01 - Business Comb. - C - 1-77

Online /Pen-Drive Video classes
Prepare Smarter with

Sanjay Welkins …Most preferred & Largest Selling
brand For CFR/FR
Rock solid foundations …with Widest and Deepest Course
Coverage … supplemented with Most Lethal and Powerful
Study Material
Division - I
High Strength Chapters
Chapter - 1
Ind AS-103: Business Combinations
(Business Combination and Corporate
Restructuring)
Synopsis:
1. Theory Base
2. Goodwill, Non-Controlling Interest & Gain on Bargain Purchase
3. Determination of Business
4. Identifying Acquiring Enterprise
5. Determination of Acquisition Date
6. Business Combination Achieved in Stages
7. Contingent Consideration
8. Retention of the original lease classification
9. Contingent Liability
10. Possible Intangible Asset
11. Re-acquired Rights
12. Bargain Purchase
13. Measurement Period
14. Accounting : Common Control and Acquisition
15. Section 15: Books of Acquiree Company
16. Section 16: Calculation of Purchase Consideration through Net Assets Method
17. Section 17 : Intrinsic Value Method of Purchase Consideration
18. Section 18 : Net Payment Method of Purchase Consideration
19. Section : 19 : Inter Company Holdings
20. Section : 20 : Reverse Acquisition: When Legal acquirer is Accounting Acquiree:
Theory Base:
1. Objective
The objective of this Ind AS is to improve the relevance, reliability and comparability of the
information that a reporting entity provides in its financial statements about a business
combination and its effects.
To accomplish that, this Ind AS establishes principles and requirements for how the acquirer:
(a) recognises and measures in its financial statements the identifiable assets acquired, the
liabilities assumed and any non-controlling interest in the acquiree;
(b) recognises and measures the goodwill acquired in the business combination or a gain from a
bargain purchase; and
(c) determines what information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination.
2. Applies to
This Ind AS applies to a transaction or other event that meets the definition of a business
combination.
Chap. 1 Ind AS-103: Business Combinations 3
3. Does not applies to

(a) the accounting for the formation of a joint arrangement in the financial statements of the joint
arrangement itself.
(b) the acquisition of an asset or a group of assets that does not constitute a business.
In such cases the acquirer shall identify and recognise the individual identifiable assets
acquired (including those assets that meet the definition of, and recognition criteria for,
intangible assets in Ind AS 38, Intangible Assets) and liabilities assumed. The cost of the
group shall be allocated to the individual identifiable assets and liabilities on the basis of their
relative fair values at the date of purchase. Such a transaction or event does not give rise to
goodwill.
(c) accounting for combination of entities or businesses under common control.
(d) The requirements of this Standard do not apply to the acquisition by an investment entity, as
defined in Ind AS 110, Consolidated Financial Statements, of an investment in a subsidiary
that is required to be measured at fair value through profit or loss.
3. Definitions
1. Acquiree - The business or businesses that the acquirer obtains control of in a business
combination.
2. Acquirer - The entity that obtains control of the acquiree.
3. Acquisition Date - The date on which the acquirer obtains control of the acquiree.
4. Business- 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.
5. 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.
6. Contingent Consideration - Usually, an obligation of the acquirer to transfer additional assets
or equity interests to the former owners of an acquiree as part of the exchange for control of the
acquiree if specified future events occur or conditions are met. However, contingent consideration
also may give the acquirer the right to the return of previously transferred consideration if
specified conditions are met.
7. Equity Interests- For the purposes of this Ind AS, equity interests is used broadly to mean
ownership interests of investor-owned entities and owner, member or participant interests of
mutual entities.
8. Fair Value - Fair value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date.
9. Goodwill - An asset representing the future economic benefits arising from other assets
acquired in a business combination that are not individually identified and separately recognised.
10. Identifying a business combination
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
4 Ind AS-103: Business Combinations Chap. 1
account for the transaction or other event as an asset acquisition.

10.The acquisition method
An entity shall account for each business combination by applying the acquisition method.
Acquisition method 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.
11. Identifying the acquirer
For each business combination, one of the combining entities shall be identified as the acquirer.
The guidance in Ind AS 110 shall be used to identify the acquirer—the entity that obtains control
of another entity, i.e. the acquiree.
12. Determining the acquisition date
1. The acquirer shall identify the acquisition date, which is the date on which it obtains control of
the acquiree.
2. The date on which the acquirer obtains control of the acquiree is generally the date on which the
acquirer legally transfers the consideration, acquires the assets and assumes the liabilities of the
acquiree—the closing date.
3. However, the acquirer might obtain control on a date that is either earlier or later than the
closing date. 4. For example, the acquisition date precedes the closing date if a written agreement
provides that the acquirer obtains control of the acquiree on a date before the closing date. An
acquirer shall consider all pertinent facts and circumstances in identifying the acquisition date.
13. Recognising and measuring the identifiable assets acquired, the liabilities assumed and
any non-controlling interest in the acquiree
As of the acquisition date, the acquirer shall recognise:
(a) separately from goodwill, the identifiable assets acquired
(b) the liabilities assumed and
(c) any non-controlling interest in the acquiree.
(d) At the acquisition date, the acquirer shall classify or designate the identifiable assets acquired
and liabilities assumed as necessary to apply other Ind ASs subsequently. The acquirer shall
make those classifications or designations on the basis of the contractual terms, economic
conditions, its operating or accounting policies and other pertinent conditions as they exist at
the acquisition date.
14. Measurement principle
The acquirer shall measure the identifiable assets acquired and the liabilities assumed at their
acquisition-date fair values.
For each business combination, the acquirer shall 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 shall be
measured at their acquisition date fair values, unless another measurement basis is required by
Ind AS
15. Exception to the recognition principle
Contingent liabilities
16. Exceptions to both the recognition and measurement principles
 Income taxes
 Employee benefits
 Indemnification asset
17. Exceptions to the measurement principle
 Reacquired rights
 Share-based payment transactions
 Assets held for sale
18. Recognising and measuring goodwill or a gain from a bargain purchase
The acquirer shall recognise goodwill as of the acquisition date measured as the excess of (a) over
(b) below:
(a) the aggregate of:
(i) the consideration transferred measured in accordance with this Ind AS, which generally
requires acquisition-date fair value;
(ii) the amount of any non-controlling interest in the acquiree measured in accordance with
this Ind AS; and
(iii) in a business combination achieved in stages the acquisition-date fair value of the
acquirer‘s previously held equity interest in the acquiree.
(b) the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities
assumed measured in accordance with this Ind AS.
19. Bargain purchases
1. In extremely rare circumstances, an acquirer will make a bargain purchase in a business
combination in which the amount in (a) exceeds the aggregate of the amounts specified (b).
2. The acquirer shall recognise the resulting gain in other comprehensive income on the
acquisition date and accumulate the same in equity as capital reserve. The gain shall be attributed
to the acquirer.
3. A bargain purchase might happen, for example, in a business combination that is a forced sale
in which the seller is acting under compulsion.
20. Consideration transferred
1. The consideration transferred in a business combination shall be measured at fair value, which
shall be calculated as the sum of the acquisition-date fair values of the assets transferred by the
acquirer, the liabilities incurred by the acquirer to former owners of the acquiree and the equity
interests issued by the acquirer.
2. Examples of potential forms of consideration include cash, other assets, a business or a
subsidiary of the acquirer, contingent consideration, ordinary or preference equity instruments,
options, warrants and member interests of mutual entities.
21. A business combination achieved in stages

(a) An acquirer sometimes obtains control of an acquiree in which it held an equity interest
immediately before the acquisition date.
(b) For example, on 31 December, 2019, Entity A holds a 35 per cent non-controlling equity
interest in Entity B.
On that date, Entity A purchases an additional 40 per cent interest in Entity B, which gives it
control of Entity B.
(c) This Ind AS refers to such a transaction as a business combination achieved in stages,
sometimes also referred to as a step acquisition.
(d) In a business combination achieved in stages, the acquirer shall re-measure its previously held
equity interest in the acquiree at its acquisition-date fair value and recognise the resulting gain
or loss, if any, in profit or loss or other comprehensive income, as appropriate.
(e) In prior reporting periods, the acquirer may have recognised changes in the value of its equity
interest in the acquiree in other comprehensive income.
If so, the amount that was recognised in other comprehensive income shall be recognised on
the same basis as would be required if the acquirer had disposed directly of the previously held
equity interest
22. A business combination achieved without the transfer of consideration
1. An acquirer sometimes obtains control of an acquiree without transferring consideration. The
acquisition method of accounting for a business combination applies to those combinations. Such
circumstances include:
(a) The acquiree repurchases a sufficient number of its own shares for an existing investor (the
acquirer) to obtain control.
(b) Minority veto rights lapse that previously kept the acquirer from controlling an acquiree in
which the acquirer held the majority voting rights.
(c) The acquirer and acquiree agree to combine their businesses by contract alone. The acquirer
transfers no consideration in exchange for control of an acquiree and holds no equity interests
in the acquiree, either on the acquisition date or previously. Examples of business
combinations achieved by contract alone include bringing two businesses together in a stapling
arrangement or forming a dual listed corporation.
2. In a business combination achieved by contract alone, 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.
23. Measurement period
1. If the initial accounting for a 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.
2. During the measurement period, the acquirer shall retrospectively adjust the provisional
amounts recognised at the acquisition date to reflect new information obtained about facts and
circumstances that existed as of the acquisition date and, if known, would have affected the
measurement of the amounts recognised as of that date.
3. During the measurement period, the acquirer shall also recognise additional assets or liabilities
if new information is obtained about facts and circumstances that existed as of the acquisition date
and, if known, would have resulted in the recognition of those assets and liabilities as of that date.
4. 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
24. Determining what is part of the business combination transaction
1. The acquirer and the acquiree may have a pre-existing relationship or other arrangement before
negotiations for the business combination began, or they may enter into an arrangement during the
negotiations that is separate from the business combination.
2. In either situation, the acquirer shall identify any amounts that are not part of what the acquirer
and the acquiree (or its former owners) exchanged in the business combination, i.e. amounts that
are not part of the exchange for the acquiree.
3. The acquirer shall recognise as part of applying the acquisition method only the consideration
transferred for the acquiree and the assets acquired and liabilities assumed in the exchange for the
acquiree. Separate transactions shall be accounted for in accordance with the relevant Ind AS.
25. Acquisition-related costs
1. Are costs the acquirer incurs to effect a business combination. Those costs include finder‘s fees;
advisory, legal, accounting, valuation and other professional or consulting fees; general
administrative costs, including the costs of maintaining an internal acquisitions department; and
costs of registering and issuing debt and equity securities.
2. The acquirer shall account for acquisition-related costs as expenses in the periods in which the
costs are incurred and the services are received, with one exception.
3. The costs to issue debt or equity securities shall be recognised in accordance with Ind AS 32
and Ind AS 109.
26. Subsequent measurement and accounting
1. Logically, 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 ASs for those items, depending on their nature.
2. However, this Ind AS 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; and
(d) contingent consideration.
26.1 Reacquired rights
A reacquired right recognised as an intangible asset shall be amortised over the remaining
contractual period of the contract in which the right was granted. An acquirer that subsequently
sells a reacquired right to a third party shall include the carrying amount of the intangible asset in
determining the gain or loss on the sale.
26.2 Contingent liabilities
After initial recognition and until the liability is settled, cancelled or expires, the acquirer shall
measure a contingent liability recognised in a business combination at the higher of:
(a) the amount that would be recognised in accordance with Ind AS 37; and
(b) the amount initially recognised less, if appropriate, the cumulative amount of income
recognised in accordance with the principles of Ind AS 115, Revenue from Contracts with
Customers. This requirement does not apply to contracts accounted for in accordance with Ind
AS 109.
26.3 Indemnification assets
At the end of each subsequent reporting period, the acquirer shall measure an indemnification
asset that was recognised at the acquisition date on the same basis as the indemnified liability or
asset, subject to any contractual limitations on its amount and, for an indemnification asset that is
not subsequently measured at its fair value, management‘s assessment of the collectibility of the
indemnification asset. The acquirer shall derecognise the indemnification asset only when it
collects the asset, sells it or otherwise loses the right to it.
26.4 Contingent consideration
1. Some changes in the fair value of contingent consideration that the acquirer recognises after the
acquisition date may be the result of additional information that the acquirer obtained after that
date about facts and circumstances that existed at the acquisition date.
2. Such changes are measurement period adjustments. However, changes resulting from events
after the acquisition date, such as meeting an earnings target, reaching a specified share price or
reaching a milestone on a research and development project, are not measurement period
adjustments.
3. The acquirer shall account for changes in the fair value of contingent consideration that are not
measurement period adjustments as follows:
(a) Contingent consideration classified as equity shall not be re-measured and its subsequent
settlement shall be accounted for within equity.
(b) Other contingent consideration that:
(i) is within the scope of Ind AS 109 shall be measured at fair value at each reporting date and
changes in fair value shall be recognised in profit or loss in accordance with Ind AS 109.
(ii) is not within the scope of Ind AS 109 shall be measured at fair value at each reporting date
and changes in fair value shall be recognised in profit or loss.
27. Disclosure
The acquirer shall disclose information that enables users of its financial statements to evaluate the
nature and financial effect of a business combination that occurs either:
(a) during the current reporting period; or
(b) after the end of the reporting period but before the financial statements are approved for issue.
The acquirer shall disclose information that enables users of its financial statements to evaluate the
financial effects of adjustments recognised in the current reporting period that relate to business
combinations that occurred in the period or previous reporting periods.
28.Business combination under common control
(a) Appendix C deals with accounting for combination of entities or businesses under common
control.
(b) 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.
(c) Common control business combinations will include transactions, such as transfer of
subsidiaries or businesses, between entities within a group.
(d) The extent of non-controlling interests in each of the combining entities before and after the
business combination is not relevant to determining whether the combination involves entities
under common control.
(e) This is because a partially owned subsidiary is nevertheless under the control of the parent
entity.
(f) Business combinations involving entities or businesses under common control shall be
accounted for using the pooling of interests method.
(g) 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 recognise any new assets or liabilities.
Illustrative Case Studies and Problems
Section - 1 –
Goodwill, Non-Controlling Interest & Gain on Bargain Purchase
1.1
FX Ltd. acquires 100% of MX Ltd. for Rs.9,60,000. Fair Value (FV) of B‘s net assets at time of
acquisition amounts Rs.8,00,000.
Required:
1. Calculate Goodwill.
2. Journal Entries in the books of A.
Answer: Purchase consideration Rs.9,60,000
FV of Net Assets Rs.8,00,000
Goodwill = Consideration – Net Assets = Rs.(9,60,000– 8,00,000) = Rs.1,60,000
Identifiable Net Assets Dr. 8,00,000
Goodwill (Balancing figure) Dr. 1,60,000
To Cash 9,60,000
To NCI -
1.2
On March 31, 2019, K-9 Ltd. acquired L-5 Ltd. K Ltd. issued 60,000 equity shares (Rs.10 par value)
that were trading at Rs.240 on March 31. The book value of L-5 Ltd.‘s net assets was Rs.72,00,000
on March 31. The fair value of net assets was assessed at Rs.1,35,00,000.
Show acquisition journal entry under Ind AS 103.
Identifiable Net Assets Dr. 1,35,00,000
To Capital a/c 6,00,000
To Additional capital a/c / Premium a/c 1,38,00,000
1.3
A Ltd. acquires 80% of B Ltd. for Rs.9,60,000 paid by equity at par. Fair Value (FV) of B‘s net
assets at time of acquisition amounts Rs.8,00,000.
Required:
1. Calculate Non-Controlling-Interest (NCI) and Goodwill.
2. Journal Entries in the books of A.
Answer:
Purchase consideration Rs.9,60,000
FV of NCI = Rs.9,60,000 × (20%/80%) = Rs.2,40,000
FV of Net Assets Rs.8,00,000
Goodwill = Consideration + NCI – Net Assets = Rs.(9,60,000 + 2,40,000 – 8,00,000) = 4,00,000
To Capital a/c 9,60,000
To NCI a/c 2,40,000
1.4
Z Ltd. acquired a 60% interest in P Ltd. on January 1, 2017. Z Ltd. paid Rs.700 Lakhs in cash for
their interest in P Ltd. The fair value of P Ltd.‘s assets is Rs.1,800 Lakhs, and the fair value of its
liabilities is Rs.900 Lakhs. Provide the journal entry for the acquisition using Ind AS, assuming that
P Ltd. does not wish to report the NCI at fair value.
Answer:
Identifiable Net Assets Dr. 1,800
Goodwill (Balancing figure) Dr. 160
To, Liabilities 700
To Capital a/c 900
To NCI a/c 360
(1) NCI = 40% × Rs. (1,800 – 900) = Rs.360 Lakhs
(2) Goodwill = Rs.700 – Rs. (1,800 – 900 – 360) = Rs.160 Lakhs.
1.5
On 1 January 2019 M Ltd. acquires 80 per cent of the equity interests of P Ltd in exchange of cash
of Rs.250. The identifiable assets are measured at Rs.350 and the liabilities assumed are measured at
Rs.50. The fair value of the 20 per cent non controlling interest in P is Rs.43.
Answer:
Amount of the identifiable net assets acquired (Rs.350 – Rs.50) Rs.300
Less: Consideration Rs.250
Less: Fair value of non-controlling interest Rs.43
Gain on bargain purchase of 80 per cent interest Rs.7
M would record its acquisition of P in its consolidated financial statements as follows:
Identifiable Net Assets Dr. 350
To, Liabilities 50
To cash a/c 250
To NCI a/c 43
To Gain on Bargain Purchase 7
The gain on bargain purchase will be recognised in other comprehensive income and accumulated in
equity as Capital Reserve.
1.6
D has acquired 100% of the equity of F on March 31, 2017. The purchase consideration comprises
of an immediate payment of Rs.10 lakhs and two further payments of Rs.1.21 lakhs if the Return on
Equity exceeds 20% in each of the subsequent two financial years. A discount rate of 10% is used.
Compute the value of total consideration at the acquisition date.
Answer:
Immediate cash payment 10.00
Fair value of contingent consideration (1.21 × .9091 + 1.21 x .8265) 2.10
Total purchase consideration 12.10
1.7
C Ltd acquires 60% share in D Ltd. for cash payment of Rs.200,000. The fair value of non-
controlling interest is Rs.1,00,000. This amount was determined with reference of market price of
D‘s ordinary shares before the acquisition date.
Calculate
NCI and goodwill following:
(i) Fair Value approach
(ii) Proportionate shares of identified net asset in acquiree approach when on the acquisition
date, the aggregate value of D‘s identifiable net assets is: (a) Rs.2,40,000; (b) Rs.3,30,000.
Answer:
Part 1 : a Part 1 : b Part 2 : a Part 2 : b
Consideration 2,00,000 2,00,000 2,00,000 2,00,000
NCI 1,00,000 1,00,000 96,000 1,32,000
40% × 240000 40% × 330000
= 96,000 = 1,32,000
Net Assets 2,40,000 3,30,000 2,40,000 3,30,000
Goodwill 60,000 56,000 2,000
Gain on Bargain Purchase 30,000
Key Note:
Under Ind AS 103, Goodwill is not amortised but tested for annual impairment in accordance with
Ind AS 36.
1.8
Z-500 Company acquired C-400 Company on April 1, 2019. For a lawsuit contingency C-400 has a
present obligation as on April 1, 2019 and the fair value of the obligation can be reliably measured
as Rs.50,000. As of the acquisition date it is not believed that an out flow of cash or other assets will
be required to settle this matter. What amount should be recorded by Z-500 Company under Ind AS
for this contingent liability of C-400 Company?
Answer:
Contingent liabilities of the Acquiree are recognized as of the acquisition date if there is a present
obligation (even if it is not probable that an outflow of resources embodying economic benefits will
be required to settle the obligation, contrary to Ind AS 37) and the fair value of the obligation can be
measured reliably. Hence, a liability of Rs.50,000 would be recorded by Z.
1.9
Entity A acquired 35 % of Entity B in 2018 for Rs.35,000. In 2019, fair value of shares of entity B is
Rs.42,000, thus Rs.7,000 reported under OCI In 2019, A further acquired 40% stake in B.
Consideration paid Rs.60,000. Entity A identifies the net assets of B as Rs.1,20,000, value 35%
shares at Rs.45,000. NCI is valued at proportionate net assets.
Show workings and Journal entries. Show workings and Journal entries.
Workings:
Amount to be transferred to P&L by A
Gain on disposal of 35% Investment 45,000 - 42,000 3,000
Gain previously reported in OCI 42,000 - 35,000 7,000
Total transfer to P&L 10,000
Measurement of Goodwill by A
Fair Value of consideration given for controlling
interest
Non-controlling interest (25% × 1,20,000) 30,000
Fair Value of previously-held interest 45,000
1,35,000
Less: Fair value of net assets of acquiree 1,20,000
Goodwill 15,000
Journal Entry:
Goodwill (Balancing figure) Dr. 15,000
To, Consideration a/c 60,000
To Investment a/c 45,000
To NCI a/c 30,000
Dr. 3,000
Investment a/c Dr. 7,000
OCI 10,000
To P&L
1.10
Measurement of NCI - Fair Value and Proportionate Share Method
W1 Ltd acquires S1 Ltd by purchasing 60% of its Equity for Rs.15 Lakh in cash. The Fair Value of
NCI is determined as Rs.10 Lakh. The Net Aggregate Value of Identifiable Assets and Liabilities, as
measured in accordance with Ind AS 103 is determined as Rs.5 Lakh. How much Goodwill is
recognized based on two measurement bases of NCI?
Answer:
A. NCI is measured at Fair Value: (Full Goodwill Method)
W1 Ltd decides to measure NCI at Fair Value rather than at its Share of Identifiable Net Assets. The
Fair Value of NCI is determined as Rs.10 Lakh (given in the question), which is the same as the Fair
Value on a per-share basis of the purchased interest. The Acquirer recognizes at the acquisition
date—(a) 100% of the Identifiable Net Assets, (b) NCI at Fair Value, and (c)Goodwill.
The Journal Entry recorded on the acquisition date for the 60% Interest acquired is as follows (in Rs.
Lakhs):
Goodwill (Balancing figure) Dr. 20
To Cash 15
To NCI 10
Where NCI is measured at Fair Value as per Ind AS 103, T, Goodwill recognized represents the
Group's Share to Total Goodwill attributable to S1 Ltd and NCI's Share of the Total Goodwill
attributable to S1 Ltd.
1.11
W1 Ltd recognizes 100% of the Identifiable Net Assets on the acquisition date and decides to
measure NCI at Proportionate Share (40%) of S1 Ltd's Identifiable Net Assets.
The Journal Entry recorded on the acquisition date for the 60% Interest acquired is as follows (in Rs.
Lakhs):
Goodwill (balancing figure) Dr. 12
To Cash 15
To NCI 2
NCI is (Rs.5 Lakh × 40%) = Rs.2 Lakh. Hence, Goodwill of Rs.12 Lakh is calculated as
consideration Rs.15 Lakh plus NCI Rs.2 Lakh less Identifiable Net Assets and Liabilities Rs.5 Lakh.
So, the Goodwill recognized under Ind AS 103, represents Ram's 60% Share of Total Goodwill
attributable to S1 Ltd. It does not include any Goodwill attributable to 40% NCI.
1.12
F1 Ltd acquires F2 Ltd by purchasing 70% of its Equity for Rs.15 Lakh in Cash. The Fair Value of
NCI is determined as Rs.69 Lakhs. The Management have elected to adopt full Goodwill Method
and to measure NCI at Fair Value. The Net Aggregate Value of the Identifiable Assets and
Liabilities, as measured in accordance with Ind AS is determined as Rs.22 Lakh. (Ignore Tax effect).
What would be the answer if F1 Ltd chooses to measure NCI using a Proportionate Share Method
for this Business Combination? (Ignore Tax effect).
Answer: Bargain Purchase Gain arises if the recognized amount of the Identifiable Net Assets is
greater than the
Fair Value of the Consideration transferred + Fair Value of NCI. This is computed and recognised as
under—
Particulars: If NCI is measured at Fair Value Proportionate
(i.e. Full G/w Share of Net
Method) Identifiable Assets
Fair Value of Consideration transferred 15.00 15.00
Fair Value of NCI (given) Given = 6.90 (30% of 22) 6.60
Fair Value of previously held Equity Interest NA NA

