INDAS 27 – SEPARATE FINANCIAL STATEMENTS

1. DETAILED OVERVIEW OF THE STANDARD

The detailed summary of this standard is as follows:

1. This standard deals with ACCOUNTING FOR INVESTMENTS in Subsidiary Co.,
Associate Co. and Joint venture Co. in the individual financial statements of Investor (i.e.
Parent Co.)

2. Separate financial statements are presented in addition to:

a. Consolidated Financial Statements (prepared in case of a subsidiary or subsidiaries);
or
b. Financial Statements in which investments in associates and joint ventures are
accounted for using equity method as per Ind AS 28.

3. Entity may present separate financial statements as its only financial statements if
it is:
i. Exempt from consolidation; or
ii. Exempt from applying equity method; or
iii. An investment entity and apply exception to consolidation for all of its subsidiaries.

4. Investor (i.e. Parent Co.) shall account for its investments in Subsidiary, Associate and
Joint Venture either at:
 Cost or
 As per Ind AS 109 Financial Instruments i.e. Fair Value (FVTPL or FVTOCI)
(i.e. we have choice to value our investments in individual financial statements at
Cost or at Fair Value)

5. Income from the Investments in Subsidiaries/Joint Ventures/ Associates shall be

recognised in P&L Statement of the Holding/Investor when right to receive such income
is established. Generally, the right to receive the dividend is established when the
dividend is approved by the shareholders in their general meeting.

22.1
 2. CATEGORY WISE VALUATION OF INVESTMENTS UNDER
INDAS 27
 The entity shall apply the same measurement rules for each category of investment.
 An entity shall classify investment in subsidiaries, associates or joint ventures into
different categories:
1. Investments in subsidiaries
Subsidiaries A - (Cost) Subsidiaries B - (Cost)

2. Investments in associates
Associates A - (Fair Value) Associate B - (Fair Value)

3. Investments in joint ventures

JV A-(Fair Value) JV B - (Fair Value)

 For the purpose of Ind AS 27 "category of investments" means broad category i.e. (a)
Investments in subsidiary, (b) Investments in associates and (c) Investments in Joint
ventures.
• It is possible to apply "cost" approach in respect of one category and "fair value"
approach for another category.
• However, it is not possible to apply "cost" approach to one subsidiary and "fair
value" approach to another subsidiary

22.2
 3. WHAT IF INVESTMENTS ARE HELD FOR SALE?

Investments accounted for at cost shall be accounted for in accordance with IndAS 105
“Non-current Assets Held for Sale and Discontinued Operations”, when they are classified
as held for sale. The measurement of investments accounted for in accordance with IndAS
109 is not changed in such circumstances.

Example ↑

An entity has invested in a subsidiary and a joint venture. Entity has elected to measure
investment in subsidiary at cost and measure investment in joint venture at fair value
through profit or loss in accordance with Ind AS 109. Now, at the end of the year, both
these investments are held for sale. In such case, the investment in subsidiary will be
measured as per Ind AS 105 i.e. at lower of its carrying amount and fair value less costs to
sell. However, investment in joint venture is continued to be accounted at fair value through
profit or loss as per Ind AS 109.

Note: Some important facts for Investment Entities:

1. It always measures its investments at FVTPL as per IndAS 109 (not even FVTOCI)
2. It is Exempt from Preparation of Consolidated Financial Statement generally
3. If investment entity (or any other similar entity) is having Investment in Subsidiary/
Associate/JV then such Investment shall be measured at FVTPL Only.
(this is exception of IndAS 27)

4. ARE THESE INVESTMENTS SUBJECT TO IMPAIRMENTAS

PER IND AS 36?

If measured at Cost - Yes and refer IndAS 36

If measured at Fair Value – No.

5. WHEN A PARENT CEASES TO BE INVESTMENT ENTITY OR

BECOME INVESTMENT ENTITY?

When an Entity becomes an Investment When an Entity ceases to be an

Entity Investment Entity
Recognise the Investments at FVTPL as per Option I - Cost model
Ind AS 109 Fair Value on the date of change of status is
taken as deemed cost
Note: any difference between Carrying
Amount of Investments and Fair Value of Option II - Continue as per Ind AS 109
Investments is:
Gain/Loss – Transfer to Profit&. Loss

22.3
Note: Any cumulative balance in OCI shall
be recycled to Profit &. Loss.

Example (When an Entity ceases to be an Investment Entity)

A Ltd. was an investment entity and was measuring its investment in subsidiary X Ltd. at fair
value. On 1 April 20X1, A Ltd. ceased to be an investment entity. On that date, the fair value
of investment in X Ltd. recorded in its books was ₹1,00,000. Now, when A Ltd. ceased to be
an investment entity, it can measure the investment in XLtd. either:
• At cost (in such case, the carrying value of { 1,00,000 will be its deemed cost at the
date of change in status), or
• Continue to measure in accordance with Ind AS 109

Example (When an Entity becomes an Investment Entity)

A Ltd. holds investment in a subsidiary X Ltd. and it measures its investment in subsidiary
at cost. On 1 April 20X1, A Ltd. becomes an investment entity. On that date, the carrying
value of investment in X Ltd. recorded in its books was ₹1,00,000. However, the fair value
of that investment on the date of change in status was ₹1,50,000. Hence, A Ltd. should
record a gain of ₹50,000 (1,50,000 – 50,000) in the Profit and Loss Account.In this case,
assume that A Ltd. was measuring the above investment at fair value through other
comprehensive income in accordance with Ind AS 109 prior to change in status. The
cumulative gain recorded in other comprehensive income was ₹50,000 and the carrying value
of investment was ₹1,50,000. Hence, on the date of change in status, A Ltd. shall reclassify
the gain of ₹50,000 from other comprehensive income to profit or loss as if the investment
has been disposed by AL td. on that date.

6. REORGANIZATION OF THE GROUP STRUCTURE

A parent re-organize the structure of its group by establishing a new entity

as its parent.

Cost of Investment for New Parent Company will be the Carrying Amount of Equity Items of Old
Parent Company, subject to below conditions:
a) New Parent Company must issue its equity shares as consideration for acquiring shares of
old parent.
b) There must be No change in Net worth of whole group.
c) Owner’s Position in New Group must be same as Position existed in Old Group.

22.4
INDAS 103 & 110

1. SCOPE OF INDAS 103

● Recognizes and measures the identifiable assets acquired, the liabilities assumed
and any non-controlling interest in the acquiree;
● Recognizes and measures the goodwill acquired in the business combination, or a gain
from a bargain purchase;
● Determines what information to disclose about the business combination.

2. WHAT TO DO NOW WHEN THE TRANSACTIONS OF BUSINESS

COMBINATIONS ARISE?

