Ind AS-103: Business Combinations

31/08/2021 0 By indiafreenotes

Ind AS 103 “Business Combinations” deals with the accounting for business combinations in standalone as well as consolidated financial statements. A set of assets acquired and liabilities assumed are typically regarded as a business if they can together run independently as a going concern (i.e. it consists of inputs and processes applied to those inputs, which has the ability to create an output). If they do not constitute business, the same shall be accounted as an asset acquisition.

It is a transaction or event where an acquirer obtains control of one or more business. ‘A business combination may be structured in a variety of ways for legal, taxation or other reasons, which include but are not limited to:

(a) One or more businesses become subsidiaries of an acquirer or the net assets of one or more businesses are legally merged into the acquirer.

(b) One combining entity transfers its net assets, or its owners transfer their equity interests, to another combining entity or its owners.

(c) All of the combining entities transfer their net assets, or the owners of those entities transfer their equity interests, to a newly formed entity (sometimes referred to as a roll-up or put-together transaction).

(d) A group of former owners of one of the combining entities obtains control of the combined entity’(Appendix B B6)

One of the most essential elements covered in this Standard is the manner of accounting in a common control transaction. Before we discuss the accounting procedure, it is crucial to understand the meaning of terms “control” and “common control”.

Ind AS 103 has defined common control business combination as a business combination in which all the combining entities or business are ultimately controlled by the same person/ persons both before and after the combination and such control is not transitory in nature. It further states that a company may be said to be under the control of another entity or an individual or a group of them where they exercise the right to govern its financial statements and operating policies arising out of contractual agreements so as to obtain benefits from its activities.

Interestingly, Ind AS 103 does not prescribe any threshold limit from a shareholding perspective to determine control in the entity. Instead, it has laid down few aspects such as decision-making powers, board composition and contractual rights to determine control. Therefore, this brings in an element of subjectivity in determining where control lies.

Ind AS 110 Consolidated Financial Statements states that where an entity (say, “A”) has power over the other entity (say, “B”), has the rights to variable returns from its involvement with B and the ability to use its power to affect the returns of B, then it may be said that Entity A controls Entity B.

Accounting treatment under common control transactions under Ind AS 103

Ind AS 103 prescribes application of pooling of interest method to account for common control business combinations. Under this method:

  • All identified assets and liabilities will be accounted at their carrying amounts, i.e. no adjustment would be made to reflect their fair values unlike in case of non-common control business combinations.
  • Balance of retained earnings in the books of acquiree entity shall be merged with that of the acquirer entity, and identity of the reserves shall be preserved.
  • Any difference, whether positive or negative, shall be adjusted against the capital reserves (or “Amalgamation Adjustment Deficit Account” in some cases).
  • Hence, no goodwill can be recorded in books under common control transactions under Ind AS 103.

Applying the acquisition method comprises four steps that are:

  • Determining the acquisition date.
  • Identifying the acquirer.
  • Recognising and measuring identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquire.
  • Recognising and measuring excess or shortfall paid as relative to fair value of assets.
  • Recognise and measure the consideration transferred for the acquire.

Initial Accounting of BC:

If initial accounting of BC could be done only on provisional measurement at the end of the reporting period, adjustments to provisional measurement based on new information as to facts and circumstances that existed at the acquisition date are allowed within one year of the acquisition date retrospectively as if the adjustments have been made at the acquisition date except to correct error under Ind.AS 8.

BC achieved in stages:

If the acquirer enhances the equity interest in the acquiree to achieve control, the previous previously held is re-measured at acquisition date fair value any resultant gain or loss is recognised in Profit and loss.

Date of acquisition is the date on which acquirer obtains control of the acquired entity

Acquisition related costs are accounted as expenses in the period they are incurred and related services received such as follows:

  • Cost of internal staff who work on the deal.
  • Cost of maintaining an acquisitions department.
  • Cost of investigation.
  • Issue costs for debt or equity.
  • Incentives to of potential targets employees to remain with company post acquisition.
  • Direct costs related to acquisition like consultant fees, rating fee etc.