I-23 About the Book I-5 Abbreviations & Acronyms I-7 Corresponding Accounting Standards I-9 Checklist - RTP/MTP Questions I-11 Checklist - Previously Asked Exam Questions I-17 Study Planner I-21 CHAPTERCHAPTER1: 1.1 CHAPTER 2 : 2.1 CHAPTER 3 : 3.1 CHAPTER 4 : 4.1 CHAPTER 5 : 5.1 CHAPTER 6 : 6.1 CHAPTER 7 : 7.1 CONTENTS CONTENTS
I-24 CONTENTS CHAPTERCHAPTER8: 8.1 CHAPTER 9 : 9.1 CHAPTER 10 : 10.1 CHAPTER 11 : 11.1 CHAPTER 12 : 12.1 CHAPTER 13 : 13.1 CHAPTER 14 : 14.1 CHAPTER 15 : 15.1 CHAPTER 16 : 16.1 CHAPTER 17 : 17.1 CHAPTER 18 : 18.1 CHAPTER 19 : 19.1 CHAPTER 20 : 20.1 CHAPTER 21 : 21.1 CHAPTER 22 : 22.1 CHAPTER 23 : 23.1* CHAPTER 24 : 24.1* CHAPTER 25 : 25.1* CHAPTER 26 : 26.1* See
I-25CONTENTS CHAPTERCHAPTER27 : 27.1* CHAPTER 28 : 28.1* CHAPTER 29 : 29.1* CHAPTER 30 : 30.1* CHAPTER 31 : 31.1* CHAPTER 32 : 32.1* CHAPTER 33 : 33.1* CHAPTER 34 : 34.1* CHAPTER 35 : 35.1* HINTS & SOLUTIONS (CHAPTER-WISE) A.1* SOLVED PAPER - DECEMBER 2021 (SUGGESTED ANSWERS) P.1* SOLVED PAPER - MAY 2022 (SUGGESTED ANSWERS) P.15* See
Demergers
Introduction - Restructuring Act of reorganising the legal,ownership,operational, or otherstructures of a company for the purpose of makingit more profitable, or better organised forits present needs.Alternate reasons for restructuring include a change of ownership or ownership structure,demerger, or aresponse to acrisis or major change in the business such as bankruptcy,repositioning, or buyout.Restructuringmay also be described as corporate restructuring,debt restructuring Corporaterestructuring&financialrestructuring.Tomeetthe challenges & seize opportunitiesthrown open by themultilateral tradeagenda&emergence of the World Trade Organisation (WTO).
- Asset&capitalrestructuring External;Organisationalrestructuring Internal;this is based on thesignificance& impact of therestructuring process on a company’s internal or externalstakeholders.
CHAPTER 30 Ind AS
30.1
Mergers Alegalprocess by which two or more companies are joined together to form a new entity or one or more companies are absorbed by another company & as a consequencetheamalgamating companylosesitsexistence&itsshareholders becometheshareholders of the new or amalgamatedcompany.
- Most of the diversified multi product companies are restructuringtheircorporateoperations into more homogenous units to achievesynergy in operations. This entails transfer of business units from onecompany to theother or breaking up of a large group into smaller ones On theother hand, smaller companies are forming alliances& joint ventures for their survival&growth. The exercise involves strategic planning to cope withthe complex changes in theownership& control& comply withavariety of businesslaws.
An arrangementwhereby some part/ undertaking of one company is transferred to another company which operates completely separate from the original company.Shareholders of theoriginalcompany are usually given an equivalentstake of ownership in the new company.
Demerger is undertakenbasicallyforfollowingreasons: As an exercise in corporate restructuring; To give effect to kind of family partitions in case of familyownedenterprises;& To help each of thesegmentsoperatemoresmoothly, as theycan now focus on amorespecifictask. 103
Objective of corporaterestructuring Efficient & competitive businessoperations by increasingthemarket share,brand power &synergies. In theemerging scenario, joint ventures,alliances,mergers, amalgamations &takeovers are becoming the easiest & quickest wayto expandcapacities&acquire dominance overthemarket.
(b)Theacquisition of an asset or a group of assetsthat doesnot constituteabusinessi.e. itisan assetacquisition.
The ACQUIRER obtains CONTROL of acquiree. Ind AS 110.) Business combination occurs when an entity obtains CONTROL of a BUSINESS by acquiring net assets or acquiring its significant equity interest.
COMBINATIONBUSINESS Dual-listed Corporations Companies executecontracts that equalise voting ÷ndrights of two shareholders,establish common governance&executivemanagement policies& provide forequalsharing of economicinterests in liquidation. Activities of the two entities Managed as a single economic entity under Becausecontractualarrangementswhileretainingtheirseparatelegalidentities.ofmutual&proportionatesharingofcontrolbytwoshareholder groups & economic risks&rewards of the two companies Considereda business combination&accountingacquirer must be identified. Stapling Arrangement Alegal entity has issued equity securities that are combined with to) thesecuritiesissued by another legal entity by virtue of acontractual Stapledsecuritiesgenerallyarrangementbetweentheentities.arequoted at a single price& cannot be traded or Thestaplingtransferredindependently.oftwoentities Considereda business combination & one of the entities must be identified as theacquirer. Staplingarrangements Oftenoccurbetweenacompany&atrust.
- Presently in India,Accounting Standard(AS) 14 ‘Accounting for Amalgamation’ lays out specific treatment foramalgamation & AS 21, ‘CFS’ are applied for consolidation.However, itis not matchingthe global financialreportingstandardsrequirements.
FINANCIAL REPORTING30.2 CombinationBusiness as per Ind AS 103
Ind AS Applicability103 Applies to atransaction or othereventthatmeetsthedefinition of aBUSINESSCOMBINATION. Ind AS 103 ApplicabilityNon- Does not apply (a)Theformationto: of a joint arrangement.