Apply ‘ACQUISITION METHOD’.….. This method has 4 steps:

a. Identifying the Acquirer - the entity that obtains the control of another entity (will
be discussed under IndAS 110 later)
Note:
In order to ascertain control do not look at the voting rights only. Evaluate other factors
also like board control, potential voting rights etc.

b. Determining the Acquisition date - the date on which it obtains control of the
acquiree.
Note:
(a) On Acquisition date – Consideration, Identifiable Net Assets, Non-Controlling
Interest & Goodwill/Gain on bargain purchase is to be measured or determined.

(b) If any approval of regulating authority is required for business combination

then the date of obtaining approval may be considered as DOA.

Example:

Company A acquired 80% equity interest in Company B for cash consideration. The relevant dates are
as under:

22.5
 ✔ Date of shareholder agreement 1st April, 20X1
✔ Appointed date as per shareholder agreement 1st June, 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
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.

c. Recognizing and Measuring the identifiable assets acquired, the liabilities assumed
and any non-controlling interest in the acquiree;

d. Recognizing and Measuring Goodwill or a Gain from a Bargain Purchase.

22.6
 SUMMARIZING THE ABOVE BASICS:

WE NEED FOUR ELEMENTS FOR SOLVING QUESTION

Consideration (PC) or Fair Value of 100% Value of NCI as on Value of Goodwill
Investment made by Net Assets as on DOA or Gain from
Parent co. only on DOA & Bargain Purchase
DOA & Again NCI is to be only on DOA
Again 100% Net recalculated as on
Assets as on Consolidation Date
Consolidation Date for preparing BS
for preparing BS
I. Cash: Here Net Assets NCI can be Goodwill/GBP will be
i. Immediate Means – calculated by any of Different when
ii. Deferred (a) Equity Capital the following two Non-Controlling
II. Other than (b) Balance of approaches- interest valued at:
Cash (Eg. Other equity (a) Fair Value a) Net Asset:
Debentures, as on DOA Or Proportionate
other Other equity means (b) Proportion of Goodwill
securities) Profits accumulated Net Assets b) Fair Value: Full
III. Contingent by any name. Qualifying NCI Goodwill
Consideration either at FV or Prop. (preferred)
IV. Step Of Net Assets
Acquisition Non-qualifying NCI
at FV Goodwill is subject
to Impairment
under IndAS 36,
but not
amortization.

22.7
 3. WHAT IS PURCHASE CONSIDERATION UNDER BUSINESS

COMBINATION?

Fair Value of Assets given on acquisition date xxx

Fair Value of Liabilities incurred by acquirer xxx
Fair Value of equity shares issued by acquirer xxx
Fair Value of Deferred Consideration (at PV) xxx [see note (i) below]

Fair Value of Contingent Consideration (at PV) xxx

Fair Value of Replacement Award of Pre-Combination Period xxx
TOTAL PURCHASE CONSIDERATION (PC) XXX

(i) *** Difference between the actual consideration to be paid and the Fair value of
Consideration recognized on acquisition date or any change after 1st recognition will be
transferred to Profit and Loss as Finance Cost every year.
(ii) Acquisition related costs incurred by an acquirer to effect a business combination are
not part of the consideration transferred, for example –
(a) STAMP DUTY payment on acquisition of Land pursuant to business combination shall
not be capitalized and treated as acquisition related cost – to be expensed off.
(b) Any Payment to the regulator of acquiree to run license.

Author’s Note –
1. Any Transaction cost incurred on Business Combination shall be directly
transferred to Profit and Loss account.
2. If Contingent Consideration is based on Employement Service then it is not to
be a Part of PC and fully treated as Post Business Combination Expense in Profit
and Loss Statement of Acquirer if Paid.

22.8
 Example:
B Ltd. has 1,00,000 no. of equity shares outstanding
A Ltd. acquired 72,000 equity shares of B Ltd. (FV per share of B Ltd. is 361-)
Consideration would be discharged in the form of cash of Rs. 5,00,000 immediately & 1 Equity Share
of A Ltd. for Every 2 shares acquired (FV per share of A= 601-)
In addition to above, A Ltd. will pay 6,00,0001- in cash after 1 year (Cost of Capital is 10%) Calculate
Purchase Consideration as on Date of Acquisition
Solution:
Calculation of Purchase Consideration
Consideration in form of Amt
1) Equity shares of A Ltd (72,000/2 x 1) x 60/- 21,60,000
2) Cash Immediate 5,00,000
3) Deferred Cash at PV 6,00,000/1.1 5,45,455
Purchase Consideration 32,05,455

FV of NCI of B Ltd:
(1,00,000 - 72,000) X 36 = 10,08,000

SFS of A Ltd: (Journal Entry for A Ltd.)

DOA= Investment in B Ltd Dr 32,05,455

.
To Bank Alc 5,00,000
To ESC & SP Alc 21,60,00
0
To Def. Cash Payable Alc 5,45,455

After 1 Year: (5,45,455 X 10%) = 54,5451/-

a) Interest Cost Alc* Dr. 54,545
To Def. Cash Payable Alc 54,545
b) Def. Cash Payable Alc Dr. 6,00,000
To Bank Alc 6,00,000
*Not a part of Investment, to be charged to P&L of Acquirer.

4. NON-CONTROLLING INTEREST

Meaning - The Equity in a Subsidiary

(a) Not Attributable directly or indirectly
(b) to a Parent
i.e. when parent owns less than 100% of the equity of acquiree.

Presentation of NCI – Separately in the CFS of parent.

22.9
Measurment of NCI - IndAS 103 requires measuring NCI as per the following methods:

Method – 1
Fair value of shares held by NCI also known as Full Goodwill method
A Limited acquires 80% shares of B Limited whose NA are Rs 140.00 crores by payment in
cash of Rs 120.00 crores. The value of non–controlling interest is Rs 30 crores.
NCI = 120/80% x 20% = 30 Cr.

Method – 2
‘Proportionate Share in Net Assets method also known as Partial Goodwill
Continuing with the above example in method 1-
Assume that the value of recognized amount of subsidiary Rs. identifiable net assets is Rs
140.00 crores, as determined in accordance with Ind AS 103. The value of non–controlling
interest is Rs 28.00 crores (i.e. Rs 140 crores x 20%).

Types of NCI –
Meaning Qualifying NCI Non-Qualifying NCI
Present ownership interest and entitles All other components of NCI
its holders to a proportionate share in
the Net Assets
Examples Ordinary Equity Shares Equity component of convertible
Preference Shares entitled to a pro-rata debt and other compound financial
share of net asset upon liquidation instruments
Share warrants
Options under Share based
payments
Measurement Option 1 – At the Fair Value of the NCI At Fair Value only unless another
of NCI Option 2 – Proportionate share of Net measurement basis is required by
Assets acquired Ind-AS.
Eg. SBP options of NCI are
measured as per Ind AS 102

Qualifying NCI (Important Note):

⮚ When FV per share of acquiree is given in the question, then use FV Method.
⮚ When question requires NCI to be measured at FV, then FV of NCI shall be computed
based on the price per share paid by parent (acquirer) for acquiring the control at
DOA
⮚ When FV is not given or question doesn’t requires to calculate as per FV, then use
Proportionate share of Net Assets acquired.

