ind as 103 business combinations · recognizing and measuring identifiable assets acquired and...

IND AS – 103 Business Combinations

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Transition from IGAAP to IND-AS

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IGAAP IND-AS

•No comprehensive standard dealing with all business combinations.

•AS 14 - Amalgamation. (Book value based accounting of mergers except Purchase Method)

•AS 10 – Slump sale (demerged division).

•AS 21 - Consolidation. (Cal of GW, CR, A/L)

• Applies to most business combinations.

• Fair value based accounting in all cases.

• Additional guidance in respect of common control transactions.

Scope Exclusions From IND AS - 103 Formation of Joint Arrangement;

Acquisition of assets or a group of assets that does not constitute business;

Acquisition by an investment entity, as per Ind AS 110, CFS, of an investment in a subsidiary that is measured at FVTPL;

Appendix-C deals with accounting for combination of entities or business under common control.

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Accounting of Assets or a Group of Assets

Acquirer shall indentify and

recognize individual identifiable assets and liabilities assumed.

Cost of group shall be allocated to individual identifiable assets and liabilities on basis of their relative fair value at date of purchase.

Does not give rise to goodwill.

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Accounting of Assets or a Group of Assets… Cont

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What is Business ? Integrated set of activities and assets;

Capable of being conducted and managed;

Provides return in the form of dividends or lower costs or other economic benefits directly to investors, owners, members or participants.

For example, acquisition of a “shell” or “shelf” company is not a business combination because no business is being acquired.

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Elements of Business 1. Input:- Any economic resource that

creates outputs when process applied to it.

2. Process:- Any system, standard or rule when applied to an input creates output.

3. Output:- Results of input and process that provide return in form of dividends, lower cost or economic benefits.

In the absence of evidence to contrary particular set of assets or activities in which goodwill is present is a business.

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Example of Business

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Thermal power generating company:-

Coal supply, water supply

Plant and equipments (CHP, BTG, switch yard, transmission line)

Other ancillary systems such as steam and water system, air and flue gas system, cooling water system, ash dyke.

Operation and maintenance

Power supply agreement or (PPA)

Definition of Control According to Ind AS 110 (CFS):-

Investor controls an investee if and only if the investor has all the following:

Power over the investee;

Exposure to variable returns from its involvement with the investee; and

Use of power over the investee to affect the amount of the investor's returns.

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Business Combinations - Application

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What is Business Combinations

A transactions or other events in which

Acquirer

Obtains control of

One or more business.

Transactions sometimes referred to as “true mergers” or “mergers of equals” are also business combinations.

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Identifying a Business Combinations

Acquirer might obtain control in variety of ways:-

By transferring cash, cash equivalents or other assets (including net assets that constitute a business);

By incurring liabilities;

By issuing equity interest;

By providing more than one type of consideration; or

Without considerations.

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Scope This Ind AS applies to all transactions or other events that meets definition of business combination.

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Variety of ways for Business Combinations

For example :-

Becomes subsidiary of acquirer;

Net assets or business is legally merged into acquirer;

One combining entity transfers net assets, or equity interest to another combining entity;

Newly formed entity.

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Key Steps of Acquisition Method Accounting

1. Indentifying the acquirer;

2. Determining the acquisition date;

3. Recognizing and measuring identifiable assets acquired and liabilities assumed;

4. Recognizing and measuring non-controlling interest in the acquiree;

5. Measuring consideration;

6. Determining what is part of business combination transaction;

7. Recognizing and measuring goodwill or a gain from bargain purchase; and

8. Measurement period adjustment / true up of provisional accounting;

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1. Indentifying the Acquirer

The acquirer is the entity that obtains control of acquiree.

Usually the entity that issues its equity interest, except “reverse acquisitions”.

Additional factors:-

• Largest portion of voting rights in combined entity;

• Single owner or group of owners holds largest minority voting interest in combined entity;

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1. Indentifying the Acquirer …… cont;

• Ability to elect or appoint or to remove majority of members of the governing body of combined entity;

• Whose senior management dominates management of combining entity;

• Entity that pays premium over pre-combinations fair value of equity interest;

• Combining entity whose relative size is greater.

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2. Determining the Acquisition Date

Date on which acquirer obtains control of acquiree;

Generally the date on which acquirer:-

• legally transfers consideration;

• Assumes assets and liabilities.

Acquisition date may precedes closing date if written agreement provides that acquirer obtains control before closing date.

Sometimes referred as closing date. 18

2. Determining the Acquisition Date …. cont

Practical challenges in indian scenario:-

• Shareholders approval;

• Section 391-394 of Companies Act, 1956 (Appointed date, effective date, high court approval);

• Regulatory approval (CCI, SEBI, Stock Exchanges);

• Open offers.