- Indian companies are increasinglystretchingtheirbusiness in foreigncountriesforbest-fit businesscombinations.
Note: An entitycan obtain control of a business by contract only in whichcasetheacquirer would neither have acquired net assets norequity interest.E.g.,Astapling arrangement or forming a dual listedcorporation. In suchacase,whilepreparingB/S,controllinginterest would be zero& non-controllinginterest will be 100%.
The acquiree is a BUSINESS.AND Two elements required for a transaction to be a business combination (Ind AS 103):
- Afterconvergence of IFRS as Ind AS, Ind AS 103 which isin line withIFRS3takescare of the globalrequirements in case of business combinations worldwide.
in
BUSINESS COMBINATION & CORPORATE RESTRUCTURING 30.3
Transfer Net Assets/ Equity Interests B
to: Bytransferringcash,cashequivalents or
SubsidiaryAcquireeAcquirer ABC
- A business combination
ways,
One or morebusinessesbecomesubsidiaries of an acquirer or the net assets of one or morebusinesses are legally merged into theacquirer; One combining entitytransfers its net assets, or itsownerstransfer theirequityinterests, to another combining entity or itsowners; All of the combining entitiestransfertheir net assets, or theowners of those entities transfertheirequityinterests, to a newly formed entity (sometimesreferred to as aroll-up or put-togethertransaction); or A group of former owners of one of the combining entitiesobtains control of thecombinedentity. Only for Clarity Ltd. PQR Ltd. Ltd. PQR Ltd. Ltd.P Ltd. Ltd. A Ltd. An acquirer might obtain control of an acquiree a variety of E.g.: may a but not limited otherassets (including net assetsthatconstituteabusiness);
be structured in
of consideration; or Withouttransferringconsideration, including by
ABC
Byincurring
variety of ways for legal, taxation or other reasons, which include
ByByissuingequityinterests;liabilities;providingmorethanonetype contract
ABNEWLtd.Transfer Net Assets/ Equity InterestsAcquirer Acquirer Acquiree Acquiree Acquiree
are
Net EquityAssets/InterestAcquireeAcquirer Q
alone.
2. Transaction Costs In a business combination, acquisition-related costs (including stamp duty) are expensed in theperiod in whichsuch costs are incurred& are not included as part of theconsiderationtransferred. Transaction costs are capitalised as a component of the cost of the assetsacquired.
To be recognised if representspresent obligation that arises from past events & its FV can be measured reliably withsubsequent changes to P&L. Not recognised,subject to Ind AS 37. Business combinations are most common form of business transaction through which companies grow in size rather than organic activities. Business combination or acquisition is DIFFERENT FROM ASSET ACQUISITION
ACQUISITIONASSET
FINANCIAL REPORTING30.4
Theassetsacquired& liabilities assumed are measured using an allocation of the FV of considerationtransferredbased upon relative fairvalues. As aresult, nogain is recognisedforabargainpurchase.
3. Deferred Tax Accounting Deferredtaxes are recorded on temporarydifferences of assets acquired(otherthan goodwill) & liabilities assumed in a business combination. Ind AS 12 Prohibits recognition of deferred taxes fortemporary differencesthatarise upon initialrecognition of an asset or liability in atransactionthat(i) is not abusiness combination & (ii) at the time of thetransaction,affectsneither accounting nor taxable income. Accordingly, no deferredtaxes are recognisedfor temporary differences on assetacquisitions(on initial recognition).
No.S. Particulars Business Combination Acquisition of Group of Assets under Ind AS 1. Intangible Assets, including Goodwill Intangibleassets are recognised at fair value, if they are separately identifiable.Goodwill is recognised as aseparateasset. Intangibleassetsacquired as part of a group of assets would be recognised&measuredbased on an allocation of the overall cost of thetransactionwithreference to theirrelativefair values. No goodwill would be recognised.
5. ContingentAssumedLiabilities
.
4. Situations where FV of assets acquired & liabilities assumed exceeds FV of consideration transferred (gain on bargain purchase) If FV of assetsacquired& liabilities assumed> FV of consideration transferred(plusthe amount of NCI &the FV of acquirer's previously held equityinterests in acquiree),a gain is recognised by acquirer in OCI&accumulatethesame in equity as capitalreserve.
DifferencebetweenCarrying Amount & FV of Land Recognised as Gain.
30.5
Note: Nogoodwill is recognised.Excess of the transaction price over fair value is adjusted in thecost of individualasset.
The cost of theassetacquisition is determined based on thefair value of assetsgiven, unless the fair value of assetsreceived is more reliably determinable. In the given case, the fair value measurement of the land appears more reliablethanthefair value estimate of theequipment and patent.Thus, the entity should record the acquisition of the equipment and patent as 1,400 Crore (the totalfair value of theconsiderationtransferred). Thus,thefair value of the consideration given, i.e., 1,400 Crore is allocated to the individual assets acquired based on their relativeestimated fair values. Yuzi Ltd. should recorda gain of 300 Crorefordifferencebetweenfair value &carrying value of the land. Theequipment is recorded at itsrelativefair value The patent is recorded at itsrelativefair value A Shorts: FV of consideration 1,400 Crores (as FV of asset given reliably measured)allocated to eachassetacquired in ratio of relative FVs.
BUSINESS COMBINATION & CORPORATE RESTRUCTURING
2. Asset Acquisition: Yuzi Ltd.acquires an equipment and a patent in exchange for 1,000 Crore cash and land.
Assumeentityincurred no transaction costs. For ease of convenience, tax consequences on the gain havebeen ignored. How shouldthetransaction be accountedfor?
