirer shall identify any amounts that are not part of what the
acquirer and the acquiree (or its former owners) exchanged in the business combination, ie
amounts that are not part of the exchange for the acquiree. The acquirer shall recognise as
part of applying the acquisition method only the consideration transferred for the acquiree
and the assets acquired and liabilities assumed in the exchange for the acquiree. Separate
transactions shall be accounted for in accordance with the relevant Ind AS.

As part of a business combination, an acquirer may reacquire a right that it had previously
granted to the acquiree to use one or more of the acquirer's recognised or unrecognised
assets. Examples of such rights include a right to use the acquirer's trade name under a
franchise agreement or a right to use the acquirer's technology under a technology licensing
agreement. A reacquired right is an identifiable intangible asset that the acquirer recog nises
separately from goodwill.

If the terms of the contract giving rise to a reacquired right are favourable or unfavourable
relative to the terms of current market transactions for the same or similar items, the acquirer
shall recognise a settlement gain or loss.

(PLEASE REFER CLASS NOTES FOR SIMPLE EXPLANATION BY JINDAL SIR IN CLASS
ON CONTRACTUAL & NON CONTRACTUAL PRE EXISTING RELATIONSHIP)

QUESTIO NO 35 [Treatment of per-existing law suit]

X Ltd. acquired the business of Y Ltd. for ` 40 cr. the purchase consideration includes
payment for settlement of a law suit against X Ltd. ` 30 lakhs. In the books of X Ltd.
there is provision for the law suit amounting to ` 40 lakhs.

Fair value of identified assets acquired is `45 cr. and fair value of liabilities assumed is `
10cr. Deferred tax liability worked out based on tax base-of acquirer and the fair value is
` 1 cr.

How should the company recognise the business combination transaction and pre-existing
relationship?
QUESTION NO 36
Progressive Ltd is being sued by Regressive Ltd for an infringement of its Patent. At
31st March 2012, Progressive Ltd recognized a INR 10 million liability related to this
litigation.

On 30th July 2012, Progressive Ltd acquired the entire equity of Regressive Ltd for
INR 500 million. On the date, the estimated fair value of the expected settlement of
the litigation is INR 20 million.

Solution
In the above scenario the litigation is in substance settled with the business
combination transaction and accordingly the INR 20 million being the fair value of
the litigation liability will be considered as paid for settling the litigation claim and
will be not included in the business combination. Accordingly, the purchase price will
reduce by 20 million and the difference between 20 and 10 will be recorded in
income statement of the Progressive limited as loss on settlement of the litigation.

QUESTION 37

Vadapav Limited is a successful company has number of own stores across India and also
offers franchisee to other companies. Efficient Ltd is one of the franchisee of Vadavap
Ltd and is and operates number of store in south India. Vadapav Ltd. decided to acquire
Efficient Ltd due to its huge distribution network and accordingly purchased the
outstanding shares on 1st April 2012. On the acquisition date, Vadapav determines that
the license agreement reflects current market terms.

Solution

Vadapav will record the finachisee right as an intangible asset (reacquired right) while
doing purchase price allocation and since it is at market terms no gain or loss will be
recorded on settlement.

QUESTION 38

ABC Ltd. acquires PQR Ltd. for a consideration of ` 1 crore. Four years ago, ABC Ltd.
had granted a ten-year license allowing PQR Ltd. to operate in Europe. The cost of the
license was ` 2,50,000. The contract allows either party to terminate the franchise at a
cost of the unexpired initial fee plus 20%. At the date of acquisition, the settlement
amount is ` 1,80,000 [(` 2,50,000 x 6/10) + 20%].

ABC Ltd. has acquired PQR Ltd., because it sees high potential in the European market
and wishes to exploit it. ABC Ltd. calculates that under current economic conditions and
at current prices it could grant a six-year franchise for a price of ` 4,50,000.

How is the license accounted for as part of the business combination?

CONCEPT 6: ASSEMBLED WORKFORCE

The acquirer subsumes into Goodwill the value of an acquired intangible asset that is not
identifiable as of the acquisition date. For example, an acquirer may attribute value to the
existence of an assembled workforce, which is an existing collection of employees that
permits the acquirer to continue to operate an acquired business from the acquisition date.

An assembled workforce does not represent the intellectual capital of

The skilled workforce—the (often specialized) knowledge and experience that employees of an
acquiree bring to their jobs. Because the assembled workforce is not an identifiable asset to be
recognized separately from goodwill, any value attributed to it is subsumed into goodwill.

CONCEPT 7: INTANGIBLE ASSETS

An intangible asset should be recorded separately from Goodwill if either the separability
criteria is met or it arises out of contractual legal criterion.

Recognition of Intangible Asset

in Business Combination

Transaction meets the Asset is identifiable either by Contractual/

definition of Asset Legal Criteria or Separability Criteria

Contractual Legal criterion

An intangible asset that meets the contractual-legal criterion is identifiable even if the asset is
not transferable or separable from the acquiree or from other rights and obligations.

For example:

a. An acquiree owns and operates a nuclear power plant. The licence to operate that power
plant is an intangible asset that meets the contractual-legal criterion for recognition
separately from goodwill, even if the acquirer cannot sell or transfer it separately from
the acquired power plant. An acquirer may recognise the fair value of the operating
licence and the fair value of the power plant as a single asset for financial reporting
purposes if the useful lives of those assets are similar.

b. An acquiree owns a technology patent. It has licensed that pate nt to others for their
exclusive use outside the domestic market, receiving a specified percentage of future
revenue in foreign exchange. Both the technology patent and the related licence
agreement meet the contractual-legal criterion for recognition separately from
goodwill even if selling or exchanging the patent and the related licence agreement
separately from one another would not be practical.

Separability Criteria

The separability criterion means that an acquired intangible asset is capable of being
separated or divided from the acquiree and sold, transferred, licensed, rented or exchanged,
either individually or together with a related contract, identifiable asset or liability. An
intangible asset that the acquirer would be able to sell, license or otherwise exchange for
something else of value meets the separability criterion even if the acquirer does not intend
to sell, license or otherwise exchange it. An acquired intangible asset meets the separability
criterion if there is evidence of exchange transactions for that type of asset or an asset of
a similar type, even if those transactions are infrequent and regardless of whether the
acquirer is involved in them.

Example:

An acquiree owns a registered trademark and documented but unpatented technical

expertise used to manufacture the trademarked product. To transfer ownership of a
trademark, the owner is also required to transfer everything else necessary for the
new owner to produce a product or service indistinguishable from that produced by the
former owner. Because the unpatented technical expertise must be separated from the
acquiree or combined entity and sold if the related trademark is sold, it meets the
separability criterion.

Accordingly, as per the guidance above it follows that identification of intangible asset will be
judgemental and will vary in each case.

Following are the possible sources of information and broad indicator to be used to identify any
possible intangible separately from goodwill:

A. Internal sources:

 Financial statements of the acquiree-

 significant R&D cost may be indicator that there may be possible technology
related intangible
 Customer acquisition cost- lot of company spend money to acquire new customers
like online e-commerce companies provide incentive to register a customer as a
first time user or download their app. That may be a strong indicator of existence
of customer list as an intangible
QUESTION 39
Company A, FMCG company acquires an online e-commerce company E, with the intention to
start its retail business. The e-commerce company has over the period have 10 million
registered users. However, the e-commerce company E does not have any intention to sale
the customer list. Should this customer list be recorded as an intangible in a business
combination?
SOLUTION
In this situation the customer database does not give rise to legal or contractual right.
Accordingly, the assessment of its separability will be assessed. The database can be
useful to other players and Company E has the ability to transfer this to them.
Accordingly, the intention not to transfer will not affect the assessment whether to
record this as an intangible or not. Hence customer list should be recorded as an intangible
in a business combination.
QUESTION 40
ABC Ltd. a pharmaceutical group acquires XYZ Ltd. another pharmaceutical business. XYZ
Ltd. has incurred significant research costs in connection with two new drugs that have
been undergoing clinical trials. Out of the two drugs, one drug has not been granted
necessary regulatory approvals. However, ABC Ltd. expects that approval will be given
within two years. The other drug has recently received regulatory approval. The drugs’
revenue-earning potential was one of the principal reasons why entity ABC Ltd. decided to
acquire entity XYZ Ltd. Whether the research and development on either of the drugs be
recognised as an intangible asset in the books of ABC Ltd.?
SOLUTION
This means that the acquirer recognises as an asset separately from goodwill an in-process
research and development project of the acquiree if the project meets the definition of
an intangible asset.
An acquiree’s in-process research and development project meets the definition of an
intangible asset when it:
(a) Meets the definition of an asset; and
(b) is identifiable, i.e. is separable or arises from contractual or other legal rights.
In accordance with above,
(i) The fair value of the first drug reflects the probability and the timing of the
regulatory approval being obtained. As per the standard, the recognition criterion of
probable future economic benefits is considered to be satisfied in respect of the
asset acquired accordingly an asset is recognised. Subsequent expenditure on an in-
process research or development project acquired separately is to be dealt with in
accordance with paragraph 43 of Ind AS 38.
(ii) The rights to the second drug also meet the recognition criteria in Ind AS 8 and are
recognised. The approval means it is probable that future economic benefits will flow
to ABC Ltd. This will be reflected in the fair value assigned to the intangible asset.

QUESTION 41
As part of its business expansion strategy, KK Ltd. is in process of setting up a
pharma intermediates business which is at very initial stage. For this purpose, KK Ltd.
has acquired on 1st April, 20X1, 100% shares of ABR Ltd. that manufactures pharma
intermediates. The purchase consideration for the same was by way of a share
exchange valued at ₹ 35 crores. The fair value of ABR Ltd.' s net assets was ₹ 15
crores, but does not include:
(i) A patent owned by ABR Ltd. for an established successful intermediate drug
that has a remaining life of 8 years. A consultant has estimated the value of
this patent to be ₹ 10 crores. However, the outcome of clinical trials for the
same are awaited. If the trials are successful, the value of the drug would fetch
the estimated ₹ 15 crores.
(ii) ABR Ltd. has developed and patented a new drug which has been approved for
clinical use. The cost of developing the drug was ₹12 crores. Based on
early assessment of its sales success, the valuer has estimated its market value
at ₹ 20 crores.
(iii) ABR Ltd.'s manufacturing facilities have received a favourable inspection by a
government department. As a result of this, the Company has been granted an
exclusive five-year license to manufacture and distribute a new vaccine.
Although the license has no direct cost to the Company, its directors believe
that obtaining the license is a valuable asset which assures guaranteed sales and
the value for the same is estimated at ₹ 10 crores.
KK Ltd. has requested you to suggest the accounting treatment of the above
transaction under applicable Ind AS.

