(Summary) Ind AS 103
To improve the relevance, reliability and comparability of the information that a reporting entity provides in its FS about a business combination and its effects.
Ind AS 103 must be applied when accounting for business combinations, but does not apply to:
- The formation of a joint venture.
- The acquisition of an asset or group of assets that is not a business, although general guidance is provided on how such transactions should be accounted for.
- Acquisitions by an investment entity of a subsidiary that is required to be measured at FVTPL under Ind AS 10.
- Business combination
- Acquisition date
- Non-controlling interest
Business Combination: A transaction or other event in which an acquirer obtains control of one or more businesses.
Transactions sometimes referred to as ‘true mergers’ or ‘mergers of equals’ are also business combinations as that term is used in this Ind AS.
Acquiree: The business or businesses that the acquirer obtains control of in a business combination.
Acquirer: The entity that obtains control of the acquire.
Acquisition date: The date on which the acquirer obtains control of the acquiree.
- An entity shall determine whether a transaction or other event is a business combination by applying the definition in this Ind AS, which requires that the assets acquired and liabilities assumed constitute a business
- If the assets acquired are not a business, the reporting entity shall account for the transaction or other event as an asset acquisition.
The acquisition method is used for all business combinations.
Steps in applying the acquisition method are:
- Identification of the ‘acquirer’
- Determination of the ‘acquisition date’
- Recognition and measurement of the identifiable assets acquired, the liabilities assumed and any NCI in the acquire.
- Recognition and measurement of goodwill or a gain from a bargain purchase.
Identifying an acquirer
For each business combination, one of the combining entities shall be identified as the acquirer.
The acquirer shall identify the acquisition date – the date on which it obtains control of the acquiree.
Acquired assets and liabilities
Ind AS 103 establishes the following principles in relation to the recognition and measurement of items arising in a business combination:
- Recognition principle: Identifiable assets acquired, liabilities assumed, and NCI in the acquiree, are recognised separately from goodwill.
- Measurement principle: All assets acquired and liabilities assumed in a business combination are measured at acquisition-date FV.
Goodwill is measured as the difference between:
- The aggregate of (i) the value of the consideration transferred (generally at FV), (ii) the amount of any NCI, and (iii) in a business combination achieved in stages, the acquisition-date FV of the acquirer’s previously-held equity interest in the acquiree, and
- The net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed.
This can be written in simplified equation form as follows:
|Goodwill||=||Consideration transferred||+||Amt. of NCI||
|FV previous equity interests||–||Net assets recognised|
If the difference above is negative, the resulting gain is a bargain purchase in profit or loss, which may arise in circumstances such as a forced seller acting under compulsion.
Choice in the measurement of NCI:
This standard allows an accounting policy choice, available on a transaction by transaction basis, to measure NCI either at:
- Fair value (also called the full goodwill method), or
- The NCI’S proportionate share of net assets of the acquiree.
If the initial accounting for a business combination can be determined only provisionally by the end of the first reporting period, the business combination is accounted for using provisional amounts. Adjustments to provisional amounts, and the recognition of newly identified asset and liabilities, must be made within the ‘measurement period’ where they reflect new information obtained about facts and circumstances that were in existence at the acquisition date.
The recognition and measurement of assets and liabilities arising in a business combination after the initial accounting for the business combination is dealt with under other relevant standards.
Contingent consideration must be measured at FV at the time of the business combination and is taken into account in the determination of goodwill. If the amount of contingent consideration changes as a result of a post-acquisition event, accounting for the change in consideration depends on whether the additional consideration is classified as an equity instrument or an asset or liability.
- The acquirer is required to disclose information that enables users of its FS to evaluate the nature and financial effect of a business combination that occurs either during the current reporting period or after the end of the period but before the FS are authorised for issue.
- The acquirer should disclose information that enable users of its FS to evaluate the financial effects of adjustments recognised in the current reporting period that relate to business combination that occurs in the period or previous reporting periods.