No Goodwill/ Gain on BargainPurchase to be recognised.
1. Asset Acquisition: Virat Ltd.purchased from Kohli Ltd.a group of assets comprising of plant and machinery, furniture,equipment and software at a combined price of 800 lakhs.Assets do not constitute business as per Ind AS 103. How would Virat Ltd.measuretheseassets at initial recognition?Thefairvalues of theseassetsdetermined applying Ind AS 113 areas under: Plant and Machinery
140 lakhs Total 700 lakhs A. (Amount in in lakhs)
Fair value Allocation of composite Transaction price Plant & Machinery 400 457.14 Furniture 60 68.58 Equipment 100 114.28 License 140 160.00 700 800.00 A Shorts: Combinedprice of 800 lakhsallocated to eachasset in ratio of relative FVs. No Goodwill/ Gain on BargainPurchase to be recognised.
Thefair value of the land is 400 Crore and its carrying value is 100 Crore. The fair values of theequipment and patent are estimated to be 500 Crore and 1,000 Crore, respectively. The equipment and patentrelate to a product that has justrecently been commercialised.Themarketforthis product is still developing.
A. As per Ind AS 103,thestandard does not apply to “the acquisition of an asset or a group of assetsthat doesnot constitute a business. In suchcasestheacquirershallidentify and recognisethe individual identifiableassetsacquired (including those assetsthat meet the definitionof, and recognitioncriteriafor, intangible assets in Ind AS 38,IntangibleAssets) and liabilities assumed.The cost of the group shall be allocated to the individual identifiable assets and liabilities on thebasis of theirrelative fair values at the date of purchase.Sucha transaction or event does not give rise to goodwill”. In the given case, the acquisition of equipment and patentdoesnot representacquisition of abusiness.
LicenseEquipmentFurniture
FINANCIAL REPORTING30.6 Acquirer BusinessGroup of AssetsIndividual Asset Relevant Specific Standard (Ind AS 16/ 38/ 40/ 41) Whether CONTROL Acquired?Allocate FV of consideration transferred on basis of relative FVs. Yes No Relevant Specific Standard (Ind AS 28 or 111) Ind AS 103 Ind AS 103 Ind AS 110 Dealswith accounting aspectsrequired for consolidation ON THE DATE OF ACQUISITION (Goodwill,CapitalReserve,NCI) DealswithperiodAFTER THEDATE OF ACQUISITION whileconsolidation of accounts. ? Only for Clarity
Analysis:BUSINESSInd AS 103 defines business as: - An INTEGRATED set of activities&assets That is CAPABLE of beingconducted &managed Forthe purpose of providing goods or services to customers,generating investment income (such as dividends or interest) or generatingother income fromordinary activities.
A business consists of INPUTS & PROCESSES applied to those inputs that have the ABILITY TO CREATE OUTPUTS.
ELEMENTS OF
BUSINESS COMBINATION & CORPORATE RESTRUCTURING 30.7
(a) Input (b) Process (c) Output Any economic resourcethatcreates, or has the ability to create,outputs when one or moreprocesses are applied to it. Any system,standard, protocol, convention or rule that whenapplied to an input or inputs, creates or has theability to createoutputs. Theresult of inputs &processesapplied to those inputs that provide goods or services to customers,generate investment income (such as dividends or interest) or generateother income fromordinaryactivities.
BUSINESS
Example: Strategic management processes,operationalprocesses&resource Theseprocessestypicallymanagementprocesses. are documented, but an organisedworkforce having thenecessary skills &experiencefollowingrules& conventions may provide the necessaryprocessesthat are capable of being applied to inputs to createoutputs.(Accounting, billing, payroll&otheradministrative systemstypically are not processesused to createoutputs.)
Example: Non-current assets (including intangible assets or rights to usenon-currentassets), intellectual property, theability to obtain access to necessarymaterials or rights& employees.
d) if atangibleasset is attached to, &cannot be physically removed &usedseparately from, another tangibleasset (or from an underlyingassetsubject to alease, as defined in Ind AS 116), withoutincurringsignificantcost, or significant diminution in utility or FV to eitherasset(fore.g., land & buildings) Considereda single identifiableasset;
b) FV of gross assetsacquiredshall include any considerationtransferred (+ FV of anyNCI &the FV of any previously held interest) in excess of the FV of net identifiableassets acquired;
2) Does notprohibit an entityfromperformingadetailed testassessment using businessdefinition.
FINANCIAL REPORTING30.8 CONCENTRATION TEST
Fortheconcentrationtest:a)grossassetsacquiredshallexclude cash&cashequivalents,deferredtaxassets,& goodwill resultingfromtheeffects of deferredtax liabilities;
1) Concentrationtest Optional test&decision to apply is made on atransaction to transactionbasis.
Optionaltest (the concentrationtest)introduced To permitasimplifiedassessment of whether an acquiredset of activities&assets is not abusiness.
Consequences:Followingconditions should be present to meetconcentrationtest: i) FV of considerationtransferred (including FV of NCI & FV of previouslyinterest held) ii) FV of liabilities assumed.
Concentrationtest Met if substantially all of the FV of grossassetsacquired is concentrated in a single identifiableasset or group of similaridentifiableassets.
c) a single identifiableassetshall include any asset or group of assetsthat would be recognised&measured as a single identifiableasset in abusiness combination;
e) whenassessingwhetherassets are similar Considerthenature of each single identifiable asset &therisksassociatedwithmanaging&creatingoutputsfrom the assets (i.e.,the riskcharacteristics); f) Not be consideredsimilar assets i. atangibleasset& an intangibleasset; ii. tangibleassets in differentclasses unless they are considereda single identifiableasset in accordancewith(d) above; iii. identifiable intangible assets in differentclasses; iv.afinancialasset&a non-financialasset; v. financialassets in differentclasses;& vi. identifiableassetsthat are withinthesameclass of asset but have significantlydifferentriskcharacteristics.
iii) resultingfromDTL.deferredCash&cashequivalent&taxassets&goodwill FV of gross assets shall be determined:
3) 3b)a)Stepprocessforconcentrationtest:MeasureFVofGrossAssetsacquired.Identifythesingleidentifiableassetsor group of similaridentifiableasset.
