Ind-AS 103

Ind-AS 103- Business Combinations
(‘BC’)
Contents
# Topic Slide
1 Identification of a business 3
combination / Scope
2 Acquisition method of accounting 14
a Who is the Acquirer 16
b Acquisition date 21
c Recognition and Measurement 25
of assets acquired, liabilities
assumed and non-controlling
interests
d Recognition and measurement 48

of goodwill and bargain
purchase
3 Acquisition in stages 51
4 Common control transactions 56

5 Disclosure requirements 58
6 Differences between GAAPs 62
2 Ind-AS 103 Business combinations

Identification of a Business
Combination

Ind-AS 103’s scope
► Ind-AS 103 applies to a transaction or other event that meets

the definition of a business combination.
► Combination of entities or businesses under common
control
(Dealt with in Appendix C of Ind-AS 103)
Scoped - Out
Pass-Through Asset
Acquisition of JV
Formation of joint ventures arrangement acquisition
subsidiary
Roll up Common
Asset acquisition
transaction
(that do not constitute a business) control (dealt
separately)

Identifying a business combination
• Transaction • Power over • Integrated set
BUSINESS
CONTROL
BUSINESS COMBINATION
or event in the investee of activities

which • Exposure, or and assets
acquirer rights • Capable of
obtains to variable being
CONTROL returns conducted
over one or • Ability to use and managed
more its power over to provide
BUSINESSes the investee return
to affect the • Returns
amount of include
investor dividends and
returns cost savings.

Business
► Business generally consists of
inputs
(economic resource that creates,
or has the ability to create, outputs)
Process
(Any system, standard, protocol,
convention or rule that when
applied to an input or inputs, Output
creates or has the ability to (The result of inputs and
create outputs.) processes applied to those
inputs that provide or have
the ability to provide a return
in the form of dividends,
lower costs or other
economic benefits directly to
investors or other owners)

Business
► BUT only inputs and processes are mandatorily required:

► Inputs(e.g. employees, non current assets...)
► Processes (e.g. Strategic/operation management ..)
► Outputs are not mandatorily required for a set of activities and assets
to qualify as a business.
► Development stage activities without outputs may still be businesses
GOODWILL
Presumption is that if goodwill exists, the acquisition is a business.
BUT
A business need not necessarily have goodwill

Definition of a business: meaning of
‘capable of’
► A business need not include all the inputs or processes that the seller
used in operating that business.
► If a market participant is capable of utilising the acquired set of activities
and assets to produce outputs by integrating the acquired set with its own
inputs and processes, the acquired set might constitute a business.
► If the elements that are missing from an acquired set are not present with
a market participant but easily replaced/replicated, the acquired set might
still be a business.
► However, in most cases, the acquired set of activities and assets must
have at least some inputs and processes in order to be considered a
business.

Definition of a business: development stage
of a set of activities and assets
Is the transferred set of activities and assets a business?

► Factors include but are not limited to whether the set:
► Has begun its planned principal activities
► Has employees, intellectual property and other inputs and
processes that could be applied to those inputs
► Is pursuing a plan to produce outputs
► Will be able to obtain access to customers that will purchase the
outputs
► Determination should be based on whether the integrated set is

capable of being conducted and managed as a business by a
market participant.

Activity 1- Development stage enterprise
Scenario 1
► Biotech A acquires outstanding shares
in Biotech B, a start-up with a license Response
for a product candidate.
► Due to loss of funding, Biotech B has
no employees, no other assets. Not a business,
► Neither clinical trials nor development since there is no process.
are currently performed. However ✓ Inputs – license
Biotech A will commence Phase 1 ✓ Processes – none
clinical tests . ✓ Outputs – none
► Should the acquisitions be

accounted as a business
combination or an asset
acquisition?

Activity 1- Development stage enterprise
Scenario 2
► Biotech A acquires outstanding shares
Response
in Biotech B, a start-up with a license
for a product candidate. It is a Business.
► Phase 1 clinical tests are currently ✓ Inputs – license &
performed by the 3 Biotech B’s employees
employees (one of whom founded ✓ Processes – operational &
Biotech B and discover the product management processes
associated with the
candidate)
performance and
supervision of the
► Should the acquisitions be technical tests.
accounted as a business ✓ Outputs – none
acquisition?