21.90 21.60
Less: Recognised Value of 100% of Net Identifiable Assets, (22.00) (22.00)
as per Ind AS
Gain on Bargain Purchase, to be recognised in (0.10) (0.40)
Income Statement
Journal Entry in the two situations will be as under— Dr Cr Dr Cr

Identifiable Net Assets 22.00 22.0
To Cash 15.00 15.0
To Gain on Bargain Purchase 0,10 0.4
To NCI 6.90 6.6
Section: 2 - Determination of Business
2.1
Company GX is a liquor manufacturer and has traded for a number of years. The company produces
a wide variety of liquor and employs a workforce of machine operators, testers, and other
operational, marketing and administrative staff. It owns and operates a factory, warehouse and
machinery and holds raw material inventory and finished products.
On 1st January 2019, Company SY pays USD 80 million to acquire 100% of the ordinary voting
shares of Company GX. No other type of shares has been issued by Company GX. On the same day,
the four main executive directors of Company SY take on the same roles in Company GX.
In this case, it is clear that Company GX is a business. It operates a trade with a variety of assets
that are used by its employees in a number of related activities. These assets and activities are
necessarily integrated in order to create and sell the company's products. Company GX obtains
control on 1st January 2019 by acquiring 100% of the voting rights.
2.2
Company D is a development stage entity that has not started revenue-generating operations. The
workforce consists mainly of research engineers who are developing a new technology that has a
pending patent application. Negotiations to license this technology to a number of customers are at
an advanced stage. Company D requires additional funding to complete development work and
commence planned commercial production.
The value of the identifiable net assets in Company D is INR 750 million. Company A pays INR
600 million in exchange for 60% of the equity of Company D (a controlling interest).
Although Company D is not yet earning revenues (an example of ‗outputs') there are a number of
indicators that it has a sufficiently integrated set of activities and assets that are capable of being
managed to produce a return for investors. In particular, Company D:
 employs specialist engineers developing the know-how and design specifications of the
technology.
 is pursuing a viable plan to complete the development work and commence production.
 has identified and will be able to access customers willing to buy the outputs.
In addition, Company A has paid a premium (or goodwill) for its 60% interest. In the absence of
evidence to the contrary, Company D is presumed to be a business .
2.3
Company A acquires 100% of the equity and voting rights of Company P, a subsidiary of a property
investment group. Company P owns three investment properties. The properties are single tenant
industrial warehouses subject to long-term leases. The leases oblige Company P to provide basic
maintenance and security services, which have been outsourced to third party contractors. The
administration of Company P's leases was carried out by an employee of its former parent company
on a part-time basis but this individual does not transfer to the new owner.
Analysis and Conclusion: In most cases, an asset or group of assets and liabilities that are capable
of generating revenues, combined with all or many of the activities necessary to earn those revenues,
would constitute a business. However, investment property is a specific case in which earning a
return for investors is a defining characteristic of the asset. Accordingly, revenue generation and
activities that are specific and ancillary to an investment property and its tenancy agreements should
therefore be given a lower ‗weighting' in assessing whether the acquiree is a business. In our view
the purchase of investment property with tenants and services that are purely ancillary to the
property and its tenancy agreements should generally be accounted for as an asset purchase.
2.4
Company A acquires 100% of the equity and voting rights of Company Q, which owns three
investment properties. The properties are multi-tenant residential condominiums subject to short
term rental agreements that oblige Company Q to provide substantial maintenance and security
services, which are outsourced with specialist providers. Company Q has five employees who deal
directly with the tenants and with the outsourced contractors to resolve any non-routine security or
maintenance requirements. These employees are involved in a variety of lease management tasks
(e.g. identification and selection of tenants; lease negotiation and rent reviews) and marketing
activities to maximise the quality of tenants and the rental income.
Analysis and Conclusion: In this case, Company Q consists of a group of revenue-generating
assets, together with employees and activities that clearly go beyond activities ancillary to the
properties and their tenancy agreements. The assets and activities are clearly integrated so Company
Q is considered a business.
2.5
Company S is a manufacturer of a wide range of products. The company's payroll and accounting
system is managed as a separate cost centre, supporting all the operating segments and the head
office functions.
Company A agrees to acquire the trade, assets, liabilities and workforce of the operating segments of
Company S but does not acquire the payroll and accounting cost centre or any head office functions.
Company A is a competitor of Company S.
Analysis and Conclusion: In this case, the activities and assets within the operating segments are
capable of being managed as a business and so Company A accounts for the acquisition as a
business combination. The payroll and accounting cost centre and administrative head office
functions are typically not used to create outputs and so are generally not considered an essential
element in the assessment of whether an integrated set of activities and assets is a business.
2.6
Company A is a property development company with a number of subsidiary companies, each of
which holds a single development. After completion of the development, Company A sells its equity
investment because the applicable tax rate is lower than that applicable to the sale of the underlying
property.
Company A is planning to start the development of a large new retail complex. Rather than
incorporating a new company, Company A acquires the entire share capital of a ‗shell' company.
Analysis and Conclusion: The shell company does not contain an integrated set of activities and
assets and so does not constitute a business. Consequently, Company A should account for the
purchase of the shell company in the same way as the incorporation of a new subsidiary. In the
consolidated financial statements, any costs incurred will be accounted for in accordance with their
nature and applicable Ind AS. No goodwill is recognised.
2.7
Company A is a pharmaceutical company. Since inception, the Company had been conducting in
house research and development activities through its skilled workforce and recently obtained an
intellectual property right (IPR) in the form of patents over certain drugs. The Company‘s has a
production plant that has recently obtained regulatory approvals. However, the Company has not
earned any revenue so far and does not have any customer contracts for sale of goods. Company B
acquires Company A.
Required:
Does Company A constitute a business in accordance with Ind AS 103?
Analysis and Conclusion: The definition of business requires existence of inputs and processes. In
this case, the skilled workforce, manufacturing plant and IPR, along with strategic and operational
processes constitutes the inputs and processes in line with the requirements of Ind AS 103.
When the said inputs and processes are applied as an integrated set, the Company A will be capable
of producing outputs; the fact that the Company A currently does not have revenue is not relevant to
the analysis of the definition of business under Ind AS 103. Basis this and presuming that Company
A would have been able to obtain access to customers that will purchase the outputs, the present case
can be said to constitute a business as per Ind AS 103.
2.8
Modifying the above illustration, if Company A had revenue contracts and a sales force, such that
Company B acquires all the inputs and processes other than the sales force, then whether the
definition of the business is met in accordance with Ind AS 103?
Analysis and Conclusion: Though the sales force has not been taken over, however, if the missing
inputs (i.e., sales force) can be easily replicated or obtained by the market participant to generate
output, it may be concluded that Company A has acquired business. Further, if Company B is also
into similar line of business, then the existing sales force of Company B may also be relevant to
mitigate the missing input. As such, the definition of business is met in accordance with Ind AS 103.
Section - 3: Identifying Acquiring Enterprise
3.1
Company P Ltd., a manufacturer of textile products, acquires 40,000 of the equity shares of
Company X (a manufacturer of complementary products) out of 1,00,000 shares in issue. As part of
the same agreement, Company P purchases an option to acquire an additional 25,000 shares. The
option is exercisable at any time in the next 12 months. The exercise price includes a small premium
to the market price at the transaction date.
After the above transaction, the shareholdings of Company X‘s two other original shareholders are
35,000 and 25,000. Each of these shareholders also has currently exercisable options to acquire
2,000 additional shares.
Analysis and Conclusion:

In assessing whether it has obtained control over Company X, Company P should consider not only
the 40,000 shares it owns but also its option to acquire another 25,000 shares (a so-called potential
voting right). In this assessment, the specific terms and conditions of the option agreement and other
factors are considered:
 the options are currently exercisable and there are no other required conditions before such
options can be exercised
 if exercised, these options would increase Company P's ownership to a controlling interest of
over 50% before considering other shareholders' potential voting rights (65,000 shares out of a
total of 1,25,000 shares)
 although other shareholders also have potential voting rights, if all options are exercised
Company P will still own a majority (65,000 shares out of 1,29,000 shares)
 the premium included in the exercise price makes the options out-of-the-money. However, the
fact that the premium is small and the options could confer majority ownership indicates that
the potential voting rights have economic substance.
By considering all the above factors, Company P concludes that with the acquisition of the 40,000
shares together with the potential voting rights, it has obtained control of Company X.
3.2
Company GX Ltd., a manufacturer of Cosmetic products, acquires 50,000 of the equity shares of
Company SQM (a manufacturer of complementary products) out of 2,00,000 shares in issue. As
part of the same agreement, Company GX acquires right to direct all financial and operational
activities of SQM Limited.
Does GX has control over SQM Limited.
Analysis : Yes! as GX has GX acquired rights to direct all financial and operational activities of
SQM Limited.
3.3
Company A and Company B operate in power industry and both entities are operating entities.
Company A has much larger scale of operations than Company B. Company B merges with
Company A such that the shareholders of Company B would receive 1 equity share of Company A
for every 1 share held in Company B. Such issue of shares would comprise 20% of the issued share
capital of the combined entity. After discharge of purchase consideration, the pre-merger
shareholders of Company A hold 80% of the capital in Company A.
In this transaction, Company A is the acquirer for the purposes of accounting for business
combination as per Ind AS 103. This is because, by merging the entire shareholding of Company B,
Company A has acquired control over Company B. Further, the shareholders of erstwhile Company
B do not obtain control over Company A on account of shares received as part of purchase
consideration, as they hold only 20% of the paid-up capital of Company A.
3.4
Company A and Company B operate in power industry and both entities are operating entities.
Company A has much smaller scale of operations than Company B. Company B merges Company A
such that the shareholders of Company B would receive 10 equity share of Company A for every 1
share held in Company B. Such issue of shares would comprise 70% of the issued share capital of
the combined entity. After discharge of purchase consideration, the pre-merger shareholders of
Company A hold 30% of capital of Company A. Post-acquisition, the management of Company B
would manage the operations of the combined entity.