Notes:
c) Determine if substantiallyall of the value determined in point (a) is concentrated in the value determined in point (b) Assetacquisition,otherwiseneeds to assess business definition as per Ind AS 103. Test is met Not a business & No further assessment is needed Test is not met Further assessment to be made
BUSINESS COMBINATION & CORPORATE RESTRUCTURING 30.9 The set of activities&assets= Not a business & no furtherassessment is needed. Yes No Whether entity elected to apply concentration test? Whether test is met? Yes No Perform further assessment. Perform further assessment. Calculation of FV of gross assets acquired: Method 1 (Normally Calculated by:) Method 2 (Alternatively) FV of consideration transferred + FV of previously held interest + FV of NCI + FV of liabilities assumed(otherthandeferredtaxliabilities) - Grossassetsexcluded(Cash&cashequivalent& DTA) = FV of grossassetsacquired FV of identifiable assets (excluding cash & deferred tax assets) + the sum of: FV of consideration transferred + FV of previously held interests + FV of NCI FV of net identifiable assets acquired (other than DTL) = FV of gross assets acquired
Steve Ltd. holds a 20%interest in Smith Ltd. At asubsequent date (the acquisition date), Steve Ltd.acquiresafurther 50%interest in Smith Ltd. and obtains control of it. Smith Ltd.’s assets and liabilities on theacquisitiondate are thefollowing: a) a building withafair value of 500; b) an identifiableintangibleassetwithafair value of 400; c) cash and cashequivalentswithafair value of 100; d) financial liabilities withafair value of 700; and e) deferredtax liabilities of 160 arisingfromtemporarydifferencesassociatedwiththe building and theintangibleasset.
30.10
FINANCIAL REPORTING Example Determining the fair value of the gross assets acquired:
2) Thedeferred tax liability is not deducted in determiningthefair value of the net assetsacquired 300) anddoesnot need to be determined. As aresult,theexcess 100)calculated doesnotincludegoodwill resultingfrom the effects of deferredtax liabilities.
Steve Ltd pays 200 for the additional 50%interest in SmithLtd.Purchaserdeterminesthat at theacquisition date, thefair value of Smith Ltd is 400,thatthefair value of the non controllinginterest in SmithLtd. is 120 (30%x 400) and thatthefair value of thepreviously held interest is 80 (20%x 400). To perform the optional concentration test, Steve Ltd. needs to determine the fair value of the gross assets acquired. Calculation of fair value of the gross assets acquired: Note:Thefair value of gross assetsacquired is determinedafter making the following exclusionsfor items that are independent of whether any substantiveprocess was acquiredi.e.the fair value of thegrossassetsacquired doesnot include: a) thefair value of thecash and cashequivalentsacquired 100) and b) deferredtaxassets(nil). Particulars (a) Fair value of the building 500 (b) Add: Fair value of theidentifiableintangibleasset 400 (c) Add: Theexcess of: (i)the sum of theconsiderationtransferred 200), plus thefair value of the non controlling interest 120), plus the fair value of thepreviously held interest 80); over (ii) thefair value of the net identifiableassetsacquired 500 + 400 + 100 700).
1)Note: Thisexcess amount is determined in amanner similar to theinitialmeasurement of goodwill in accordancewith Ind AS 103. Including this amount in determining thefair value of the gross assetsacquiredmeansthat the concentration test is based on an amount that is affected by the value of any substantiveprocessesacquired.
300400 100 Total 1,000
i. Thefair value exerciseresulted in thefollowing:
2) DavidLtd.agreed to pay anadditionalpayment as consideration thatis higher of 30 lakh and 25% of any excess profits in the first year afteracquisition, over its profits in the preceding 12 months madeby Parker Ltd.Thisadditional amount will bedue after3years.ParkerLtd. has earned 20 lakhprofit in thepreceding year and expects to earnanother 10 lakh.
5) Parker Ltd. had alawsuit pending withacustomer who had made a claim of 35 lakh.Management reliably estimatedthefair value of the liability to be 10 lakh.
You
Non current Property,assets:plant and equipment 400600 Investment 300200 CurrentInventoriesassets: 300100 FinancialTradeassetsreceivables 400200 Cash and cash equivalents 150200 Others 300 300 Total 1,850 1,600 Equity and Liabilities EquitySharecapital-Equityshares of 100 each for ParkerLtd.& 10 eachforDavidLimited 500400 OtherEquity 700275 Non current liabilities: Long term borrowings 200300 Long term provisions 10080 Deferred tax 2055 CurrentShortliabilities:termborrowings 130170 Trade payables 200 320 Total 1,850 1,600NOV 19 (16 Marks)
4) Parker Ltd. had certainequitysettledshare-based paymentaward(original award)which got replaced by the new awardsissued by David Ltd. As per the original term, the vesting period was 4years and as of the acquisition date the employees of Parker Ltd. have alreadyserved2years of service. As per the replacedawards,the vesting period has been reduced to one year (one yearfrom the acquisitiondate). The fair value of the award on the acquisition date was as Originalaward-follows: 6lakh Replacementaward- 9lakh
is given below: Assets
Q.ComprehensiveQuestion: TheBalanceSheet of
3) In addition to above, DavidLtd alsohas agreed to pay one of the founder shareholder-directorapayment of 25 lakh provided he stays withthe Company for two yearsaftertheacquisition.