22.10
Negative NCI – NCI can be negative also when Net Assets acquired are negative (i.e. Assets
are less and Liabilities are more)

5. CALCULATION OF GOODWILL OR GAIN ON BARGAIN PURCHASE

(A) Goodwill or Gain from Bargain Purchase shall be calculated as under:

Cost of Investments (FV of Consideration transferred) XXXX

Add: XXXX
Fair Value of Previous Equity Interest (in case of Multiple
Acquisition)
Add: XXXX
Non-Controlling Interest as per above two methods
Less: XXXX
Identifiable Net Assets of acquiree at Fair Value on DOA
Goodwill or Gain from Bargain Purchase XXXX

Gain on Bargain Purchase - Ind AS 103 requires that the bargain purchase gain should be

recognised in OCI and accumulated in equity as capital reserve.

If there is no clear evidence for the underlying reason for classification of the business
combination as a bargain purchase, then it should be recognised directly in equity as capital
reserve.

Goodwill - shall be presented in Consolidated Balance Sheet separately from Other Intangible
Assets.

Carve Out – IFRS 3 requires the entity to recognize Gain on Bargain Purchase to Profit or
Loss A/c and not through OCI.

22.11
(B) How to solve the question when acquisition of control (DOA) is made during
the year and balances of other equity (for the purpose of calculating Net
Assets as on DOA) are not given on the same date?
Assume Profits (Other Equity) are accrued evenly throughout the year except when there
are –
(a) Abnormal Items
(b) Non-Recurring Items

And Prepare “Statement of Changes in Net Assets”

Particulars Net Assets as Changes during Total Balance
on DOA the period as on CFS
date
Balance of Share Capital
+ Balance of other equity
(profits)
+/- Abnormal Items; Non XXX
recurring items or Errors
+ Dividend paid during the XXX
year or Dividend of CY
declared in CY & Entry
passed.
= Balances
+/- Time Adjustment (assume
evenly accrued)

**Time adjustment is done

on Profit after Tax before
any appropriation like
dividend
= Balances after Time
Adjustment
+/- Restate Abnormal Items
- Pref. Dividend
+/- Revaluation of
Assets/Liabilities along
with Depreciation if any

22.12
 +/- DTA/DTL on above
revaluation
- Elimination of Unrealized
Profit & DTA thereof
Final Balance

● Take Net Assets as on DOA as 100% for the purpose of calculating Goodwill/GBP
● Apportion the Change column between Parent’s Share and NCI’s Share

6. TREATMENT OF DIVIDEND

1) If dividend is Paid after DOA, then Acquirer must be eligible for this. However, if Dividend
is paid before DOA, Acquirer is not eligible.
2) If Acquirer is eligible for Dividend, then it must include it in its P&L A/c
3) While making Time Adjustment Calculation in SCNA, Profit must be After Tax & Before
any Dividend or Other Appropriation.
4) Therefore, if Dividend is Declared/Paid during the year, it needs to be added back in
Changes Column to determined Profit before Dividend. Let’s understand the same below:
a. Add back in the statement of Net Assets (in change column) just to make proper
time adjustment.
b. Apply Time adjustment
c. Deduct the proportionate dividend directly from parent's P&L and remaining
dividend directly from NCI directly. When dividend is paid before DOA then deduct
the dividend directly from DOA.

Example:

Treatment of Preference Share Capital & Preference Dividend in Subsidiaries)

Balance Sheet as on 31/3/24

p E
Equity share capital 15,00,000 9,00,000
9% Preference Share Capital 6,00,000 5,00,000
Other Equity 10,00,000 8,00,000
Liabilities 9,00,000 8,00,000
40,00,000 30,00,000
PPE 14,00,000 20,00,000
Investments:
In Equity Shares (60%) 8,00,000

22.13
 In Preference Shares (30%) 2,00,000

All Other Assets 16,00,000 10,00,000

40,00,000 30,00,000

1) Both Investment were acquired on 1/4/23

2) Preference Dividend is declared by Subsidiary on 31/3/24. But no entry is yet passed by
both.
3) Equity dividend is paid on subsidiary on 1/10 @12%
4) Balance of other equity of subsidiary as on 1/4/23 = 5,00,000.
Show important workings & Prepare CBS.
Solution : -
Working Note 1: SCNA
Particulars DOA Changes after DOA Balanc
Position 12 Months e
1/4/23 Sheet
31/3/
24
Equity Share Capital 9,00,000 9,00,0
00
Other Equity 5,00,000 3,00,000 8,00,00
0
+ Equity Dividend 1,08,000
Paid
+ Preference
Dividend Paid (No
need to add back as
entry not passed)

(-) Preference (45,000)

Dividend
14,00,000 3,63,000
100% Net Parent - 60% = 2,17,800
assets as on NCI - 40% = 1,45,200
DOA

Working Note 2: - (NCI including Preference Share Capital)

NCI (40% of Net Assets as on DOA) 5,60,000
+ Proportionate 70% Preference Share Capital 3,50,000
NCI as on DOA 9,10,000
(+) Share in Post-Acquisition Profit (60%) 1,45,200
(-) Dividend Equity Received (1,08,000 x 40%) (43,200)
TOTAL NCI 1,12,000
**Excluding Preference Share Dividend, it should be separately shown in CBS "Other Current
Liabilities".

Working Note 3: - Cost of Control Investment

Equity 60% 10,00,000
Preference 30% 9,10,000
19,10,000

22.14
 (-) 100% Net Assets: 14,00,000
100% Pref. Share Capital: 5,00,000 (19,00,000
)
Goodwill 10,000

Working Note 4: - Other Equity Balance

Balance with Parent in SFS 10,00,000
+ Post Acquisition Share in Subsidiary Prof it 2,17,800
- Dividend Equity (64,800)
11,53,000
+ Preference Dividend Income 30% 13,500
11,66,500

Consolidated Balance Sheet

PPE 34,00,000
Goodwill 10,000
Other Current Asset 26,00,000
60,10,000
Equity Share Capital 15,00,000
9% Preference Share Capital 6,00,000
Other Equity 11,66,500
NCI 10,12,000
Liabilities 17,00,000
Net Dividend Payable (Preference) 31,500
60,10,000

7. FAIR VALUE OF IDENTIFIABLE NET ASSETS (REVALUATION)

Following Steps should be kept in mind if Separate Fair Values of Net Assets are given in the
question:
1. Calculate Revaluation Profit/loss on the date of acquisition along with its Tax effect
(i.e. DTL/DTA) – This shall be adjusted in the Net Asset as on acquisition date under
“statement of Net Assets” in Pre-acquisition column.
2. Calculate Additional Depreciation/Saving in Depreciation due to revaluation of NA, and
it shall be adjusted in the post-acquisition net assets along with its tax effect (i.e
DTA/DTL)
How to Calculate Depreciation Effect on Revaluation of Assets:

Depreciation that should be charged on Fair Value of PPE as on DOA till Date of XXX
Consolidation

22.15
Less - Actual Depreciation charged in Books from DOA to Date of Consolidation XXX

Balancing Figure would be Additional Dep or Saving in Dep. XXX

22.16
Example: (Fair Valuation of PPE)
Balance Sheet of Acquiree as on 31/3/24
PPE (After 10% Depreciation) 13,50,000
Current Asset 7,50,000
21,00,000
Equity Share Capital (10/-) 12,00,000
Other Equity 3,00,000
Liabilities 6,00,000
21,00,000
90% Investment Acquired by Acquirer on 1/7 /23 at Cost of 12,58,000
Other Equity Balance of Acquiree as on Beginning of Year is 90,000. Tax Rate 25%. Market Value
of PPE on 1/7 /23 is 16,00,000
Solution:
Working Note 1:
a) PPE as on 31/3 (BV) = 13,50,000
b) PPE as on 1/4 (BV) (10% Depreciation)= 15,00,000
c) PPE as on 1/7 (BV) (10% Dep for 3 Months)= 14,62,500
d) PPE as on 1/7 (MV) = 16,00,000
e) Fair Value Gain (MV- BV) (d-c) = 1,37,500

Tax Effect:
Current Asset as per CFS (on DOA)= 16,00,000
Tax Base (Value as per Acquiree's Record)= 14,62,500
DTL@25% = 34,375 (to be Created on DOA due to Business Combination it will ultimately affect
Goodwill/ GBP)

Working Note 2:
Depreciation for Post Acquisition Period (i.e., 11/7 to 31/3)
a) Depreciation Charged by Acquiree for Post Acquisition Period (14,62,500 - 13,50,000) =
1,12,500
b) Depreciation that should be charges in CFS for Post Acquisition period on 16,00,000
(16,00,000 X 10% X 9/12) = 1,20,000
c) Excess Depreciation to be charges in CFS= 7,500
Date DOA Balance
Current Asset (CFS) 16,00,000 Sheet
14,80,000
Tax Base 14,62,500 13,50,000
1,37,500 1,30,000
0ld DTL (1,37,500 x 25%) 34,375
Revised DTL (1,30,000 x 25%) 32,500
Reversal of DTL = 1,875

Working Note 3: Statement of Changes in Net Asset

Particulars DOA Changes after DOA Balance
Position 1/7 (1/7 - 31/3) Sheet

Equity Share Capital 12,00,000 12,00,000

Other Equity 90,00 2,10,000 3,00,000
0

22.17
 (+/-) Time 52,50 52,500
Adjustment for 3 0
Months
NA as in DOA 13,42,500 1,57,500
(+/-) Fair Value 1,37,500 (7,500)
Adjustment
(+/-) DT Adjustment (34,375) 1,875
(liab.)

NA as on DOA 14,45,625 1,51,875

100% Net Parent - 90%
assets as on = 1,36,687
1/9 NCI - 10% = 15,187

Working Note 4: - Cost of Control

Investment @90% 12,58,000
+ NCI as on DOA 1,44,563
(-) 100% Net Assets (14,45,625)
Gain on Bargain Purchase 43,062

Working Note 5: - NCI

As per Net Asset Proportion 1,44,563
+ Post Acquisition of Shares 15,187
1,59,750

Working Note 6: Consolidated Other Equity

CR R&S
Balance of Parent XXX XXX
+ Shares from Acquiree 1,36,68
+ GBP 43,062 7

43,062 1,36,687

Consolidated Balance Sheet (Extract)

PROPERTY PLANT AND EQUIPTMENT 14,80,000
P XXX
S 13,50,000
+ FV Gain on DOA 1,37,500
-Additional Depreciation (7,500)
CURRENT ASSETS 7,50,000
P XXX
S 7,50,000
Equity Share Capital of Parent XXX
Consolidated Other Equity 1,79,749
NCI 1,59,750
LIABILITI 6,00,000
ES
P XXX
S 6,00,000
32,500
DTL

22.18
 8. STEP ACQUISITIONS

● Step Acquisition means acquiring equity interest in subsidiary at various different dates
let’s say acquired first time in the year 2019 @ 20% then acquired another 40% in the
year 2020. In this case, CONTROL is meant to be acquired in the year 2020.
● If it results in acquisition of Control, then Consolidation of FS is must.
● Consolidation begins only from the date of obtaining control.
● Investments held before obtaining control must be revalued (at Fair value) through P&L
a/c.
● How to Calculate FV of Previous Investments?
First Preference – FV will be provided in the question
Second Preference – Compute FV based on Price per share paid by Parent in its latest
acquisition (i.e. on DOA of Control)
● Goodwill/Gain on Bargain Purchase shall be calculated only on the date of obtaining
control.

We can understand the entire process through following Journal Entries:

1. Revalue previously recognized investment at fair value:
Investments A/c Dr. or P&L A/c Dr.
To P&L A/c To Investment A/c

2. Now Consolidate the subsidiary:

Net Assets (100%) (value as per IndAS 103) Dr. Fair Value
Goodwill Dr. Calculated as above
To Non-Controlling Interest Calculated as per INDAS103
To Bank Consideration
To Investment** (previously recognized) Fair Value
** Previous investment may be Investment in Associate before obtaining control.

Calculation of Goodwill/CR
Cost of Investment (further investment when control obtained) --- xxx
+ Fair value of previous equity interest --- xxx
+ Non-Controlling Interest as per above two methods --- xxx
Identifiable Net Assets (FV) of subsidiary on acquisition date --- xxx

22.19
 Investment in Associate Converted into Investment in Subsidiary

1) Initially we had an investment in Associate

In CFS we must have apply Equity Method on Such Investment
Equity Method:
Cost on Investment XXX

+ Share in Post-Acquisition P&L XXX

+ Share in Post-Acquisition OCI XXX

+ Share in Post-Acquisition Other Equity XXX

(-) Dividend Received (XXX)

Value of Investment (In CFS) XXXXX

Journal Entries:
Investment A/c Dr.
To Consolidated P&L A/c
To Consolidated OCI A/c

2) Subsequently when Associate is Converted into Subsidiary due to Further

Investments.
Equity Method is discontinued and follow INDAS 103
Follow Step Acquisition Method and Measure previous Investment in Associates at FV
as on DOA. Any Accumulated Balances in OCI shall be treated as Follows:
(a) Balance of OCI to the extent allowed as reclassified shall be transferred to
Consolidated P&L A/c
(b) Balance of OCI to the Extent not allowed to be reclassified - shall be directly
transfer to reserve in CFS.