In Present case, Company B is the acquirer for the purposes of accounting for business combination
as per Ind AS 103. This is because, after merger, the shareholders of erstwhile.
Company B would have a controlling interest and management of the combined entity. As such, in
substance, Company B has acquired control over Company A.
It is important to note that the Company B would be considered as an acquirer for accounting
purposes only (i.e., accounting acquirer). For legal purposes as well as for reporting purposes, it is
the Company A that would be considered as an acquirer (i.e., legal acquirer).
Appropriate identification of an acquirer is relevant, as the net assets of the accounting acquiree
(rather than that of the accounting acquirer) are recognised at fair value.
3.5
Company A decided to spin-off two of its existing businesses (currently housed in two separate
entities, Company B and Company C). To facilitate the spin-off, Company A incorporates a new
entity (Company D) with nominal equity and appoints independent directors to the board of
Company D. Company D signs an agreement to purchase Companies B and C in cash, conditional
on obtaining sufficient funding. To fund these acquisitions, Company D issues a prospectus offering
to issue shares for cash.
At the conclusion of the transaction, Company D is owned 99% by the new investors with Company
A retaining only a 1% non-controlling interest.
In this situation, a set of new investors paid cash to obtain control of Company D in an arm's length
transaction. Company D is then used to effect the acquisition of 100% ownership of Companies B
and C by paying cash. Company A relinquishes its control of Companies B and C to the new owners
of Company D.
Although Company D is a newly formed entity, Company D is identified as the acquirer not only
because it paid cash but also because the new owners of Company D have obtained control of
Companies B and C from Company A.
Identification of the acquiring enterprise is very critical and the accounting may change
significantly if the accounting acquirer is different than legal acquirer.
Section - 4 - Determination of Acquisition Date

4.1
Company ZX acquired 80% equity interest in Company BX for cash consideration. The relevant
dates are as under:
Date of shareholder agreement June 1, 2019
 Appointed date as per shareholder agreement  April 1, 2019

 Date of obtaining control over the board representation  July 1, 2019
 Date of payment of consideration  July 15, 2019
 Date of transfer of shares to Company ZX  August 1, 2019
 In this case, as the control over financial and operating policies are acquired through
obtaining board representation on July 1, 2019, it is this date that is considered as the
acquisition date. It may be noted that the appointed date as per the agreement is not
considered as the acquisition date, as the Company ZX did not have control over Company
BX as at that date.
4.2
Can an acquiring entity account for a business combination based on a signed non-binding letter of
intent where the exchange of consideration and other conditions are expected to be completed with 2
months?
Answer:
No. as per the requirement of the standard a non- binding Letter of Intent (LOI) does not effectively
transfer control and hence this cannot be considered as the basis for determining the acquisition date.
4.3
On April 1 Company HX agrees to acquire the share of Company BH in an all equity deal. As per
the binding agreement Company HX will get the effective control on 1 April however the
consideration will be paid only when the shareholders' approval is received. The shareholders
meeting is scheduled to happen on 30 April. If the shareholder approval is not received for issue of
new shares, then the consideration will be settled in cash. What is the acquisition date?
Answer:
The acquisition date in the above example is 1 April. In the above scenario even if the shareholder
don't approve the shares consideration can be settled through payment of cash.
4.4
On 9 April 2020, S-7 Ltd. a listed company started to negotiate with R-8 Ltd, which is an unlisted
company about the possibility of merger. On 10 May 2020, the board of directors of S-7 authorized
their management to pursue the merger with R-8 Ltd. On 15 May 2020, management of S-7 Ltd
offered management of R-8 Ltd 12,000 shares of S-7 Ltd against their total share outstanding. On 31
May 2020, the board of directors of R-8 Ltd accepted the offer subject to shareholder vote. On 2
June 2020 both the companies jointly made a press release about the proposed merger.
On 10 June 2020, the shareholders of R-8 Ltd approved the terms of the merger. On 15 June, the
shares were allotted to the shareholders of R-8 Ltd.
The market price of the shares of S-7 Ltd was as follows:
Date Price
9 April 70
10 May 75
15 May 60
31 May 70
2 June 80
10 June 85
15 June 90
What is the acquisition date and what is purchase consideration in the above scenario?
Answer:
As per paragraph 8 of Ind AS 103, the acquirer shall identify the acquisition date, which is the date
on which it obtains control of the acquiree. In the above scenario, the acquisition date will the date
on which the shares were allotted to the shareholders of R-8 Ltd. Although the shareholder approval
was obtained on 10 June but the shares were issued only on 15 June and accordingly the 90 will be
considered as the market price.
Section - 5 : Business Combination Achieved in Stages
5.1
On 31 December 2019, Entity AX holds a 35 per cent non-controlling equity interest in Entity BX -
Having a carrying amount of Rs. 40,000. On that date, Entity AX purchases an additional 40 per
cent interest in Entity BX for RS. 1,00,000, which gives it control of Entity BX. Net Identifiable
assets of BX limited on that date amounted to Rs. 1,50,000 and Previously held Investments held by
AX limited remeasured at Rs. 45,000.
This transaction is referred as a business combination achieved in stages, sometimes also referred to
as a step acquisition.
In a business combination achieved in stages, the acquirer shall re-measure its previously held
equity interest in the acquiree at its acquisition-date fair value and recognise the resulting gain or
loss, if any, in profit or loss.
In prior reporting periods, the acquirer may have recognised changes in the value of its equity
interest in the acquiree in other comprehensive income.
As per Ind AS 109 or Ind AS 27, an entity can elect to measure investments in equity instruments at
fair value through other comprehensive income.
However, once elected all gains and losses on that investment even on sale is recognized in OCI.
Therefore, if the investment is designated as fair value through OCI, the resulting gain or loss, if
any, will be recognized in OCI.
Section - 6 : Contingent Consideration

6.1
Company A acquires Company B in April 2019 for cash. The acquisition agreement states that an
additional Rs.20 million of cash will be paid to B's former shareholders if B succeeds in achieving
certain specified performance targets. A determines the fair value of the contingent consideration
liability to be 15 million at the acquisition date. At a later date, the probability of meeting the said
performance target becomes lower.
As certain consideration is based on achieving certain performance parameters in future, the
consideration is contingent on achieving those parameters. As such, the transaction involves
contingent consideration. Company should recognise contingent consideration.
6.2
KKV Ltd acquires a 100% interest in VIVA Ltd, a company owned by a single shareholder who is
also the KMP in the Company, for a cash payment of USD 20 million and a contingent payment of
USD 2 million. The terms of the agreement provide for payment 2 years after the acquisition if the
following conditions are met:
 the EBIDTA margins of the Company after 2 years after the acquisition is 21%.
 the former shareholder continues to be employed with VIVA Ltd for at least 2 years after the
acquisition. No part of the contingent payment will be paid if the former shareholder does not
complete the 2 year employment period.
Analysis and Conclusion: In the above scenario the former shareholder is required to continue in
employment and the contingent consideration will be forfeited if the employment is terminated or if
he resigns. Accordingly, only USD 20 million is considered as purchase consideration and the
contingent consideration is accounted as employee cost and will be accounted as per the other Ind
AS standards.
Section - 7 : Retention of the original lease classification

7.1
Company VXM has entered into certain lease arrangements which were appropriately classified as
finance leases, based on facts and circumstances as at inception. Company VXM was acquired by
Company KLM and consequently all the identifiable net assets including the lease arrangements
were taken over by KLM. Based on facts and circumstances as at the acquisition date, Company
KLM determines that the lease arrangement meets the criteria for operating lease.
Analysis and Conclusion: Company KLM would be required to retain the original lease
classification of the lease arrangements and thereby recognise the lease arrangements as finance
leases. As such, KLM would not be able to consider the lease arrangements as taken on operating
lease basis.
7.2
M-5 Ltd acquired C-5 Ltd. During the analysis of the financial statement they discovered that C-5
Ltd has an existing lease arrangement where C-5 Ltd. is a lessee. The lease term is 5 years and is an
operating lease for an office space at a prime location. The remaining lease period under the
arrangement is 3 years. M-5 Ltd.'s M & A head assesses that: (i) the lease is ‗at-market‘; and (ii)
other market participants would not be willing to pay a premium for it.
The annual rentals are:
Year 1: Rs.2,000
Year 2: Rs.2,100
Year 3: Rs.2,200
Year 4: Rs.2,300
Year 5: Rs.2,400
C-5 Ltd. financial statements include an annual rent expense of Rs.2,200 (determined on a straight-
line basis) as lease rental increase is not linked to inflation and a deferred rent liability of Rs.300 at
Please discuss the treatment of the lease arrangement in the business combination accounting?
Answer:
The accrued rent for straight-lining does not represent a liability and accordingly it is not recorded as
a liability on the acquisition date. However, the rental expenses will be recorded based on straight-
lining (which will be computed based on the remaining lease period) for Rs.2,300 per year.
Section - 8: Contingent Liability

8.1
A suit for damages worth Rs.10 million was filed on Company B for alleged breach of certain
contract provisions. Company B had disclosed the same as a contingent liability in its financial
statements, as it considered that it is a present obligation for which it was not probable that the
amount would be payable. Company A acquire Company B and determines the fair value of the
contingent liability to be Rs.2 million.
Company A would recognise Rs.2 million in its financial statements as part of acquisition
accounting, even if it is not probable that payment will be required to settle the obligation.
8.2
Company A acquires Company B in a business combination on April 1, 2019. B is being sued by
one of its customers for breach of contract. The sellers of B provide an indemnification to A for the
reimbursement of any losses greater than Rs.100. There are no collectability issues around this
indemnification.
At the acquisition date, Company A determined that there is a present obligation and therefore the
fair value of the contingent liability of Rs.250 is recognised by A in the acquisition accounting. In
the acquisition accounting A also recognises an indemnification asset of Rs.150 (Rs.250 - Rs.100).
8.3
Progressive Ltd is being sued by Regressive Ltd for an infringement of its Patent. At 31 March
2022, Progressive Ltd recognised a Rs.10 million liability related to this litigation.
On 30 July 2022, Progressive Ltd acquired the entire equity of Regressive Ltd for Rs.500 million.
On that date, the estimated fair value of the expected settlement of the litigation is Rs.20 million.
In the above scenario the litigation is in substance settled with the business combination transaction
and accordingly the Rs. 20 million being the fair value of the litigation liability will be considered as
paid for settling the litigation claim and will be not included in the business combination.
Accordingly, the purchase price will reduce by 20 million and the difference between 20 and 10 will
be recorded in income statement of the Progressive limited as loss on settlement of the litigation.
Section - 9 : Possible Intangible Asset

9.1
K-7, FMCG company acquires an online e-commerce company, with the intention to start doing
retailing. The e-commerce company has over the period have 10 million registered users. However,
the e-commerce company does not have any intention to sale the customer list. Should this customer
list be recorded as an intangible in a business combination?
In this situation the customer database does not give rise to legal or contractual right. Accordingly,
the assessment of its separability will be assessed. The database can be useful to other players and E-
Commerce Company has the ability to transfer this to them. Accordingly, the intention not to
transfer will not affect the assessment whether to record this as an intangible or not.
Section - 10 - Re-acquired Rights
10.1
K-900 Limited is a successful company has number of own stores across India and also offers
franchisee to other companies. E-400 Ltd is one of the franchisee of K-900 Ltd and operates number
of store in south India. K-900 Ltd. decided to acquire E-400 Ltd due to its huge distribution network
and accordingly purchased the outstanding shares on 1 April 2022. On the acquisition date, K-900
determines that the license agreement reflects current market terms.
Analysis and conclusion:
K-900 will record the franchisee right as an intangible asset (reacquired right) while doing purchase
price allocation and since it is at market terms no gain or loss will be recorded on settlement.
Section - 11: Bargain Purchase
11.1
H-901 is one of the largest liquor manufacturing company in the world and it acquires another Entity
Y-100 which has significant presence in India and UK. However, the competition commission in
UK has issued orders to sell one division of the UK assets of Entity Y- 100 in order to comply with
the local competition regulation in UK within a specified timeline. Entity Z-500 another boutique
liquor manufacturer realises the opportunity and purchase the assets of Entity Y-100 from Entity H-
901.
Analysis and conclusion:
In the given case above it is more likely than not that there could be an element of bargain purchase
as the Entity Y-100 was under compulsion to sell the assets within a specified timeline.
As mentioned above before recognising a gain on a bargain purchase, the acquirer shall determine
whether there exists clear evidence of the underlying reasons for classifying the business
combination as a bargain purchase. If such evidence exists, the acquirer shall reassess whether it has
correctly identified all of the assets acquired and all of the liabilities assumed and shall recognise
any additional assets or liabilities that are identified in that review.
The acquirer shall then review the procedures used to measure the amounts this Ind AS requires to
be recognised at the acquisition date for all of the following:
 the identifiable assets acquired and liabilities assumed;
 the non-controlling interest in the acquiree, if any;
 for a business combination achieved in stages, the acquirer's previously held equity interest in
the acquiree; and
 the consideration transferred.
The objective of the review is to ensure that the measurements appropriately reflect consideration of
all available information as of the acquisition date.
Section: Measurement Period

12.1
Entity X acquired 100% shareholding of Entity Y on 1 April 2019 and had complete the preliminary
purchase price allocation and accordingly recorded net assets of Rs.100 million against the purchase
consideration of 150 million. Entity Y had significant carry forward losses on which deferred tax
asset was not recorded due to lack of convincing evidence on the acquisition date. However, on 31
March 2020, Entity Y won a significant contract which is expected to generate enough taxable
income to recoup the losses. Accordingly, the deferred tax asset was recorded on the carry forward
losses on 31 March 2020. Whether the aforesaid losses can be adjusted with the Goodwill recorded
based on the preliminary purchase price allocation?
No, as per the requirement of Ind AS 103, changes to the net assets are allowed which results from
the discovery of a fact which existed on the acquisition date. However, change of facts resulting in
recognition and de-recognition of assets and liabilities after the acquisition date will be accounted in
accordance with other Ind AS. In the above scenario deferred tax asset was not eligible for
recognition on the acquisition date and accordingly the new contract on 31 March 2020 will
tantamount to change of estimate and accordingly will not impact the Goodwill amount.
Section: Accounting : Common Control and Acquisition
13.1
Company X, the ultimate parent of a large number of subsidiaries, re-organises the retail segment of
its business to consolidate all of its retail businesses in a single entity. Under the reorganisation,
Company Z (a subsidiary and the biggest retail company in the group) acquires Company X‘s
shareholdings in its one operating subsidiary, Company Y by issuing its own shares to Company X.
After the transaction, Company X will directly control the operating and financial policies of
Companies Y.
In this situation, Company Z pays consideration to Company X to obtain control of Company Y. The
transaction meets the definition of a business combination. Prior to the reorganisation, each of the
parties are controlled by Company X. After the reorganisation, although Company Y are now owned
by Company Z, all two companies are still ultimately owned and controlled by Company X. From
the perspective of Company X, there has been no change as a result of the reorganisation. This
transaction therefore meets the definition of a common control combination and is within the scope
of Ind AS 103.
13.2
Enterprise Ltd. has 2 divisions Laptops and Mobiles. Division Laptops has been making constant
profits while division Mobiles has been invariably suffering losses.
On 31st March, 2020, the division-wise draft extract of the Balance Sheet was:
(Rs. in crores)
Laptops Mobiles Total
Fixed assets cost 250 500 750
Depreciation (225) (400) (625)
Net Assets (A) 25 100 125
Current assets: 200 500 700
Less: Current liabilities (25) (400) (425)
(B) 175 100 275
Total (A+B) 200 200 400
Financed by:
Loan funds - 300 300
Capital: Equity Rs.10 each 25 - 25
Surplus 175 (100) 75
200 200 400
Division Mobiles along with its assets and liabilities was sold for Rs.25 crores to Turnaround Ltd. a
new company, who allotted 1 crore equity shares of Rs.10 each at a premium of Rs.15 per share to
the members of Enterprise Ltd. in full settlement of the consideration, in proportion to their
shareholding in the company. One of the members of the Enterprise ltd was holding 52%
shareholding of the Company.
Assuming that there are no other transactions, you are asked to:
(i) Pass journal entries in the books of Enterprise Ltd.
(ii) Prepare the Balance Sheet of Enterprise Ltd. after the entries in (i).
(iii) Prepare the Balance Sheet of Turnaround Ltd.
Answer :
Journal of Enterprise Ltd.
(Rs. in crores)
Dr. Cr.
(1) Loan Funds Dr. 300
Current Liabilities Dr. 400
Provision for Depreciation Dr. 400
To Fixed Assets 500
To Current Assets 500
To Capital Reserve 100
(Being division Mobiles along with its assets and
liabilities sold to Turnaround Ltd. for Rs.25 crores)
This demerger will meet the definition of common control transaction. Accordingly, the transfer of
assets and liabilities will be derecognized and recognized as per book value and the resultant loss
or gain will be recorded as capital reserve in the books of demerged entity (Enterprise Ltd).
Enterprise Ltd. : Balance Sheet after reconstruction

Assets Note No. Amount
Non-Current Assets
Property, Plant And Equipment 25
Current Assets
Other Current Assets 200
225
Equity And Liabilities
Equity
Equity Share Capital (Of Face Value of Rs. 10 Each) 25
Other Equity 175
Liabilities
Current Liabilities 25
225
(Rs. in crores)
Notes to Accounts
(Rs. in crores)
1. Other Equity
Surplus (175-100) 75
Add: Capital Reserve on reconstruction 100
175
Notes to Accounts: Consequent on transfer of Division Mobiles to newly incorporated
company
Turnaround Ltd., the members of the company have been allotted 1 crore equity shares of Rs.10
each at a premium of Rs.15 per share of Turnaround Ltd., in full settlement of the consideration in
proportion to their shareholding in the company.
Balance Sheet of Turnaround Ltd.
(Rs. in crores)
Non-Current Assets
Property, Plant And Equipment 100
Current Assets
Other Current Assets 500
600
Equity
Equity Share Capital (of Face Value of Rs.10 Each) 1 10
Other Equity 2 (110)
Liabilities
Non-Current Liabilities
Financial Liabilities
Borrowings 300
Current Liabilities
Current Liabilities 400
600
Notes to Accounts
(Rs. in
crores)
1. Share Capital:
Issued and Paid-up capital
1 crore Equity shares of Rs.10 each fully paid up 10
(All the above shares have been issued for consideration other than cash, to the
members of Enterprise Ltd. on takeover of Division Mobiles from Enterprise Ltd.)
2. Other Equity:
Securities Premium 15
Capital reserve [25- (600 - 700)] (125)
(110)
Working Note:
In the given case, since both the entities are under common control, this will be accounted as
follows:
 All assets and liabilities will be recorded at book value
 No goodwill will be recorded.
 Securities issued will be recorded as per the nominal value.
13.3
The following is the draft Balance Sheet of Diverse Ltd. having an authorised capital of Rs.1,000
crores as on 31st March, 2021:
Assets Amount
Non-current assets
Property, plant and equipment ( Gross less Rs. 200 depreciation) 600
Financial assets
Investments carried at fair value 1,000
Current assets
Other current assets 3,000
4,600