1) Fair value of property,plant and equipment (PPE)on 1st April, 2019 was 450 lakh
BUSINESS COMBINATION & CORPORATE RESTRUCTURING 30.139
6) Theapplicabletaxratefor both entities is 40%. are required to prepare openingconsolidated balance sheet of David Ltd. as on 1st April, 2019 along withworkings.Assume discount rate of 8%. DavidLtd. and ParkerLtd. as of 31st March, 2019 DavidLtd. Parker Ltd.
OtherInformation: i. DavidLtd.acquired 70%shares of Parker Ltd on 1st April, 2019 by issuing its own shares in theratio of 1share of DavidLtd. for every2shares of Parker Ltd. The fair value of theshares of DavidLtd.was 50 per share.
awardi.e.(6 x
+
400 Number of shares 4,00,000 Shares to be issued 2:1 2,00,000 Fair value per share 50 (A) 70.00 8% (B) 23.81 Replacementaward-Marketbasedmeasure of theacquire award i.e. Fair value of originalaward(6)xratio of the portionof the vestingperiod completed (2)/ greater of thetotalvesting period (3) or the original vesting period(4) of
(C)
FINANCIAL REPORTING30.140 A. ConsolidatedBalance Sheet of David Ltd. as on 1st April, 2019 Working Notes: a) Fair value adjustment- As per Ind AS 103, the acquirer is required to record the assets and liabilities at theirrespectivefair value.Accordingly,the PPE will be recorded at 450 lakh. Amount Assets Non current Property,assets:plant and equipment 850.00 Investment 500.00 CurrentInventoriesassets: 400.00 FinancialTradeassets:receivables 600.00 Cash and cash equivalents 350.00 Others 600.00 Total 3,300.00 Equity and Liabilities EquityShare capital 514.00 Other Equity 1,067.49 Non Controlling Interest 173.70 Non current Financialliabilities:liabilities:Longtermborrowings 500.00 Long term provisions (100 + 80 + 23.81) 203.81 Deferred tax 11.00 CurrentFinancialliabilities:liabilities:Shorttermborrowings 300.00 Trade payables 520.00 Provision for law suit damages 10.00 Total 3,300.00
Purchase consideration (A +
c) There is adifferencebetween contingent consideration and deferredconsideration. In the given case, 30 lakh is the minimum payment to be paid after3 years and accordingly will be considered as deferredconsideration.Theother element is if company meetscertaintargetthenthey will get 25% of that or 30 lakhwhichever is higher. In the given case,sincethecriterion is the minimum what is expected to be paid, the fair value of the contingent consideration hasbeen considered as zero. The impact of time value on deferredconsideration hasbeen given @8%.
96.81
d) Theadditionalconsideration of 25 lakh to be paid to the founder shareholder is contingent to him/her continuing in employment and hence,this will be considered as employeecompensation and will be recorded as post combination expenses in the income statement of ParkerLtd. Ltd. the acquire 2/4) 3.00 B C)
Working Notes: 1. Computation of Purchase Consideration Particulars Amount Share capital of Parker
b) The value of replacementaward is allocated between considerationtransferred and post combination expense.Theportionattributable to purchaseconsideration is determinedbased on the fair value of thereplacementawardfortheservicerendered till thedate of theacquisition.Accordingly, 3 lakh (6x2/4) is considered as apart of purchaseconsideration and is credited to DavidLtd.equity as this will be settled in its own equity. The balance of 3lakh will be recorded asemployee expense in the books of ParkerLtd.overtheremaininglife,which is 1year in thisscenario.
BUSINESS COMBINATION & CORPORATE RESTRUCTURING 30.141 2. Allocationof PurchaseParticularsconsideration Book(A)value Fairvalue(B) FV Adjustment(A-B) Property, plant and equipment 600450 (150) Investment 200200 Inventories 100100FinancialTradeassets:receivables 200200 Cash and cash equivalents 200200 Others 300300 Less: Financial Liabilities Long term borrowings (300)(300) Long term provisions (80)(80) Deferred tax (55)(55) FinancialShortLiabilitiestermborrowings (170)(170) Trade payables (320)(320) Contingent liability (10) (10) Net assets (X) 675515 (160) Deferred taxasset on fair value adjustment (160 x 40%) (Y) 64 160 Net assets (X+Y) 579 Non-controllinginterest (NCI) (579 x 30%) rounded off 173.70 (NetassetsCapitalreserveNCI PC) 308.49 Purchaseconsideration(PC) 96.81 3.Computation ofConsolidated amounts ofconsolidatedfinancial statements DavidLtd. Parker acquisition)(preLtd.- AllocationPPA Total Assets Non current assets: Property, plant and equipment 400600 (150) 850 Investment 300200 500 CurrentInventoriesassets: 300100 400 Financial assets: Trade receivables 400200 600 Cash and cash equivalents 150200 350 Others 300300 600 Total 1,850 1,600 (150) 3300 Equity and Liabilities EquityShare capital Shareseach allotted to Parker Ltd. 500 14514 OtherOtherEquityEquity 700 700 Replacement award 33 Security (2,00,000premiumsharesx 70% 5656 Capital reserve 308.49308.49 Non controlling interest 0 173.70173.70 Non current liabilities: Financial Liabilities Long term borrowings 200300 500 Long term provisions 100 80 23.81 203.81 Deferred tax 20 55 (64) 11 CurrentFinancialliabilities:LiabilitiesShorttermborrowings 130170 300 Trade payable 200320 0 520 Liability for lawsuit damages 10 10 Total 1,850 925 525 3,300
Q.Assets/ LiabilitiesTaken Over – Intangible Assets: MNC Ltd. is in process of setting up amedicinemanufacturingbusiness which is at very initialstage. For this purpose, MNC Ltd. as part of its business expansionstrategyacquired on 1st April, 2019, 100%shares of Akash Ltd.,a company thatmanufactures pharmacy products.The purchase consideration forthe same was by way of ashareexchangevalued at 38 Crore.Thefair value of Akash Ltd.’s assets and liabilities was 68 Crore and 50 Crorerespectively, but thesame doesnot include thefollowing: i. Apatentowned by AkashLtd. for an establishedsuccessful new drug that has a remaining life of 6years.Aconsultant has estimatedthe value of this patent to be 8 Crore.However,the outcome of clinical trials for the same are awaited. If the trials are successful,the value of the drug would fetchtheestimated 12 Crore.