CONCEPT 8: CONTINGENT CONSIDERATION

The consideration the acquirer transfers in exchange for the acquiree includes any asset or
liability resulting from a contingent consideration arrangement. The acquirer shall recognise
the acquisition-date fair value of contingent consideration as part of the consideration
transferred in exchange for the acquiree.

The acquirer shall classify an obligation to pay contingent consideration as a liability or as

equity on the basis of the definitions of an equity instrument and a financial liability in
accordance with the requirement of Ind AS 32 Financial Instruments: Presentation, or other
applicable Indian Accounting Standards. The acquirer shall classify as an asset a right to the
return of previously transferred consideration if specified conditions are met.

Fair value of the assets transferred or liability incurred should be measured on the
acquisition date to determine the fair value. Any direct cost of acquisition should be
recorded directly in profit and loss account and should not be included in purchase
consideration.

Example:

Company A acquires Company B in April 2011 for cash. The acquisition agreement states
that an additional 20 million of cash will be paid to B’s former shareholders if B
succeeds in achieving certain specified performance targets. A determines the fair value
of the contingent consideration liability to be 15 million at the acquisition date. At a later
date, the probability of meeting the said performance target becomes lower.

As certain consideration is based on achieving certain performance parameters in future,

the consideration is contingent on achieving those parameters. As such, the transaction
involves involves contingent consideration. Further, since the consideration is to be
settled for a variable amount in cash, such consideration would be in the nature of
financial liability rather than equity.

As at the acquisition date, the acquirer should consider the acquisition date fair value of
contingent consideration as part of business combination. Accordingly, such recognition
would increase goodwill (or reduce gain on bargain purchase, as the case may be).

In the above example, if the change of meeting the performance criteria becomes less
probable, then in such a case, the contingent consideration in the nature of financial
liability should be remeasured and the impact for the change in the fair value should be
recogninsed in statement of profit and loss.

QUESTION 42
[Issue of fixed number of shares] A Ltd. has completed negotiation with B Ltd. acquiring
its business. A Ltd. agrees to issue 1, 00,00,000 of its own shares to the shareholders of B
Ltd. in exchange of their holding. It also agrees to pay another 20, 00,000 shares if
revenue form the business of B Ltd. exceeds ` 100 cr. during the first year of post
combination operation.

Fair value of identifiable assets and liabilities of B Ltd. is ` 100 cr. and ` 20 cr.
respectively. On the date of acquisition, market price of A Ltd.’s share is ` 100.

The probability analysis of expected revenue of B Ltd.’s business:

Revenue = ` 100 cr. 40%

Revenue > ` 100 cr. 60%

(i) How should the arrangement to issue 20, 00,000 shares be classified?
(ii) Find out Goodwill.
(iii) At the end of first half of year 1, the probability revenue generation has been
reassessed:

How should the change in fair value be accounted for?

Assume that the arrangement is not linked to providing services. Acquirer’s incremental
borrowing rate is 11%

QUESTION 43
How should contingent consideration payable in relation to a business combination be
accounted for on initial recognition and at the subsequent measurement as per Ind
AS in the following cases:
(i) On 1 April 20X1, A Ltd. acquires 100% interest in B Ltd. As per the terms of
agreement the purchase consideration is payable in the following 2 tranches:
a. an immediate issuance of 10 lakhs shares of A Ltd. having face value of
INR 10 per share;
b. a further issuance of 2 lakhs shares after one year if the profit before
interest and tax of B Ltd. for the first year following acquisition exceeds
INR 1 crore.
i. The fair value of the shares of A Ltd. on the date of acquisition is
INR 20 per share. Further, the management has estimated that on
the date of acquisition, the fair value of contingent consideration is ₹
25 lakhs.
ii. During the year ended 31 March 20X2, the profit before interest and
tax of B Ltd. exceeded ₹ 1 crore. As on 31 March 20X2, the fair value
of shares of A Ltd. is ₹ 25 per share.
iii. Continuing with the fact pattern in (a) above except for:
c. The number of shares to be issued after one year is not fixed.
d. Rather, A Ltd. agreed to issue variable number of shares having a fair
value equal to ₹ 40 lakhs after one year, if the profit before interest and
tax for the first year following acquisition exceeds ₹ 1 crore. A Ltd. issued
shares with ₹ 40 lakhs after a year.
CONCEPT 9: CONTINGENT PAYMENTS TO EMPLOYEE SHAREHOLDERS
Whether arrangements for contingent payments to employees or selling shareholders are
contingent consideration in the business combination or are separate transactions depends
on the nature of the arrangements. Understanding the reasons why the acquisition
agreement includes a provision for contingent payments, who initiated the arrangement and
when the parties entered into the arrangement may be helpful in assessing the nature of
the arrangement.
Continuing employment—the terms of continuing employment by the selling
shareholders who become key employees may be an indicator of the substance of a
contingent consideration arrangement. The relevant terms of continuing employment
may be included in an employment agreement, acquisition agreement or some other
document. A contingent consideration arrangement in which the payments are
automatically forfeited if employment terminates is remuneration for post-
combination services. Arrangements in which the contingent payments are not
affected by employment termination may indicate that the contingent payments are
additional consideration rather than remuneration.
Duration of continuing employment—If the period of required employment coincides
with or is longer than the contingent payment period, that fact may indicate that the
contingent payments are, in substance, remuneration.
QUESTION 44
KKV Ltd acquires a 100% interest in VIVA Ltd, a company owned by a single shareholder
who is also the KMP in the Company, for a cash payment of USD 20 million and a contingent
payment of USD 2 million. The terms of the agreement provide for payment 2 years after
the acquisition if the following conditions are met:
• the EBIDTA margins of the Company after 2 years post acquisition is 21%.
• the former shareholder continues to be employed with VIVA Ltd for at least 2 years
after the acquisition. No part of the contingent payment will be paid if the former
shareholder does not complete the 2 year employment period.
Solution
In the above scenario the former shareholder is required to continue in employment and
the contingent consideration will be forfeited if the employment is terminated or if he
resigns. Accordingly, only USD 20 million is considered as purchase consideration and the
contingent consideration is accounted as employee cost and will be accounted as per the
other Ind AS.
QUESTION45: Contingent consideration- Payments to employees who are former
owners of acquiree
ABC Ltd. acquires all of the outstanding shares of XYZ Ltd. in a business combination. XYZ
Ltd. had three shareholders with equal shareholdings, two of whom were also senior-level
employees of XYZ Ltd. and would continue as employee post acquisition of shares by ABC
Ltd.
• The employee shareholders each will receive ₹ 60,00,000 plus an additional payment
of ₹ 1,50,00,000 to 2,00,00,000 based on a multiple of earnings over the next two
years.
• The non-employee shareholders each receive ₹ 1,00,00,000.
The additional payment of each of these employee shareholders will be forfeited if they
leave the employment of XYZ Ltd. at any time during the two years following its acquisition
by ABC Ltd. The salary received by them is considered reasonable remuneration for their
services.
How much amount is attributable to post combination services?
Solution
Ind AS 103 provides an indication that a contingent consideration arrangement in which
the payments are automatically forfeited if employment terminates is remuneration for
post-combination services.
Arrangements in which the contingent payments are not affected by employment
termination may indicate that the contingent payments are additional consideration rather
than remuneration.
In accordance with the above, in the instant case, the additional consideration of ₹
1,50,00,000 to ₹ 2,00,00,000 represents compensation for post-combination services, as
the same represents that part of the payment which is forfeited if the former
shareholder does not remain in the employment of XYZ Ltd. for two years following the
acquisition - i.e., only ₹ 60,00,000 is attributed to consideration in exchange for the
acquired business.

CONCEPT 10: EMPLOYEES BENEFITS (RETIREMENT BENEFITS)

The acquirer records the fair value of the obligations for any post retirement obligation as
per the principles of Ind AS 19 which is an exception of the general fair value rule
CONCEPT 11: REPLACEMENT OF SHARE BASED PAYMENTS

The acquirer shall measure a liability or an equity instrument related to share-based

payment transactions of the acquiree or the replacement of an acquiree's share-based payment
transactions with share-based payment transactions of the acquirer in accordance with the
method in Ind AS 102, Share-based Payment, at the acquisition date.

Pre-combination period Post-combination

Computation- Market-based measure Computation-The difference

multiplied by ratio of the vesting
between the fair value of the award
period completed as on the acqusition
on the date of acqusition date and
date to the greater of -original the value allocated to pre-
vesting period or revised vesting
combination period
period

The incremental amount is allocated

The value as computed above is to post combination period as a
included in Purchase consideration. service cost over the remaining
vesting period.

QUESTION NO 46
[Under the replacement awards the employees are required to provide further service
after the acquisition date, but vesting period has been completed under the acqiree’s
award] Acquired A Ltd. issues a replacement award under a business combination
transaction, the market based measurement of which under Ind As 102 is ` 10 million. The
employees are required to render 2 years service after business combination to be
entitled to the award. The original award of acquiree has a market based measure of ` 9
million on the date of acquisition, and a vesting period of 5 years which all the employees
have completed. Should the additional obligation be treated as liability assumed in a
business combination? If not allocate the obligation into pre-combination obligation and
post-combination remuneration.