Activity 2- Application in real estate industry
Scenario 1
► Company A acquires land and a
vacant building from Company B. Response
► No processes, other assets or
employees (for example, leases and
Not a business,
other contracts, maintenance or
since there is no process.
security personnel or a leasing office)
are acquired in the transaction. ✓ Inputs – land and vacant
building
✓ Processes – none
✓ Outputs – none
► Should the acquisitions be
accounted as a business
acquisition?

Activity 2- Application in real estate industry
Scenario 2
► Company A acquires an operating Response
hotel, the hotel’s employees, the
It is a Business.
franchise agreement, inventory,
reservations system and all ‘back ✓ Inputs – non-current assets,
office’ operations. franchise agreement and
Employees
✓ Processes – operational
► Should the acquisitions be and resource management
accounted as a business processes associated with
combination or an asset operating the hotel
acquisition? ✓ Outputs – revenues from
operating the hotel

Differences in accounting for business
combination vs. asset acquisition
Business combination Asset acquisition
Impact on:
Goodwill Goodwill (or a gain on a bargain No goodwill is recognised
purchase) may arise
Initial measurement of Fair value Allocated cost (on a relative
assets acquired and fair value basis)
liabilities assumed
Directly attributable Expensed Capitalised
transaction costs
Deferred tax on initial Recognised Not recognised*
recognition
Disclosures More extensive Less disclosures required
*While this is generally the case, in some instances the initial recognition exception will not apply and a deferred tax
balance will need to be recognised for any temporary difference.

Example : Differences for accounting for a BC
vs. Asset Acquisition
► Entity P acquires 100% of entity V’s shares for 1000, incurring transaction
costs of 200.
► V has no liabilities. The only assets are 2 buildings (A,B) their book value is
700. The fair value of A and B is 300 and 600 respectively.
► Tax base of buildings is 700 and income rate is 20%.
BC Asset acquisition
Price paid 1,000 1,000
Transaction costs P&L- expensed 200 - capitalized
Total consideration 1,000 1,200
Fair values (BC) / Relatives FV of Assets acquired
Asset A 300 400=(1200*300/900)

Asset B 600 800=(1200*600/900)
total 900 1,200
DTL 40=(900-700)*20% N/A
Goodwill 140=(1000-900+40) N/A

Business Combination
– Acquisition Method of Accounting

Application of the acquisition method
– 4 step process
3 4
Identifiable
2 assets Goodwill or
Liabilities Bargain
What is the purchase
1 Acquisition assumed
Who is the date? NCI
Acquirer? Consideration
transferred

Who is the Acquirer?
► For each business combination, one of the combining entities shall be

identified as the acquirer.
► The entity that obtains control of the acquiree is identified as acquirer
in all business combinations.
► Refer Ind-AS 110 guidance on control for identification of the acquirer.
► Acquirer is usually the entity that transfers
the cash or other assets or incurs the
liabilities
► Acquirer is usually the entity that issues
If applying the guidance in
Ind-AS 110 does not clearly its equity interests
indicate the acquirer, the ► Acquirer normally has the largest portion
following factors are of the voting rights in the combined entity
considered in making
that determination :
► Acquirer will have ability to elect or
appoint or to remove a majority of the
members of the governing body of the
combined entity

Specific case of formation of new
entity
► Where a new entity (NewCo) is formed to effect business combination
between two or more entities, say B and C, Ind-AS 103 identifies two
distinct scenarios
NewCo
Entity B Entity C
► NewCo issues its equity instruments in exchange for equity

instruments in B and C - Either B or C should be identified as the
acquirer
► NewCo transfers cash (or other assets) in exchange for equity

instruments in B and C (e.g. from the proceeds of a debt/ equity issue to
new investors) NewCo may be identified as the acquirer.

Example 3 – Formation of a new
entity
Fact Pattern
► X and Y are two existing entities carrying on business independently.
► The two entities decide to combine their businesses through a new
entity Z.
► New entity Z issues equity shares in itself in the proportion two-third to
the equity shareholders of X and one-third to the equity shareholders
of Y.
Should Z be regarded as an acquirer?