(iii) Grant of Licence to Akash Ltd. bytheGovernment: As regards to the five-yearlicense, para 44 of Ind AS 38 requires to recognise grantasset at fair value byMNC Ltd. It can recognise both theasset(license) and thegrant at 7Crore to be amortisedover four remainingyears of useful life i.e. 1.75 Crore perannum.
(ii) Patent internally developed by Akash Ltd.: Further as per para 75 of lnd AS 38 ‘IntangibleAssets’, after initial recognition, an intangible assetshall be carried at revalued amount, being itsfair value at the date of therevaluation less any subsequentaccumulated amortisation andany subsequentaccumulatedimpairmentlosses. For the purpose of revaluations under thisStandard,fair value shall be determined by reference to an active Theremarket.is no activemarket for patentssince the fair valueis based on earlyassessment of its salesuccess.Hence, itis suggested to use the cost model and recognise the patent at the actual development cost of 13 Crores.
Suggest the accounting treatment of the above transactionswith reasoning under applicable Ind AS in the booksof MNC Ltd.
Hence,therevisedworking would be as follows: Fair value of net assets of Akash Ltd. (68 50) Add: Patent (8 + 13) Add: License Less: Grant for License Purchase Consideration Capital Reserve NOV 19 (8 Marks)
A. As per para 13 of Ind AS 103 ‘Business Combination’, theacquirer'sapplication of the recognition principle and conditions may result in recognising some assets and liabilities that the acquiree had not previouslyrecognised as assets and liabilities in its financial statements. This may be the casewhen the asset is developed by the entityinternally and chargedtherelatedcosts to expense.
Based on the above, the company canrecognise following Intangible assetswhile determining Goodwill/ BargainPurchaseforthetransaction:
ii. Akash Ltd. has developed and patentedanother new drug which has been approved forclinical use.The cost of developing the drug was 13 Crore.Based on early assessment of its salessuccess,areputed valuer has estimated its market value at 19 Crore.However,there is no activemarketforthe patent.
FINANCIAL REPORTING30.142
iii. Akash Ltd.’s manufacturingfacilities have receivedafavourableinspection by a governmentdepartment. As aresult of this, the company has been granted an exclusivefive-yearlicense on 1st April, 2018 to manufacture and distributea new vaccine. Although the license hasno direct cost to the Company, its directorsbelieve that obtaining thelicense is valuableassetwhichassuresguaranteedsales and the cost to acquirethelicense is estimated at 7Crore of remaining period of life. It is expected to generate at leastequivalentrevenue.
(i)Patent owned by Akash Ltd.: Thepatentowned will be recognised at fair value byMNC Ltd.even though it was not recognised by Akash Ltd. in its financialstatements. The patent will be amortised over theremaininguseful life of theasseti.e.6years. Since the company is awaitingthe outcome of thetrials,the value of thepatent should be valuedat 8Crore. It cannot be estimated at 12 Crore and the extra 4Crore should only be disclosed as a contingentasset and not recognised.
Q.Common Control Transaction: ParentA holds 100% inits subsidiaryB.ParentA had acquiredB, 10 years back and had decided to account for the acquisition under the purchase method using fair values of the subsidiaryB in itsconsolidatedfinancialstatements.
The acquisition of B Ltd. by A Ltd. is business combination under common control. In such a situation, pooling of interest method shouldbe applied.However,B Ltd. is 100%subsidiary of A Ltd and A Ltd in its Consolidated financialstatements use to give the carrying values of assets and liabilities of B Ltd atfair value (as per acquisition under purchase method) Hence, the carrying valuefor the purpose of pooling of interest method will be the values given in Consolidatedfinancialstatements and not in Separatefinancialstatements.
In otherwords, since BLtd. is mergingwithA Ltd. (i.e.parent), nothing has changed and the transaction only means that theassets,liabilities and reserves of B Ltd. which were appearing in theconsolidatedfinancialstatements of Group A immediately before the merger would now be apart of theseparatefinancialstatements of A Ltd Accordingly, it would be appropriate to recognise thecarrying value of the assets,liabilities and reserves pertaining to BLtd. as appearing in theconsolidatedfinancialstatements of ALtd. NOV 19 (4 Marks)
During thecurrentyear,Adecides to mergeBwithitself. Forthe purpose of thisproposedmerger,whatvalues of B should be used for accounting under the Ind AS? A. Reference to be included to AppendixC of Ind AS 103.
BUSINESS COMBINATION & CORPORATE RESTRUCTURING 30.143
The fairvalue of identifiable net assets is determined at 45,00,000.
ii. P Limited agrees to pay additional consideration of 4,00,000, if the cumulative profits of S Limited exceeds 40,00,000 overthe nexttwo years. At theacquisition date, it is not considered probable thatextraconsideration will be paid. The fair value of contingentconsideration is determined to be 2,00,000 at theacquisitiondate.