QUESTION NO 47
[Under the replacement awards the employees are required to provide further service
after the acquisition date, and vesting period has not been completed under the acquiree’s
award] acquirer A Ltd. issues a replacement award under a business combination
transaction, the market based measurement of which under Ind As 102 is ` 10 million The
employees are required to render 2 years service after business combination to be
entitled to the awards. The original award of acquiree has a market based measure of ` 9
million on the date of acquisition, and a vesting period of 5 years of which the employees
have completed 2 years only. Should the additional obligation be treated as liability
assumed in a business combination?

QUESTION NO 48
Green Ltd acquired Pollution Ltd. as a part of the arrangement Green Ltd had to replace the
Pollution Ltd’s existing equity-settled award. The original awards speciy a vesting period of five
years. At the acquisition date, Pollution Ltd employees have already rendered two years of
service.

As required, Green Ltd replaced the original awards with its own share-based payment awards
(replacement award). Under the replacement awards, the vesting period is reduced to 2 year
(from the acquisition date)

The value (market-based measure) of the awards at the acquisition date are as follows:
 Original awards : INR 500
 Replacement awards: INR 600.
As of the acquisition date, all awards are expected to vest.

CONCEPT 12: NON-REPLACEMENT SHARE BASED PAYMENTS AWARDS

The acquiree may have outstanding share-based payment transactions that the acquirer
does not exchange for its share-based payment transactions. If vested, those acquiree
share-based payment transactions are part of the non-controlling interest in the acquiree
and are measured at their market-based measure. If unvested, they are measured at their
market-based measure as if the acquisition date were the grant date in accordance with
paragraphs 19 and 30.
The market-based measure of unvested share-based payment transactions is allocated to
the non- controlling interest on the basis of the ratio of the portion of the vesting period
completed to the greater of the total vesting period and the original vesting period of the
share-based payment transaction. The balance is allocated to post-combination service.
The above means that the acquiree’s existing award will be settled in its own shares and
the consequential shareholders will become the Non-controlling shareholders. The above
principles can be summarized as follows:
Vested shares-
• the value credited to Share based payment reserve is classified as NCI. Unvested-
• Pre-combination period is considered as a part of NCI
• Post-combination period- is recorded as employee cost and the credit forms part of
the NCI in the balance sheet.
QUESTION 49
P a real estate company acquires Q another construction company which has
an existing equity settled share based payment scheme. The awards vest
after 5 years of employee service. At the acquisition date, Company Q’s
employees have rendered 2 years of service. None of the award are vested at
the acquisition date. P did not replace the existing share-based payment
scheme but reduced the remaining vesting period from 3 years to 2 year.
Company P determines that the market-based measure of the award at the
acquisition date is INR 500 (based on measurement principles and conditions
at the acquisition date as per Ind AS 102).

CONCEPT 13: PURCHASE CONSIDERATION PAID IN OTHER ASSETS

QUESTION NO 50
X Ltd. acquired Y Ltd. by transfer of its retail division (fair value of which is ` 360 million) and
10,00,000 equity shares to the previous owners of Y Ltd. Market price of equity share of
X Ltd. (par value ` 10 each) as on the date of acquisition was ` 350 per share. It was
decided to pay the purchase consideration to the liquidator of y Ltd.

Assets and liabilities of retail segment of X Ltd. (Amount in ` million)

Carrying amount Acquisition date fair value

Equipment 120 130
Inventories 120 150
Receivables 110 110
Trade payables 30 30
As on the acquisition date assets and liabilities of Y Ltd. were as follows (Amount in `
million).

Carrying amount Acquisition date fair value

Land and Building 30 50
Plant and machinery 500 600
Equipment 20 10
Inventories 100 80
Receivables 100 80
Cash and Cash Equivalents 10 10
Assets 760 830
Loans 100 100
Trade Payables 30 30
Liabilities 130 130
Net Assets 630 700

Find out purchase consideration and goodwill on business combination. Show accounting
entry of acquirer for business combination.

QUESTION NO 51

AX Ltd. and BX Ltd. amalgamated on and from 1st January 2012. A new Company ABX Ltd. was
formed to take over the businesses of the existing companies.

Summarized Balance Sheet as on 31-12-2012

INR in '000

ASSETS Note No. AX Ltd BX Ltd

Non-current assets

Property, Plant and Equipment 8,500 7,500

Financial assets

Investments 1,050 550

Current assets

Inventory 1,250 2,750

Trade receivable 1,800 4,000

Cash and Cash equivalent 450 400
13050 15200
EQUITY AND LIABILITIES

Equity

Equity share capital (of face 6,000 7,000

value of INR 10 each)

Other equity 3,050 2,700

Liabilities

Non-current liabilities

Financial liabilities

Borrowings 3,000 4,000

Current liabilities

Trade payable 1,000 1,500

13,050 15,200
ABX Ltd. issued requisite number of shares to discharge the claims of the equity shareholders of
the transferor companies.

Prepare a note showing purchase consideration and discharge thereof and draft the Balance
Sheet of ABX Ltd:

Assuming BX ltd is a larger entity and their management will take the control of the entity.
The fair value of net assets of AX and BX limited are as follows:

ASSETS AX LTD. BX LTD.

FIXED ASSETS 9500 10,000
INVENTORY 1300 2,900
FAIR VALUE OF BUSINESS 11000 14,000

QUESTION NO 52
A Ltd. acquired the business of B Ltd. on 1 April. 2015 on which date the acquiree had the
following assets and liabilities (` million):

Assets Amount liabilities Amount

Property, plant and Equipment at 100 8% Debentures 100
cost less depreciation
Assets under operating Lease at 100 Trade creditors (after setting 30
cost less depreciation off 25 due to A Ltd.)
Investments in Equity Shares 30 Provision for Retirement 30
Benefit of Employees
(Reassessed under Ind As 19
at 50)
Trade Receivables 40 24 Deferred Tax Liability 20
Less 40% doubtful debts 16
B Ltd. guarantees that loss will not
exceed 25%
Inventories 40
Short-term investments 30
Cash & Cash Equivalents 20
Total 344 Total 180
Other information:

(i) B Ltd. has not accounted for self-developed brand name which is valued at 20
million and customer list which is valued at ` 10 million;

(ii) It has not recognised a warranty obligation as the company did not consider
that there will be cash outflow- the fair value of the obligation is ` 2 million. B
Ltd. guarantees that loss arising out of warranty obligation will not exceed ` 1
million.

Also b Ltd. guarantees collection of 75% of trade receivables.

(iii) A Ltd. has agreed to pay ` 5 million to Mr. B, the major shareholder and
managing director of B Ltd., for putting his efforts to integrate the functioning
of A Ltd. and B Ltd. in post-combination period extending to maximum one year.

There is no employment contract with Mr. B.

(iv) It was agreed that investment in equity shares, short-term investments and
cash and cash equivalents will be taken over by Mr. B of B Ltd. at Balance sheet
value which is the current market value.

(v) Fair value of property, plant and Equipment : ` 220 million;

(vi) A Ltd. agrees to pay upfront ` 250 million and additional ` 50 million to previous
owners of B Ltd. During the first year of acquisition if 80% of the costumers
are retained. The company expects that it is almost certain to retain existing
customers of B Ltd.

Prepare a worksheet detailing out identifiable assets and liabilities and goodwill.

CONCEPT 14: DEFERRED TAXES IN RELATION TO BUSINESS

ACQUISITION

As per the requirement of Ind As 12, no deferred tax consequence should be recorded on
initial recognition of deferred tax except assets and liabilities acquired during business
combination. Accordingly, the acquirer shall recognize and measure a deferred tax asset or
liability arising From the assets acquired and liabilities assumed in a business combination in
accordance with Ind AS 12, Income Taxes.
The acquirer shall account for the potential tax effects of temporary differences and carry
forwards of an acuiree that exist at the acquisition date or arise as a result of the acquisition
in accordance with Ind AS 12.

QUESTION 53
On 1.1.2020 entity H acquired 100% share capital of entity S for 15,00,000. The
book values and fair values of the identifiable assets and liabilities of entity S
at the date of acquisition are set out below, together with tax bases in entity S’
tax jurisdictions. Any goodwill arising on the acquisition is not deductible for
tax purpose. The tax rates in entity H and entity S jurisdiction are 30% and
40% respectively.

Acquisitions Book values Tax base Fair values

Land & buildings 600 500 700
Plant & machinery 250 200 270
Inventory 100 100 80
Accounts receivable 150 150 150
Cash and cash Equivalents 130 130 130

Accounts Payable 160 160 160

Retirement benefit obligations 100 - 100
You are required to compute deferred tax on acquisition of business….also
compute goodwill on acquisition of business.

CONCEPT 15: LEASE CONTRACTS ON ACQUISITION DATE

ACQUIREE IS A LESSEE
 The acquirer shall recognise right-of-use assets and lease liabilities for leases
identified in accordance with Ind AS 116.
 The acquirer is not required to recognise right-of-use assets and lease liabilities for:
(a) leases for which the lease term ends within 12 months of the acquisition date; or
(b) leases for which the underlying asset is of low value.
 The acquirer shall measure the lease liability at the present value of the remaining
lease payments as if the acquired lease were a new lease at the acquisition date.
 The acquirer shall measure the right-of-use asset at the same amount as the lease
liability, adjusted to reflect favourable or unfavourable terms of the lease when
compared with market terms.
ACQUIREE IS A LESSOR
In measuring the acquisition-date fair value of an asset, the acquirer shall take into account the terms of
the lease. The acquirer does not recognise a separate asset or liability if the terms of an operating lease
are either favourable or unfavourable when compared with market terms.

CONCEPT 16: ASSETS HELD FOR SALE WITH ACQUIREE ON

ACQUISITION DATE

The acquirer shall measure an acquired non-current asset (or disposal group) that is classified as held for
sale at the acquisition date in accordance with Ind AS 105, Non-current Assets Held for Sale and
Discontinued Operations, at fair value less costs to sell in accordance with that Ind AS.
UNIT 3: ACQUISITION METHOD
(IF BUSINESS COMBINATION IS IN THE FORM OF
ACQUISITION OF SIGNIFICANT EQUITY INTEREST)

NON CONTROLLING INTEREST IN AN ACQUIREE

Ind AS 103 allows the acquirer to measure a non-controlling interest in the acquiree at its
fair value at the acquisition date. Sometimes an acquirer will be able to measure the
acquisition-date fair value of a non-controlling interest on the basis of a quoted price in an
active market for the equity shares (ie those not held by the acquirer). In other situations,
however, a quoted price in an active market for the equity shares will not be available. In
those situations, the acquirer would measure the fair value of the non -controlling interest
using other valuation techniques.