Equity
Equity share capital (of face value of INR 10 each) 250
Other equity 1,350
Liabilities
Non-current liabilities -
Financial liabilities
Borrowings 1,000
Current liabilities -
Current liabilities 2,000
4,600
Capital commitments: Rs.700 crores.
The company consists of 2 divisions:
(i) Established division whose gross block was Rs.200 crores and net block was Rs.30 crores;
current assets were Rs.1,500 crores and working capital was Rs.1,200 crores; the entire
amount being financed by shareholders‘ funds.
(ii) New project division to which the remaining fixed assets, current assets and current liabilities
related.
The following scheme of reconstruction was agreed upon:
(a) Two new companies Sunrise Ltd. and Khajana Ltd. are to be formed. The authorised capital
of Sunrise Ltd. is to be Rs.1,000 crore. The authorised capital of Khajana Ltd. is to be Rs.500
crore.
(b) Khajana Ltd. is to take over investments at Rs.800 crore and unsecured loans at balance sheet
value of Rs.600 crore. It is to allot equity shares of Rs.10 each at par to the members of
Diverse Ltd. in satisfaction of the amount due under the arrangement. The book value of
loans approximates the fair values.
(c) Sunrise Ltd. is to take over the PPE and net working capital of the new project division along
with the secured loans and obligation for capital commitments for which Diverse Ltd. is to
continue to stand guarantee at book values. It is to allot one crore equity shares of Rs.10 each
as consideration to Diverse Ltd. Sunrise Ltd. made an issue of unsecured convertible
debentures of Rs.500 crore carrying interest at 15% per annum and having a right to convert
into equity shares of Rs.10 each at par on 31.3.2013. This issue was made to the members of
Diverse Ltd., as a right, who grabbed the opportunity, and subscribed in full.
(d) Diverse Ltd. is to guarantee all liabilities transferred to the 2 companies.
(e) Diverse Ltd. is to make a bonus issue of equity shares in the ratio of one equity share for
every equity share held by making use of the revenue reserves.
(f) None of the shareholders hold more than 50% and are not related to each other.
Assume that the above scheme was duly approved by the Honourable High Court and that there are
no other transactions. Ignore taxation.
You are asked to:
(i) Pass journal entries in the books of Diverse Ltd., and
(ii) Prepare the balance sheets of the three companies after the scheme of arrangement.
Working Notes:
In the given case, due to demerger the net assets of 400 which as per the given problem is a business
have been transferred to Khajana limited and as a consideration Khajana limited has issued shares to
the shareholders of diverse Ltd. It is assumed that none of the members control Diverse Ltd and
neither they have contractual arrangement to control Diverse Ltd and accordingly this will be
accounted as transfer of non-cash assets to owners and will be recorded at fair value in the books of
Diverse Ltd and shown as dividend paid. In the books of Khajana Ltd. this will be accounted as
purchase of business wherein the shareholders through Khajana Ltd. have purchased the Business
from Diverse Ltd and will be accounted as business combination. This is because the members don't
control diverse Ltd and Khajana Ltd. and hence this will not meet the criteria for common control
transaction. In the given scenario it is assumed that the fair value of the liability and the investments
are similar and hence no fair value adjustment has been recorded as a part of purchase price
allocation.
1. Amount Due from Khajana Ltd.
Investments at fair value 1,000
Less : Unsecured Loans (600)
Net Consideration 400
2. In the given case, Diverse Ltd will continue to control Sunrise Ltd. before and after the demerger
and hence this will meet the common control transaction. As per the requirement of Ind AS 103, the
assets and liabilities acquired by sunrise Ltd will be recorded at their book value and the securities
issues will be recorded at their nominal value. The difference between the consideration and the net
assets transferred will be recorded as capital reserve in the books of Diverse Ltd. Further the
difference between the carrying amount of consideration and the book value of assets and liabilities
will be recorded as capital reserve in the books of Sunrise Ltd.
Segregation of Assets & Liabilities between Established and New Division
As per information in point (i)
Particulars Total (A) Established New Project Division
Division (B) (A-B)
1 Net Block 600 (Given) 30 (Given) 570 (A-B)
2 Current Assets 3,000 (Given) 1,500 (Given) 1,500 (A-B)
Working Capital 1,000 (Given) 1,200 (Given) (200) (A-B)
Current Liabilities 2,000 300 1,700
(Rs. in crores)
Established New Project division Total
division
1. Fixed assets:
Gross block 200 600 800
Less: Depreciation (170) (30) (200)
30 570 600
Current assets 1,500 1,500 3,000
Less: Current liabilities (300) (1,700) (2,000)
Employment of funds 1,200 (200) 1,000
2. Guarantee by Diverse Ltd. against:
(a) (i) Capital commitments 700
(ii) Liabilities transferred to
Sunrise Ltd.
Secured loans against fixed assets 300
Secured loans against working 100

capital
Current liabilities 1,700 2,100
(b) Liabilities transferred to 600
Khajana Ltd.
Answer :
Journal of Diverse Ltd.
Transactions with Khajana Ltd.
(Rs. in crores)
1. Khajana Ltd. A/c Dr. 400
Unsecured loans A/c Dr. 600
To Investments A/c 1,000
(Being transfer of investments at agreed value of Rs.800
crores but recorded as per fair value, unsecured loans Rs.600
crores) - WN 1
2. Reserve and surplus A/c Dr. 400
To Khajana Ltd 400
Non cash transfer
Transactions with Sunrise Ltd.
(Rs. in crores)
1. Sunrise Ltd. A/c (1cr equity shares x Rs.10) Dr. 10
Secured loans against fixed assets A/c Dr. 300
Secured loans against working capital A/c Dr. 100
Current liabilities A/c (WN 2) Dr. 1,700
To Property, Plant and Equipment A/c (WN 2) 570
To Current assets A/c (WN 2) 1,500
To Capital reserve A/c 40
(Assets and liabilities of New Project Division transferred to
Sunrise Ltd. along with capital commitments of Rs.700
crores, the difference between consideration and the book
values at which transferred assets and liabilities appeared
credited to capital reserve)
2. Equity shares of Sunrise Ltd. Dr. 10
To Sunrise Ltd. 10
(Receipt of one crore equity shares of Rs.10 each from
Sunrise Ltd. in full discharge of consideration on transfer of
assets and liabilities of the New Project Division)
3. Investment in debentures A/c Dr. 500
To Bank A/c 500
(Issue of unsecured convertible debentures by Sunrise Ltd.,
subscribed in full)
4. Revenue reserves A/c Dr. 250
To Equity share capital A/c 250

(Allotment of 25 crores equity shares of Rs.10 each as fully
paid bonus shares to the members of the company by using
revenue reserves in the ratio of one equity share for every
equity share held)
Diverse Ltd.
Balance Sheet after the scheme of arrangement
(Rs. in crores)
Non-current assets
Property, plant and equipment 30
Financial assets
Investments 510
Current assets
Other current assets (1500-500) 1,000
1,540
Equity
Equity share capital (of face value of INR 10 each) 1 500
Other equity 2 740
Liabilities
Current liabilities
Current liabilities 300
1,540
Notes to Accounts (Rs. in crores)
1 Share capital:
Authorised capital: 100 crores Equity Shares of Rs.10 each 1,000
Issued, subscribed and paid up capital 50 crores Equity Shares of 500
Rs.10 each fully paid-up
(Of the above shares, 25 crores fully paid Equity Shares of Rs.10
each have been issued as bonus shares by capitalization of revenue
reserves)
2 Reserves and Surplus:
1. Capital Reserve on transfer of:
Business of new project division to Sunrise Ltd. 40
2. Surplus (Profit and Loss Account):
As per last balance sheet 1,350
Less: Transfer of non-cash assets as dividend (W.N.1) Used for (400) 700
issue of fully paid bonus shares (250)
740
3 Fixed assets:
Net PPE:
As per last balance sheet 600
Less: In respect of assets transferred to Sunrise Ltd. (570) 30
4 Investments (at cost):
Investment in Equity Instruments
In wholly owned subsidiary Sunrise Ltd.
1 crore equity shares of Rs.10 each 10
Investment in Debentures and bonds
15% unsecured convertible debentures 500
510
Balance Sheet of Sunrise Ltd. after the scheme of arrangement
Rs. in crores
Non-current assets
Property, plant and equipment 570
Current assets
Cash and Cash equivalent 500
Other current assets 1,500
2,570
Equity
Other equity (capital reserve) 2 (40)
Liabilities
Non-current liabilities
Borrowings 900
Current liabilities
Current liabilities 1,700
2,570
Notes:
1. Capital commitments
2. Guarantee given by Diverse Ltd. in respect of:
Capital commitments 700
Liabilities 2,100 2,800
Notes to Accounts (Rs. in crores)
1 Share Capital
Authorised Capital
100 crores Equity Shares of Rs.10 each 1,000
Issued, Subscribed and Paid-up capital 1 crore

Equity Shares of Rs.10 each fully paid-up 10
(All the above shares have been issued for consideration other than cash,
on takeover of new project division from Diverse Ltd.
All the above shares are held by the holding company Diverse Ltd.)
2 Secured Loans
(a) Against property plant and equipment 300
(b) Against working capital 100
400
3 Unsecured Loans
15% Unsecured convertible Debentures 500
- Convertible into equity shares of Rs.10 each at par on 31.3.2019
Balance Sheet of Khajana Ltd. after the scheme of arrangement

(Rs. in crores)
Non-current assets
Financial assets
Investments 1,000
1,000
Equity
Non-controlling interest -
Liabilities
Borrowings 600
1,000
Notes to Accounts
(Rs. in crores)
1 Share Capital 1
Authorised 1
50 crores Equity Shares of Rs.10 each 500
Issued, Subscribed and Paid-up
40 crores Equity Shares of Rs.10 each fully paid-up 400
13. 4
Maxi Mini Ltd. has 2 divisions - Maxi and Mini. The draft information of assets and liabilities as at
31st October, 2020 was as under:
Maxi Mini Total
division division (in crores)
Fixed assets:
Cost 600 300 900

Depreciation (500) (100) (600)
W.D.V. (A) 100 200 300
Net current assets:
Current assets 400 300 700
Less: Current liabilities (100) (100) (200)
(B) 300 200 500
Total (A+B) 400 400 800
Financed by:
Loan funds (A) - 100 100
(secured by a charge on fixed assets)
Own funds:
Equity capital 50
(fully paid up Rs.10 per share)
Reserves and surplus 650
(B) ? ? 700
Total (A+B) 400 400 800
It is decided to form a new company Mini Ltd. to take over the assets and liabilities of Mini division.
Accordingly, Mini Ltd. was incorporated to take over at Balance Sheet figures, the assets and
liabilities of that division. Mini Ltd. is to allot 5 crore equity shares of Rs.10 each in the company to
the members of Maxi Mini Ltd. in full settlement of the consideration. The members of Maxi Mini
Ltd. are therefore to become members of Mini Ltd. as well without having to make any further
investment.
(a) You are asked to pass journal entries in relation to the above in the books of Maxi Mini Ltd. and
Mini Ltd. Also show the Balance Sheets of the 2 companies as on the morning of 1st November,
2020, showing corresponding previous year‘s figures.
(b) The directors of the 2 companies ask you to find out the net asset value of equity shares pre and
post demerger.
(c) Comment on the impact of demerger on ―shareholders wealth‖.
Answer:
Demerged Company: Mini Division of ―Maxi Mini Ltd‖
Resulting Company: ―Mini Ltd.‖
(a) Journal of Maxi Mini Ltd. (Demerged Company)
(Rs. in crores)
Dr. Cr.
Current liabilities A/c Dr. 100
Loan fund (secured) A/c Dr. 100
Provision for depreciation A/c Dr. 100
Loss on reconstruction (Balancing figure) Dr. 300
To Fixed assets A/c 300
To Current assets A/c 300
(Being the assets and liabilities of Mini division taken out of the books on
transfer of the division to Mini Ltd., the consideration being allotment to

the members of the company of one equity share of Rs.10 each of that
company at par for every share held in the company vide scheme of
reorganisation)
Assumption: In the absence of additional information on fair value of the assets transferred it has
been assumed that the group of shareholders control both the demerged and the resultant entity.
Journal of Mini Ltd.
(Rs. in crores)
Dr. Cr.
Fixed assets (300-100) A/c Dr. 200
Current assets A/c Dr. 300
To Current Liabilities A/c 100
To Secured loan funds A/c 100
To Equity share capital A/c 50
To Capital reserve 250
(Being the assets and liabilities of Mini division of Maxi Mini Ltd. taken over and allotment of 5 crores
equity shares of Rs.10 each at part as fully paid up to the members of Maxi Mini Ltd.)
Maxi Mini Ltd.
Balance Sheet as at 1st November, 2020
Rs. in crore
Assets Note After Before
No. Reconstruction Reconstruction
Non-current assets
Property, Plant and Equipment 2 100 300
Current assets
Other current assets 400 700
500 1,000
Equity
Other equity 1 350 650
Borrowings 0.00 100
Current liabilities
Current liabilities 100 200
500 1,000
Notes to Accounts
After Before
Reconstruction Reconstruction
1. Other Equity
Reserves and Surplus 650 650
Less: Loss on reconstruction (300)
350 650
2. Fixed Assets 600 900
Less: Depreciation (500) (600)
100 300
Notes to Accounts: Consequent on reconstruction of the company and transfer of Mini division to
newly incorporated company Mini Ltd., the members of the company have been allotted 5 crores
equity shares of Rs.10 each at part of Mini Ltd. The demerged entity and the resultant entity are
common control and accordingly the transaction has been accounted at book values of the assets
transferred in both the entity.
Mini Ltd.
Balance Sheet as at 1 November, 2020 Rs. in crore
Assets Note After
No. reconstruction
Non-current assets
Property, Plant and Equipment 200
Current assets
Other current assets 300
500
Equity
Other equity (capital reserve) 250
Liabilities
Borrowings 100
Current liabilities
Current liabilities 100
500
Notes to Account
(Rs.in crores)
1. Share Capital:
Issued and paid up:
5 crores Equity shares of Rs.10 each fully paid up 50
(All the above shares have been issued for consideration other than cash, to the
members of Maxi Mini Ltd., on takeover of Mini division from Maxi Mini
Ltd.)
(b) Net asset value of an equity share
Pre-demerger Post-demerger
Maxi Mini Ltd. : Rs. 700 crores = Rs.140 Rs. 400 crores = Rs.80
5 crores 5 crores
Mini Ltd.: Rs. 300 crores = Rs.60
5 crores
(c) Demerger into two companies has had no impact on "net asset value" of shareholding. Pre-
demerger, it was Rs.140 per share. After demerger, it is Rs.80 plus Rs.60 i.e. Rs.140 per original
share.
It is only yield valuation that is expected to change because of separate focusing on two distinct
businesses whereby profitability is likely to improve on account of demerger.
13. 5
AX Ltd. and BX Ltd. amalgamated on and from 1st January 2021. A new Company ABX Ltd. was
formed to take over the businesses of the existing companies.
Summarized Balance Sheet as on 31-12-2021
Rs. in '000
Assets Note No. AX Ltd BX Ltd
Non-current assets
Property, Plant and Equipment 8,500 7,500
Financial assets
Investments 1,050 550
Current assets
Inventory 1,250 2,750
Trade receivable 1,800 4,000
Cash and Cash equivalent 450 400
13,050 15,200
Equity
Equity share capital (of face value of INR 10 each) 6,000 7,000
Other equity 3,050 2,700
Liabilities
Borrowings 3,000 4,000
Current liabilities
Trade payable 1,000 1,500
13,050 15,200
ABX Ltd. issued requisite number of shares to discharge the claims of the equity shareholders of the
transferor companies.
Prepare a note showing purchase consideration and discharge thereof and draft the Balance Sheet of
ABX Ltd:
(a) Assuming that both the entities are under common control
(b) Assuming BX ltd is a larger entity and their management will take the control of the entity.
The fair value of net assets of AX and BX limited are as follows:
Assets AX Ltd. BX Ltd.
('000) ('000)
Fixed assets 9,500 1,000
Inventory 1300 2900
Fair value of the business 11,000 1,4000
Answer:
(a) (Assumption: Common control transaction)
1. Calculation of Purchase Consideration
AX Ltd. BX Ltd.
Rs. '000 Rs. '000
Assets taken over:
Investments 10,50 5,50
Trade receivables 18,00 40,00
Cash & Bank 4,50 4,00
Gross Assets 130,50 152,00
Less: Liabilities
12% Debentures 30,00 40,00
Trade payables 10,00 (40,00) 15,00 (55,00)
Net Assets taken over 90,50 97,00
Less: Reserves and Surplus:
General Reserve 15,00 20,00
P & L A/c 10,00 5,00
Investment Allowance Reserve 5,00 1,00
Export Profit Reserve 50 (30,50) 1,00 (27,00)
Purchase Consideration 60,00 70,00
Total Purchase Consideration = 130,00 (60,00 of AX Ltd. & 70,00 of BX Ltd.)
2. Discharge of Purchase Consideration No. of shares to be issued to AX Ltd =
Net Assets taken over of AX Ltd.
× Purchase Consideration
Net Assets taken over of AX Ltd. and BX Ltd.
No. of shares to be issued to BX Ltd =
Net Assets taken over of BX Ltd.
× Purchase Consideration
Net Assets taken over of AX Ltd. and BX Ltd.
AX Ltd. BX Ltd.
Rs. '000 Rs. '000
130,00 × 90.50 = 6,27,500 * Equity shares of Rs.10 each 62,75
187.50
130,00 × 97,00 = 6,72,500 67,25
187,50
Equity shares of Rs.10 each
* The total purchase consideration is to be discharged by ABX Ltd. in such a way that the rights of
the shareholders of AX Ltd. and BX Ltd. remain unaltered in the future profits of ABX Ltd.
Balance Sheet of ABX Ltd. as on 1.1.2021
Rs. in '000
Non-current assets
Property, Plant and Equipment 16,000
Financial assets
Investments 1,600
Current assets

