Indian Accounting Standard 103 Business Combinations
Business is an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants.
Business combination is 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.
Ind AS 103 must be applied when accounting for business combinations but does not apply to (1) formation of a joint venture; (2) 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; and (3) acquisition by an investment entity, as defined in Ind AS 110, Consolidated Financial Statements, of an investment in a subsi diary that is required to be measured at fair value through profit or loss. Appendix C to Ind AS 110 deals with accounting for combination of entities or businesses under common control.
Determining whether a transaction is a business combination:
- Business combinations can occur in various ways, such as by transferring cash, incurring liabilities, issuing equity instruments (or any combination thereof), or by not issuing consideration at all (i.e. by contract alone)
- Business combinations can be structured in various ways to satisfy legal, taxation or other objectives, including one entity becoming a subsidiary of another, the transfer of net assets from one entity to another or to a new entity.
- The business combination must involve the acquisition of a business, which generally has three elements:
- Inputs – an economic resource (e.g. non-current assets, intellectual property) that creates outputs when one or more processes are applied to it
- Process – a system, standard, protocol, convention or rule that when applied to an input or inputs, creates outputs (e.g. strategic management, operational processes, resource management)
- Output – the result of inputs and processes applied to those inputs.
The acquisition method
An entity should account for each business combination by applying the acquisition method, which requires:
(a) identifying the acquirer;
(b) determining the acquisition date;
(c) recognising and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree; and
(d) recognising and measuring goodwill or a gain from a bargain purchase.
For each business combination, one of the combining entities should be identified as the acquirer.
The acquirer should identify the acquisition date, which is the date on which it obtains control of the acquiree.
Recognising and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquire
As of the acquisition date, the acquirer should recognise, separately from goodwill, the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree.
The acquirer should measure the identifiable assets acquired and the liabilities assumed at their acquisition date fair values.
The acquirer should measure at the acquisition date, components of non-controlling interest in the acquiree that are present ownership interests and entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation at either:
(a) fair value; or
(b) the present ownership instruments’ proportionate share in the recognised amounts of the acquiree’s identifiable net assets.
All other components of non-controlling interests should be measured at their acquisition date fair values, unless another measurement basis is required by Ind AS.
Exception to the recognition principle
The acquirer recognises a contingent liability assumed in a business combination at the acquisition date if it is a present obligation that arises from past events and its fair value can be measured reliably, even if it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation.
Exceptions to both the recognition and measurement principles
The acquirer shall recognise and measure a deferred tax asset or liability arising from the assets acquired and liabilities assumed in a business combination and account for the potential tax effects of temporary differences and carry-forwards of an acquiree that exist at the acquisition date or arise as a result of the acquisition in accordance with Ind AS 12.
The acquirer shall recognise and measure a liability (or asset, if any) related to the acquiree’s employee benefit arrangements in accordance with Ind AS 19, Employee Benefits.
If the indemnification relates to an asset or a liability that is recognised at the acquisition date and measured at its acquisition-date fair value, the acquirer shall recognise the indemnification asset at the acquisition date measured at its acquisition-date fair value.
Leases in which acquiree is the lessee
The acquirer shall recognise right-of-use assets and lease liabilities for leases identified in accordance with Ind AS 116, Leases in which the acquiree is the lessee.
The acquirer shall measure the lease liability at the present value of the remaining lease payments as if the acquired lease were a new lease at the acquisition date. The acquirer shall measure the right-of-use asset at the sameamount as the lease liability, adjusted to reflect favourable or unfavourable terms of the lease when compared with market terms.
Exceptions to measurement principle
The acquirer shall measure the value of a reacquired right recognised as an intangible asset on the basis of the remaining contractual term of the related contract regardless of whether market participants would consider potential contractual renewals when measuring its fair value.
The acquirer shall measure a liability or an equity instrument related to share-based payment transactions of the acquiree or the replacement of an acquiree’s share-based payment transactions with share-based payment transactions of the acquirer in accordance with the method in Ind AS 102, Share-based Payment, at the acquisition date.
Asset held for sale
The acquirer shall measure an acquired noncurrent asset (or disposal group) that is classified as held for sale at the acquisition date in accordance with Ind AS 105, Non-current Assets Held for Sale and Discontinued Operations, at fair value less costs to sell.