The fair values of the acquirer's interest in the acquiree and the non -controlling interest on
a per-share basis might differ. The main difference is likely to be the inclusion of a control
premium in the per-share fair value of the acquirer's interest in the acquiree or, conversely,
the inclusion of a discount for lack of control (also referred to as a non-controlling interest
discount) in the per-share fair value of the non-controlling interest if market participants would
take into account such a premium or discount when pricing the non-controlling interest.

QUESTION NO 54 (FAIR VALUE METHOD)

A Limited acquires 80% of B Limited at a valuation of ` 150.00 crores (excluding

control premium) by payment in cash of ` 120.00 crores. The value of non-
controlling interest is ` 30 cores. Value of net assets is 130 crores.

QUESTION NO 55 (PROPORTIONATE SHARE METHOD)

WITH the help of given information as in above, Assume that the value of recognized
amount of subsidiary‘s identifiable net assets is ` 130.00 crores, as determined in
accordance with Ind 103.

QUESTION NO 56
In the aforesaid example, if the consideration is ` 90

QUESTION NO 57 GOODWILL RECOGNISED DEPENDS ON HOW NCI IS

MEASURED.

Ram Ltd. acquires shyam Ltd. by purchasing 60% of its equity for ` 15 lakh in cash. The
fair value of non – controlling interest is determined as ` 10 lakh. The net aggregate value
of identifiable assets and liabilities, as measured in accordance with Ind 103 is determined
as ` 5 lakh.
How much goodwill is recognized based on two measurements based of non- controlling
interest (NCI)?

QUESTION NO 58 GAIN ON A BARGAIN PURCHASE WHEN NCI IS MEASURED

AT FAIR VALUE

Seeta Ltd. acquires Geeta Ltd. purchasing 70% of its equity for ` 15 lakh in cash. The fair
value of NCI is determined as ` 6.9 lakh. Management have elected to adopt full goodwill
method and to measure NCI at fair value. The net aggregate value of identifiable assets
and liabilities, as measured in accordance with the standard is determined as ` 22 lakh.
(Tax consequences being ignored).

QUESTION NO 59
GAIN ON A BARGAIN PURCHASE WHEN NCI IS MEASURED AT PROPORTIONATE
SHARE OF IDENTIFIABLE NET ASSETS.

Continuing the facts as stated in the above illustration, except, that seeta. Ltd. chooses to
measure NCI using a proportionate share method for this business combination. (Tax
consequences have been ignored).

QUESTION NO 60
Measurement of goodwill there is no non-controlling interest

X Ltd. acquired Y Ltd. on payment of ` 25 crore cash and transferring a retail business,
the fair value of which is ` 15 crore. Assets acquired and liabilities assumed in the
acquisition are ` 36 crore.

Find out the Goodwill.

QUESTION NO 61
Measurement of Goodwill when there is non- non-controlling interest

Raja Ltd. purchased 60% share of Ram Ltd. paying ` 525 lakh. Number of issued capital of
Ram Ltd. is lakh. Fair value of identifiable assets of Ram of Ram Ltd. is ` 640 lakh and that
of liabilities is ` 50 lakh. As on the date of acquisition, market price share of Ram Ltd. is `
775. Find out the value of goodwill.
QUESTION 62

Company A acquired 90% equity interest in Company B on April 1, 2010 for a

consideration of 85 crores in a distress sale. Company B did not have any
instrument recognized in equity. The company appointed a registered value with
whose assistance. The company valued the fair value of NCI and the fair value
identifiable net assets at 15 crores and 100 crores respectively.
Required
Find the value at which NCI has to be shown in the financial statements by both
methods.

QUESTION 63

Company A acquires 70 percent of Company S on January 1, 2011 for consideration

transferred of 5 million. Company A intends to recognize the NCI at
proportionate share of fair value of identifiable net assets. With the assistance of
a suitable qualified valuation professional.

A measures the identifiable net assets of B at 10 million. A performs a review and

determines that the business combination did not include any transactions that
should be accounted for separately from the business combination.
Required
State whether the procedures followed by A and the resulting measurements are
appropriate or not. Also calculate the bargain Purcahse gain in the process.

QUESTION 64

Company A acquired 90% equity interest in Company B on 1st April, 20X1 for a
consideration of ` 85 crores in a distress sale. Company B did not have any instrument
recognised in equity. The Company appointed a registered valuer with whose assistance,
the Company valued the fair value of NCI and the fair value identifiable net assets
at ` 15 crores and ` 100 crores respectively.
Find the value at which NCI has to be shown in the financial statements
SOLUTION

In this case Company a has the option to measure NCI as follows:

 Option 1: Measure NCI at fair value l.e., ` 15 crores as derived by the valuer;
 Option 2: Measure NCI as proportion of fair value of identifiable net assets i.e. ,` 10
crores (100 crores x 10%)

QUESTION 65

Company A acquires 70 percent of Company S on 1st January, 20X1 for consideration

transferred of ` 5 million. Company A intends to recognise the NCI at proportionate
share of fair value of identifiable net assets. With the assistance of a suitably
qualified valuation professional, A measures the identifiable net assets of B at ` 10
million. A performs a review and determines that the business combination did not
include any transactions that should be accounted for separately from the business
combination.
State whether the procedures followed by A and the resulting measurements are
appropriate or not. Also calculate the bargain purchase gain in the process.

SOLUTION
 The amount of B’s identifiable net assets exceeds the fair value of the
consideration transferred plus the fair value of the NCI in B, resulting in an
initial indication of a gain on a bargain purchase. Accordingly, A reviews the
procedures it used to identify and measure the identifiable net assets
acquired, to measure the fair value of both the NCI and the consideration
transferred, and to identify transactions that were not part of the business
combination.

 Following that review, A concludes that the procedures followed and the
resulting measurements were appropriate.

Identifiable net assets 1,00,00,000

Less: Consideration transferred (50,00,000)

NCI (10 million x 30%) (30,00,000)

Gain on bargain purchase 20,00,000

QUESTION 66 POTENTIAL VOTING RIGHTS

Company P Ltd., a manufacturer of textile products, acquires 40,000 of the equity shares
of Company X (a manufacturer of complementary products) out of 1,00,000 shares in issue
As part of the same agreement, Company P purchases an option to acquire an additional
25,000 shares. The option is exercisable at any time in the next 12 months. The exercise
price includes a small premium to the market price at the market price at the transaction
date.

After the above transaction, the shareholdings of Company P’s two other original
shareholders are 35,000 and 25,000 Each of these shareholders also has currently
exercisable options to acquire 2,000 additional shares. Asseses whether control is
acquired by Company P.

Solution

In assessing whether it has obtained control over Company X, Company P should consider
not only the 40,000 shares it owns but also its option to acquire another 25,000 shares (a
so-called potential voting right). In this assessment, the specific terms and conditions of
the option agreement and other factors are considered:

 The options are currently exercisable and there are no other required conditions
before such option can be exercised
 If exercised, these options would increase Company P’S ownership to a controlling
interest of over 50% before considering other shareholders’ potential voting rights
out of a total of 1,25,000 shares)
 although other shareholders also have potential voting rights, if all optional are
exercised Company P will own a majority (65,000 shares out of 1,29,000 shares)
 the premium included in the exercise price makes the option out-of the money.
However, the fact that the premium is small and the option could confer majority
ownership indicates that the potential voting rights have economic substance.

By considering all the above factors, Company P concludes that with the acquisition of the
40,000 shares together with the potential voting rights it has obtained control of
Company X.
QUESTION 67: BUSINESS COMBINATION ACHIEVED BY CONTRACT ALONE
Sita Ltd and Beta Ltd decides to combine together for forming a Dual Listed Corporation
(DLC). As per their shareholder’s agreement, both the parties will retain original listing
and Board of DLC will be comprised of 10 members out of which 6 members will be of Sita
Ltd and remaining 4 board members will be of Beta Ltd.
The fair value of Sita Ltd is ₹ 100 crores and fair value of Beta Ltd is ₹ 80 crores. The
fair value of net identifiable assets of Beta Limited is ₹ 70 crores. Assume non-controlling
Interest (NCI) to be measured at fair value.
You are required to determine the goodwill to be recognised on acquisition.
Solution
Sita Ltd has more Board members and thereby have majority control in DLC. Therefore,
Sita Ltd is identified as acquirer and Beta Ltd as acquiree.
Since no consideration has been transferred, the goodwill needs to be calculated as the
difference of Part A and Part B:
Part A:
1) Consideration paid by Acquirer. - Nil
2) Controlling Interest in Acquiree – ₹ 80 crores
3) Acquirer’s previously held interest - Nil
Part B:
Fair value of net identifiable asset – ₹ 70 crores
Goodwill is recognised as ₹ 10 crores (80 – 70 crores) in business combination achieved
through contract alone when NCI is measured at fair value.