Inventory 4,000
Trade receivable 5,800
Cash and Cash equivalent 850
28,250
Equity
Equity share capital (of face value of INR 10 each) 1 13,000
Other equity 2 5,750
Liabilities
Borrowings 3 7,000
Current liabilities
Trade payable 2,500
28,250
Notes to Accounts
('000) ('000)
1. Share Capital
13,00,000 Equity Shares of Rs.10 each 130,00
2. Reserves and surplus
General Reserve (15,00 + 20,00) 35,00
Profit & Loss (10,00 + 5,00) 15,00
Investment Allowance Reserve (5,00 + 1,00) 6,00
Export Profit Reserve (50 + 1,00) 1,50 57,50
3. Long Term Borrowings
12% Debentures (Assumed that new debentures were issued in 70,00
exchange of the old series) (30,00+40,00)
(b) Assessment: In this case BX Ltd. and AX Ltd. are not under common control and hence Ind AS
103 for business combination accounting will be applied. A question arises here is who is the
accounting acquirer AXBX Ltd which is issuing the share or AX Ltd. or BX Ltd. As per the
accounting guidance provided in Ind AS 103 sometimes the legal acquirer may not be the
accounting acquirer. In the given scenario although AXBX Ltd. is issuing the shares but the BX Ltd.
post-merger will have control and is bigger in size which is a clear indicator that BX Ltd. will be
accounting acquirer. Accordingly, the following accounting steps has to be followed:
 BX Ltd. assets will be recorded at historical cost in the merged financial statements.
 Shares issued to the shareholders of BX Ltd. will be recorded at nominal value and the shares
issued to the members of AX Ltd. will be recorded at the fair value of the business which is
11,000.
 The above purchase price will be allocated to the assets and liabilities of AX Limited at fair
value and the resultant amount will be recorded as Goodwill.
(1) Calculation of Purchase Consideration
AX Ltd. BX Ltd.
Rs.'000 Rs.'000
AX Ltd. BX Ltd.
Rs.'000 Rs.'000
Assets taken over:
Investments 10,50 5,50
Trade receivables 18,00 40,00
Cash & Bank 4,50 4,00
Goodwill 900 1
Gross Assets 150,00 152,00
Less: Liabilities
12% Debentures 30,00 40,00
Trade payables 10,00 (40,00) 15,00 (55,00)
Purchase Consideration 11,000 97,00
(2) Discharge of Purchase Consideration (PC):

AX Ltd. BX Ltd.
Rs. '000 Rs. '000
Fair value of BX Ltd business is 11,000 and accordingly per share 11,000
fair value is 20. Considering the above AXBX Ltd will issue
5,50,000 shares as PC to the members of AX Ltd.
5,50,000 Equity Shares of Rs.10 each at a premium of 10 each
7,00,000 Equity Shares of Rs.10 each 70,00
Balance Sheet of ABX Ltd. as on 1.1.2021
INR in '000
Non-current assets
Goodwill 900
Property, Plant and Equipment (9500+7500) 17,000
Financial assets
Investments (1050+550) 1,600
Current assets
Inventory (1300+2750) 4,050
Trade receivable (1800+4000) 5,800
Cash and Cash equivalent (450+400) 850
30,200
Equity
Equity share capital (of face value of INR 10 each) 1 12,500
Other equity 2 8,200
Liabilities
Borrowings 3 7,000
Current liabilities
Trade payable 2,500
30,200
Notes to Accounts
('000) ('000)
1. Share Capital
1,250,000 Equity Shares of Rs.10 each (700,000 to BX 1,25,00
Ltd and 550,000 as computed above to AX LTD)
2. Reserves and Surplus
General reserve of BX Ltd 20,00
P&L of BX Ltd 5,00
Export Profit Reserve of BX Ltd 1,00
Investment Allowance Reserve of BX Ltd 1,00 27,00
3. Long Term Borrowings
12% Debentures (Assumed that new debentures were 70,00
issued in exchange of the old series)
13.6
Company A and Company B are in power business. Company A holds 25% of equity shares of
Company B. On November 1, Company A obtains control of Company B when it acquires a further
65% of Company B's shares, thereby resulting in a total holding of 90%. The acquisition had the
following features:
 Consideration: Company A transfers cash of Rs.59,00,000 and issues 1,00,000 shares on
November 1. The market price of Company A's shares on the date of issue is Rs.10 per share.
The equity shares issued as per this transaction will comprise 5% of the post-acquisition
equity capital of Company A.
 Contingent consideration: Company A agrees to pay additional consideration of
Rs.7,00,000 if the cumulative profits of Company B exceed Rs.70,00,000 over the next two
years. At the acquisition date, it is not considered probable that the extra consideration will
be paid. The fair value of the contingent consideration is determined to be Rs.3,00,000 at the
acquisition date.
 Transaction costs: Company A pays acquisition-related costs of Rs.1,00,000.
 Non-controlling interests (NCI): The fair value of the NCI is determined to be Rs.7,50,000
at the acquisition date based on market prices. Company A elects to measure non-controlling
interest at fair value for this transaction.
 Previously held non-controlling equity interest: Company A has owned 25% of the shares
in Company B for several years. At November 1, the investment is included in Company A's
consolidated statement of financial position at Rs.6,00,000, accounted for using the equity
method; the fair value is Rs.20,00,000.
The fair value of Company B's net identifiable assets at November 1 is Rs.60,00,000, determined in
accordance with Ind AS 103.
Required
Determine the accounting under acquisition method for the business combination by Company A.
Response:
Identify the acquirer
In this case, Company A has paid cash consideration to shareholders of Company B. Further, the
shares issued to Company B pursuant to the acquisition do not transfer control of Company A to
erstwhile shareholders of Company B. Therefore, Company A is the acquirer and Company B is the
acquirer.
Determine acquisition date
As the control over the business of Company B is transferred to Company A on November 1, that
date is considered as the acquisition date.
Determine the purchase consideration
The purchase consideration in this case will comprise the following:
Cash consideration Rs.59,00,000
Equity shares issued (1,00,000 x 10 i.e., at fair value) Rs.10,00,000
Contingent consideration (at fair value) Rs.3,00,000
Fair value of previously held interest Rs.20,00,000
As such, the total purchase consideration is Rs.92,00,000.
Acquisition cost incurred by and on behalf of the Company A for acquisition of Company B should
be recognised in the Statement of profit and loss. As such, an amount of Rs.1,00,000 should be
recognised in Statement of profit and loss.
Determine fair value of identifiable assets and liabilities
The fair value of identifiable net assets is determined at Rs.60,00,000.
Measure NCI
The management has decided to recognise the NCI at its fair value. As such, the NCI will be
recognised at Rs.7,50,000.
Re-measure previously held interests in case business combination is achieved in stages
In this case, the control has been acquired in stages i.e., before acquisition to control, the Company
A exercised significant influence over Company B. 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 the
acquisition date should be recognised in Statement of Profit and Loss. As such, an amount of
Rs.14,00,000 (i.e., 20,00,000 less 6,00,000) will be recognised in Statement of profit and loss.
Determination of goodwill or gain on bargain purchase
Goodwill should be calculated as follows: (Rs.)
Total consideration 92,00,000
Recognised amount of any non-controlling interest 7,50,000
Less: fair value of Lila-Domestic's net identifiable assets (60,00,000)
Goodwill 39,50,000
Section - 14 - Highly Advance Level
14.1
The balance sheet of Professional Ltd. and Dynamic Ltd. as of 31 March 2020 is given below:
Assets Professional Ltd Dynamic Ltd

Non-Current Assets:
Property plant and equipment 300 500
Investments 400 100
Current assets:
Inventories 250 150
Financial assets
Trade receivable 450 300
Cash and cash equivalents 200 100
Others 400 230
Total 2,000 1,380
Equity and Liabilities
Equity
Share capital- Equity shares of Rs.100 each 500 400
Reserve and surplus 810 225
Non-Current liabilities:
Long term borrowings 250 200
Long term provisions 50 70
Deferred tax 40 35
Current Liabilities:
Short term borrowings 100 150
Trade payable 250 300
Total 2,000 1,380
Other information
(a) Professional Ltd. acquired 70% of Dynamic Ltd on 1 April 2020 by issuing its own shares in
the ratio of 1 share of Professional Ltd for every 2 shares of Dynamic Ltd. The fair value of
the share of Professional Ltd was Rs.40 per share.
(b) The fair value exercise resulted in the following: (all nos. in Lakh)
(a) PPE fair value on 1 April 2020 was Rs.350 lakhs.
(b) Professional Ltd also agreed to pay an additional payment that is higher of 35 lakh and
25% of any excess of Dynamic Ltd in the first year after acquisition over its profits in the
preceding 12 months. This additional amount will be due after 2 years. Dynamic Ltd has
earned Rs.10 lakh profit in the preceding year and expects to earn another Rs.20 Lakh.
(c) In addition to above, Professional Ltd also had agreed to pay one of the founder
shareholder a payment of Rs.20 lakh provided he stays with the Company for two year
after the acquisition.
(d) Dynamic Ltd had certain equity settled share based payment award (original award)
which got replaced by the new awards issued by Professional Ltd. As per the original
term the vesting period was 4 years and as of the acquisition date the employees of
Dynamic Ltd have already served 2 years of service. As per the replaced awards the
vesting period has been reduced to one year (one year from the acquisition date). The fair
value of the award on the acquisition date was as follows:
(i) Original award- Rs.5 lakh
(ii) Replacement award-Rs.8 lakh.
(e) Dynamic Ltd had a lawsuit pending with a customer who had made a claim ofRs.50 lakh
Management reliably estimated the fair value of the liability to be Rs.5 lakh.
(f) The applicable tax rate for both entities is 30%.
You are required to prepare opening consolidated balance sheet of Professional Ltd as on 1 April
2020. Assume 10% discount rat
Answer:
Consolidated Balance sheet of Professional Ltd as on 1 April 2020 (Rs. in Lakhs)
Assets
Non-Current Assets:
Property plant and equipment 650
Investments 500
Current assets:
Inventories 400
Financial assets:
Trade receivable 750
Cash and cash equivalents 300
Others 630
Total 3,230
Equity
Share capital- Equity shares of Rs.100 each 700
Reserve and surplus 942.63
NCI 154.95
Long term borrowings 450
Long term provisions (50+70+28.93) 148.93
Deferred tax 28.5
Short term borrowings 250
Trade payable 550
Provision for Lawsuit Damages 5
Total 3230
(a) Fair value adjustment- As per Ind AS 103, the acquirer is required to record the assets and
liabilities at their respective fair value. Accordingly, the PPE will be recorded at Rs.350
lakhs.
(b) The value of replacement award is allocated between consideration transferred and post
combination expense. The portion attributable to purchase consideration is determined based
on the fair value of the replacement award for the service rendered till the date of the
acquisition. Accordingly, 2.5 (5 x 2/4) is considered as a part of purchase consideration and
is credited to Professional Ltd equity as this will be settled in its own equity. The balance of
2.5 will be recorded as employee expense in the books of Dynamic Ltd over the remaining
life, which is 1 year in this scenario.
(c) There is a difference between contingent consideration and deferred consideration. In the
given case 35 is the minimum payment to be paid after 2 years and accordingly will be
considered as deferred consideration. The other element is if company meet certain target
then they will get 25% of that or 35 whichever is higher. In the given case since the
minimum what is expected to be paid the fair value of the contingent consideration has been
considered as zero. The impact of time value on deferred consideration has been given @
10%.
(d) The additional consideration of Rs.20 lakhs to be paid to the founder shareholder is
contingent to him/her continuing in employment and hence this will be considered as
employee compensation and will be recorded as post combination expenses in the income
statement of Dynamic Ltd.
Working for Purchase consideration Rs. in lakhs
Particulars Amount
Share capital of Dynamic Ltd 400
Number of shares 4,00,000
Shares to be issued 2:1 2,00,000
Fair value per share 40
PC (A) in lakhs (2,00,000 x 70% x Rs.40 per share) 56
Deferred consideration (B) Market based measure of the acquiree 28.93
award (5) x ratio of the portion of the vesting period completed
(2)/greater of the total vesting period (3) or the original vesting period
(4) of the acquiree award
Replacement award (5 x 2 / 4) (C) 2.5
PC in lakhs (A+B+C) 87.43
Purchase price allocation workings
Particulars Book value Fair value (B) FV adjustment
(A) (A-B)
Property plant and equipment 500 350 (150)
Investments 100 100 -
Inventories 150 150 -
Financial assets: -
Trade receivable 300 300 -
Cash and cash equivalents 100 100 -
Others 230 230
Long term borrowings (200) (200) -
Long term provisions (70) (70) -
Deferred tax (35) (35) -
Short term borrowings (150) (150) -
Trade payable (300) (300) -
Contingent liability - (5) (5)
Net assets (X) 625 470 (155)
Deferred tax Asset on FV adjustment 46.50 155
(155*30%) (Y)
Net assets (X+Y) 516.5
Non-controlling interest (516.50 x 30%) 154.95

rounded off
Capital Reserve (Net assets - NCI - PC) 274.12
Purchase consideration (PC) 87.43
Consolidation workings
Professional Dynamic Ltd PPA Total
Ltd (pre-acquisition) Allocation
Assets
Non-Current Assets:
Property plant and equipment 300 500 (150) 650
Investments 400 100 0 500
Current assets:
Inventories 250 150 400
Financial assets:
Trade receivable 450 300 750
Cash and cash equivalents 200 100 300
Others 400 230 630
Total 2,000 1,380 3230

Equity
Share capital- Equity shares of Rs.100 500 200 700
each
Reserve and surplus 810 132.62 942.62
Non-controlling interest 0 154.95 154.95
Long term borrowings 250 200 450
Long term provisions 50 70 28.93 148.93
Deferred tax 40 35 (46.5) 28.5
Short term borrowings 100 150 250
Trade payable 250 300 0 550
Liability for lawsuit damages 5 5
Total 2,000 755 475 3230
Other Equity
Reserves and Surplus 810 810
Replacement award 2.5 2.5
Discount on issue of shares (200-56) (144) (144)
Capital Reserve 274.12 274.12
810 132.12 942.62
14.2
P-9 a real estate company acquires Q-4 another construction company which has an existing equity
settled share based payment scheme. The awards vest after 5 years of employee service. At the
acquisition date, Company Q-4‘s employees have rendered 2 years of service. None of the awards
are vested at the acquisition date. P did not replace the existing share-based payment scheme but
reduced the remaining vesting period from 3 years to 2 year. Company P-9 determines that the
market-based measure of the award at the acquisition date is Rs.500 (based on measurement
principles and conditions at the acquisition date as per Ind AS 102).
Answer:
The market based measure or the fair value of the award on the acquisition date of 500 is allocated
NCI and post combination employee compensation expense. The portion allocable to pre-
combination period is 500 × 2/5 = 200 which will be included in pre-combination period and is
allocated to NCI on the acquisition date. The amount is computed based on original vesting period.
The remaining expense which is 500-200 = 300 is accounted over the remaining vesting period of 2
years as compensation expenses.
14.3
Green Ltd acquired Pollution Ltd. as a part of the arrangement Green Ltd had to replace the
Pollution Ltd.‘s existing equity-settled award. The original awards specify a vesting period of five
years. At the acquisition date, Pollution Ltd employees have already rendered two years of service.
As required, Green Ltd replaced the original awards with its own share-based payment awards
(replacement award). Under the replacement awards, the vesting period is reduced to 2 year (from
the acquisition date).
The value (market-based measure) of the awards at the acquisition date are as follows:
 original awards: INR 500
 replacement awards: INR 600.
As of the acquisition date, all awards are expected to vest.
Answer:
Pre-combination period
The value of the replacement awards will have to be allocated between the pre-combination and
post combination period. As of the acquisition date, the fair value of the original award (Rs.500)
will be multiplied by the service rendered upto acquisition date (2 years) multiplied by greater of
original vesting period (5 years) or new vesting period (4 years). Accordingly, 500 x 2/5= 200 will
be considered as pre-combination service and will be included in the purchase consideration.
Post- Combination period
The fair value of the award on the acquisition date is 600 which means the difference between the
replacement award which is 600 and the amount allocated to pre-combination period (200) is 400
which will be now recorded over the remaining vesting period which is 2 years as an employee
compensation cost.
Non-replacement Awards
The acquiree may have outstanding share-based payment transactions that the acquirer does not
exchange for its share-based payment transactions. If vested, those acquiree share-based payment
transactions are part of the non-controlling interest in the acquiree and are measured at their
market-based measure. If unvested, they are measured at their market-based measure as if the
acquisition date were the grant date in accordance with paragraphs 19 and 30.
The market-based measure of unvested share-based payment transactions is allocated to the non-
controlling interest on the basis of the ratio of the portion of the vesting period completed to the
greater of the total vesting period and the original vesting period of the share-based payment
transaction. The balance is allocated to post-combination service.
The above means that the acquiree's existing award will be settled in its own shares and the
consequential shareholders will become the Non-controlling shareholders. The above principles
can be summarized as follows:
Vested shares—
 the value credited to Share based payment reserve is classified as NCI.
Unvested—
 Pre-combination period is considered as a part of NCI
 Post-combination period- is recorded as employee cost and the credit forms part of the NCI
in the balance sheet.
Section – 15 –
Books of Acquiree and Acquirer: Purchase consideration given
Q - 15.1 –
Purchase consideration is given
Balance sheet of Twister limited is as follows:
Share capital 200,000 Buildings 200,000
Debentures 100,000 Plant 83,000
Creditors 30,000 Stock 39,500
Profit and loss a/c 70,000 Debtors 77,500
Westminster limited took all the assets and debentures for Rs. 2,95,000 payable Rs. 2,62,000 in
Shares and balance in cash. Acquisition Cost amounted to Rs. 3,000 and met by Westminster
limited. Prepare necessary account in the books of Acquiree Company and pass entries in the books
of Acquirer Company.
Realisation loss Rs. 5,000
Detailed Solution :
1. Step : Purchase Consideration
1. 33,000 In cash
2. 2,62,000 equity shares
Total purchase consideration 2,95,000
2 – Ledger Accounts In The Books Of Acquiree Company