Specific case of Reverse
Acquisitions
► Applicable when a smaller entity acquires a bigger company.
► Example: A Ltd. a big private company wants to become a public entity
but does not want to register its equity shares. In order to accomplish that,
A Ltd. gets itself acquired by B Ltd., a smaller public entity.
A Ltd. B Ltd.
Issues Equity shares
Private Company Equity Shares Public Company
Legal Acquiree Legal Acquirer
Accounting Acquirer Accounting Acquiree

Reverse Acquisitions
► The legal acquiree is the ‘in-substance’ acquirer

► The consolidated financial statements (CFS) prepared following a
reverse acquisition:
► Issued under the name of the legal parent (accounting acquiree);
but
► Described in the notes as a continuation of the financial
statements of the legal subsidiary (accounting acquirer)
► Net assets of legal subsidiary (accounting acquirer) at pre-
combination carrying amounts
► Net assets of legal parent (accounting acquiree) are restated to fair
value
► Comparative information in CFS is that of legal subsidiary
► Retroactively adjusted to reflect the legal capital of the legal parent (accounting
acquiree)

Date of acquisition
► Generally the date on which the acquirer: legally transfers the consideration,
acquires the assets; and assumes the liabilities of the acquiree
► will normally be the closing date.
► However, the acquirer might obtain control on a date that is either earlier or
later than the closing date.
► 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.
► Date on which control is acquired by the acquirer
► Is the agreement subject to substantive pre-condition, the acquisition date
will be the date the last of those pre-condition is satisfied
► Date when acquirer commences direction of operation and financial
policies
► Date when majority of board members are appointed
► Date from which the flow of economic benefit changes
► Date of clearance by competition authority (if any)

Example 4
► Company A has signed a purchase agreement (PA)with Company B on July

1, 20X0.
► PA was filed with the high court for approval on Jan 1, 20X1
► PA provides that subject to the High Court approval of the agreement, any
profits or losses arising out of operations of B from July 1, 20X0 will belong
to A.
► PA provides that the management of B will run B from the July 1 20X0 as
trustee’s of A.
► PA also provides that the purchase consideration payable by A to B will be
based on B net assets value as at July 1 20X0 and as determined by the
independent valuer.
► The High Court approves the transaction on 25 March 20X1 and is filed with
the ROC immediately. A is preparing CFS for the year ended 31 March
20X1.
Should CFS include Company B from 1 July 20X0,1 January 20X1 or from
25 March 20X1?

Consideration transferred

Consideration transferred
► The consideration transferred in a business combination shall be measured at

acquisition date fair value, which shall be calculated as the sum of the following:
► acquisition-date fair values of the assets 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, deferred
consideration ordinary or preference equity instruments, options, warrants and
member interests of mutual entities.
► However, any portion of the acquirer’s share-based payment awards exchanged

for awards held by the acquiree’s employees that is included in consideration
transferred in the business combination shall be measured in accordance with
Ind-AS 102 rather than at fair value.

Contingent consideration to be
paid by the acquirer
Initial treatment Ind-AS 103
Recognition Always recognise

Measurement Fair value at acquisition date
Classification As Financial Instrument in most cases - liability /equity as
per Ind-AS 32
Subsequent treatment Ind-AS 103
Equity Not re-measured

Liability Re-measured at fair value through P&L in accordance with
Ind-AS 109
► Additional/ new information becomes available during

No adjustment made to goodwill ,
the measurement period on facts and circumstances that
except in case of provisional
existed at the acquisition date.
accounting during the measurement
period when : ► Measurement period is not to exceed one year from
acquisition date

Example 6 –
Contingent consideration
► On January 1, 2007, entity A acquires 100% interest in entity B.
► The consideration for acquisition is payable in the following 2 tranches:
► an immediate issuance of 1 million shares of entity A having face value of
CU10 per share;
► a further issuance of 0.2 million shares after one year if the profit before
interest and tax for the first year following acquisition exceeds CU500,000
► At the date of acquisition, the fair value of shares of entity A is CU20 per
share.
► The management has estimated that at the date of acquisition, the fair value
of contingent consideration is CU2.5 million.
► At the end of year 1, it is noted that entity A has actually met the condition for
issuance of further shares.
► At that date, the fair value of shares of entity A is CU25 per share.
How should be treated the contingent consideration at initial recognition
and subsequently?

Response
► At the date of acquisition, consideration payable for acquisition is

calculated as below:
Fair value of shares issued
(1,000,000 x CU20) CU20,000,000
Fair value of contingent consideration CU 2,500,000
Total CU22,500,000
► Regarding contingent consideration:
► Number of shares to be issued is stated to be fixed
► No obligation to pay cash
► Thus, it meets definition of equity as per Ind-AS 32.
► Accordingly, CU2,500,000 would be classified as part of equity.
► Not to be remeasured subsequently or on issuance of shares.
► Amount recognized initially would be split into share capital and share
premium upon issuance of shares.