QUESTION 68
On 1st January, 20X1, A Ltd. acquires 80 per cent of the equity interests of B Ltd. in
exchange for cash of ₹ 15 crore. The former owners of B Ltd. were required to dispose off
their investments in B Ltd. by a specified date, and accordingly they did not have
sufficient time to find potential buyers. A qualified valuation professional hired by the
management of A Ltd. measures the identifiable net assets acquired, in accordance with
the requirements of Ind AS 103, at ₹ 20 crore and the fair value of the 20 per cent non-
controlling interest in B Ltd. at ₹ 4.2 crore. How should A Ltd. recognise the above bargain
purchase?
Solution
The amount of B Ltd.'s identifiable net assets i.e., ₹ 20 crore exceeds the fair value of
the consideration transferred plus the fair value of the non-controlling interest in B Ltd.
i.e. ₹ 19.2 crore. Therefore, A Ltd. should review the procedures it used to identify and
measure the net assets acquired and the fair value of non-controlling interest in B Ltd. and
the consideration transferred. After the review, A Ltd. decides that the procedures and
resulting measures were appropriate.
A Ltd. measures the gain on its purchase of the 80 per cent interest at ₹ 80 lakh, as the
difference between the amount of the identifiable net assets which is ₹ 20 crore and the
sum of purchase consideration and fair value of non-controlling interest, which is ₹ 19.2
crore (cash consideration of ₹ 15 crore and fair value of non-controlling interest of ₹ 4.2
crore).
Assuming there exists clear evidence of the underlying reasons for classifying the
business combination as a bargain purchase, the gain on bargain purchase of 80 per cent
interest calculated at ₹ 80 lakh, which will be recognised in other comprehensive income on
the acquisition date and accumulated the same in equity as capital reserve.
If the acquirer chose to measure the non-controlling interest in B Ltd. on the basis of its
proportionate share of identifiable net assets of the acquiree, the recognised amount of
the non- controlling interest would be ₹ 4 crore (₹ 20 crore × 0.20). The gain on the
bargain purchase then would be ₹ 1 crore (₹ 20 crore – (₹ 15 crore + ₹ 4 crore)).
ADDITIONAL CONCEPTS TO BE CONSIDERED UNDER UNIT 2

CONCEPT 1: STEP BY STEP ACQUISITION

An acquirer sometimes obtains control of an acquiree in which it held an equity interest

immediately before the acquisition date.

Example:

On 31st December 2011, Entity A holds a 35 per cent non-controlling equity interest in
Entity B. On that date, Entity A purchases an additional 40 per cent interest in Entity B,
which gives it control of Entity B. This transaction is referred as a business combin ation
achieved in stages, sometime also referred to as a step acquisition.

In a business combination achieved in stages, the acquirer shall remeasure its previously
held equity interest in the acquiree at its acquisition-date fair value and recognise the
resulting gain or loss, if any, in profit or loss. In prior reporting periods, the acquirer may
have recognised changes in the value of its equity interest in the acquiree in other
comprehensive income. As per Ind AS 109 or Ind AS 27, an entity can elect to measure
investments in equity instruments at fair value through other comprehensive income.
However, once elected all gains and losses on that investment even on sale is recognized in
OCI. Therefore, if the investment is designated as fair value through O CI, the resulting
gain or loss, if any, will be recognized in OCI.

QUESTION 69
STEP ACQUISITION WHEN CONTROL IS OBTAINED.

Entity D has a 40% interest in entity E. the carrying value of the equity interest. Which
has been accounted for as an associate in accordance with Ind As 28 is ` 40 lakh. Entity D
purchases the remaining 60% interest in entity E for ` 600 lakh in cash. The fair value of
the 40% previously held equity interest is determined to be ` 400 lakh., the net aggregate
value of the identifiable assets and liabilities measured in accordance with Ind AS 103 is
determined to be identifiable ` 880 lakh. Tax consequences have been ignored. How entity
D account for the business combination?

QUESTION 70
Company A and Company B are in power business. Company A holds 25% of equity share of
Company B. On November 1, Company A obtains control of Company B when it acquires of
further 65% of Company B’s shares, thereby resulting ijn a total holding of 90%. The
acquisition had the following features.

Consideration: Company A transfers cash of 59,00,000 and issues 1,00,000 shares

of November 1. The market price of Company A’s shares on the date of issues is 10 per
share. The equity shares issued as per this transaction will comprise 5% of the post-
acquisition equity capital of Company A.

Contingent Consideration: Company a agrees to pay additional consideration of 7,00,000

if the comulative profits of Company B exceed 70,00,000 over the next two years. At
the acquisition date, it is not considered probable that the extra consideration will be
paid. The fair value of the contingent consideration is determined to be 3,00,000 at the
acquisition date.

Transaction costs: Company A pays acquisition-related costs of 1,00,000.

Non-controlling interests (NCI): The fair value of the NCI is determined to be ₹

7,50,000 at the acquisition date based on market prices. Company A elects to measure
non-controlling interest at fair value for this transaction.
Previously held non-controlling equity interest: Company A has owned 25% of the shares
in Company B for several years. At 1st November, the investment is included in Company
A’s consolidated balance sheets at ₹ 6,00,000, accounted for using the equity method; the
fair value is ₹ 20,00,000.
The fair value of Company B’s net identifiable assets at 1st November is ₹ 60,00,000,
determined in accordance with Ind AS 103.
Determine the accounting under acquisition method for the business combination by
Company A.

QUESTION 71

On 1st April, 20X1, PQR Ltd. acquired 30% of the voting ordinary shares of XYZ Ltd. for
` 8,000 crore. PQR Ltd. accounts its investment in XYZ Ltd. using equity method as
prescribed under Ind AS 28. At 31st March, 20X2, PQR Ltd. recognised its share of
the net asset changes of XYZ Ltd. using equity accounting as follows:
(` in crore)
Share of profit or loss 700
Share of exchange difference in OCI 100
Share of revaluation reserve of PPE in OCI 50
The carrying amount of the investment in the associate on 31 March, 20X2 was
st

therefore ` 8,850 crore (8,000 + 700 + 100 + 50).

On 1st April, 20X2, PQR Ltd. acquired the remaining 70% of XYZ Ltd. for cash ` 25,000
crore. The following additional information is relevant at that date:

(` in crore)
Fair value of the 30% interest already owned 9,000
Fair value of XYZ's identifiable net assets 30,000
How should such business combination be accounted for?

Non-controlling interests (NCI): The fair value of the NCI is determined to be 7,50,000
at the acquisition date based on market price. Company A elects to measure non-
controlling interest at fair value for this transaction.

Previously held non-controlling equity interest: Company A has owned 25% of the shares in
Company B for several years. At November 1, the investment is included in Company A’s
consolidated statement of financial position at 6,00,000, accounted for using the equity
method; the fair value is 20,00,000.

The fair value of Company B’s net indentifiable assets at November 1 is 60,00,000,
determined in accordance with IND AS 103.

Required

Dertermine the accounting under acquisition method for the business combination by
Company A.

QUESTION NO 72

A Ltd. holds 30% shares in B Ltd. which was acquired on 15.7.2012. In separate financial
statements, the investment in associate is carried at cost ` 200 million. In the
consolidated financial statements as at 31 March, 2015, the investment is recognised
applying equity method accounting at ` 300 million. Changes in equity were recognized as
FVOCI.

On 1 April, 2015, A Ltd. acquired another 30% stake of B Ltd. for ` 350 million.

AS on the date of acquisition, fair value of identifiable assets and liabilities of B Ltd were
determined as ` 1200 million and ` 200 million respectively. Deferred tax liability has been
reassessed based on acquisition date fair value of assets and liabilities at ` 40 million.

Market price of previously held 30% interest is ` 330 million.

How should A Ltd. recognise the acquisition of controlling stake in B Ltd.?

CONCEPT 2: CONTROL IN BUSINESS WITHOUT ACQUISITION OF SHARES

QUESTION NO 73
X holds 46% of 100 million equity shares issued by Y Ltd. This is recognised as investment
in associate in the separate financial statements at cost of ` 4600 million. In the
consolidated financial statements, the investment is accounted for applying equity method
accounting at ` 6300 million. The difference of 2300 million has been recognised in the
consolidate profit and loss as share of profit form the associate. Fair value of identifiable
assets and liabilities of Y Ltd. as on 1.4.2015: Assets (other than cash and cash
equivalents) ` 14000 million, Cash and cash equivalents ` 1800 million, Liabilities ` 2000
million.

As on 1 April 2015, Y Ltd. repurchases 10 million equity shares @ ` 160 share (i.e for `
1600 million)

This repurchase gives controlling interest to X Ltd.

How should the company recognise the impact of gaining controlling interest in Y Ltd.?
UNIT 4: COMMON CONTROL TRANSACTIONS
(APPENDIX C)
Common control business combinations will include transactions, such as transfer of subsidiaries
or businesses, between entities within a group.

The extent of non-controlling interests in each of the combining entities before and after
the business combination is not relevant to determining whether the combination involves
entities under common control. This is because a partially-owned subsidiary is nevertheless
under the control of the parent entity.

An entity can be controlled by an individual, or by a group of individuals acting together

under a contractual arrangement, and that individual or group of individuals may not be
subject to the financial reporting requirements of Ind AS. Therefore, it is not necessary
for combining entities to be included as part of the same consolidated financial statements
for a business combination to be regarded as one having entities under common control.

A group of individuals are regarded as controlling an entity when, as a result of contractual

arrangements, they collectively have the power to govern its financial and operating policies so as
to obtain benefits from its activities, and that ultimate collective power is not transitory.

Common control combinations are the most frequent. Broadly, these are transactions in which
an entity obtains control of a business (hence a business combination) but both combining
parties are ultimately controlled by the same party or parties both before and after the
combination. These combinations often occur as a result of a group reorganisation in which the
direct ownership of subsidiaries changes but the ultimate parent remains the same. However,
such combinations can also occur in other ways and careful analysis and judgement are
sometimes required to assess whether some combinations are covered by the definition (and
the scope exclusion). In particular:

 an assessment is required as to whether common control is 'transitory' (if so, the

combination is not a common control combination and Ind AS 103 applies). The term
transitory is not explained in the standard. In our view it is intended to ensure that
Ind AS 103 is applied when a transaction that will lead to a substantive change in
control is structured such that, for a brief period before and after the combination,
the entity to be acquired/sold is under common control. However, common control
should not be considered transitory simply because a combination is carried out in
contemplation of an initial public offering or sale of combined entities.

 when a group of two or more individuals has control before and after the transaction, an
assessment is needed as to whether they exercise control collectively as a result of a
contractual agreement.
Examples of common control transaction

 Merger between fellow subsidiaries

 Merger of subsidiary with parent

 Acquisition of an entity from an entity within the same group

 Bringing together entities under common control in a corporate legal structure.