FINANCIAL REPORTING30.144
Thepurchase consideration in this case will comprise the following: Cash consideration: 0,0 0,000 Equity shares issued i.e., at fair value): ,00,000 Contingent consideration(at fairvalue): ,00,000 Fair value of previously held interest: ,00,000 As such, the total purchase consideration is: 79,00,000.
Acquisition cost incurred by and on behalf of thePLimitedforacquisition of SLimited should be recognised in the Statement of profit and loss. As such, an amount of 1,00,000 shouldbe recognised in Statement of profit and loss
Q.ComprehensiveQuestion – AcquisitionMethod: P Limited and S Limited arein business of manufacturinggarments.P Limited holds 30% of equityshares of S Limitedfor last severalyears.P Limited obtainscontrol of SLimitedwhen it acquiresfurther 65%stake of S Limited's shares,therebyresulting in atotal holding of 95% on December 31, 2019.Theacquisition had thefollowingfeatures.
In this case,the controlhas been acquired in stagesi.e., before acquisition to control,the PLimitedexercisedsignificant influence over SLimited. As such, the previously held interest should be measured at fair value and the difference between the fair value and the carrying amount as at theacquisition date should be recognised in Statement of Profit and Loss. As such, an amount of 10,00,000 (i.e., 18,00,000 less8,00,000) will be recognised in Statement of profit and loss.
Determination of goodwill or gain on bargainpurchase
Recognised amount of any non controlling interest 5,00,000
iii. PLimitedspentacquisition-relatedcosts of 2,00,000. iv.Thefair value of the NCI is determined to be 5,00,000 at the acquisitiondatebased on marketprice.P Limited decided to measure non controlling interest at fair valuefor thistransaction.
Analysethetransaction and determinethe accountingunder acquisition methodforthe businesscombination by PLimited. A. Let us evaluateeach of the steps discussed in the above analysis: Identifytheacquirer In thiscase,PLimited has paid cashconsideration to shareholders of S Limited. Further, the shares issued to SLimited pursuant to the acquisition do not transfercontrol of P Limited to erstwhileshareholders of SLimited. Therefore, PLimited is the acquirer and S Limited is the acquiree . Determine acquisitiondate As the control over the business of SLimited is transferred to PLimited on Dec 31,that date is considered as theacquisition date. Determine thepurchaseconsideration
v. P Limited has owned 30% of the shares in S Limitedfor severalyears. At December 31, 2019, the investment is included in PLimited's consolidated balancesheet at Thefair8,00,000.valueof previous holdings, accounted for using theequity method is arrived at 18,00,000.Thefair value of SLimited's net identifiableassets at December 31, 2019 is 45,00,000,determined in accordancewith Ind AS 103.
Measure NCI The management hasdecided to recognise the NCI at its fair value. As such,the NCI will be recognised at 5,00,000. Re measure previously held interests in case business combination is achieved in stages
Goodwill shouldbe calculated as follows: ( ) Total consideration 79,00,000
Less: Fair value of S Limited’s net identifiable assets (45,00,000) Goodwill 39,00,000 NOV 20 (8 Marks)
i. P Limited transferscash of 50,00,000 and issues 90,000 shares on December 31, 2019.Themarketprice of P Limited's shares on thedate of issue was 10 per share. Theequitysharesissued as per thistransaction will comprise5% of the postacquisitioncapital of PLimited.
Determine fairvalue of identifiable assets and liabilities
(ii) Patentinternally developed by AG Limited: As per para 18 of Ind AS 103 ‘Business Combinations’, theacquirershallmeasurethe identifiableassetsacquired and the liabilities assumed at theiracquisition date fair values. Since the patent developed has been approved for clinical use, itisan identifiableasset, hence,thesame will be measured at fair value i.e. 1,000 lakh on theacquisitiondate.
Add: Patent ( ) Purchase Consideration
BUSINESS COMBINATION & CORPORATE RESTRUCTURING 30.145
A. Recognition Principle asperInd AS: As per para 13 of Ind AS 103 ‘Business Combination’, theacquirer'sapplication of the recognition principle and conditions may result in recognising some assets and liabilities thattheacquiree hadnot previouslyrecognised as assets and liabilities in its financial statements.Thismay bethe casewhen the asset is developed by theentityinternally and chargedtherelatedcosts to expense.
Capital Reserve
JULY 21 (5 Marks)
Accounting Treatment: Based on theabove, thecompany can recognisefollowingIntangibleassetswhile determining Goodwill/ BargainPurchaseforthetransaction: (i)Patent owned by AG Limited: The patent owned will be recognised at fair value by UG Limited even thoughit was not recognised by AG Limitedinitsfinancial statements.The patent will be amortised over theremaininguseful life of the asseti.e. 10 years. Since the company is awaitingthe outcome of thetrials, thevalue of the patentshould be valued at 500 lakhs. It cannot be estimated at 750 lakhs and theextra 250 lakhs should only be disclosed as acontingentasset and not recognised.
Q.Assets/ LiabilitiesTaken Over Intangible Assets: As part of its businessexpansionstrategy,UG Limited isin process of setting up ahealth careintermediates business.Theprocess isat very initial stage.Towardsthis, UG Limited acquired on 1st April, 2020, 100%ordinaryshares of AG Limited. AG Limited manufactures healthcareintermediates.Thepurchaseconsideration of AG Limited was by way of ashare exchange valued at 1,750 lakhs.The fair value of AG Limited's net assetswas 750 lakhs, but thisfair value doesnot include: Apatentowned by AG Limited for an establishedsuccessfulintermediate drug that has aremaining life of 10 years.Aconsultant has estimatedthe value of this patent at 500 lakhs.However,the outcome of clinicaltrials for the same is awaited. If thetrials are successful,the value of the drug would fetchestimated 750 lakhs. AG Limited has developed and patenteda new vaccine which has been approvedfor clinical use.The cost of developing the vaccine was 600 lakhs.Based on an early assessment of its sales success; its market value has been estimated at 1,000 lakhs by a UGvaluer.Limitedhas requested you to suggest the accounting treatment of the above transaction under applicable Ind AS.