Consider all facts and circumstances.

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3. Recognizing and measuring identifiable assets acquired and liabilities assumed

An item is recognized as assets and liability only if:-

It meets definition of assets or a liability at acquisition date; (e.g. cost acquirer incur in future to exit activity of acquiree or to terminate employment of or relocate an acquiree’s employees are not liabilities)

It must be part of business combination transaction rather than separate transaction.

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3. Recognizing and measuring identifiable assets acquired and liabilities assumed ….. Cont

Acquirer recognizes separately from goodwill, the identifiable intangible assets acquired in business combinations even though not recognized in books of acquiree such as brand name, patent, etc.

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3. Recognizing and measuring identifiable assets acquired and liabilities assumed ……. Cont

At acquisition date acquirer need to classify/designate acquired assets and liabilities assumed as necessary to apply other Ind AS. E.g.:-

Classification of financial assets and liabilities measured as at amortized cost, FVTPL or FVTOCI.

Designation of a derivative instrument as a hedging instrument.

Assessment of whether an embedded derivative should be separated from a host contract.

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Exception:-

Following two classifications on the basis of inception of the contract:-

Classification of a lease contract as either an operating lease or a finance lease as per Ind AS – 17.

Classification of contract as an insurance contract as per Ind AS - 104.

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Acquirer shall measure the identifiable assets and the liabilities assumed at acquisition date fair values.

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Exceptions to recognition and measurement principles:-

Recognition exceptions:-

1. Contingent liabilities

Measurement exceptions:-

2. Reacquired rights

3. Share-based payment awards

4. Assets held for sale

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Both recognition and measurement:-

5. Income tax

6. Employee benefits

7. Indemnification assets

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1. Contingent liabilities

Under Ind AS 37, contingent liabilities are not recognized as liabilities; instead disclosed in Financial Statement.

Under Ind AS 103, acquirer should recognize at the acquisition date if it is a present obligation that arise from past events and fair value can be measured reliably.

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2. Reacquired rights

Acquirer may reacquire a right previously granted to use acquirer assets. E.g. lease right, right to use acquirer trade name, right to use acquirer’s technology.

Recognize it as intangible assets separately from goodwill on the basis of remaining contractual term.

Acquirer shall recognize settlement gain or loss.

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3. Share-based payment awards

Acquirer measure a liability or equity instrument related to share-based payment transactions as per Ind AS-102 (Share Based Payment) at acquisition date.

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Share-based payment awards ….. Cont

Three possible actions:-

Acquirer replaces acquiree awards on a mandatory basis;

included in measuring consideration.

Acquirer replaces acquiree awards on a voluntary basis;

Acquirer does not replaces acquiree awards.

in both cases not part of considerations, included as remuneration cost in post-combination financial statement.

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4. Assets held for sale (Ind AS 105)

Measure non-current assets (disposal group) at fair value less cost to sell.

5. Income tax (Ind AS 12)

Recognize deferred tax assets/liabilities arising from assets acquired and liabilities assumed in business combination.

6. Employee benefits as per Ind AS 19.

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7. Indemnification assets

Seller may contractually indemnify the acquirer for outcome of contingency.

E.g. seller may indemnify the acquirer against losses arising from pre-acquisition contingencies, such as uncertain tax positions, environment liabilities or legal matters.

Indemnification assets is recognized at its acquisition date fair value.

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4. Recognizing and measuring non-controlling interest in the acquiree

Non-controlling interest (“NCI”) is defined as:-

Equity in a subsidiary;

Not attributable, directly or indirectly

To parent.

Measure proportionate share of net assets

either at:-

1. At fair value of NCI; or

2. At NCI’s proportionate share of net assets acquired.

Other components (E.g. share warrants) of NCI at fair values.

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X Ltd acquires Y Ltd in two stages:-

• On 1st Jan 2008 it purchased 30% of the equity shares of Y Ltd for Rs. 20 Crore.

• On 1st Jan 2012 X Ltd purchased 50% of shares for Rs. 150 Crore.

As on the acquisition date :

• The carrying amount of net assets is Rs. 180 Crore and the fair value of identifiable net assets is Rs. 200 Crore.

• The fair value of the original investment of 30% equity shares is Rs. 50 Crore and the fair value of remaining 20% non-controlling interest is Rs. 80 Crore.