QUESTION 74

Company X, the ultimate parent of a large number of subsidiaries, reorganizes the retail
segment of its business to consolidate all of its retail businesses in a single entity. Under
the reorganization, Company Z ( a subsidiary and the biggest retail company in the group)
acquires Company X’s shareholdings in its one operating subsidiary, Company Y by issuing it
sown shares to Company X. After the transaction, Company X will directly control the
operating and financial policies of Companies Y.

Company X

Company Z Company M Other Subsidies

Company Y

Company X

Other Subs Company Z

Company Y
Solution

In this situation, Company Z pays consideration to Company X to obtain control of

Company Y. The transaction meets the definition of a business combination. Prior to the
reorganization, each of the parties are controlled by Company X. After the
reorganization, although Company Y are now owned by Company Z, all two companies are
still ultimately owned and controlled by Company X. From the perspective of Company X,
there has been no change as a result of the r eorganization. This transaction therefore
meets the definition of a common control combination and is within the scope of Ind AS
103.
QUESTION 75

ABC Ltd. and XYZ Ltd. are owned by four shareholders B, C, D and E, each of whom holds
25% of the shares in each company. Shareholders B, C and D have entered into a
shareholders' agreement in terms of governance of ABC Ltd. and XYZ Ltd. due to which
they exercise joint control.

Whether ABC Ltd. and XYZ Ltd. are under common control?

B C B D
C E C
E

75% 75%

25% XYZ 25%

ABC
Ltd. LTd.

Solution

Appendix C to Ind AS 103 defines common control business combination as a business

combination involving entities or businesses in which all the combining entities or
businesses are ultimately controlled by the same party or parties both before and after
the business combination, and that control is not transitory.
In the instant case, both ABC Ltd. and XYZ Ltd. are jointly controlled by group of
individuals (B, C and D) as a result of contractual arrangement. Therefore, in the
current scenario, ABC Ltd. and XYZ Ltd. are considered to be under common control.

QUESTION 76

ABC Ltd. and XYZ Ltd. are owned by four shareholders B, C, D and E, each of whom holds
25% of the shares in each company. However, there are no agreements between any of
the shareholders that they will exercise their voting power jointly.

Whether ABC Ltd. and XYZ Ltd. are under common control?
Solution

Appendix C to Ind AS 103 defines ‘Common control business combination’ as business

combination involving entities or businesses in which all the combining entities or
businesses are ultimately controlled by the same party or parties both before and after
the business combination, and that control is not transitory.
In the present case, there is no contractual arrangement between the shareholders who
exercise control collectively over either company. Thus, ABC Ltd. and XYZ Ltd. are not
considered to be under common control even if there is an established pattern of voting
together.

METHOD OF ACCOUNTING FOR COMMON CONTROL BUSINESS COMBINATIONS

Business combinations involving entities or businesses under common control shall be accounted
for using the pooling of interest method.

The pooling of interest method is considered to involve the following:

(i) The assets and liabilities of the combining entities are reflected at their carrying
amounts.
(ii) No adjustments are made to reflect fair values, or recognize any new assets or liabilities.
The only adjustments that are made are to harmonise accounting policies.

(iii) The financial information in the financial statements in respect of prior periods should
be restated as if the business combination had occurred from the beginning of the
earliest period presented in the financial statements, irrespective of the actual date of
the combination. However, if business combination had occurred after that date, the
prior period information shall be restated only from that date.

The consideration for the business combination may consist of securities, cash or other assets.
Securities shall be recorded at nominal value. In determining the value of the consideration,
assets other than cash shall be considered at their fair values.

The balance of the retained earnings appearing in the financial statements of the transferor is
aggregated with the corresponding balance appearing in the financial statements of the
transferee. Alternatively, it is transferred to General Reserve, if any.
The identity of the reserves shall be preserved and shall appear in the financial statements
of the transferee in the same form in which they appeared in the financial statements of
the transferor. Thus, for example, the General Reserve of the tr ansferor entity becomes
the General Reserve of the transferee, the Capital Reserve of the transferor becomes the
Capital Reserve of the transferee and the Revaluation Reserve of the transferor becomes
the Revaluation Reserve of the transferee. As a result of preserving the identity, reserves
which are available for distribution as dividend before the business combination would also
be available for distribution as dividend after the business combination.
The difference, if any, between the amount recorded as share capital issued plus any additional
consideration in the form of cash or other assets and the amount of share capital of the
transferor shall be transferred to capital reserve and should be presented separately from
other capital reserves with disclosure of its nature and purpose in the notes.
The acid test in assessing common control transaction is that before and after the
reorganization the entity should be controlled by the same shareholders.

QUESTION NO 77

AX Ltd. and BX Ltd. amalgamated on and from 1st January 2012. A new Company ABX Ltd. was
formed to take over the businesses of the existing companies.

Summarized Balance Sheet as on 31-12-2012

INR in '000

ASSETS Note No. AX Ltd BX Ltd

Non-current assets

Property, Plant and Equipment 8,500 7,500

Financial assets

Investments 1,050 550

Current assets

Inventory 1,250 2,750

Trade receivable 1,800 4,000

Cash and Cash equivalent 450 400
13050 15200
EQUITY AND LIABILITIES

Equity

Equity share capital (of face 6,000 7,000

value of INR 10 each)

Other equity 3,050 2,700

Liabilities

Non-current liabilities

Financial liabilities

Borrowings 3,000 4,000

Current liabilities
Trade payable 1,000 1,500
13,050 15,200
ABX Ltd. issued requisite number of shares to discharge the claims of the equity shareholders of
the transferor companies.

Prepare a note showing purchase consideration and discharge thereof and draft the Balance
Sheet of ABX Ltd:

Assuming that both the entities are under common control

QUESTION NO 78
Maxi Mini Ltd. has 2 divisions - Maxi and Mini. The draft information of assets and liabilities as
at 31st October, 2012 was as under:

Maxi Mini division Total (in

division crores)
Fixed assets:

Cost 600 300 900

Depreciation 500 100 600

W.D.V. (A) 100 200 300

Net current assets:

Current assets 400 300 700

Less: Current liabilities 100 100 200

(B) 300 200 500

Total (A+B) 400 400 800

Financed By:

Loan Funds (A) - 100 100

(secured by a charge on fixed assets

Own funds:

Equity capital 50
(Fully paid up 10 per share)

Reserves and surplus 650

(B) ? ? 700

Total (A+B) 400 400 800

It is decided to form a new company Mini Ltd. to take over the assets and liabilities ofMini
division.

Accordingly, Mini Ltd. was incorporated to take over at Balance Sheet figures, the assets
and liabilities of that division. Mini Ltd. is to allot 5 crore equity shares of r 10 each in the
company to the members of Maxi Mini Ltd. in full settlement of the consideration. The
members of Maxi Mini Ltd. are therefore to become members of Mini Ltd. as well without
having to make any further investment.

(a) You are asked to pass journal entries in relation to the above in the books of Maxi Mini
Ltd. and Mini Ltd. Also show the Balance Sheets of the 2 companies as on the morning of
1st November, 20X2, showing corresponding previous year's figures.
(b) The directors of the 2 companies ask you to find out the net asset value of equity shares
pre and post demerger.
(c) Comment on the impact of demerger on "shareholders wealth".

QUESTION NO 79
Enterprise Ltd. Has 2 divisions Laptops and Mobiles. Division Laptops has been making constant
profits while division Mobiles has been invariably suffering losses.

On 31st March, 2012, the division – wise draft extract of the Balance Sheet was:

( in crores)

Laptops Mobiles Total

Fixed assets cost 250 500 750

Depreciation 225 500 (625)

Net Assets (A) 25 100 125

Current assets: 200 500 700

Less Current liabilities (2 (400) (425)

(B) 175 100 275

Total (A+B) 200 200 400

Financed by:

Loan Funds - 300 300

Capital: Equity R 10 each 25 - 25

Surplus 175 100 75

200 200 400

Division Mobiles along with its assets and liabilities was sold for 25 crores to Turnaround Ltd.
A new company, who allotted I crore equity shares of Rs 10 each at a premium of Rs 15 per
share to the members of Enterprise Ltd. In full settlement of the consideration , in proportion
to their shareholding in the company. One of the members of the Enterprise Ltd was holding
52%. Shareholding of the Company.’
Assuming that there are no other transactions, you are asked to:

(i) Pass journal entries in the books of Enterprise ltd.

(ii) Prepare the Balance Sheet of Enterprise Ltd. After the entries in (i)
(iii) Prepare the Balance Sheet of Turnaround Ltd.
UNIT 5: REVERSE ACQUISITION

A reverse acquisition occurs when the entity that issues securities (the legal acquirer)
is identified as the acquiree for accounting purposes on the basis of the guidance
above. The entity whose equity interests are acquired (the legal acquiree) must be t he
acquirer for accounting purposes for the transaction to be considered a reverse
acquisition. For example, reverse acquisitions sometimes occur when a private operating
entity wants to become a public entity but does not want to register its equity share s.
To accomplish that, the private entity will arrange for a public entity to acquire its
equity interests in exchange for the equity interests of the public entity. In this
example, the public entity is the legal acquirer because it issued its equity interests,
and the private entity is the legal acquireebecause its equity interests were acquired.
However, application of the guidance given in above paragraph results in identifying:

a) the public entity as the acquireefor accounting purposes (the accounting acquiree);
and
b) the private entity as the acquirer for accounting purposes (the accounting
acquirer).

The accounting acquiree must meet the definition of a business for the transaction to be
accounted for as a reverse acquisition, and all of the recognition and measurement principles
of Ind AS 103, including the requirement to recognize goodwill, will apply.

QUESTION NO 80

On September 30, 2011 Entity A issue 2.5 shares in exchange for each ordinary share of Entity B.
All of Entity B’s shareholders exchange their shares in Entity B. Therefore, Entity A issues 150
ordinary shares in exchange for all 60 oridnary shares of Entity B.

The fair value of each ordinary share of Entity B at September 30, 2011 is 40. The quoted market
price of Entity A’s ordinary shares at that date is 16.

The fair values of Entity’s A’s identifiable assets and liabilities at September 30, 2011 are the same
as their carrying amounts, except that the fair value of Entity A’s non-current assets at September
30, 2011 is 1,500.