Example 7 –
Contingent consideration
► The facts pattern given in this case is the same as that in example 2 except
the following
► The number of shares to be issued after one year is not fixed.
► Rather, entity A agreed to issue as many shares as have the fair value
equal to CU4 million after one year, if the profit before interest and tax for
the first year following acquisition exceeds CU500,000
► The management has estimated that at the date of acquisition, the fair value
of contingent consideration is CU2.5 million.
► At the end of year 1, it is noted that entity A has actually met the condition for
issuance of further shares.
► At that date, the fair value of shares of entity A is CU25 per share.
How should be treated the contingent consideration at initial recognition

and subsequently?

Response
► At the date of acquisition, consideration payable for acquisition is

CU22,500,000 (i.e., CU20,000,000 plus CU2,500,000).
► Regarding contingent consideration:
► Number of shares to be issued varies (depending on profit) in a manner
that the fair value of the shares would always be equal the fair value of
the obligation
► Thus, it meets definition of liability as per Ind-AS 32.
► Liability would be fair valued at the end of year one and resulting loss
of CU1,500,000 (CU4,000,000 – CU2,500,000) to be recognised in
the profit or loss for the period.
► Subsequent to restatement of liability, entity A would recognised
issuance of 160,000 (CU4,000,000/ 25) shares at the fair value of
liability on that date, i.e., CU4 million.

Pre-existing relationships
► Business combination in effect settles pre-existing relationship,
Supply contract Termination of

with acquirer The contract
Shares in acquirer Acquisition of

Treasury shares
Receivables/
Extinguishment
Payables
Contractual right to
Repurchase of
Use the acquirer’s
intangible
asset

Pre-existing relationships
A pre-existing relationship is any relationship that existed between acquiree and

acquirer before business combination was contemplated
Settlement favourable Settlement unfavourable

to acquirer to acquirer
Gain on settlement Loss on settlement
Subject to adjustment in respect of any existing carrying amount

in the financial statements of the acquirer

Recognition and measurement
principle
► At the acquisition date, the acquirer shall recognize, separately from
goodwill:
► the identifiable assets acquired,
► the liabilities assumed; and
► any non-controlling interest in the acquiree*
► Measurement at the fair value at acquisition date**
► For recognition of identifiable assets acquired/ liabilities assumed as
part of the acquisition method, these assets/ liabilities
► must meet the definitions of assets and liabilities in the Framework
at the acquisition date
► must be part of what the acquirer and the acquiree (or its former
owners) exchanged in the business combination transaction
*Exceptions to recognition principle: contingent liability, deferred taxes, employee benefits, assets
indemnifications‘
**Exceptions to measurement principle: deferred taxes, employee benefits, assets indemnifications,

reacquired rights, share-based payments, assets held for sale

Intangible assets
Marketing related
In-process research
Customer-related
and development
Technology-based Artistic-related
Contract-based

Case study: Intangible Assets
Please comment on recognition of intangible asset other than Goodwill in each of

the following situations:
1) Company P acquires Company S, a medical testing company, in a business

combination on 31 December 20X1. S provides testing services to patients, such
as blood screening, based on referrals from their general practitioners (medical
practitioners who provide primary care to patients). S maintains a database with
each patient's information, such as name, address, telephone number, doctor's
name, insurer's name and policy number. However, this patient information is
protected by privacy laws and S cannot sell, licence, transfer or otherwise
exchange it.
2) Company P acquires Company S, a bottling company, in a business combination

on 31 December 20X1. S has a five-year agreement to supply bottles to
Customer.

Case study: Intangible Assets
Please comment on recognition of intangible asset other than Goodwill in each of

the following situations:
3) Company P acquires Company S, a ski-holiday company, in a business

combination on 30 June 20XX, which is during S's off-season. S has a practice
of establishing customer relationships through contracts but it does not have
any contracts in place with customers at the acquisition date.

Solution
1) The customer list does not meet the separability criterion because privacy laws
and regulations over patient information prevent selling, transferring, licensing
or exchanging patient information separately from the acquiree. Whether or not
P could recognise a separate intangible asset for the relationship with the
patients and the general practitioner would depend on the specific facts and
circumstances of each case.
2) The agreement, whether cancellable or not, meets the contractual-legal criterion.