Acquirer Company Account
Real . A/c 2,95,000 Cash 33,000
Shares In Acquirer Company 2,62,000
Realisation Account
Buildings 200,000 Debentures 1,00,000

Plant 83,000 Creditors 30,000
Stock 39,500 Acquirer Company – PC due 2,95,000
Debtors 77,500 Share holders a/c – loss – 5,000
Cash – payment to creditors not 30,000 bal. fig.
taken over
Cash account
Acquirer Company) 33,000 Realisation – creditors 30,000
Equity shareholders a/c – av. Bal 3,000
t/f
Shareholders account
Shares in Acquirer company 2,62,000 Share Capital 2,00,000
Cash - 3,000 Profit and loss a/c 70,000
Realisation – loss 5,000
2,70,000 2,70,000
#-3 : Entries in the books of Acquirer Company

Particulars Amount Amount
1 Consideration a/c 2,95,000
To liquidator of Acquiree Company 2,95,000
Purchase of business
2 Buildings 200,000
Plant 83,000
Stock 39,500
Debtors 77,500
To, 12% Debentures 1,00,000
To, Consideration 2,95,000
To, capital reserve a/c – bal. fig. 5,000
Assets and liabilities taken over diff. credited to
capital reserve
3 Consideration a/c 2,95,000
Cash 33,000
Equity Share capital 2,62,000
Discharge of purchase consideration
4. Acquisition related cost/ Expenses* a/c 3,000
To bank a/c 3,000
Expenses borne by Acquirer Company
*Acquisition-related costs*
costs are incurred and the services are received
Q - 15.2 –
The following is the balance sheet of Eleven limited:
Share capital 2,00,000 Goodwill 2,00,000
General reserve 1,20,000 Buildings 1,80,000
Profit and loss a/c 1,60,000 Debtors 1,50,000
Creditors 70,000 Bank 1,20,000
Bills payable 1,10,000 Discount on issue of Debentures 10,000
Twenty limited acquired the business of Eleven limited. Assets were taken at book values but
goodwill was taken over at Rs. 300,000. Purchase price was paid as Rs. 70,000 in cash and balance
in shares of Rs. 10 each. Realisation expenses were Rs. 7,000. Prepare necessary accounts in the
books of Eleven limited and pass entries in the books of Twenty limited.
Realisation profit Rs. 93,000
Since it is given that business is being taken over, all liabilities shall be presumed to be taken over .
# 1 - Calculation of Purchase Consideration
Assets taken over at Fair value
Goodwill 3,00,000
Buildings 1,80,000
Debtors 1,50,000
Bank 1,20,000 7,50,000
Less liabilities taken over Creditors 70,000

Bills payable 1,10,000 1,80,000
Purchase consideration / net 5,70,000

assets
Mode of payment
Cash 70,000
Shares – bal fig. 5,00,000
# 2 – ledger accounts in the books of Acquiree Company

Real . A/c 5,70,000 Cash 70,000
Shares in Shares in Acquirer 5,00,000
Company
Realisation Account
Goodwill 2,00,000 Creditors 70,000
Buildings 1,80,000 Bills payable 1,10,000
Debtors 1,50,000 Acquirer Company 5,70,000
Bank 1,20,000
Cash - liab : Nil + expenses ; 7,000
7,000
Shareholders a/c – profit 93,000
Cash account
Bal. b/d (not taken over) - Real. – liab. & Expenses 7,000
paid
Acquirer Company 70,000 Shareholders a/c - BF 63,000
Discount on issue of debentures 10,000 Share Capital 2,00,000
Shares in Acquirer Company 5,00,000 General Reserves 1,20,000
Cash – available cash bal. paid to 63,000 Profit and loss a/c 1,60,000
SH
Realisation – profit 93,000
5,73,000 5,73,000
Entries In The Books Of Acquirer Company-
Identifiable assets taken over # 7,50,000

WN 1
To Liabilities taken over 1,80,000
To Consideration a/c 5,70,000
Consideration 5,70,000
To Cash a/c 70,000
To, Share Capital 5,00,000
Q - 15.3 -
The following is the balance sheet of Stop limited as on 31.12.2020:
Share capital Goodwill 50,000
10,000 equity shares of 100 each 10,00,000 Land and buildings 3,00,000
fully paid 3,70,000 Plant and machinery 6,70,000
General reserve 30,000 Stock 4,50,000
Profit and loss account 1,50,000 Debtors 2,50,000
12% Debentures 2,10,000 Cash at bank 30,000
Sundry creditors Preliminary expenses 10,000
17,60,000 1760,000
Start limited acquired the business of Stop limited (excepting cash at bank and 12% Debentures) for
Rs. 16,80,000, payable as Rs. 15,00,000 in the form of 100,000 Equity shares of Rs. 10 each at a
premium of Rs. 5 per share and balance in cash. Stop limited redeemed its debentures at a premium
of 10%. Acquisition Cost mounted to Rs. 10,000 and were borne by Start limited. You are required
to close the books of Stop limited and pass entries in the books of Start limited.
Profit Rs. 155,000
Detailed Solution
#-1: Calculation of purchase consideration – given : Rs. 15,00,000
# - 2 : Mode of payment :
1. 1,80,000 In cash – balancing figure
2. 1500,000 1,00,000 equity shares of Rs. 10 each @ Rs. 15

Total purchase 16,80,000
consideration

Real . A/c 16,80,000 Cash 1,80,000
Company
Realisation Account
Goodwill 50,000 12% Debentures 1,50,000
Land and buildings 3,00,000 Creditors 2,10,000
Plant and machinery 6,70,000 Acquirer Company – PC due 16,80,000
Stock 4,50,000 Share holders a/c – loss – 5,000
Debtors 2,50,000 bal. fig.
Cash – debentures paid 1,50,000 +
10% premium 1,65,000
Shareholders a/c – profit - BF 1,55,000
Cash account
Bal b/d – not taken over 30,000 Realisation - debentures 1,65,000
Acquirer Company) 1,80,000 Available balance t/f to Equity 45,000
shareholders a/c –
Preliminary expenses 10,000 Share Capital 10,00,000
Shares in Acquirer Company 15,00,000 General reserve 370,000
Cash - 45,000 Profit and loss a/c 30,000
Realisation – profit 1,55,000
15,55,000 15,55,000
#-3 : Entries in the books of Acquirer Company

2 Goodwill on Business combination–bal fig. 1,70,000
Goodwill 50,000
Land and buildings 3,00,000
Plant and machinery 6,70,000
Stock 4,50,000
Debtors 2,50,000
To, creditors 2,10,000
To, Consideration 16,80,000
Assets and liabilities taken over diff. T/F to GW a/c

3 Consideration 16,80,000
Cash 1,80,000
Equity Share capital 10,00,000
Security Premium 5,00,000
4. Acquisition related Expense a/c* 10,000
To bank a/c 10,000
*Acquisition-related costs
costs are incurred and the services are received
Section – 16
Books of Acquiree and Acquirer:
Calculation of Consideration through Net Assets Method
Q – 16.1
Top limited decided to sell its business to Bottom limited on 31.3.2020 on which date the balance
sheet of the companies was as follows:
Share capital 500,000 Goodwill 60,000
7.5% Debentures 100,000 Property 150,000
Creditors 150,000 Plant 210,000
Reserves 90,000 Stock 350,000
Cash 70,000
840,000 840,000
Bottom limited took over all assets and Liabilities except cash, at their book values - however
Goodwill was taken over at Rs. 100,000 and property at Rs. 180,000. Bottom limited agreed to pay
Rs. 90,000 in cash and balance in the form of equity shares of Rs. 100 each. Expenses of liquidation
amounted to Rs. 15,000. Show ledger account in the books of Top limited and pass entries in the
books of Bottom limited.
Answer- Purchase Consideration Rs. 590,000, Realisation Profit Rs. 55,000
# 1 - Calculation of Purchase consideration
Assets taken over at Fair value
Goodwill 1,00,000
Property 1,80,000
Plant 2,10,000
Stock 3,50,000 8,40,000
Less liabilities taken over Creditors 1,50,000

7.5% 1,00,000 2,50,000
Debentures
Purchase consideration / net assets 5,90,000

Mode of payment
Cash 90,000
Shares – bal fig. 5,000 shares of Rs. 5,00,000
100 each

Real . A/c 5,90,000 Cash 90,000
Company
Realisation Account
Goodwill 60,000 7.5 % Debentures 1,00,000
Property 1,50,000 Creditors 1,50,000
Plant 2,10,000 Acquirer Company 5,90,000
Stock 3,50,000
Cash 70,000
Cash - liab : Nil + expenses ; 15,000
15,000
Shareholders a/c – profit 55,000
Cash account
Bal. b/d (not taken over) 70,000 Real. – liab. & Expenses 15,000
paid
Acquirer Company 90,000 Shareholders a/c - BF 1,45,000
Shares in Acquirer Company 5,00,000 Share Capital 5,00,000
Cash – available cash bal. paid to 1,45,000 Reserves 90,000
SH
Realisation profit 55,000
6,45,000 6,45,000
Entries in the books of Acquirer Company-
Identifiable assets taken over# WN 8,40,000

1
To Liabilities taken over 2,50,000
To Cash a/c 90,000
To, Share Capital 5,00,000
Q - 16.2
The following is the balance sheet of Nose limited:
Share capital : Intangible assets 50,000
50000 equity shares of Rs. 10 each 500,000 Fixed assets 420,000
Debentures 100,000 Current assets 110,000
Creditors 50,000 Profit and loss a/c 70,000
6,50,000 6,50,000
Eye limited agreed to acquiree the above company on the following terms –
1. The assets of Nose limited are to be considered as worth Rs. 500,000
2. The Purchase price is to be paid one – quarter in cash and the balance in shares, which are issued
at market price
3. Eye limited to take over all assets and liabilities
4. Liquidation expenses amounted to Rs. 300 and agreed to be paid by Nose limited
5. Market value of shares of Rs. 10 each of Eye limited is Rs. 12 each
Detailed Solution:
# 1 - Calculation of purchase consideration
Net Assets taken over Rs. 5,00,000 less liabilities taken over at Rs. ( deb. 1,00,000 + creditors Rs.
50,000) = 3,50,000
Mode of payment Cash 87,500
Shares in Acquirer Company 2,62,500
Number of shares to be issued by Acquirer Company 2,62,500 / 12 = 21,000 3,50,000
shares

Real . A/c 3,50,000 Cash 87,500
Shares in Acquirer Company 2,62,500
a/c
Realisation Account
Intangible assets 50,000 5% Deb. 1,00,000
Fixed assets 4,20,000 Creditors 50,000
Current assets 1,10,000 Acquirer Company 3,50,000
Cash : liabilities nil + expenses 300 Shareholders – loss 80,300
300
Cash account
Bal. b/d (not taken over) - Real. – liab. And expenses 300
paid
Acquirer Company 87,500 Shareholders a/c - BF 87,200
Profit and loss 70,000 Share Capital 5,00,000

Shares in Acquirer Company a/c 2,62,500
Real - loss 80,300
Cash – available cash bal. paid to 87,200
SH
5,00,000 5,00,000
# - 3 - Entries in the books of Acquirer Company-
Identifiable assets taken over # 5,00,000

WN 1
To creditors 50,000
To Debentures 1,00,000
To cash a/c 87,500
To, Share Capital 21,000 x 10 2,10,000
To Premium account 21,000 x 2.5 52,500
Section – 17 –
Books of Acquiree and Acquirer:
Intrinsic Value Method of Purchase Consideration
Q - 17.1
The following are the balance sheets of Kay limited and Jay limited as on 30th September, 2019:
Liabilities Kay limited Jay limited
Equity share capital of Rs. 10 each 400,000 180,000
General reserve 500,000 100,000
Profit and loss account 300,000 80,000
Debentures 350,000 -
Creditors 200,000 100,000
Bills payable 50,000 40,000
1800,000 500,000
Assets
Fixed assets 700,000 300,000
Investments 500,000 --
Current assets 600,000 200,000
1800,000 500,000
The board of directors of Kay limited approved to take over Jay limited as on the aforementioned
date. Find out the ratio of exchange of shares on the basis of the book values.
Answer- ratio of exchange 2: 3
Q – 17.2
The following are the balance sheets of One and Two limited as on 31.12.2019:
Particulars One Two Particulars One Two
Share capital: of Rs. 10 150,000 120,000 Fixed assets 140,000 75,000
each 95,000 10,000 Stock 42,000 47,000
Reserves -- 20,000 Trade debtors 30,000 50,000
10% Debentures 47,000 32,000 Bank 80,000 10,000
Trade creditors
292,000 182,000 292,000 182,000
 One limited agreed to acquire Two limited on the above date, on the following terms:
 One limited to revalue its fixed assets at Rs. 195,000, to be incorporated in the books.
 Shares of both the companies to be valued on Net Assets basis after considering Rs. 50,000
towards value of goodwill of Two limited.
 The cost of absorption of Rs. 3,000 is met by One limited.
Find out:
 Ratio of exchange of shares
 Give journal entries in the books of One limited
 Construct the bank account in the books of One limited.
Author’s Note-
# Nothing is mentioned in this question whether liabilities have been taken over or However it is
given that business has been taken over; therefore all liabilities shall presumed to be taken over.
Detailed Solution –
1:
Calculation of net assets and Intrinsic Value of Shares
Goodwill - 50,000
Fixed assets 1,95,000 75,000
Stock 42,000 47,000
Debtors 30,000 50,000
Bank 80,000 10,000
Total assets 3,47,000 2,32,000
Less Liabilities:
Debentures - 20,000
Trade Creditors 47,000 32,000
Net Assets / capital employed / assets 3,00,000 1,80,000
available for Share-holders
Less : Preference share Capital Nil Nil
Assets available for Equity shareholders 3,00,000 1,80,000
÷ ÷ ÷
Number of Equity Shares 15,000 12,000
Intrinsic Value of Shares (IVS) 20 15
2:
Purchase Consideration: Net assets of Acquiree Company (Two Limited) = 1,80,000
Number of shares to be issued by Acquirer Company on the basis of its IVS
= Purchase Consideration / IVS of Acquirer Company
1,80,000 / 20 = 9,000 shares
Thus Acquirer Company shall issue 9,000 shares of Rs. 10 each @ 20 per share
3:
Ratio of Exchange = 9,000 shares for 12,000 shareholders of Acquiree Company that is 3:4
4 – Ledger Accounts In The Books Of Acquiree Company

Real . A/c 1,80,000 Eq. Shares in Acquirer 1,80,000
Company a/c
Realisation Account
Fixed assets 75,000 10% Debentures 20,000
Stock 47,000 trade creditors 32,000 52,000
Trade debtors 50,000 Acquirer Company – 1,80,000
Bank 10,000 1,82,000 PC due
Bank – liab. & exp. Nil
Shareholders – profit 50,000
Equity shares in Shares in 1,80,000 Share Capital - 1,20,000
Acquirer Company
Reserves 10,000
Real – Profit 50,000
1,80,000 1,80,000
5 : Entries in the books of Acquirer Company–
1. Goodwill bal. fig. 50,000
Sundry assets- 1,82000
To liabilities – 52,000
Assets and liabilities taken
2. Consideration 1,80,000
To, Equity Share capital 9,000 x 10 90,000
To, Securities Premium 90,000
3. Expenses (Acquisition related cost) a/c 3,000
To, Bank 3,000
Bank account
Op. bal b/d . 80,000 Expenses 3,000
Acquiree– cash/ bank taken over 10,000 Balance c/d – bal. fig. 87,000
90,000 90,000
Q – 17.3
The following are the balance sheets of Thumb and Finger limited as on 31.12.2019:
Particulars Thumb Finger Particulars Thumb Finger
Share Capital: Of Rs. 10 Factory Building 2,10,000 1,60,000
Each 5,40,000 4,03,300 Debtors 2,86,900 1,72,900
General Reserve 1,01,000 65,000 Stock 91,500 82,500