Acquisition break up is as follows:-

• 30% interest earlier acquired in 2008

• 50% interest acquired in 2012

• 20% NCI

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Particulars Option 1 NCI at Fair Value (Rs. in Crore)

Option 2 If NCI is in Proportion of net assets (Rs. In Crore)

Fair value of the Consideration

150 150

Non-controlling Interest 80 40 (20% of 200)

Interest acquired earlier 20 20

Total 250 210

Fair value of net assets 200 200

Goodwill 50 10

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5. Measuring consideration

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Sum of acquisition date fair values of :-

Assets transferred by acquirer;

+ Liabilities incurred by acquirer to former owners of acquiree;

+ Equity interest issued by acquirer.


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Contingent considerations:-

Arises when acquirer agrees to transfer additional assets or equity interest to former owners of acquiree after acquisition date, if specified future events occur or conditions are met.

Acquirer may also ask for return of previously transferred consideration.

Initially recognized at its fair value as part of consideration transferred.


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Contingent considerations …. cont

Contingent considerations classified as equity shall not be remeasured and subsequent settlement is accounted for within equity.

Other contingent considerations (financial assets and liability) shall be measured at fair vale at each reporting date and shall be accounted in profit and loss.


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Business combination without transfer of consideration:-

E.g.:-

• Buyback by acquiree,

• lapse of minority veto rights;

To determine amount of goodwill, in such cases, acquirer should use acquisition date fair value of acquirer’s interest in acquiree.


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Acquisition related cost:- (finder’s fees; advisory, legal, accounting, valuation and other professional or consulting fees; general administrative costs)

Acquirer shall account for acquisition-related costs as expenses.

The costs to issue debt or equity securities shall be recognized in accordance with Ind AS 32 and Ind AS 109.

6. Determining what is part of business combination transaction

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Transactions entered into primarily for the benefit of acquirer / combined entity : Separate transactions

• A transactions that in effect settles pre-existing relationship e.g. lawsuit, supply contract, franchising or licensing arrangement;

• A transactions that reimburses acquiree for paying acquirer’s acquisition related cost.

Transactions entered into primarily for the benefit of acquiree / former owner : part of business combinations

7. Recognizing and measuring goodwill or a gain from bargain purchase

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Goodwill is defined as:

An asset;

Representing the future economic benefits arising from other assets acquired in business combination;

That are not individually identified and;

Separately recognized.

7. Recognizing and measuring goodwill or a gain from bargain purchase

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Goodwill =

Consideration transferred

+ Amount of non controlling interest

+ Fair value of previously held equity interest

- Fair value of net assets

If results negative, then gain on bargain purchase, in OCI in equity as capital reserve.

Reassessment required in case of bargain gain on purchase, in case no evidence, directly in equity as capital reserve.

8. Measurement period adjustment / True up of provisional accounting

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Acquirer shall report in its financial statements provisional amounts for items for which accounting is incomplete;

Retrospectively adjust assets, liabilities, NCI, consideration, goodwill;

New information is obtained about facts and circumstances existed at the acquisition date;

Shall not exceed one year from Acquisition date.

Business Combination of Entities under Common Control – Appendix C

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Common control business combination means a business combination involving entities or businesses in which all the combining entities or businesses are ultimately controlled by the same party before and after the business combination and that control is not transitory*.

* Look at duration of control of business

before and after the reorganization.

Example of Common Control

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Accounting for Common Control Business Combinations

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Accounted as per “pooling of interest method”

Assets and liabilities at carrying amounts;

No new assets or liabilities;

No adjustment to reflect fair values;

Only harmonise accounting policies;

No goodwill is recognized.

Prior periods to be restated if business combination occurred from beginning of preceding period, irrespective of actual date of combination.


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Consideration may consist of securities, cash or other assets.

Securities are recorded at nominal value;

Assets other than cash shall be considered at their fair values.

Identity of reserve is preserved.

Capital Reserve = Share capital issued by transferee + additional consideration (cash/other assets) at fair value – share capital of transferor.


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Appendix - C is not applicable to accounting for transfer between common control entities of assets / liabilities not constituting business.

Disclosures for Common Control Business Combinations

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Names and general nature of business of the combining entities;

Date on which the transferor obtains control of the transferee;

Description and number of shares issued;

Amount of capital reserve and the treatment thereof.

Business Combinations achieved in stages (Step acquisitions)

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• Acquirer shall remeasure its previously held equity interest in the acquiree at it acquisition-date fair value.

• If less than 20% stake, recognize the resulting gain or loss, if any, in profit or loss or other comprehensive income. (Based on accounting for investment as FVTOCI or FVTPL).

• If more than 20% stake, recognize gain/loss arising on fair value remeasurement in profit / loss. Previously recognized amount in OCI will be reclassified to profit / loss.