Additionally, because S establishes its relationship with Customer through a
contract, not only the agreement itself but also S's customer relationship with
Customer meet the contractual-legal criterion. Therefore both the bottling
agreement and the related customer relationships are recognised separately
from goodwill at their acquisition-date fair values.

Solution (contd..)
3) S does not have any contracts in place with customers at the acquisition date, P
does not recognise any customer contracts as part of its acquisition accounting.
However, S's customer relationships are considered to meet the contractual-
legal criterion because S has a practice of establishing customer relationships
through contracts. These customer relationships are recognised separately from
goodwill at their acquisition-date fair values.

Lease
► Operating leases – Acquiree is lessee

► Acquirer not to recognize any asset /liability related to operating lease
where acquiree is lessee- E.g., Lease incentives being amortized by the
acquiree not to be recognized by the acquirer or any carry forward due to
straight-lining of leases
► If lease is at favourable/ unfavourable vs. current market prices, an intangible
asset/ liability would need to be recognized-E.g.,
► Intangible asset would arise if rent paid is lower.
► Amortised over the rent period.
► Consequently the rent charge in P&L would be stated at market.
► Operating leases – Acquiree as lessor
► Acquirer to consider the lease terms while measuring the acquisition-date
fair value of the asset - No separate asset or liability to be recognized
even if lease terms are favourable/unfavourable vs. market terms
► Instead it reflects the lease terms in the leased asset fair valuation

Exceptions to the recognition and
measurement principles
Exception to both
Exception to Exception to
recognition and
recognition measurement
measurement
principle principle
principle
Deferred taxes and tax

Reacquired rights uncertainties – Ind AS
12
Contingent
liabilities Share-based
payment awards -Ind Indemnification assets
AS 102
Assets held for sale

Employee benefits – Ind
or distribution Ind AS
AS 19 and
105

Contingent liability - Measurement
Subsequent recognition
Initial recognition Higher of

Amount that would be recognized under Ind-AS 37 ;
► IIi AND
FV Amount initially recognized less, if applicable,
cumulative amortization recognized under
Ind-AS 115.
This requirement does not apply to Financial contracts that are

accounted for in accordance with Ind-AS 109 ( for e.g. financial
guarantee)

Example 8 – contingent liability?
► Burger King sells burgers. Experience suggests that one in a

million burger sold is contaminated. Burger was acquired by
Pizza King, on which date Burger had sold one million burgers
(in the past week or so).
Should Pizza King provide for the liability in the acquisition

accounting that may arise on the contaminated burger.
Response- No, since on acquisition date this is a possible

obligation and not a present obligation.
Pizza King should account for this liability in the post
combination financial statements only if the
contaminated case is reported.

Indemnification asset
► 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. As a result, the acquirer obtains an
indemnification asset.
► Examples of indemnification assets:
► The seller agrees to pay the settlement costs of an outstanding
court case against the acquiree.
► The acquiree is the subject of an uncertain tax position and the
seller agrees to refund the acquiree if any costs are incurred as a
result of tax proceeding.

Indemnification asset (cont.)
► Recognition and measurement
Indemnified item Indemnification asset
Fair value Fair value

Exception to recognition and Exception to recognition and
measurement rule measurement rule subject to the need for
a valuation allowance for uncollectible
amounts
► Derecognition
► Collected
► Sold
► Lost otherwise

Example
► In January 2010 Entity P acquires a 100% interest in Entity S, a manufacturer

of cosmetics, from Entity V. At the time of acquisition there are two open
litigations against S:
► Litigation 1: S customers have alleged that S products contain harmful levels
of parabens that cause breast cancer. The claimants are suing S for
damages amounting to CU 50 million.
► Litigation 2: S is in a dispute with tax authorities over its tax return for 2008.
► V will indemnify P for the losses up to CU 25 million in the case of Litigation 1.
P has also received an indemnification from V to cover the outcome of
Litigation 2.
► How should P account for the contingent liability/liability and the
indemnification assets assuming that:
► The fair value of the contingent liability resulting from Litigation 1 is CU 15 million.
► An outflow in relation to Litigation 2 is probable. The estimated amount expected to be paid is
CU 13 million (amount claimed by tax authorities). The fair value of the liability is CU 11 million.