Profit And Loss A/C 66,000 43,500 Goodwill 50,000 35,000
Sundry Creditors 44,400 58,200 Cash At Bank 98,000 1,09,590
Preliminary Expenses 15,000 10,010
7,51,,400 5,70,000 7,51,,400 5,70,000
 Goodwill of thumb and finger limited to be valued at Rs. 75,000 and Rs. 50,000 respectively
 Thumb limited to revalue its fixed assets at Rs. 195,000 and Finger limited at Rs. 1,75,000.
 Stock of Finger limited has been shown at 10% above of its cost
 It is decided that Thumb limited shall absorb Finger limited by taking over its entire
business by issue of shares at intrinsic values.
Find out :
 Ratio of exchange of shares
 Give journal entries in the books of Thumb limited
 Construct balance sheet in the books of Thumb limited.
Note :
Stock Of Finger Limited has been shown at 10% above of its cost
That is if cost is 100 then recorded value is 110
therefore stock Shall Be computed at cost that is : 82,500 x 100 / 110 = Rs. 75,000
IVS 7,02,000 / 54,000 = 13 , 5,24,290 / 40,330 = 13
Exchange ratio 1:1
Number of shares to be issue by Acquirer Company= 40,330 shares of Rs. 10 each @ 13
17.4 - Module /Adapted from Past Examination Papers and modified

F1 Limited agreed to takeover F2 limited as at 1.10.2020. Summarised Balance Sheets of F1 and F2
as at 31.3.21 are as follows:
F1 F2
Equity of Rs. 10 each fully paid 20,00,000 15,00,000
Reserves and Surplus
Reserve 3,90,000 3,40,000
Profit & Loss A/c 3,30,000 1,60,000
Creditors 85,000 75,000
28,05,000 20,75,000
Fixed Assets (tangible) 15,50,000 12,60,000
Current Assets
Stock 5,35,500 3,81,500
Debtors 3,49,500 2,31,000
Bank 3,40,000 1,80,000
Preliminary Expenses 30,000 22,500
28,05,000 20,75,000
Additional information available:
(i) For the six months period from 1st April 2020, F1 Ltd. and F2 Ltd. made profits of Rs. 5,40,000
and Rs. 3,60,000 respectively, after writing off depreciation @ 10% per annum on their fixed assets.
(ii) Both the companies paid on 1 August 2020, equity dividends of 10%. Dividend tax at 15% was
paid, by each of them on such payments.
(iii) Goodwill of F2 Ltd. was valued at Rs.1,68,900 on the date of takeover. Stock of F2 Ltd., subject
to an abnormal item of Rs.8,500 to be fully written off, would be appreciated by 20% for purpose of
takeover.
(iv) F1 Ltd. would issue to F2 Ltd.‘s shareholders fully paid equity shares of Rs.10 each, on the basis
of the comparative intrinsic values of the shares on the date of takeover. You are required to:
(1) Calculate consideration to be transferred by F1 Ltd.
(2) Calculate Number of shares to be issued by F1 Ltd. to F2 Ltd.
3) Ascertain closing bank balance which will appear in the Balance Sheet of F1 Ltd. (After
absorption of F2 Ltd.).
Solution:
1. Computation of cash and bank balance of the Companies as on 1st October
Particulars F1 Ltd. (Rs.) F2 Ltd.(Rs. )
Balance as on 1st April 3,40,000 1,80,000
Add: Net Profit during the 6 months 5,40,000 3,60,000
Add: Depreciation for 6 months
(15,50,000 x 10% x 6/12) & (12,60,000 x 10% x6/12) 77,500 63,000
Total 9,57,500 6,03,000
Less: Dividend paid 2,00,000 1,50,000
Less: Dividend distribution Tax @15% 30,000 22,500
Balance as on 30th September 7,27,500 4,30,500
2. Computation of Net Assets of F1 Ltd and F2 Ltd. as on 1st October
Particulars F1 Ltd. (Rs. ) F2 Ltd. (Rs.)
Goodwill (at agreed value) — 1,68,900
Fixed Assets (Book Value- Depreciation @10% for 6 months) 14,72,500 11,97,000
Debtors 3,49,500 2,31,000
Stock (including appreciation @ 20%) 5,35,500 4,47,600
Cash and Bank balances as computed above 7,27,500 4,30,500
Total Assets 30,85,000 24,75,000
Less: Creditors 85,000 75,000
Value of Net Assets on 1st October (considered as Fair Value) 30,00,000 24,00,000
No: of equity shares 2,00,000 1,50,000
Intrinsic value per share (considered as Fair Value) Rs.15 Rs.16
So, consideration to be transferred by F1 Ltd. will be Rs.24,00,000.
3. Calculation of Number of shares to be issued by F1 Ltd. to F2 Ltd. :

= Rs.24,00,000/ Rs.15 per shares = 1,60,000 shares.
17.5- Module /Adapted from Past Examination Papers and modified

The summarised balance sheets of W1 and W2 as on 31.3.20 are given below. W2 limited was
merged with W1 limited with effect from 31st March , 2022
W1 W2
Equity of Rs. 10 each fully paid 8,00,000 3,00,000
Reserves and Surplus
General Reserve 3,00,000 2,00,000
Profit & Loss A/c 2,50,000 80,000
Non - current liabilities :
12% Debentures 2,00,000 1,00,000
Sundry Creditors 60,000 50,000
Provision for Taxation 90,000 50,000
17,00,000 7,80,000
Assets:
Non- current Assets
Fixed Assets (tangible) 10,00,000 4,50,000
Investments (non-trade) 1,50,000 50,000
Current Assets
Stock 1,60,000 50,000
Debtors 80,000 90,000
Advance tax 60,000 30,000
Bank 2,30,000 1,10,000
Preliminary Expenses 20,000 -
17,00,000 7,80,000
W1 Ltd. would issue 12% Debentures to discharge the claims of the debenture holders of W2 Ltd. at
par. Non-trade investments of W1 Ltd. fetched @ 20% while those of W2 Ltd. fetched @ 12%.
Profit (Pre-tax) of W1 Ltd. and W2 Ltd. during 2019-20, 2020-21 and 2021-22 were as follows:
Year A Ltd. (Rs. ) B Ltd. (Rs.)
2019-20 6,00,000 2,00,000
2020-21 7,00,000 2,50,000
2021-22 5,00,000 1,50,000
Goodwill may be calculated on the basis of capitalisation method taking 20% as the pre-tax normal
rate of return. Purchase consideration is discharged by W1 Ltd. on the basis of intrinsic value per
share. Prepare Balance Sheet of W1 Ltd. after merger as per Schedule III Division II.
Solution:
1. Calculation of Closing Capital Employed
Particulars W1 Ltd. (Rs.) W2 Ltd. (Rs.)
Sundry Assets as per Balance Sheet 17,00,000 7,80,000
Less: Preliminary Expenses 20,000 ---
Less: Non -Trade Investment 1,50,000 50,000
Less: Creditors 60,000 50,000
Less: 12% Debentures 2,00,000 1,00,000
Less: Provisions for Taxations 90,000 50,000
Net Capital Employed 11,80,000 5,30,000
2. Calculation of goodwill:
Particulars W1 Ltd. (Rs.) W2 Ltd. (Rs.)
Total of profits for the 3 years 18,00,000 6,00,000
Simple Average Profits 6,00,000 2,00,000
Less: Income from Non -Trade Investments 30,000 6,000
Average income from capital employed 5,70,000 1,94,000
Capitalized value of Average Profits =
Average Income from capital
employed/20% 28,50,000 9,70,000
Net Capital Employed (Step 1) 11,80,000 5,30,000

Goodwill (considered as Fair Value) 16,70,000 4,40,000
3. Calculation of Intrinsic value
Particulars A Ltd. (Rs.) B Ltd. (Rs.)
Capital Employed 11,80,000 5,30,000
Add: Non Trade Investment 1,50,000 50,000
Add: Goodwill 16,70,000 4,40,000
Total 30,00,000 10,20,000
No. of shares 80,000 30,000
Intrinsic value Per Share
(considered as fair value) Rs. 37.50 Rs. 34
It is assumed that Net Assets are at Fair Value) and equal to Capital Employed + Non-Trade
Investment
4. Calculation of Consideration
Consideration = 30,000 shares at Rs.34 per share = Rs. 10,20,000
Shall be Discharged By W1 Ltd.: By issue of its own 27,200 shares of 10 @ Rs. 37.50.
5. Balance Sheet of W1 Ltd. as at 1st April 2022

Particulars Note No. Amount (Rs.)
I. Assets
1. Non-Current Assets
PPE 14,50,000
Goodwill 4,40,000
Non-current investment 2,00,000
2. Current Assets 3 8,10,000
Total 29,00,000
II. Equity and Liabilities
1. Equity
(a) Equity Share Capital 1 10,72,000
(b) Other Equity 2 12,78,000
2. Non-Current Liabilities :
12% Debentures 3,00,000
3. Current Liabilities
(a) Creditors 1,10,000
(b) Provision for Tax 1,40,000
Total 29,00,000
Notes
1. Share Capital
Particulars Amount (Rs. )
Authorized, issued, subscribed and paid up capital
of 1,07,200 Equity Shares of Rs. 10 each
(of the above 27,200 shares were issued to vendors
for non cash consideration) 10,72,000
Total 10,72,000
2. Other Equity
Securities Premium (@ Rs. 27.5 on 27,200 shares) 7,48,000
Profit & Loss A/c 2,50,000
General Reserve 3,00,000
Total 12,98,000
Less: Preliminary Expenses written off (20,000) 10,78,000
Total
3. Other Current Assets (Acquiree‘s assets/liabilities considered at fair value)
(a) Stock [1,60,000 + 50,000] 2,10,000
(b) Sundry Debtors [80,000 + 90,000] 1,70,000
(c) Advance Tax [60,000 + 30,000] 90,000
(d) Cash and Bank [2,30,000 +1,10,000] 3,40,000 8,10,000
17.6 - Module /Adapted from Past Examination Papers and modified

The following are the Balance Sheets of Good Ltd. and Bad Ltd. as on 31.03.2021:
(Rs. in crores)
Good Ltd. Bad Ltd.
Equity and Liabilities:
Equity Share Capital:
Authorised 25 5
Issued and Subscribed Equity Shares of Rs. 10 each fully paid 12 5
Other Equity 88 10
Equity 100 15
Unsecured loan from Good Ltd. --- 10
100 25
PPE at cost 80 40
Less: Depreciation 60 34
Written down value 20 6
Investments at Cost: 30 lakhs equity shares
of Rs. 10.each of Bad Ltd. 3 ---
Long term loan to Bad Ltd. 10
Current Asset: 200 134
(Less Current Liabilities) (-)133 (-)115
Working capital 67 19
100 25
On that day Good Ltd. absorbed Bad Ltd. The Members of Bad Ltd. are to get one equity share of
Good Ltd. issued at a premium of Rs. 2 per share for every five equity share held by them in Bad
Ltd. The necessary approvals are obtained; You are asked to pass Journal entries in the books of the
two companies to give effect to the above.
Solution: We need to assume that the swap ratio is based on Fair Value of shares. Again, it is
assumed that Assets and liabilities acquired are all at Fair Value.
Books of Bad Ltd.
Journal Particulars Dr. (Rs. in Crore) Cr. (Rs. in Crore)
Realization A/c Dr. 174.00
To PPE A/c 40.00
To Current Assets A/c 134.00
(Assets taken over by Good Ltd. transferred to Realization A/c)
Provision for Depreciations A/c Dr. 34.00

Current Liabilities A/c Dr. 115.00
Unsecured Loan from Good Ltd. A/c Dr. 10.00
To Realization A/c 159.00
(Transfer of liabilities and provision to Realization A/c)
Good Ltd. A/c Dr. 1.20

(Purchase Consideration due A/c)
Equity Shareholders A/c Dr. 13.80

(Loss on Realization transferred to Equity shareholders A/c)
Equity Share Capital A/c Dr. 5.00

Other Equity A/c Dr. 10.00
To Equity Shareholders A/c 15.00
(Share capital and reserve transferred to equity shareholders A/c)
Equity Shareholders (Good Ltd.) A/c Dr. 0.72

To Good Ltd. A/c 0.72
(3/5th of the considerations due from Good Ltd. adjusted against the amount due to Good Ltd.)
Equity Shares of Good Ltd. A/c Dr. 0.48

To Good Ltd. A/c 0.48
(Receipts of 4 lacs Equity Shares of Rs. 10 each at Rs.12 per Share for allotment of outside
shareholders)
Equity Shareholders A/c Dr. 0.48

To Equity Share of Good Ltd. A/c 0.48
(Distribution of equity shares received from Good Ltd. to Shareholders)
Books of Good Ltd.

Journal
Particulars Dr. (Rs. in Crore) Cr. (Rs. in Crore)
Profit and Loss A/c Dr. 2.28
To Investment A/c 2.28
(Book Value - Fair Value = 3 - 0.72) 2.28
(Investment measured at Fair Value and difference with book value transferred to P & L)
PPE A/c Dr. 6.00

Current Assets A/c Dr. 134.00
To Current Liabilities A/c 115.00
To Unsecured Loan (from Good Ltd.) A/c 10.00
To Consideration A/c [See Note] 0.48
To Investment in Bad Ltd. (at Fair Value) 0.72
To Gain on Bargain Purchase A/c 13.80
(Assets and liabilities taken over and the difference transferred to Gain on Bargain Purchase)
Consideration A/c Dr. 0.48

To Equity Share Capital A/c 0.40
To Security Premium A/c 0.08
(Allotment to outside Shareholders at a premium of Rs. 2 per Share)
Unsecured Loan (From Good Ltd.) A/c Dr. 10.00

To Loan to Bad Ltd. A/c 10.00
(Cancellations of mutual unsecured loan)
Working Notes (Rs. in Crores)

Purchase Considerations 1.20 (50 lacs/5) x Rs.12 = 1.20
Equity Shares of Rs. 12 each belonging to Good Ltd. 3/5 x 1.20 0.72
Payable to other equity shareholders 0.48
Number of equity shares of Rs. 10 each to be issued 48 lacs /12 4 lacs
Section – 18
Net Payment Method of Purchase consideration
Q – 18.1
Following is the summarized balance sheet of X-9 Limited as at 31.03.2019:
Equity and Liabilities X Limited
Equity shares of Rs. 100 each 15,00,000
11% Preference shares of Rs. 100 each 5,00,000
General Reserve 3,00,000
Trade Payables 2,00,000
25,00,000
Assets :
Land and Buildings 10,00,000
Plant and Machinery 7,00,000
Furniture and fittings 2,00,000
Inventory in trade 3,00,000
Trade Receivables 2,00,000
Cash at Bank 1,00,000
25,00,000
Y-100 limited agreed to acquire X-9 limited on the following terms:

 Each equity share in X-9 Ltd. For the purpose of absorption is to be valued at Rs. 80
 Equity shares will be issued by Y-100 by valuing its each equity shares of Rs. 100 each at
Rs. 120 per share
 11% Preference shares of X-9 limited will be given Debentures of Y-100 limited at
equivalent value
 All the assets and liabilities will be recorded at the same value in the books of Y-100 limited.
Calculate Purchase consideration
Purchase consideration ; Rs. 17,00,000
Q- 18.2-
The following is the balance sheet of Early limited as on 31.3.2020:

Share capital : Fixed assets 7,00,000

5,000 equity shares of 100 each 5,00,000 Current assets 4,00,000
10% 4,000 Preference shares of 100 Cash 3,00,000
each 4,00,000
10 % Debentures 2,00,000
Creditors 1,00,000
Staff provident fund 1,00,000
Reserve fund 1,00,000
14,00,000 14,00,000
Late limited agrees to take over all the assets (excluding cash) and all liabilities except Debentures
of Early limited.
As per the terms of agreement, Acquirer Company shall discharge the amount of purchase
consideration through-
 Issue of 15 equity shares of Rs. 10 each at par for each equity shareholder of Acquiree
Company
 Issue of 30 equity shares of Rs. 10 each at 20% premium for every 4 preference shareholders
of Acquiree Company.
 Issue of such an amount of 15% debentures at par so that 10% debentures of Acquiree
Company could be discharged at 20% premium.
Calculate Purchase Consideration.
Q - 18.3-
Yes limited agreed to acquire the assets excluding cash on 31st December 2009 of No limited. The
balance sheet of No limited on this date is as follows:
Equity share capital of Rs. 10 each Goodwill 60,000
General reserve 300,000 Premises 120,000
Debentures 80,000 Machinery 200,000
Creditors 50,000 Stock 80,000
Profit and loss account 10,000 Debtors 30,000
60,000 Cash 10,000
500,000 500,000
The consideration was as follows:
1. A cash payment of Rs. 4 for every share of No limited
2. The issue of one share of Rs. 10 each in the Yes limited for every share in No limited
3. The issue of 1,100 debentures of Rs. 50 each in Yes limited to discharge the debentures of No
limited at a premium of 10%
4. The expenses of liquidation of No limited amounted to Rs. 4,000 and met by themselves.
Prepare necessary accounts in the books of No limited and pass opening entries in the books of Yes
limited.
Solution -
# -1 : Purchase consideration Rs. 420,000/ loss Rs. 24,000
Calculation of purchase consideration
Equity shareholders 30,000 x 4 1,20,000 in cash
1
30,000 x 1 x 10 3,00,000 In shares
1
Total purchase 4,20,000

consideration
Debentures 50,000 + 10% 55,000 1,100 deb. of 50 each

Real . A/c 4,20,000 Eq.sh in Acquirer co. 3,00,000
Cash 1,20,000
Realisation Account
GW 60,000 Debentures 50,000
Premises 1,20,000 Creditors 10,000
Machinery 2,00,000 Acquirer Company 4,20,000
Stock 80,000 Shareholders- loss 24,000
Debtor 30,000
Cash : Expenses 4,000
creditors 10,000
Cash account
Bal. b/d (not taken over) 10,000 Real. – exp & creditors 14,000
Acquirer Company 1,20,000 Shareholders a/c – BF 1,16,000
Eq. Shares in Acquirer Company 3,00,000 Share Capital 3,00,000
a/c
Realisation -loss 24,000 G /R 80,000
Cash 1,16,000 P&L a/c 60,000
Real- Profit
4,40,000 4,40,000
#-3: Entries in the books of Acquirer Company