Hence,therevisedworking would be as follows: Fair value of net assets of AG Limited
Thedirectors of Muhammad Ltd.wish to close one of the divisions ofTyson Ltd.They estimatethatthis will cost 2,00,000 in redundancypayments.
Theproperty, plant and equipment of Tyson Ltd. includes land withacarrying valueof 10,000 but afair value of 50,000.
FINANCIAL REPORTING30.146
a) Muhammad Ltd.purchased 60% of theshares of Tyson Ltd. on 1st January, 20X1. At the acquisitiondate,TysonLtd. had sharecapital of 10,000 &retainedearnings of 1,90,000
Required: As per Ind AS 103,what is the fair value of theconsiderationtransferred to acquire control of Pacquiao Ltd.? Try out:
Includedwithinthe intangible assets of Tyson Ltd. is goodwill of 20,000 which arose on the purchase of the trade and assets of a sole-trader business. Tyson Ltd. hasan internally generatedbrandthat is not recognised(inaccordance with Ind AS 38).Thedirectors of Muhammad Ltd.believethatthisbrand has afair value of 1,50,000. In accordancewith Ind AS 37,thefinancialstatements of Tyson Ltd.disclosethefactthata customer has initiated legal proceedingsagainst them If thecustomerwins,whichlawyers have advised is unlikely, estimated damages would be 1 million.Thefair value of this contingent liability hasbeen assessed as 1,00,000 at theacquisitiondate.
Required:What is the fair value of Tyson Ltd.’s identifiable net assets at theacquisition date? Try out: Play Time !! b) Following on, the purchaseconsiderationtransferred by Mayweather Ltd. in exchange fortheshares in PacquiaoLtd.was as follows: Cash paid of 3,00,000. Cash to be paid in one year’s time of 2,00,000. 10,000 shares in MayweatherLtd.These had a nominal value of 1 and afair valueat 1st January, 20X1 of 3each. 2,50,000 to be paid in one year’s time if Pacquiao Ltd. makes a profit beforetax of more than 20,00,000.There is a 50%chance of thishappening.Thefair value of this contingentconsiderationcan be measured as thepresent value of theexpected value.
Legalfeesassociatedwith the acquisitionwere 10,000.Whererequired,a discount rate of 10%should be used.
Ltd ’s brand is internallygenerated and has not been recognised in the consolidated financial statements. At acquisition, it had afair value of 5 million and a remainingestimateduseful life of 5years.
Brock Ltd.’s policy is to valuethe non controlling interest(NCI) at acquisition at fair value. Thefair value of the NCI at acquisition was correctlycalculated and included in the goodwill Required:Explaincalculation. to thefinancial controller how the above threeissues should havebeen accounted for in the consolidated financial statements forthe year ended 31st December, 20X1. Provide thejournalentriesrequired to correct any errors.Ignoredeferredtax.
c) On 1st January, 20X1,Brock Ltd.acquired 80% of the ordinaryshares of Rocky Ltd.The group accountant has calculatedthatthe goodwill arising on acquisition was 40 million However, the financial controller has uncovereda number of errors and requiresadvice about how to resolvethem: No entries have been posted in respect of contingentcashconsiderationthat will be paid in 20X5 if Rocky Ltd. meets profit targets. The contingentconsideration had a fair value of 4 million at acquisition and wascalculated using a discount rate of 10%. No fair value adjustment hasbeen recorded in respect of Rocky Ltd.'snon-depreciable land.This land had acarrying amount of 2 million atacquisition and afair value of 3 Rockymillion.
Try-out:
BUSINESS COMBINATION & CORPORATE RESTRUCTURING 30.147
Description Financial Reporting (FR) | ALL-IN-ONE (Set of 2 Volumes) AUTHOR : Priyanka R. Agrawal PUBLISHER : TAXMANN DATE OF PUBLICATION : June 2022 EDITION : 2nd Edition ISBN NO : 9789356221208 NO. OF PAGES : 2476 BINDING TYPE : PAPERBACK Rs. : 2695 | USD : 98 This is the first-ever theoretically interactive book for CA-Final | Financial Reporting. The objective of the book is as follows: Completeness for the lengthiest & critical subject of CA-Final – Financial Reporting Conciseness is maintained by condensing the ICAI study material, among other things, to save time Creative Presentation to increase students' memory retention power Student-centric approach is followed throughout this book The Present Publication is the 2nd Edition & updated till 30th April 2022 for CA-Final | New Syllabus | Nov. 2022 Exams. This book is authored by CA Priyanka R. Agrawal, with the following noteworthy features: Charts, Diagrams, Eye-catching Symbols & Words! o [Original & Unique Charts & Diagrams] are given to present the subject matter briefly o [Helps you in Saving Time] so that the entire subject can be covered with ease o [Easy to Memorise, Revise & Recollect] Content & Theory o [Most Updated & Amendment Contents] relevant for CA Final Exams (Nov. 2022 onwards) o [Coverage of ICAI Study Materials] with important points highlighted o [Additional Theoretical Concepts] for enhancing acumen o [Hindi + English = Hinglish] is used in some parts of the book to connect with the students Question Bank o [Along with Details Answers] is given in the book o [A Shorts; Unique Add-on for Quick Revision] This feature summarises the answers to the questions o [Conceptual Clarity] is provided by Topic-wise illustrations o Coverage of this book includes IFRS Questions ICAI Study Material & Education Material Previous Exam Question RTPs & MTPs of ICAI ORDER NOW