Response
► Litigation 1
► In the purchase price allocation, identifiable liability of CU 15 million is recognised.
► The liability is measured at fair value, and the indemnification asset should be
measured at fair value.
► Asset is recognised amounting to CU 15 million assuming that none of the possible
outcomes taken into calculation of the fair value of liability exceeds the
indemnification cap and there is no risk of uncollectibility.
► Litigation 2
► In the purchase price, allocation liability related to Litigation 2 — tax litigation — is
recognised at CU 13 million, i.e., at the amount expected to be paid, not at fair
value
► The indemnification asset has to be recognised and measured using assumptions
consistent with those used to measure the indemnified item.
► An asset amounting to CU 13 million is recognised assuming there is no risk of
uncollectibility.

Non-controlling interest
► NCI is equity in a subsidiary not attributable, directly or

indirectly to a parent
► Measurement option for NCI at acquisition date:
At Fair Value At Proportionate share of

acquiree’s identifiable net assets
Choice is made for each business combination (not a policy choice)

Measurement Period - Provisional
allocations
► If the Initial accounting is incomplete by end of the reporting period in which
combination occurs, the acquirer shall report provisional amounts
► Measurement period
► Is the period after the acquisition date during which the acquirer may adjust the
provisional amounts recognized for a business combination
► 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.
► Shall not exceed one year from the acquisition date.
► Results in retrospective restatement to reflect additional information within

the measurement period of goodwill and comparatives
► After the measurement period ends, the accounting for a business combination
can be amended only as to correct an error in accordance with Ind-AS 8

Measurement of goodwill
Consideration
G
O
O Non
D
Controlling Net assets
Interests (NCI) acquired
W
I
L Previously held
L equity interest
Acquisition related costs charged to P&L Except, Debt securities issue cost–
incorporated in effective interest rate (Ind-AS 109) and Equity issues cost
recognized in equity (Ind-AS 32).

Bargain purchase
► A bargain purchase is one where the goodwill is negative

A bargain purchase might happen, for example, in a business combination
that is a forced sale in which the seller is acting under compulsion.
► In such cases, the acquirer should reassess whether it has correctly

identified all of the assets acquired and all of the liabilities assumed
► If reassessment confirms bargain purchase, any gain is recognized in

equity as capital reserve on the acquisition date. However, If there does
not exist clear evidence of the underlying reasons for classifying the
business combination as a bargain purchase, the gain (bargain purchase)
should be recognised directly in equity as capital reserve.

– Achieved in stages
Combination achieved in stages
► An acquirer may obtain the control of an acquiree in stages, by

successive purchases of shares (commonly referred to as a ‘step
acquisition’)
► If the acquirer holds a non-controlling equity investment in the

acquiree immediately before obtaining control:
► Remeasure investment to fair value as at the date of gaining control
► Recognise any gain or loss on remeasurement in profit or loss or OCI as
appropriate.
► If the investment was previously classified as FVOCI, any gain or loss
accumulated in equity shall be recognised on the same basis as would be
required if the acquirer had disposed off directly the previously held equity
interest.
► Goodwill calculation to follow such valuation.

Example 9- acquisition in stages
► Investor acquires a 20 per cent ownership interest in Investee (a service

company) on 1 January 200X for CU3,500,000 cash. At that date, the fair value
of Investee’s net identifiable assets is CU10,000,000, and the carrying amount of
those assets is CU8,000,000.
► Investor does not have significant influence over investee. Thus, it treated
investments as FVOCI investments. Fair value of investment as at December 31,
200X was CU6,000,000. Accordingly, investor recognized unrealized gain of
CU2,500,000 in equity.
► On 1 January 20X1, Investor acquires a further 60 per cent ownership interest in

Investee for CU19,000,000 cash, thereby obtaining control. This includes control
premium of CU1,000,000. At that date, the fair value of Investee’s net identifiable
assets is CU12,000,000 and the carrying amount of those assets is
CU10,000,000.
► Investee’s profit for the year 200X is CU2,000,000. Fair value of Non-controlling
interest (20%) and Fair value of original investment (20%) on the date of
acquisition is CU6,000,000.
Response
► Under Ind-AS 103, the following approach would be followed for

computation of goodwill
► Remeasure investment to fair value as at the date of gaining control
and Recognise any gain or loss on remeasurement in profit or loss.
20% investment which is previously held and classified as FVOCI (3.5)
would be fair valued on date of acquisition CU6,000,000 and
CU2,500,000 gain accumulated in equity would be recognized in profit or
loss.
► Fair value of net identifiable assets of the acquiree at the acquisition
date is CU12,000,000.
► Total cost of acquisition would be measured at acquisition date as
CU25,000,000, i.e., CU19,000,000 plus CU6,000,000.
► Goodwill shall be calculated using one of the two approaches discussed
above for measurement of non-controlling interest.
► If the entity follows option I to measure non-controlling interest at fair
value, amount on non-controlling interest may be significantly different.