The statements of financial position of Entity A and Entity B immediately before the business
combination are:
Entity A (legal parent Entity B ( legal
accounting acquire) subsidiary, accounting
acquirer)
Current Assets 500 700
Non-current assets 1,300 3,000
Total Assets 1,800 3,700
Current liabilities 300 600
Non-Current liabilities 400 1,100
Total liabilities 700 1,700
Shareholder’s equity
Retained earnings 800 1,400
Issued equity
100 ordinary shares 300
60 ordinary shares 600
Total sahreholders equity 1,100 2,000
Total liabilities and 1,800 3,700
shareholders equity
UNIT 6: IND AS 103 VS AS 14
(NOT RELEVANT FOR EXAMS)

S.No. Basic Ind AS Accounting Standards

1. Goodwill or capital Gain on bargain purchaseis Difference between the

reserve (gain on recognised in CAP.RES. if purchase consideration
bargain purchase) there is and the net assets
sufficient evidence that shows acquired is recorded as
the appropriateness of goodwill or capital
bargain purchase gain. Reserve (presented as
Goodwill is not amortised but equity) as the case may
tested for impairment annually be.
(IND AS 38) Goodwill arising on
Amalgamation is amortized
over its useful
life not exceedingfive
Years unless a longer
period is justified.
There is no specific
guidance on goodwill
Arising on subsidiaries
acquired which are not
amalgamations.
In practice, such
goodwill is not amortized
but tested for
impairment.

Contingent Initially recognized at Period end until Contingent

2.
consideration acquisition date fair value . consideration is included in
 Initially recognized the purchase consideration
at acquisition date as at the date of
fair value amalgamation, if payment is
 Subsequent probable and a reasonable
measurement estimate of the amount can
 Contingent be made. In other cases the
consideration adjustment is recognized in
classified as equity the profit and loss account
is not remeasured. as and when it becomes
 Contingent determinable.
consideration
classified as liability
generally Others:
remeasured at fair
There is no specific
value with changes
at every reporting guidance. In practice. In
settlement with practice, contingent
changes in fair value consideration is recognized
recognized in profit when the contingency is
or loss. resolved.

In-process research  Initially recognized There is no specific

3.
and development at acquisition date guidance.
fair value
 Subsequently
measured in
accordance with Ind
AS 38
Measurement period Ind AS 103 provides for a There is no specific
4.
measurement period after the guidance.
acquisition date for the acquirer
to adjust the provisional
amounts recognized to reflect
the additional information that
existed as at the date of
acquisition.
The measurement period is
limited to one year from the
acquisition date.
Business combination Any equity interest in the If two or more investment
5.
achieved in stages acquiree held by the acquirer are made over a period of
(step acquisition) immediately before the time, the equity of the
obtaining control over the subsidiary at the date of
acquiree is adjusted to investment is generally
acquisition-date fair value. determined on a step-by
Any resulting gain or loss is step basis.
recognized in the profit or loss
Trasactions between Appendix C to Ind AS 103 There is no specific
6.
entities under provides detailed guidance on guidance. In practice, the
common control which is very similar to the determined by the scheme
pooling of interest method as approved through a court
specified by AS 14. order.
ADDITIONAL QUESTIONS TO BE DISCUSSED

QUESTION NO 81 (DISCUSSED IN MTP 1…..Q1….PLS REFER MTP VIDEOS)

The balance sheet of Professional Ltd. and Dynamic Ltd. as of 31 March 2012 is given
below:

Assets Professional Ltd Dynamic Ltd

Non-Current Assets:
Property plant and equipment 300 500
Investments 400 100
Current assets:
Inventories 250 150
Financial assets
Trade receivable 450 300
Cash and cash equivalents 200 100
Others 400 230
Total 2 000 1 380
Equity and Liabilities
Equity
Share capital- Equity shares of r 100 each 500 400
Reserve and surplus 810 225
Non-Current liabilities:
Long term borrowings 250 200
Long term provisions 50 70
Deferred tax 40 35
Current Liabilities:
Short term borrowings 100 150
Trade payable 250 300
Total 2 000 1 380
Other Information
a. Professional Ltd. acquired 70% of Dynamic Ltd on 1 April 2012 by issuing
its own shares in the ratio of 1 share of Professional Ltd for every 2
shares of Dynamic Ltd. The fair value of the share of Professional Ltd
was 40 per share.
b. The fair value exercise resulted in the following : (all nos in Lakh)
a. PPE fair value on 1st April 2012 was 350 lakhs
b. Professional Ltd aslo agreed to pay an additional payment that is
higher of 35 lakh and 25% of any excess of Dynamic Ltd in the
first year after acquisition over its profit in the preceding 12
months. This additional amount will be due after 2 years. Dynamic
Ltd. has earned 10 lakh profit in the preceding year and expects
to earn another 20 lakh.
c. In additional to above, Professional Ltd also had agreed to pay one
of the founder shareholder a payment of 20 lakh provided he
stays with the Company for two year after the acquisition.
d. Dynamic Ltd had certain equity settled share based payment
award (original award) which got replaced by the new awards
issued by Professional Ltd. As per the original term the vesting
period was 4 years and as of the acquisition date the employees of
Dynamic Ltd have already served 2 years of service. As per the
replaced wards the vesting period has been reduced to one year (
one year from the acquisition date). The fair value of the award
on the acquisition date was as follows:
i. Original award 5 Lakh
ii. Replacement award 8 lakh.
e. Dynamic Ltd had a lawsuit pending with a customer who had made
a claim of 50 lakh. Management reliably estimated the fair value
of the liability to be 5 lakh.
f. The applicable tax rate for both entities is 30%
You are required to prepare opening consolidated balance sheet of Professional Ltd as on
1st April 2012. Assume 10% discount rate.

QUESTION 82

1. Scenario 1: New information on the fair value of an acquired loan

Bank F acquires Bank E in a business combination in October, 20X1. The loan by Bank E
to Borrower B is recognised at its provisionally determined fair value. In December
20X1, F receives Borrower B’s financial statements for the year ended 30 th September,
20X1, which indicate significant decrease in Borrower B’s income from operations. Basis
this, the fair value of the loan to B at the acquisition date is determined to be less
than the amount recognised earlier on a provisional basis.
2. Decrease in fair value of acquired loan resulting from an event occurring during
the measurement period
Bank F acquires Bank E in a business combination in October, 20X1. The loan by Bank E
to Borrower B is recognised at its provisionally determined fair value. In December
20X1, F receives information that Borrower B has lost its major customer earlier that
month and this is expected to have a significant negative effect on B’s operations.
Comment on the treatment done by Bank F.
SOLUTION

Scenario 1: The new information obtained by F subsequent to the acquisition relates

to facts and circumstances that existed at the acquisition date. Accordingly, an
adjustment (i.e., decrease) to in the provisional amount should be recognised for loan to
B with a corresponding increase in goodwill.
Scenario 2: Basis this, the fair value of the loan to B will be less than the amount
recognised earlier at the acquisition date. The new information resulting in the change
in the estimated fair value of the loan to B does not relate to facts and circumstances
that existed at the acquisition date, but rather is due to a new event i.e., the loss of a
major customer subsequent to the acquisition date. Therefore, based on the new
information, F should determine and recognise an allowance for loss on the loan in
accordance with Ind AS 109, Financial Instruments: Recognition and Measurement, with
a corresponding charge to profit or loss; goodwill is not adjusted.

QUESTION 83 (DISCUSSED IN MTP 2…..Q1…REFER MTP VIDEOS)

H Ltd. acquired equity shares of S Ltd., a listed company, in two tranches as
mentioned in the below table:
Date Equity stake purchased Remarks

1st November, 15% The shares were purchased based

20X6 on the quoted price on the stock

1st January, 20X7 45% exchange on the relevant dates.

Both the above-mentioned companies have Rupees as their functional currency.

Consequently, H Ltd. acquired control over S Ltd. on 1st January, 20X7. Following is
the Balance Sheet of S Ltd. as on that date:
Particulars Carrying value (₹ in Fair value (₹ in crore)
crore)

ASSETS:
Non-current assets
Property, plant and equipment 40.0 90.0
Intangible assets 20.0 30.0
Financial assets
- Investments
100.0 350.0
Current assets
Inventories
Financial assets
- Trade receivables 20.0 20.0
- Cash held in functional 20.0 20.0
currency

Other current assets 4.0 4.5

Non-current asset held for sale 4.0 4.5
TOTAL ASSETS 208
EQUITY AND LIABILITIES:
Equity
(a) Share capital (face value ₹ 12.0 50.4
100)
(b) Other equity 141.0 Not applicable
Non-current liabilities
(a) Financial liabilities
- Borrowings 20.0 20.0
Current liabilities
(a) Financial liabilities
- Trade payables 28.0 28.0
(b) Provision for warranties 3.0 3.0
(c) Current tax liabilities 4.0 4.0
TOTAL EQUITY AND 208.0
LIABILITIES

Other information:
Property, plant and equipment in the above Balance Sheet include leasehold motor
vehicles having carrying value of ₹ 1 crore and fair value of ₹ 1.2 crore. The date of
inception of the lease was 1st April, 20X0. On the inception of the lease, S Ltd. had
correctly classified the lease as a finance lease. However, if facts and circumstances
as on 1st April, 20X7 are considered, the lease would be classified as an operating
lease.
Following is the statement of contingent liabilities of S Ltd. as on 1st January, 20X7:
Particulars Fair value (₹ in crore) Remarks

Law suit filed by a 0.5 It is not probable that an

customer for a claim of outflow of resources embodying
₹ 2 crore economic benefits will be
required to settle the claim.
Any amount which would be paid
in respect of law suit will be tax
deductible.
Income tax demand of 2.0 It is not probable that an
₹ 7 crore raised by tax outflow of resources embodying
authorities; S Ltd. has economic benefits will be
challenged the demand required to settle the claim.
in the court.