Recognising and measuring goodwill or a gain from a bargain purchase
Goodwill is measured as the difference between the consideration transferred in exchange for the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed.
In extremely rare circumstances, an acquirer will make a bargain purchase in a business combination, where the value of acquired identifiable assets and liabilities exceeds the consideration transferred; the acquirer shall recognise a gain (bargain purchase). The gain shall be recognised by the acquirer in Other Comprehensive Income on the acquisition date and accumulate the same in equity as capital reserve, if there exists a clear evidence of the underlying reasons for classifying the business combination as a bargain purchase.
If there does not exist clear evidence of the underlying reasons for classifying the business combination as a bargain purchase, then the gain shall be recognised directly in equity as capital reserve.
A reverse acquisition occurs when the entity that issues securities (the legal acquirer) is identified as the acquiree for accounting. The entity whose equity interests are acquired (the legal acquiree) must be the acquirer for accounting purposes for the transaction to be considered a reverse acquisition.
Applying the acquisition method to particular types of business combinations
A business combination achieved in stages
The acquirer shall remeasure its previously held equity interest in the acquiree at its acquisition-date fair value and recognise the resulting gain or loss in profit or loss or other comprehensive income, as appropriate.
A business combination achieved without the transfer of consideration
The acquirer shall attribute to the owners of the acquiree the amount of the acquiree’s net assets recognised in accordance with this Ind AS. In other words, 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.
If the initial accounting for business combination is incomplete by the end of the reporting period in which the combination occurs, the acquirer shall report in its financial statements provisional amounts for the items for which the accounting is incomplete.
During the measurement period, the acquirer shall retrospectively adjust the provisional amounts recognised and additional assets or liabilities that existed as of the acquisition date to reflect new information obtained.
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.
Subsequent measurement and accounting of specific items
In general, an acquirer shall subsequently measure and account for assets acquired, liabilities assumed or incurred and equity instruments issued in a business combination in accordance with other applicable Ind AS for those items, depending on their nature. However, Ind AS 103 provides guidance on subsequently measuring and accounting for the following assets acquired, liabilities assumed or incurred and equity instruments issued in a business combination:
(a) reacquired rights,
(b) contingent liabilities recognised as of the acquisition date,
(c) indemnification assets,
(d) contingent consideration.
The acquirer shall disclose information of a business combination that occurs either:
- during the current reporting period; or
- after the end of the reporting period but before the financial statements are approved for issue.
The Standard requires the acquirer to disclose information for each business combination that occurs during the reporting period such as the name and a description of the acquiree, the acquisition date, the percentage of voting equity interests acquired and other disclosures as prescribed in the standard.
Business combination of entities under common control
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 or parties both before and after the business combination, and that control is not transitory.
Business combinations involving entities or businesses under common control shall be accounted for using the pooling of interests method.
The pooling of interest method is considered to involve the following:
(i) The assets and liabilities of the combining entities are reflected at their carrying amounts;
(ii) No adjustments are made to reflect fair values, or recognize any new assets or liabilities. The only adjustments that are made are to harmonise accounting policies; and
(iii) The financial information in the financial statements in respect of prior periods should be restated as if the business combination had occurred from the beginning of the preceding period in the financial statements, irrespective of the actual date of the combination. However, if business combination had occurred after that date, the prior period information shall be restated only from that date.
As a consideration for the business combination, securities shall be recorded at nominal value and assets other than cash shall be considered at their fair values.
The balance of the retained earnings appearing in the financial statements of the transferor is aggregated with the corresponding balance appearing in the financial statements of the transferee. Alternatively, it is transferred to General Reserve, if any.
The identity of the reserves shall be preserved and shall appear in the financial statements of the transferee in the same form in which they appeared in the financial statements of the transferor.
The difference, if any, between the amount recorded as share capital issued plus any additional consideration in the form of cash or other assets and the amount of share capital of the transferor shall be transferred to capital reserve and should be presented separately from other capital reserves with disclosure of its nature and purpose in the notes.
The following disclosures shall be made in the first financial statements following the business combination:
(a) names and general nature of business of the combining entities;
(b) the date on which the transferor obtains control of the transferee;
(c) description and number of shares issued, together with the percentage of each entity’s equity shares exchanged to effect the business combination; and
(d) the amount of any difference between the consideration and the value of net identifiable assets acquired, and the treatment thereof.