Response
Amount CU
Option 2 NCI at
Option 1 NCI at
proportion of net
fair value
assets
Cost of acquisition 25,000,000 25,000,000

Non-controlling interest at fair value 6,000,000 NA
Non-controlling interest as proportion NA 2,400,000

of net assets
Total 31,000,000 27,400,000
Less: Fair value of net 12,000,000 12,000,000

identifiable assets
Goodwill 19,000,000 15,400,000

– Common control transactions

Common control transactions
► Combination of entities or businesses in which ALL of the combining
entities/businesses are ultimately CONTROLLED by the SAME party (ies)
both BEFORE and AFTER the transaction and that control is not transitory
► It will include transactions such as transfer of subsidiaries or businesses,

between entities within a group
► The extent of minority interest in each of the combining entities before and
after the BC not relevant to determine whether a combination involves
entities under common control
► It is not necessary that combining entities are included as part of the same
CFS
► A group of individuals can be a controlling party
► BC involving entities or businesses under common control shall be accounted

for using the pooling of interests method

Common control transaction
A Ltd
B Ltd C Ltd
51% 100%
D Ltd E Ltd
65% 80%
E Ltd amalgamated with D Ltd

Application of pooling of interest method –
key principles
Assets and liabilities of the combining entities are reflected at their carrying
amounts (only adjustments that are made are to harmonise accounting policies);
No 'new' goodwill is recognized as a result of the combination;
Financial information in financial statements in respect of prior periods should be

restated as if business combination had occurred from beginning of preceding
period in financial statements, irrespective of actual date of combination
However, if business combination had occurred after that date, prior period
information shall be restated only from that date

60
Application of pooling of interest method –
key principles
Consideration for business combination may consist of securities, cash or other

assets. Securities shall be recorded at nominal value. In determining the value of
consideration, assets other than cash shall be considered at their fair values
Identity of reserves shall be preserved and shall appear in financial statements

of transferee in same form in which they appeared in financial statements of
transferor
Difference, if any, between amount recorded as share capital issued plus any
additional consideration in form of cash or other assets and amount of share
capital of transferor shall be transferred to capital reserve and should be presented
separately from other capital reserves

61
– Disclosure requirements

Disclosures
General Information on the business combination
Consideration Transferred
Assets acquired and liabilities assumed
Goodwill or a gain on bargain purchase
Transactions that are not part of the business combination;
In which the acquirer holds less than 100 percent of the acquiree;
Business combinations achieved in stages, i.e., step acquisitions;
Pro forma information about revenue and profit or loss; and
Measurement period adjustments and contingent consideration adjustments.

Disclosures contd..
► Revenue and profit or loss of combined entity for current reporting

period as though acquisition date for all business combinations that
occurred during the year had been as of beginning of annual reporting
period.
► Reconciliation of movements in goodwill:

► Opening amounts for gross goodwill and impairment losses
► Additional goodwill recognised in the period
► Adjustments from recognition of deferred tax assets
► Movements in goodwill of a ‘disposal group’ under Ind-AS 105
► Impairment losses recognised in the period
► Net exchange differences arising in the period
► Any other changes arising in the period
► Closing amounts for gross goodwill and impairment losses

–Differences between GAAPs

Key Differences
Indian GAAP vs Ind-AS 103 vs IFRS 3
Area Indian GAAP Ind-AS / IFRS
Scope No comprehensive standard Ind-AS 103 / IFRS 3 deals with both
covering all business combinations. amalgamations and acquisitions
AS 14 deals only with amalgamation except formation of joint venture and
acquisition of assets which do not
constitute business
Accounting No standard differentiates between Appendix C of Ind-AS 103 deals with
for common common control and other business accounting for BCs involving entities
control combinations but AS 14 allows use under common control. It requires the
transactions of pooling of interest method for same to be accounted for using the
accounting of amalgamation in the pooling of interest method.
nature of merger IFRS excludes common control
transactions from the scope of IFRS 3
Acquisition The date of amalgamation / The date on which the acquirer
Date acquisition mentioned in the court effectively obtains control of the
scheme is the acquisition date acquiree is the acquisition date