Journal Entry as per INDAS 103:

Net Asset A/c Dr.
Consolidated OCI A/c Dr.
Goodwill A/c Dr.
To Bank A/c
To Investment A/c
To Consolidated P&L A/c
To Reserves A/c
To Consolidated P&L A/c (FV Gain)
22.20
Example: -
Invested 15% in Equity of B Ltd on 1/4/22 @ 5,00,000/-
Total Equity Shares outstanding of B Ltd. id 1,00,000 No.
Invested another 45% in equity of B Ltd on 1/4/23 @25,00,000/-
Market Value of Share of B Ltd. on 1/4/23 is 50/-
100% Net Assets Fair Value of B Ltd.
1/4/22 = 50,00,000
1/4/23 = 60,00,000
NCI Should be at Fair Value
Calculate COC & also discuss treatment of 15% Investment in CFS.
(Parent Follows Cost model under INDAS 27)
Solution:
Date of Acquisition = 1/4/23
Cost of Control:
Investment (PC)
1/4/23 – 45 % Equity 25,00,000
1/4/22 – 15% Equity (15,000 x 50) 7,50,000
32,50,000
+ NCI as on DOA (40,000 x 50/-) 20,00,000
(-) 100% Net Assets (60,00,000)
Gain on Bargain Purchase 7,50,000

While calculating GBP as above, we have remeasured 15% Investment @7,50,000 (i.e., FV Gain of
2,50,000). Its second effect should be credited to P&L of parent & to be reflected in Consolidated
Other Equity of Grp.

9. UNREALISED PROFIT/LOSS ON ASSETS/STOCKS TRANSFERRED

WITHIN THE GROUP:

1. Effect on Consolidated Balance Sheet:

a. Calculate Book value of asset/stock transferred within the group (net of depreciation if
any)
b. Calculate un-realised profit/loss on above book value.
c. If such transaction is upstream (i.e. sale by subsidiary to parent), then eliminate
profit/loss in statement of Changes in NA in Post-acquisition column with similar effect
in Asset/Stock value.
d. If such transaction is downstream (i.e. sale by parent to subsidiary), then eliminate the
profit/loss from Consolidated Retained Earnings of Parent with similar effect in
Asset/Stock value)
** If the Loss is irrecoverable (Permanent decline in FV/NRV) then Ignore (no reversal)

22.21
Note: DTA/DTL should also be reflected in the above calculations. DTA shall be
recognized in case of elimination of Profit.

10. SUMMARY:

(A) RECOGNITION –
● On acquisition date, recognize all identifiable Assets acquired and Liabilities assumed if
they meet the definition of assets and liabilities as per Framework.
● Those Assets & Liabilities which are not recorded by acquiree in its financial
statements - shall also be recorded if they meet the recognition criteria as per acquirer.
● Recognition of Contingent Liabilities -
Outcome INDAS 37 Business Combination
Possible obligation Not recognized Not recognized
Present obligation – not probable Not recognized Recognized if reliably
that an outflow of economic Measured
benefits will occur
Present obligation – probable Not recognized Not recognized
that an outflow of economic
benefits will occur, but cannot
be measured reliably

● Indemnification 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. The Acquirer shall record Indemnification Asset only if related
Liability is also Recorded.

(B) MEASUREMENT OF ASSETS & LIABILITIES –

● Identifiable Assets and Liabilities acquired and recorded shall be measured at FAIR
VALUE as on Acquisition Date.
● NCI shall be measured first on Acquisition date either at (i) Fair Value or (ii)
Proportionate share in the Net Assets of acquire.
● NCI shall be re-measured on every BS Date by any of the above methond.
● Income Tax Assets – DTA or DTL shall be measured on Assets and liabilities acquired
on business combination as per INDAS 12 only.
● DBO of Employee Benefits – Principles of INDAS 19 shall be followed.
● Share based payments (ESOPs or Cash Liability) – Principles of INDAS 102 shall be
applicable.

22.22
 ● Assets held for sale - 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

(C) MEASUREMENT PERIOD –

Meaning – the period after the acquisition date during which the acquirer may adjust
the provisional amounts recognized for a business combination.
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.

What if when New Information arise after acquisition during measurement period
–
During the measurement period
(a) the acquirer shall retrospectively adjust the provisional amounts recognized 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 recognized as of that date.
(b) the acquirer shall also recognize additional assets or liabilities if new information is
obtained about facts and circumstances that existed as of the acquisition date.

Accounting –Adjust related Assets/Liabilities and NCI.

Any change i.e. increase and 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.

22.23
 11. CONTROL OBTAINED OVER A SUBSIDIARY WITHOUT THE

TRANSFER OF CONSIDERATION

An acquirer sometimes obtains control of an acquiree without transferring consideration. Such

circumstances include:
a) The acquiree repurchases a sufficient number of its own shares for an existing investor
(the acquirer) to obtain control.
b) Minority veto rights lapse that previously kept the acquirer from controlling an acquiree in
which the acquirer held the majority voting rights.
c) The acquirer and acquiree agree to combine their businesses by contract alone. The acquirer
transfers no consideration in exchange for control of an acquiree and holds no equity
interests in the acquiree, either on the acquisition date or previously. Examples of business
combinations achieved by contract alone include bringing two businesses together in a
stapling arrangement or forming a dual listed corporation.

Treatment:
The acquirer shall re-measure its existing equity interest in the acquiree at its acquisition
date fair value (and recognize the gain or loss on such re-measurement in profit or loss or
other comprehensive income, as the case may be) and use that to compute goodwill or gain on
bargain purchase.
The equity interests in the acquiree held by parties other than the acquirer are a non-
controlling interest in the ACQUIRER’S post-combination financial statements even if the
result is that all of the equity interests in the acquiree are attributed to the non-controlling
interest.

Example:

A Ltd. obtained control over B Ltd. by contract alone. There is no stake in B Ltd. held by A Ltd. So,
while preparing the consolidated financial statements, A Ltd. will attribute 100% of the net assets of
B Ltd. to the non-controlling interest.

22.24
 12. IMPAIRMENT OF GOODWILL

● Once the Goodwill is recognized on Business Combination under Consolidated Financial

Statements, it is required to make impairment testing on annual basis on such goodwill as
per IndAS 36 ‘Impairment of Assets’
One Most common point to understand is Goodwill can never be shown (Recognised) in SFS.

● Goodwill is not required to be amortized every period.

Journal Entry in CFS
Full Goodwill Method Partial Goodwill Method
Consolidated Retained Earnings A/c Dr Consolidated Retained Earnings A/c Dr
NCI A/c Dr To Goodwill A/c
To Goodwill A/c

13. CHANGE IN PERCENTAGE OF HOLDING OF PARENT CO.

A. Full/Partial Disposal of Share (with loss of control) with or without

Significant Influence:
In case parent sells entire investments with loss of control or sells majority of
investment and retain such portion which does not result in Significant Influence then
consider following journal entry:
Bank A/c Dr. (Sale Proceeds)
Investments A/c Dr. (Value of retained investments if any at Fair Value)
Minority Interest Dr. (Proportionate share in NA)
Capital Reserve Dr. (Previously recognized if any on COC)
To Net Assets A/c (Value on the date of sale)
To Goodwill A/c (Previously recognized if any on COC)
(Any difference in above entry will be transfer to Profit and Loss A/c of Holding
co.)