In relation to the above-mentioned contingent liabilities, S Ltd. has given an

indemnification undertaking to H Ltd. up to a maximum of ₹ 1 crore.
₹ 1 crore represents the acquisition date fair value of the indemnification
undertaking.
Any amount which would be received in respect of the above undertaking shall not be
taxable.
The tax bases of the assets and liabilities of S Ltd. is equal to their respective
carrying values being recognised in its Balance Sheet.
Carrying value of non-current asset held for sale of ₹ 4 crore represents its fair
value less cost to sell in accordance with the relevant Ind AS.
In consideration of the additional stake purchased by H Ltd. on 1st January, 20X7, it
has issued to the selling shareholders of S Ltd. 1 equity share of H Ltd. for every 2
shares held in S Ltd. Fair value of equity shares of H Ltd. as on 1st January, 20X7 is
₹ 10,000 per share.
On 1st January, 20X7, H Ltd. has paid ₹ 50 crore in cash to the selling shareholders
of S Ltd. Additionally, on 31st March, 20X9, H Ltd. will pay ₹ 30 crore to the selling
shareholders of S Ltd. if return on equity of S Ltd. for the year ended 31st March,
20X9 is more than 25% per annum. H Ltd. has estimated the fair value of this
obligation as on 1st January, 20X7 and 31st March, 20X7 as ₹ 22 crore and ₹ 23
crore respectively. The change in fair value of the obligation is attributable to the
change in facts and circumstances after the acquisition date.
Quoted price of equity shares of S Ltd. as on various dates is as follows: As on
November, 20X6 ₹ 350 per share
As on 1st January, 20X7 ₹ 395 per share
As on 31st March, 20X7 ₹ 420 per share
On 31st May, 20X7, H Ltd. learned that certain customer relationships existing as on
1st January, 20X7, which met the recognition criteria of an intangible asset as on
that date, were not considered during the accounting of business combination for the
year ended 31st March, 20X7. The fair value of such customer relationships as on 1st
January, 20X7 was ₹ 3.5 crore (assume that there are no temporary differences
associated with customer relations; consequently, there is no impact of income taxes
on customer relations).
On 31st May, 20X7 itself, H Ltd. further learned that due to additional customer
relationships being developed during the period 1st January, 20X7 to 31st March,
20X7, the fair value of such customer relationships has increased to ₹ 4 crore as on
31st March, 20X7.
On 31st December, 20X7, H Ltd. has established that it has obtained all the
information necessary for the accounting of the business combination and that more
information is not obtainable.
H Ltd. and S Ltd. are not related parties and follow Ind AS for financial reporting.
Income tax rate applicable is 30%.
You are required to provide your detailed responses to the following, along with
reasoning and computation notes:
(a) What should be the goodwill or bargain purchase gain to be recognised by H Ltd.
in its financial statements for the year ended 31st March, 20X7. For this
purpose, measure non- controlling interest using proportionate share of the fair
value of the identifiable net assets of S Ltd.
(b) Will the amount of non-controlling interest, goodwill, or bargain purchase gain so
recognised in (a) above change subsequent to 31st March, 20X7? If yes, provide
relevant journal entries.
(c) What should be the accounting treatment of the contingent consideration as on 31st March, 20X7?
QUESTION 84
On 1st April, 20X1, Company A acquired 5% of the equity share capital of Company B
for 1,00,000. A accounts for its investment in B at Fair Value through OCI (FVOCI)
under Ind AS 109, Financial Instruments: Recognition and Measurement. At 31st
March, 20X2, A carried its investment in B at fair value and reported an unrealised
gain of ₹ 5,000 in other comprehensive income, which was presented as a separate
component of equity. On 1st April, 20X2, A obtains control of B by acquiring the
remaining 95 percent of B.
Comment on the treatment to be done based on the facts given in the question.
SOLUTION
At the acquisition date A recognises the gain of ₹ 5,000 in OCI as the gain or loss is
not allowed to be recycled to income statement as per the requirement of Ind AS
109. A’s investment in B would be at fair value and therefore does not require
remeasurement as a result of the business combination. The fair value of the 5
percent investment (1,05,000) plus the fair value of the consideration for the 95
percent newly acquired interest is included in the acquisition accounting.
QUESTION 85
Entity A and entity B provide construction services in India. Entity A is owned by a
group of individuals, none of whom has control and does not have a collective control
agreement. Entity B is owned by a single individual, Mr. Ram. The owners of entities A
and B have decided to combine their businesses. The consideration will be settled in
shares of entity B. Entity B issues new shares, amounting to 40% of its issued share
capital, to its controlling shareholder, Mr. Ram. Mr. Ram then transfers the shares to
the owners of entity A in exchange for their interest in entity A. At this point Mr.
Ram controls both entities A and B, owning 100% of entity A and 71.42% of entity B.
Mr. Ram had a controlling interest in both entity A and entity B before and after the
contribution. Is the combination of entities A and B a combination of entities under
common control?
SOLUTION
No. This is not a business combination of entities under common control. Mr. Ram’s
control of both entities before the business combination was transitory. The
substance of the transaction is that entity B has obtained control of entity A. Entity
B accounts for this transaction as a business combination under Ind AS 103 using
acquisition accounting.
QUESTION 86
On 1 April 20X1, Alpha Ltd. acquires 80 percent of the equity interest of Beta Pvt.
Ltd. in exchange for cash of ₹ 300. Due to legal compulsion, Beta Pvt. Ltd. had to
dispose of their investments by a specified date. Therefore, they did not have
sufficient time to market Beta Pvt. Ltd. to multiple potential buyers. The
management of Alpha Ltd. initially measures the separately recognizable identifiable
assets acquired and the liabilities assumed as of the acquisition date in accordance
with the requirement of Ind AS 103. The identifiable assets are measured at ₹ 500
and the liabilities assumed are measured at ₹ 100. Alpha Ltd. engages on independent
consultant, who determined that the fair value of 20 per cent non-controlling
interest in Beta Pvt. Ltd. is ₹ 84.
Alpha Ltd. reviewed the procedures it used to identify and measure the assets
acquired and liabilities assumed and to measure the fair value of both the non
controlling interest in Beta Pvt. Ltd. and the consideration transferred. After the
review, it decided that the procedures and resulting measures were appropriate.
Calculate the gain or loss on acquisition of Beta Pvt. Ltd. and also show the journal
entries for accounting of its acquisition. Also calculate the value of the non-
controlling interest in Beta Pvt. Ltd. on the basis of proportionate interest method, if
alternatively applied?
SOLUTION
The amount of Beta Pvt. Ltd. identifiable net assets [₹ 400, calculated as ₹ 500 - ₹
100) exceeds the fair value of the consideration transferred plus the fair value of
the non controlling interest in Beta Pvt. Ltd. [₹ 384 calculated as 300 + 84]. Alpha
Ltd. measures the gain on its purchase of the 80 per cent interest as follows:
₹ in lakh
Amount of the identifiable net assets acquired (₹ 500 - ₹ 100) 400
Less: Fair value of the consideration transferred for Alpha Ltd.
80 per cent interest in Beta Pvt. Ltd. 300
Add: Fair value of non controlling interest in Beta Pvt. Ltd. 84 (384)

Gain on bargain purchase of 80 per cent interest 16

Journal Entry
₹ in lakh

Amount of the identifiable net assets acquired (₹ 500 - ₹ 100) 400

Less: Fair value of the consideration transferred for Alpha Ltd. 300
80 per cent interest in Beta Pvt. Ltd.
Add: Fair value of non controlling interest in Beta Pvt. Ltd. 84 (384)
Gain on bargain purchase of 80 per cent interest 16
If the acquirer chose to measure the non controlling interest in Beta Pvt. Ltd. on the
basis of its proportionate interest in the identifiable net assets of the acquire, the
recognized amount of the non controlling interest would be ₹ 80 (₹ 400 x 0.20). The
gain on the bargain purchase then would be ₹ 20 (₹ 400- (₹ 300 + ₹ 80)

QUESTION 87
ABC Ltd. prepares consolidated financial statements upto 31st March each year. On
1st July 20X1, ABC Ltd. acquired 75% of the equity shares of JKL Ltd. and gained
control of JKL Ltd. the issued shares of JKL Ltd. is 1,20,00,000 equity shares.
Details of the purchase consideration are as follows:
- On 1st July, 20X1, ABC Ltd. issued two shares for every three shares acquired
in JKL Ltd. On 1st July, 20X1, the market value of an equity share in ABC Ltd.
was ₹ 6.50 and the market value of an equity share in JKL Ltd. was ₹ 6.
- On 30th June, 20X2, ABC Ltd. will make a cash payment of ₹ 71,50,000 to the
former shareholders of JKL Ltd. who sold their shares to ABC Ltd. on 1st July,
20X1. On 1st July, 20X1, ABC Ltd. would have to pay interest at an annual rate
of 10% on borrowings.
- On 30th June, 20X3, ABC Ltd. may make a cash payment of ₹ 3,00,00,000 to
the former shareholders of JKL Ltd. who sold their shares to ABC Ltd. on 1st
July, 20X1. This payment is contingent upon the revenues of ABC Ltd. growing
by 15% over the two-year period from 1st July, 20X1 to 30th June, 20X3. On
1st July, 20X1, the fair value of this contingent consideration was ₹
2,50,00,000. On 31st March, 20X2, the fair value of the contingent
consideration was ₹ 2,20,00,000.
On 1st July, 20X1, the carrying values of the identifiable net assets of JKL Ltd. in
the books of that company was ₹ 6,00,00,000. On 1st July, 20X1, the fair values of
these net assets was ₹ 7,00,00,000. The rate of deferred tax to apply to temporary
differences is 20%.
During the nine months ended on 31st March, 20X2, JKL Ltd. had a poorer than
expected operating performance. Therefore, on 31st March, 20X2 it was necessary
for ABC Ltd. to recognise an impairment of the goodwill arising on acquisition of JKL
Ltd., amounting to 10% of its total computed value.
Compute the impairment of goodwill in the consolidated financial statements of ABC
Ltd. under both the methods permitted by Ind AS 103 for the initial computation of
the non- controlling interest in JKL Ltd. at the acquisition date.