Key Differences
Accountin Under purchase method, acquired assets Under purchase method,
g for and liabilities are recognised at their existing acquired identifiable assets,
assets book values or consideration is allocated to liabilities and contingent
and individual assets and liabilities based on their liabilities are recognised at fair
liabilities acquisition date fair values. Identifiable value.
taken over assets and liabilities may include assets and
liabilities not recorded in financial statements
of transferor company.
Considera Consideration for amalgamation means The cost of acquisition is
tion aggregate of shares and other securities amount of cash or cash
issued and payment made in form of cash or equivalents paid, plus fair value
other assets by acquirer to shareholders of of other purchase consideration
acquiree. While it is required that non-cash given. The fair value of
elements of consideration should be included securities issued by acquirer is
at fair value, it is also stated that the value of determined at the date of
any securities (forming part of consideration) exchange.
fixed by statutory authorities may be taken to
be their fair value.

Key Differences
Non- Minority interest is valued at Non-controlling interest is stated either at
controlling its proportionate share of acquisition-date fair value or at non-
interest historical book value of net controlling interest’s proportionate share of
assets and presented outside fair value of acquiree’s identifiable net assets
shareholders’ equity and included within shareholders’ equity
Accounting Under AS 14, excess of As per Ind-AS 103, on acquisition date,

for goodwill consideration paid over the acquirer will recognise excess as goodwill
/ bargain net assets acquired is and subsequently it would be recorded as
purchase recorded as goodwill and is cost less impairment losses. Amortisation of
amortised to profit or loss over goodwill is prohibited. Bargain purchase is
a period not exceeding 5 recognised in OCI or directly in equity as
years. In case of bargain capital reserve on acquisition date
purchase, the difference is IFRS 3 prescribes treatment similar to Ind-AS
recorded as capital reserve. for accounting of goodwill. However, in case
of bargain purchase, the gain is recognised in
profit or loss

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Ind-AS 103- Business Combinations

d Recognition and measurement 48

4 Common control transactions 56

2 Ind-AS 103 Business combinations

3 Ind-AS 103 Business combinations

► Ind-AS 103 applies to a transaction or other event that meets

4 Ind-AS 103 Business combinations

• Transaction • Power over • Integrated set

or event in the investee of activities

5 Ind-AS 103 Business combinations

► Business generally consists of

6 Ind-AS 103 Business combinations

► BUT only inputs and processes are mandatorily required:

7 Ind-AS 103 Business combinations

8 Ind-AS 103 Business combinations

Is the transferred set of activities and assets a business?

► Determination should be based on whether the integrated set is

9 Ind-AS 103 Business combinations

► Should the acquisitions be

10 Ind-AS 103 Business combinations

11 Ind-AS 103 Business combinations

12 Ind-AS 103 Business combinations

13 Ind-AS 103 Business combinations

14 Ind-AS 103 Business combinations

Asset A 300 400=(1200*300/900)

15 Ind-AS 103 Business combinations

16 Ind-AS 103 Business combinations

17 Ind-AS 103 Business combinations

► For each business combination, one of the combining entities shall be

18 Ind-AS 103 Business combinations

► NewCo issues its equity instruments in exchange for equity

► NewCo transfers cash (or other assets) in exchange for equity

19 Ind-AS 103 Business combinations

20 Ind-AS 103 Business combinations

21 Ind-AS 103 Business combinations

► The legal acquiree is the ‘in-substance’ acquirer

22 Ind-AS 103 Business combinations

23 Ind-AS 103 Business combinations

► Company A has signed a purchase agreement (PA)with Company B on July

24 Ind-AS 103 Business combinations

25 Ind-AS 103 Business combinations

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

► Examples of potential forms of consideration include cash, other assets, a

► However, any portion of the acquirer’s share-based payment awards exchanged

26 Ind-AS 103 Business combinations

Recognition Always recognise

Subsequent treatment Ind-AS 103

Equity Not re-measured

► Additional/ new information becomes available during

27 Ind-AS 103 Business combinations

28 Ind-AS 103 Business combinations

► At the date of acquisition, consideration payable for acquisition is

29 Ind-AS 103 Business combinations

How should be treated the contingent consideration at initial recognition

30 Ind-AS 103 Business combinations

► At the date of acquisition, consideration payable for acquisition is

31 Ind-AS 103 Business combinations

► Business combination in effect settles pre-existing relationship,

Supply contract Termination of