B. Purchase of additional shares or Disposal of shares affects NCI but

Control exist:
Where proportion of the equity of NCI changes, then group shall adjust controlling
and non-controlling interest and any difference between adjustment of NCI (increase

22.25
 or decrease) and fair value of consideration received is to be attributed to the Other
Equity of Parent.

Journal Entries:
1. If additional shares purchased (control already exist)
NCI A/c (Pro rata adjustment)
To Cash A/c (Purchase Consideration)
(difference in above entry is directly transfer to other equity)

2. If some holding is disposed (control not lost)

Cash A/c Dr. (Sales proceeds)
To NCI A/c (Proportion of NA + Goodwill)
(difference in above entry is directly transfer to other equity)

C. Loss of control of a subsidiary in two or more transactions

A parent might lose control of a subsidiary in two or more arrangements
(transactions). However, sometimes circumstances indicate that the multiple
arrangements should be accounted for as a single transaction.

Example

MN Ltd. was holding 80% stake in UV Ltd. Now, MN Ltd. wants to dispose its entire holding in UV Ltd.
It can do it in following ways:

22.26
● Option 1: Sale entire 80% stake in single transaction. In this case, the entire gain / loss on sale of
70% stake would be recognized in profit or loss.
● Option 2: Sale 25% stake in one transaction and sale the remaining 55% stake in another transaction.
In this case, the gain / loss on sale of 25% stake would be recognized directly in equity since it will
be sale of stake without loss of control. When the remaining 55% stake is sold then the gain / loss
pertaining to that stake will be recognized in profit or loss.

14.CHAIN HOLDING

Let us understand this topic through given diagram:

H Ltd.
(Parent)
80% S Ltd.
(Direct Sub) SS Ltd.

IMPORTANT CONCEPTS:
1. Calculate Parent’s Share (H Ltd.) in Direct Subsidiary (S Ltd.) and Calculate NCI’s Share
(outside share holders of S Ltd.) in Direct Subsidiary (S Ltd.)
H’s Share in S Ltd. = 80%
NCI’s Share in S Ltd. = 20%

2. Calculate Parent’s Share (H Ltd.) in Indirect Subsidiary (SS Ltd.) and Calculate NCI’s Share
(outside share holders of SS Ltd.) in SS Ltd.
H’s Share in SS Ltd. = 80% of 70% = 56%
NCI’s Share in SS Ltd. = 100% - 56% = 44%

3. Prepare “Statement of Changes in Net Assets” of both the Subsidiaries (Direct S Ltd. and
Indirect SS Ltd.) and bifurcate the Post Acquisition Column into Two Parts “Parent’s Share”
and “NCI’s Share” which we usually do in every case.

22.27
15. ACQUIRER’S SHARE BASED PAYMENT AWARDS EXCHANGED FOR
AWARDS HELD BY THE Acquiree’s EMPLOYEES

Introduction:
If the acquirer replaces the acquiree awards, either all or a portion of the market-based
measure of the ACQUIRER’S replacement awards shall be included in measuring the
consideration transferred in the business combination.
Market based measure means that awards will be re-measured on the acquisition date as per
the requirements of Ind AS 102.

16. PRE-EXISTING RELATIONSHIP BETWEEN ACQUIRER AND

ACQUIREE

There can be two types of relationships:

1) Non-contractual Relationship:
i) Example - Law Suit filed by acquirer on acquiree or vice versa

22.28
 ii) If acquirer and acquiree agreed to settle these law suits due to business combination
by paying/receiving compensation, then it needs to be considered under Business
Combination Accounting in the books of acquirer on date of acquisition.
iii) Above compensation shall not become part of Purchase Consideration. It is to be
recognized separately as under:

Compensation Receivable A/c Dr. Loss (P&L) A/c Dr.

To Gain (P&L) A/c To Compensation Payable A/c

iv) If any receivable/payable is shown in Books of Acquiree then it shall not become
part of Net Assets.

2) Contractual Relationships:
i) Example – Required Rights (i.e. Franchise rights given by Acquirer to Acquiree prior
to date of acquisition)
ii) On date of Acquisition, acquirer shall recognise:
a) “Required Rights” as a Separate Identifiable Intangible Asset apart from
other Net Assets Acquired at Fair Value.
b) “Loss on Cancellation of Rights” at Lower of:-
Penalty Payable as per Contractual Terms; or
Difference between Fair Value of Required Right & Proportionate Value of
Contract.
iii) Journal Entry of above Loss on Cancellation:
Loss on Cancellation (P&L) A/c Dr.
To Penalty Payable A/c
Example:
Aakash Ltd. is Sued by Subhash Ltd. for a legal claim of Rs. 10 Lacs for a use of Trademark of Subhash
Ltd. Aakash Ltd. has made provision for penalty payable of Rs. 6 Lacs. However Subhash Ltd. has not
recognized any receivable for penalty.
After 1 year (Case is not yet settled), Subhash Ltd. acquired control over Aakash for a Consideration
of Rs. 62 Lacs (net of above penalty claim).
Fair Value of Claim on Date of Acquisition is Rs. 10 Lacs
Fair Value of Net Assets Acquired of Aakash Ltd. is Rs. 70 Lacs.
Assume NCI is Nil. Calculate Goodwill or Gain from Bargain Purchase.
Golden Rule: PC should be kept separate from Pre-existing Relatiaships (PER). PC Should not included
the effect of pre-existing Relationship. PER should be recog. separately at Fair Value on DOA.
Gross PC for Acquiring Contral = 62 + 10 = 72
Journal Entries in the Books of subhash Ltd.
1) Compensation Receivable Dr. 10
To Gain (P&l) 10
2) Net Asset Dr. 70

22.29
 Goodwill Dr. 2
To Consideration Payable A/c 72
3) Consideration payable 72
To Compensation Receivable 10
To Bank / Cash 62

Example:
Consider above Example 24 with following changes:
i) Now Subhash Ltd. is sued by Aakash Ltd.
ii) Gross Final Consideration Payable by Subhash Ltd. towards acquisition of business is Rs. 85 Lacs
iii) Both Companies have not passed any entry of Payable or receivable of penalty in their books.
Solution
Actual Consideration to world acquiring Control = 85 - 10 = 75 Lacs.
1) Loss (P&l) 10
Dr. 10
To Compensation Payable
2) Net Assets Dr. 70
5
Goodwill Dr. (b/f) 75

