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Ind-AS 103: Business Combinations (Accounting for Acquisition by…
Ind-AS 103: Business Combinations
Important Definitions
Business
Inputs + Processes + Output
Assets acquisition
No G/W or cap. res.
Purchase price allocated over assets in ratio of fair values acquired assets
Business combination
1 entity acquires control over other entity
Net assets
Significant equity interest
Control
Special types
Reverse acquisition
Acquisitions under common control
Accounting for Acquisition by Net Assets
Identify acquirer
Entity paying cash or transferring assets
Entity incurring liabilities
Entity issuing equity shares
accounting acquirer may be different from legal acquirer
Acquirer is the largest entity in the group
(assets & liabilities, voting power)
Identify acquisition date
Date on which shares are issued
Date on which acquirer obtains control
Purchase consideration
Payment in cash + Fair Value of assets/liabilities on acquisition date+Shares issued+Contingent consideration +Pre combination obligation
Difference between face value & fair value of shares -
Sec. Premium
Difference between face value & fair value of assets -
SOPL
Identify & measure assets and liabilities
At fair value on acquisition date
Identify G/W or bargain purchase benefits
G/W: When PC exceeds net assets on acquisition date
Bargain purchase: When PC is less than net assets
capital reserve
Identify special items
Future services
write off as normal employee costs over service period in SOPL
Idemnification of assets
Recognise difference between
estimated collection from POV of acquirer & acquiree
Subsequent measurement
If collection < recognised amt.
hand over collected amt to acquiree & reverse remaining balance
If collection > recognised amt.
hand over collected amt to acquiee upto indemnified assets & excess collection adjusted against G/W
Pre-existing relationships
to be settled prior to business combination separately
Drs/Crs
Loans/investments
Law suits
Re-acquired rights
(Pre-existing contracts)
Recognised as intangible assets & written off over pending contractual period on SLM basis
Recognised at present value of additional cash flows at market rate
Profit/loss = PV of add. cash flows - Premature cancellation charges
transfer to SOPL immediately
Contingent liabilities
Recognised only if fair value can be estimated
Operating lease agreement held by acquiree
No recognition of assets/liabilities
Exception:
Recognition of asset/liability by comparing fair value of operating lease and actual lease rentals
only if lease is transferable
Recognised assets/liability will be amortised over remaining period of lease on SLM basis
Acquirer will charge lease rentals on SLM basis over the remaining period
Assembled workforce
No asset/liability
Employees retirement benefits
to be recognised as liabilities only if employees are shifted to acquirer
Intangible assets held by acquiree
G/W
not taken over
Others
Recognised if separable from G/W
Not recognised by acquirer
Recognised by acquirer of fair value is available
Share based payments
Pre-combination obligation=
Fair value of original plan x
Completed services/Old or new vesting period whichever is higher
Post combination remuneration =
Fair value of new plan - Pre combination obligation
Contingent consideration
Recognise it on acquisition date at fair value
Any difference between recorded and actual payout to be written off in SOPL
PC payable in other assets
Recognise fair value of given assets
Difference between carrying amt and fair value to be transferred to SOPL
DTA/DTL to be recognised on acquisition date
Acquisition expenses paid by acquirer to be written off in SOPL
Accounting for Acquisition by Significant Equity Interest
No recognition of assets and liabilities in SFS
Acquisition method applied in CFS
assets & liabilities of subsidiary taken at fair value
Valuation of NCI
Fair value method=
No of shares in sub co held by outsiders x Market price per share on acquisition date
Proportionate share method=
Net assets at fair value held by subsidiary x % share in business held by others
G/W or Cap Res = PC+NCI-Net Assets at FV
Step by step acquisition
In SFS, write off investment in associate & recognise investment in subsidiary
In CFS, write off investment in associate at fair value
Acquisition without acquiring further shares
buy back of shares by acquiree
No change in SFS
In CFS, calculate G/W or cap. res. and NCI on acquisition date
Acquisition by exchange of shares
Acquisition cost recognised on the basis of value per share of acquiree entity
Accounting for Special Types
Reverse Acquisition
(Backdoor listing process)
PC will be calculated on the basis of no of shares the accounting acquirer would have issued.
Common Control Transactions
Merger
Transfer all assets/liabilities at carrying amt
Transfer all reserves
PC paid in cash, other assets or shares at par value only
Profit/loss on merger transferred to capital reserve
In merger of subsidiary to holding, PC will be reduced by % of shares in subsidiary to the extent not held by holding and investment in subsidiary will be cancelled on merger date
Demerger
Transfer all assets/liabilities at carrying amt
Issue of shares at par value in payment of PC to
members
of demerged co
Profit/loss on merger transferred to capital reserve