Reverse acquisitions

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When large private company wishes to make backdoor listing by acquiring a small listed company.

Occur when private entity wants to become public entity without going through listing process.

Private entity arrange for public entity to acquire its equity interest.

As a result, the public entity becomes legal acquirer because it issue equity interest and private entity becomes legal acquiree.


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Usually accounting acquirer (private entity) issues no consideration.

Instead accounting acquiree (public entity) issues its equity shares.

Acquisition date fair value of consideration is based on equity interest of listed entity.


Public entity

legal acquirer

Accounting acquiree

Private entity

legal acquiree

Accounting acquirer

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Overview of key differences

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Particulars Indian GAAP Ind – AS 103

Definition of business

No AS define term “Business” in comprehensive

manner.

Defines business in detail. If no business, Ind AS 103 not applicable.

Accounting of acquisition related cost

No specific guidance.

Accounted as expenses in the period.


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Acquisition date

The date of amalgamation / acquisition as defined in the court scheme is the acquisition date.

The date on which the acquirer effectively obtains control of the acquiree is the acquisition date.

Method of Accounting

Under the existing AS 14 there are two methods of accounting for amalgamation. The pooling of interest method and the purchase method.

Ind AS 103 prescribes only the Acquisition method (purchase method) for each business combination.


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Contingent liabilities

Contingent liabilities are not recognized.

The acquiree’s contingent liabilities are recognized as actual liabilities by the acquirer at the acquisition date as part of acquisition accounting, if they are present obligation arising from past events and their fair values can be measured reliably.


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Minority (non-controlling) interests at acquisition

Minority interest is valued at its proportionate share of historical book value of net assets.

At either: (a) Fair value; or (b)The present ownership instruments’ proportionate share in the recognized amounts of the acquiree’s identifiable net assets. Not a policy choice, rather selected on transaction basis.

Goodwill amortization

Goodwill arising on amalgamation in the nature of purchase is amortized to the statement of profit or loss over a period not exceeding five years. Goodwill on consolidation is not amortized.

Goodwill is not amortized but tested for impairment on annual basis in accordance with Ind AS 36.


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Step acquisitions of subsidiary

AS 21 recognizes step acquisitions; however at each step, the valuation is done on the basis of book values.

At the date of obtaining control, the acquirer re-measures any previously held equity interest to fair value.


Acquisition accounting is based on legal form. Legal acquirer is treated as acquirer and legal acquiree is treated as acquiree for legal as well as accounting purposes.

Acquisition accounting is based on substance. Accordingly, in a reverse acquisition, a legal acquirer may be treated as acquiree and legal acquiree may be treated as acquirer for Ind-AS 103 purposes.


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Accounting for common control business combination

Under Indian GAAP, none of the standards differentiate between common control and other business combinations.

Ind-AS 103 requires business combinations involving entities or businesses under common control to be accounted using the pooling of interests method.

Subsequent adjustments to assets and liabilities

No subsequent adjustment to assets and liabilities is permitted.

Ind-AS 103 permits adjustments to items recognized in the original accounting for a business combination, for a maximum of one year from the acquisition date

First Time Adoption For business combinations that occurred before the date of transition, entities have following options:- (Appendix C – Ind AS 101)

Restate all business combinations; or

Restate all business combinations that occurred after a particular date of the first time adopters choosing but before the date of transition; or

Do not restate any business combinations prior to date of transition.

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Carve out from IFRS 3 IFRS 3 requires bargain purchase gain

arising on business combination to be recognized in profit or loss.

IFRS 3 excludes from its scope business combinations of entities under common control. Ind AS 103 (Appendix C) gives the guidance in this regard.

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Key Disclosures Name and description of acquiree;

Acquisition date;

% of voting equity interest acquired;

Primary reason for business combination;

Description of how acquirer obtained control;

Qualitative description of factors that make up goodwill recognized;

Total amount of goodwill that is expected to be deductible for tax purpose;

Amount recognized as of acquisition date for each major class of assets and liabilities;

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Key Disclosures ….. Cont Acquisition date fair value of total consideration

transferred and acquisition date fair value of each major class of consideration, such as;

• Cash

• Tangible and intangible assets

• Liabilities incurred

• Equity interest issued or issuable and method of measuring fair value of those interest.

Contingent consideration arrangements;

Each contingent liability recognized;

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Key Disclosures ….. Cont Details of bargain purchase;

Details of non-controlling interest;

Contingent consideration arrangements;

Each contingent liability recognized;

Details of business combinations achieved in stages;

Amount of revenue and profit or loss of acquiree since acquisition date;

Various details where initial accounting of business combination is incomplete.

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