To Consideration Payable
3) Consideration Payable Dr. 75
Compensation Payable Dr. 10
To Bank A/c 85

Example:
V’Smart Academy Pune provided franchise rights for 10 years to Kolkata based Coaching Center for
Rs. 10 Lacs. Penalty clause as per the contract due to cancellation of Franchise is 110% of remaining
period of proportionate franchise fees.
After two years, Vsmart acquired Kolkata center at a consideration of Rs. 60 Lacs (Including
Penalty). Fair Value of Net Assets of Kolkata is Rs. 40 Lacs (other than Franchise Rights).
Fair Value of Franchise Rights as on DOA is Rs. 15 Lacs.
Solution:
1) Proportionate Value of Contract = 10/10 x 8 = 8 Lacs.
2) Penalty as per Contract = 8 Lacs + 10% = 8.8 Lacs.
3) Fair Value of Reacquired Rights = 15 Lacs.
4) Differences Between FV & Prop. Value of Contract = 7 Lacs. (15 - 8)
5) Lower will 7 Lacs. Payable which is recognised as penalty
6) PC for control acquisition = 60 - 7 = 53 Lacs.

DOA (Journal entry)

1) Loss as Cancellation (P&l) 7
To Penalty Payable 7
2) Net Assets a/c Dr. 40
ReAcq. Rights a/c Dr. 15
To Consideration Payable 53
To GBP (OCI - CR) 2

3) Penalty Payable Dr. 7

53

22.30
 Consideration Payable Dr. 60

To Bank a/c

17. DEMERGER

Accounting Treatment
Demerged company shall transfer its business (Net Assets) to resultant company. In the
books of demerged company, all Assets and Liabilities of the segment demerged shall be de-
recognized and loss on demerger or loss on reconstruction is recognized in the equity.

Resultant Company shall follow IndAS 103 – acquisition method i.e. it shall record the Net
Assets at Fair Value. Any difference between purchased consideration and fair value of net
assets shall be recognized as Goodwill or Gain from bargain purchase (Capital Reserve).

18.COMMON CONTROL BUSINESS COMBINATIONS

(Appendix C of IndAS 103)

“CONTROL DOES NOT TRANSFER”; IT EXIST WITH SAME ENTITY

Common control business combinations will include transactions, such as transfer of
subsidiaries or businesses, between entities within a group.
Also, a group of individuals are regarded as controlling an entity when, as a result of
contractual agreements, they collectively have the power to govern its financial and operating
policies.

1. Which accounting method is prescribed for CCBC?

Pooling of interests method is applied under Common Control business combination by both
transferor and transferee companies as under:
● Assets and Liabilities are derecognized by transferor and recognized by transferee at
Book Values.
● All the Reserves and Surplus of transferor is maintained by Transferee Company.
● Consideration (PC) is calculated at Fair value and recorded accordingly.

22.31
Any difference in above shall be transfer to Capital Reserve in transferor and transferee
company.
Different Cases of Common Control Business Combination:
When Two Companies merge When Subsidiary of a Group An Existing Company
& Form A New Company Acquires Control of Another Transfers One Division to a
Existing Subsidiary of Same Newly Incorporated Company
Group
When Two Companies merge Example – A Ltd. Holds 90% An Existing Company
& Form A New Company in Share Capital of B Ltd. & Transfers One Division to a
Which Shareholders of Both 80% Share Capital of C Ltd. Newly Incorporated Company
Companies Shall have same Now A Ltd. Sold its such New Company Issues
Rights. investment in C Ltd. to B Ltd. Shares to the Share Holders
of Existing Company, as a
Example – (This means Subsidiary of A result of which such Share
A Ltd. + B Ltd. = C Ltd. Group Acquires Control of Holders get Control over the
Under this case, Purchase another Existing Subsidiary New Company. i.e. Control over
Consideration will be Equal to of Same Group) the Transferred Division is not
Sum of Share Capital of Both Shifted. It Exist with Same
the Companies if Separate Members of Group. (These
Purchase Consideration is not Shareholders were already
given. having control over Net Assets
of Existing Company. However
it may be noted that this may
also result into Demerger)

(A)
How to Calculate Purchase Consideration in Common Control Business Combination
transaction if Purchase Consideration is Not Given in Question?
Answer:
Under Common Control Business Transaction, Rights/Control does not Transfer, it should
remain with same Party.
Therefore, If Two Companies are getting Merged under Common Control Business Transaction
Then we should make sure that Rights of Shareholders of Both the Companies remain
Unaltered in the Future Profits of the New Company.
Therefore, Purchase Consideration is Equal to the Sum of Equity Share Capital of Both the
Companies. (In Above Example PC = ESC A Ltd. + ESC B Ltd.)

(B)
How to Allocate Above Purchase Consideration to the Share Holders of Both Companies?
Answer:

22.32
Total Purchase Consideration should be allocated in Proportion of “Book Value of Net Assets
Taken Over” of Both the Companies.

19. REVERSE ACQUISITION

A. But sometimes acquirer may be different from legal acquirer (Reverse Acquisition). In
such case, accounting acquirer is identified.

Example:
X Ltd. acquired the business of Y Ltd. It will issue 5 shares of Rs. 10 each for every 2 shares held.
No. of O/s shares in X – 8000 shares
No. of O/s shares in Y – 7000 shares
Net Assets of Y – 90000/-
Identify the acquirer.

B. Preparation & Presentation of Consolidated Financial Statements:

CFS shall be issued under the name of Legal Acquirer but described in the notes as a
continuation of the FS of the Accounting Acquirer (Legal Subsidiary) with ONE
ADJUSTEMENT, which is to adjust retroactively the accounting ACQUIRER’S legal capital to
reflect the legal capital of the legal acquirer.
Total Share Capital = SC of Accounting Acquirer+ PC to Legal Acquirer

Reconciliation of legal SC of the entity whose FS are being prepared (Legal Acquirer) with
Presented Share Capital (as above) to be disclosed
Reserves of Accounting Acquirer to be only recognized, at its carrying amount
Goodwill or GBP = FV of Consideration – FV of Net Assets of Legal Acquirer

Fair Value of Consideration –

The Assets, Liabilities, Retained Earnings and other Equity balances of accounting acquirer
- shall be recognized and measured at carrying amount.
The Assets & Liabilities of Legal Acquirer - shall be recognized and measured as per IndAS
103 i.e. Fair Value.

C. How to Calculate the EPS after Business Combination-

Earnings Available to ESH / W. Avg. No. of Equity Shares

(a) Earnings Available to ESH:

EAESH of Accounting Acquirer for a period before Business Combination

22.33
 (+)
EAESH of Combined Entity after Business Combination

(b) W. Avg. No. of Equity Shares:

Legal no. shares in the combined entity to Accounting Acquirer for full year
(+)
Legal no. Shares with legal Acquirer for Post Combination Period only

Most Important Question is How to Calculate the Consideration under

Reverse Acquisition that Should be Discharged by Accounting Acquirer
against getting Control?

Takeover by One Company of a Company Merger of Two or More Companies

a) An Exchange ratio Must be given Exchange Ratio if Not Given then fair value
b) Fair Value of Accounting Acquirer shall of both the companies may be given.
also be given. Purchase Consideration is equal to FV of
c) Based on Above Exchange Ratio, Business of Legal Acquirer.
Calculate the number of shares which How to identify that it is Reverse
are to be issued by legal acquirer to Acquisition?
Accounting Acquirer. Based on above fair value ratios if
d) Now calculate Percentage of Holding of percentage of fair value is more than 50%
Total Outstanding shares of Legal then it is reverse acquisition.
Acquirer (% of Holding means % of
Shares Held by Accounting Acquirer in
Legal Acquirer) (If this Percentage is
more than 50% than we can say that
this is the case of reverse acquisition)
e) Taking above % as a base & Taking
Shares outstanding of Accounting
Acquirer as a base calculate purchase
consideration as under:

{[O/s Shares issued by A/c Acq. / % of

Holding (Point d) X 100] – O/s shares issued
by A/c Acq. } X Fair Value per share of A/c
Acquirer

22.34
Example:
The Balance Sheets of Entity A and Entity B immediately before business acquisition are as follows:
Amount (₹in thousands)

Particulars Entity A Entity B

Current Assets 600 800
Non-Current Assets 1,200 2,900
Total Assets 1,800 3,700
Current Liabilities 400 200
Non - Current Liabilities 300 1,200
Total Liabilities 700 1,400
Equity
30,000 Shares of 10/- Each 300
60,000 Shares of 10/- Each 600
Retained Earnings 800 1,700
Total Equity 1,100 1,200
Total Equity and Liability 1,800 3,700

On 31 March 20X1, Entity A issues 2.5 shares in exchange for each share of Entity B. All of entity B's
shareholders exchange their shares. Therefore, Entity A issues 1,50,000 shares in exchange for all
60,000 shares of entity B. Entity A legally owns 100% of entity B.
The shareholders of Entity B own 83.33% (1,50,000/1,80,000) of the combined entity. The directors
of entity B are appointed 6 out of 8 positions in combined entity board. In accordance with Ind AS
103, Entity B (Legal Acquiree) is the accounting acquirer and Entity A (Legal Acquirer) is the accounting
acquiree as Entity B shareholders control over combined entity.
The quoted market price of Entity B's share as at 31st March, .20X1 is ₹ 105 per share and Entity A's
share price as at 31st March, 20X1 is ₹ 20 per share.
Assume the fair value of Entity A's identifiable net assets as at 31st March, 20X1 are the same as
carrying values and ignore tax effect.
The acquisition date fair value (i.e. at 31st March, 20X1) of the accounting acquirer equity instrument
is generally used to determine the amount of consideration transferred for business combination. In
this case it is 105 per share (Entity B).
So if the business combination had taken place in the form of Entity B issuing additional shares to
Entity A's shareholders in exchange for their shares in Entity A, Entity B would have to issue 12,000
shares (30,000 / 2.5) for the ratio of ownership interest in the combined entity to be same.
(12,000/72,000). Therefore, the consideration for the business combination effectively transferred
by Entity B is ₹ 12, 60,000 (12000 Shares x 105).
Calculation of Goodwill:
Fair value of Assets less Liabilities Assumed (Entity A) - ₹11,00,000
Consideration transferred (by Entity B) - (₹12,60,000)
Goodwill - ₹1,60,000

22.35
 20. BUSINESS ACQUISITION vs. ASSET ACQUISITION
(CONCENTRATION TEST)

-
=>

Aset/Gup
Single X100
of Similar Assets
%

Gross Assets
to 90 % or more then Test is passed .

22.36
Example:
Myntra, large clothing company, wants to expand to the new location. During its research it discovers
an old factory with infrastructure owned by the local company. Current owner discontinued the
production recently. Currently, there are only a few people working in the factory on the closing works.
ABC decides to buy the factory, but the owner agrees to sell it only with all its liabilities and assets in
entirety.
The Balance Sheet of the factory is as follows:
Particulars Amount
ASSETS:
Non Current Assets
Factory Premise 30,00,000
Plant and Machinery 12,00,000
DTA 1,50,000
Current Assets:
Inventories 2,50,000
Cash and Cash Equivalents 1,00,000
Total Assets 47,00,000
EQUITY & LIABILITIES:
Equity
Share Capital 2,00,000
Other Equity 1,00,000
Current Liabilities 44,00,000
Total Equity & Liabilities 47,00,000

Fair value of the factory building is Rs. 31,00,000. All other assets in factory Rs.s balance sheet are
stated at fair values. Myntra pays Rs. 5,00,000 for the factory in its entirety. Assess whether Myntra
acquired a business or not.
Solution
Perform a concentration test first.
We need to calculate fair value of gross assets.
There are two ways of calculating it:
1. Add up gross assets (and excess of consideration paid over FV of net assets):
● FV of a building: 31,00,000 plus
● FV of P&M: 12,00,000; plus
● FV of inventories of 2,50,000; plus
● FV of + consideration paid: 5,00,000; less FV of Net Assets acquired Rs. 3,00,000 (being the
equity) plus Rs. 1,00,000 (being FV of building of 31,00,000 less book value of building of
30,00,000) i.e. Rs. 4,00,000
● Total: Rs. 46,50,000
Remember – you ignore cash and deferred taxes (and goodwill, but there is none).
2. Adjusting liabilities and consideration paid:
● Consideration paid: Rs. 5,00,000; PLUS
● FV of liabilities: Rs. 44,00,000; LESS
● Cash acquired: Rs. 1,00,000; LESS
● Deferred tax asset acquired: Rs. 1,50,000
● Total: Rs. 46,50,000

22.37
OK, so the fair value of gross assets acquired is Rs. 46,50,000; and it is mainly concentrated in building
and P&M. However factory building and P&M are NOT similar assets, because they represent different
classes of property, plant and equipment.
The question is whether the P&M can be removed from the factory without significant cost. If not,
then the factory and its equipment would be considered a single asset for the purpose of this test and
the concentration test would be met.
Let’s assume this is not the case.
As a result, the concentration test is NOT met, the fair value is NOT concentrated in a single asset
(or group of similar assets) and as a result, Myntra must assess inputs, processes and outputs in order
to conclude whether the acquired activities and property are a business or not.
First of all, does the set of activities and assets have output?
No, it does not, because the factory has been recently closed.
Therefore, if it does not have an output, we need to see whether there is a substantive process present.
There is a workforce (a few employees working on the closing of factory), but there are no other inputs
that workforce develops or converts into output.
The workforce there only works on the closure.
Thus Myntra can conclude that it acquired assets, not a business (no consolidation, but the asset
acquisition).

22.38