1. Goodwill a/c 60,000
Premises 1,20,000
Machinery 2,00,000
Stock 80,000
Debtors 30,000
To debentures 55,000
To Consideration 4,20,000
To capital reserve (bal. fig) 15,000
Assets and liabilities taken over and
difference credited to capital reserve account
3 Acquiree Company a/c 4,20,000

Cash 1,20,000
Share capital 3,00,000
4 Debentures of Acquiree Company 55,000

To debentures of Acquirer Company a/c 55,000
Q – 18.4
The Balance sheet of Tip limited on 31.03.2019 stood as follows:
6,000 Equity shares of 500 each 30,00,000 Land and buildings 11,00,000
1,300 Debentures of 500 each 650,000 Plant and machinery 15,50,000
Sundry creditors 250,000 Patent 240,000
Workmen‘s Saving a/c 200,000 Furniture 260,000
Insurance fund 65,000 Work in progress 815,000
Reserve fund 275,000 Stock of goods 185,000
Profit and loss a/c 60,000 Sundry debtors 265,000
Cash at bank 85,000
45,00,000 45,00,000
On this date, the assets (Satisfies definition of Business) of Tip limited are purchased by Sip
limited. The purchase consideration was as follows-
A payment in cash at Rs. 90 for every share in Tip limited. A further payment in cash at Rs. 550 for
every debenture in Tip limited which the debenture-holders have agreed to accept in full discharge
of their claims. An exchange of four shares of Sip limited of Rs. 75 [quoted in the market at Rs. 140
each] for every share in Tip limited.
Make necessary ledger accounts in the books of Tip limited and pass opening entries in the books of
Sip limited.
Purchase consideration Rs. 39,00,000, profit Rs. 50,000
#-1: purchase consideration –
Share holders 6,000 / 1 x 90 5,40,000 Cash
6,000 / 1 x 140 x 4 33,60,000 Shares
39,00,000
Debenture- holders 1,300 / 1 x 550 7,15,000 Cash
# 2 – Ledger Accounts In The Books Of Acquiree Company

Real . A/c 39,00,000 Eq.sh in Acquirer co. 33,60,000
Cash 5,40,000
Realisation Account
Land and buildings 11,00,000 1,300 Debentures
Plant and machinery 15,50,000 of 500 each 650,000
Patent 240,000 Sundry creditors 250,000
Furniture 260,000 Workmen‘s Saving 200,000 11,00,000
Work in progress 815,000 a/c
Stock of goods 185,000 Acquirer 39,00,000
Sundry debtors 265,000 Company– PC due
Cash at bank 85,000 45,00,000
Cash : sundry
creditors 2,50,000
and WSB a/c 4,50,000

2,00,000 50,000
Shareholders – profit
Bank /Cash account

Bal b/d nil Real. – liabilities 4,50,000
Acquirer Company 5,40,000 Share-holders a/c ; bal. fig. 90,000
Acquirer Company 33,60,000 Equity shareholders a/c 3,00,000
Cash 90,000 Insurance fund 65,000
Reserve fund 2,75,000
Profit and loss a/c 60,000
Realisation - profit 50,000
#-4 : Entries In The Books Of Acquirer Company

1. Goodwill – bal fig 1,15,000
Sundry assets- 45,00,000
To liabilities – debentures 7,15,000
To capital reserve – balancing figure
Assets and liabilities taken over difference credited
to capital reserve
2. Consideration a/c 39,00,000
Cash 5,40,000
Equity Share capital 24,000 x 75 18,00,000
Security premium 24,000 x 65 15,60,000
3. Debentures of Acquiree co a/c 7,15,000
To cash 7,15,000
Debentures of Acquiree Company paid
18.5 - Module /Adapted from Past Papers and modified

Z Ltd. took over the business of X Ltd. and Y Ltd. The summarised Balance Sheets of Z Ltd., X Ltd.
and Y Ltd. as on 31 March, 2020 are given below:
(Rs. in Lakhs)
Liabilities Z Ltd. Rs. X Ltd. Rs. Y Ltd.
Rs.
Share Capital:
Equity shares of Rs. 100 each 1,000 800 750
12% Preference shares of Rs. 100 each - 300 200
Reserves and Surplus:
Revaluation Reserve - 200 150
General Reserve 600 170 150
Profit and Loss Account 50 30
Non- current Liabilities:
10% Debentures (Rs. 100 each) - 60 30
Sundry Creditors 400 270 120
Bills payables - 150 70
Total 2,000 2,000 1,500
Assets :
Non Current Assets:
Tangible:
Land and Building 600 550 400
Plant and Machinery 400 350 250
Investments 150 50
Current Assets:
Stock 500 350 250
Sundry Debtors 300 250 300
Bills Receivables 50 50
Cash and Bank 200 300 200
Total 2,000 2,000 1,500
Additional Information:
(1) 10% Debenture holders of X Ltd., and Y Ltd., are discharged by Z Ltd., issuing such number of
its 15% Debentures of Rs. 100 each, so as to maintain the same amount of interest.
(2) Preference shareholders of the two companies are issued equivalent number 15% preference
shares of Z Ltd., at a price of Rs. 150 per share (face value of Rs. 100).
(3) Z Ltd. will issue 5 equity shares for each equity share of X Ltd. and 4 equity shares for each
equity share of Y Ltd. The shares are to be issued Rs. 30 each, having a face value of Rs. 10 per
share. Prepare the Balance Sheet of Z Ltd. as on 1 April, 2020 in the Schedule III Division II
format.
Solution:
1. Computation of Consideration (Rs. in Lakhs)
Particulars X Ltd. (Rs. ) Y Ltd. (Rs. )
Preference Share Holders treated as Equity :
3,00,000 shares of Rs. 150 each 450 :
2,00,000 shares of Rs. 150 each 300
Equity Share Holders : 5 x 8,00,000 shares of Rs. 30 each 1,200 :
4 x 7,50,000 shares of Rs. 30 each 900
15% debentures for 10% old debentures* 40 20
Total 1,650 1,200
* shall not be considered for computation of Purchase consideration as it is not a payment to
owners.
2. Computation of Securities Premium
Particulars Equity Share Capital Securities premium Total
Preference Share Capital =
(3,00,000 + 2,00,000) =
5,00,000 shares Rs. 100 each = 500 At Rs. 50 each = 250 750
Equity Share Capital
= (40,00,000 + 30,00,000) =
70,00,000 shares Rs. 100 each = 700 At Rs. 20 each = 1,400 2,100
Total 1,200 1,650 2,850
3. Computation of Goodwill / Gains on Bargain Purchase

X Ltd. Y Ltd.
Consideration 1,650 1,250
Less: Net assets taken over
( presumed at Fair Value) 1,540 1,290
Goodwill 110
Gains on Bargain Purchase 90
Net Goodwill 110 - 90 = 20
Balance Sheet of Z Ltd. (As at 1st April 2020) (Rs. in Lakhs)
Particulars Note No. Amount
I.ASSETS
(1) Non-current Assets
PPE 4 2,550
Goodwill 20
Non-current investment 5 200
(2) Current Assets
Other Current Assets 6 2,750
Total 5,520
II. EQUITY AND LIABILITIES
(1) Equity
(a) Equity Share Capital 1 1,700
(b) Instruments entirely Equity in nature 500
(c) Other Equity (Securities Premium) 2,250
(2) Non-current Liabilities:
Long term Borrowings 2 60
(3) Other Current Liabilities 3 1,010
Total 5,520
Notes
1. Equity
Particulars (Rs. in Lakhs)
Authorized, issued, subscribed and paid up capital:
(a) Equity share capital: 1,70,00,000 equity shares of Rs.10 each [100,00,000 + 70,00,000] 1,700
(b) Instruments entirely equity in nature: 5,00,000 preference shares of Rs.100 each
(treated as equity in nature) 500
(c) Other equity (600 + 1,650) 2,250
Total 4,450
2. Non Current Liabilities
15% Debentures of Rs. 100 60
Total 60
3. Other Current Liabilities
Sundry Creditors (270 + 120) + 400 790
Bills payable (150 + 70) 220
Total 1,010
4. PPE:
(a) Plant and Machinery [350 + 250] + 400 1,000
(b) Land and Building [550 + 4001] + 600 1,550
Total 2,550
5. Non Current Investments

Investment [150+50] 200
Total 200
6. Other Current Assets

(a) Stock [350 + 250] + 500 1,100
(b) Sundry Debtors [250 + 300] + 300 850
(c) Bills receivable [50 + 50] 100
(d) Cash and Bank [300 + 200] + 200 700
Total 2,750
Section - 19: Inter - Company Holdings

19A: When Acquirer Company holds shares in the Acquiree Company:
Treatment in the books of Acquiree Company:

1 Compute the IVS of Acquiree Company
2 Calculate total Intrinsic value of shares held by Number of shares held by Acquirer
Acquirer company in the Acquiree company company x IVS of Acquiree company
3 Equity shareholder‘s A/c With total intrinsic value as per previous
To Acquirer company step
Amount due to Acquirer company to the extent
of their holdings in Acquiree company
4 Now compute the purchase consideration in normal usual manner for the entire business
ignoring the fact that that some shares are held by the Acquirer company.
5 Calculate the net amount of purchase consideration due to outsiders as follows:
Gross Purchase consideration
Less total IVS held by the Acquirer company as per step 2
Net purchase consideration
6 Now record the net receipt of purchase consideration
Shares in Acquirer company
Cash bank a/c
To Acquirer company
Number of shares to be issued by Acquirer company = net purchase consideration due to
outsiders / agreed issue price of a share.
19A.1
Acquirer Company holds share in Acquiree companies
Given below are the balance sheets of X limited and Y limited as at 31.3.2020 at which date Y
limited was taken over by X limited on the basis of their respective values of shares:
Particulars X Limited Y Limited

Equity Share capital of Rs. 10 each, fully Paid up 5,00,000 10,00,000
General reserve 26,20,000 5,85,000
12% debentures 2,20,000 1,10,000

Sundry creditors 1,60,000 55,000
35,00,000 17,50,000
Tangible fixed assets 22,00,000 10,00,000
Investments 3,25,000 5,00,000
Current assets 8,05,000 65,000
Preliminary expenses 1,70,000 1,85,000
35,00,000 17,50,000
Investments of X Limited represent 25,000 equity shares of Y limited. Investments of Y limited are
considered worth Rs. 6,00,000.
Give journal entries in the books of X limited and Y limited and prepare the balance sheet of X
limited after absorption.
19A.2
Acquirer Company Holds Shares in Acquiree Company
The Balance Sheets of X Ltd. and Y Ltd. as on 31.03.20 are as under: X Acquires Y limited.
(RS. IN LAKHS)
Liabilities X Y Assets X Y
Equity shares of Rs.10 each 5.00 10.00 Tangible Fixed assets 22.00 10.00
General reserve 24.50 4.00 Investments 3.25 5.00
12% Debentures 2.20 1.10 Current assets 8.05 0.65
Creditors 1.60 0.55
33.30 15.65 33.30 15.65
Investments of X ltd. represents 1,25,000 shares of Y Ltd. Investments of Y Ltd. are considered
worth Rs.6 lakhs.
Prepare a statement showing the number of shares to be allotted by X Ltd. to Y Ltd.
19 B: When Acquiree Company holds shares in the Acquirer Company:
Treatment in the books of Acquiree Company:

1 Compute the IVS of Acquirer company
2 Calculate total Intrinsic value of shares Number of shares held by Acquiree company x IVS
held by Acquiree company in the of Acquirer company
Acquirer company
3 Compute profit or loss Total IVS as per previous step less book value of
such shares
4 Transfer such profit or loss to Entry : Shares in the Acquirer company a/c
Realisation account To, Realisation
(For profit )
Calculation of shares to be issued by the Acquirer company

Case –a – purchase consideration is determined under Net Payment Method
1 Number of shares in Acquiree company Xxx
2 Number of shares in Acquirer company to be issued for each share in Xxx
Acquiree company
3 Total number of shares to be issued = 1 x 2 Xxx
4 Less : total number of shares already held by Acquiree company Xxx
5 Number of additional shares to be issued by Acquirer company = 3 - 4 xxx
Case –b – purchase consideration is determined under Net Assets Method

1 Assets taken over at their agreed values (other than Shares) Xxx
2 Less : liabilities taken over Xxx
3 Net assets taken over Xxx
4 Agreed price for each share of Acquirer company Xxx
5 Number of shares to be issued to Acquiree company = 3 / 4 xxx
Concept question:
A limited absorbs B limited allotting 2 shares of Rs. 100 each at a premium of 5% for every 1 share.
Total number of shares in B limited is 10,000. B limited holds 2,000 shares in A limited. Calculate
the amount of purchase consideration
Concept question:
A limited absorbs B. Assets were taken over at a valuation of Rs. 15,00,000 (other than shares of A
limited ) and liabilities worth Rs. 5,00,000 . Purchase price was satisfied by issue of equity shares of
Rs. 100 each at a premium of 5% Total number of shares in B limited is 10,000. B limited holds
2,000 shares in A limited. Calculate the amount of purchase consideration
19B.1
Acquiree Company holds share in Acquirer Company
Following are the balance sheets of two companies, Wye Ltd. and Zed Ltd. as at December 31,
2022.
Liabilities Wye Ltd. Zed Ltd. Assets Wye Ltd. Zed Ltd.
Rs. Rs. Rs. Rs.
Share capital: Sundry assets 7,50,000 3,50,000
(shares of Rs.100 1,000 shares in Wye
each) 5,00,000 3,00,000 Ltd. - 1,00,000
Reserve 1,00,000 55,000
Creditors 1,50,000 95,000
Total 7,50,000 4,50,000 Total 7,50,000 4,50,000
Wye Ltd. was to absorb Zed Ltd. on the basis of intrinsic value of the shares; the purchase
consideration was to be discharged in the form of fully paid shares, entries to be made at par value
only. A sum of Rs.20,000 is owed by Wye Ltd. to Zed Ltd. Also included in the stock of Wye Ltd.
Rs.30,000 worth goods supplied by Zed Ltd. at cost plus 20% Show Computation of Purchase
consideration.
19-C: CROSS HOLDINGS

19C.1 -
The following balance sheets of A Ltd. and B Ltd. as at 31st March, 2022 are given to you:
A Ltd. B Ltd.
Rs. Rs.
Liabilities:
Share capital
Fully paid up equity shares of Rs.100 each 15,00,000 5,00,000
General reserve 2,00,000 1,00,000
Profit and loss account 1,60,000 10,000

10% Debentures - 3,00,000
Current liabilities 2,00,000 90,000
20,60,000 10,00,000
Assets:
PPE 10,00,000 50,000
Sundry debtors 2,90,000 1,50,000
Stock 4,80,000 2,10,000
1,000 shares in B Ltd. 1,50,000 -
3,000 shares in A Ltd. - 5,00,000
Cash at bank 1,40,000 90,000
20,60,000 10,00,000
B Ltd. traded raw material which were required by A Ltd. for manufacture of its products. Stock of
A Ltd. includes Rs.1,00,000 for purchases made from B Ltd. on which the company (B Ltd.) made a
profit of 12% on selling price.
A Ltd. owed Rs.25,000 to B Ltd. in this respect.
It was decided that A Ltd. should absorb B Ltd. on the basis of the intrinsic value of the shares of the
two companies.
Before absorption, A Ltd. declared a dividend of 10%.
A Ltd. also decided to revalue the shares in B Ltd. before recoding entries relating to the absorption.
Show the Computation of Purchase Consideration and prepare the statement showing number of
shares to be issued by A limited to B limited.
Section: 20
Reverse Acquisition: When Legal acquirer is not an Accounting Acquiree
20.1
Balance sheet of H and S limited is as at 31.3.22follows:
H S
Non - current Assets 2,000 3,000
Current Assets 1,000 1,000
Total 3,000 4,000
Equity Share Capital 1,000 (Face value Rs. 10). 800 (Face Value Rs. 10)
Other Equity 500 1,600
Non-Current Liabilities 700 1,200
Current liabilities 800 400
H limited and S Limited shares are quoted at Rs. 20 and Rs. 50 respectively on 31.03.2020. H
limited issues shares in exchange ratio based on quoted price.
Pass entries in the books of Acquirer and Prepare the Consolidated Balance sheet.
Solution:
1. It is a business combination. Ration of Exchange shall be 20 :50 that is 2:5 . It means H limited
shall issue 5 shares (@Rs. 20) for 2 shares of S limited.
Thus 200 shares (80/2×5) of H shall be issued to owners of S, who would become 2/3 rd owner of
the group interest (as total shares in the group would be 300 shares, 100 shares belonging to the
owners of H and 200 Issued to S).
For accounting purpose the subsidiary company S Ltd., (holding 2/3rd of the group interest) shall be
considered as the acquirer company. It is a reverse acquisition.
The carrying amounts of assets and liabilities are considered to be their fair value.
As 100% shares of S Ltd. are acquired there is no non controlling interest.
2. Consideration transferred: Of the group 100 shares are held by owners of H and 200 shares are
held by owners of S. Effective consideration from the view point of accounting acquirer S is the fair
value of 100 shares held by H = 20 × 100 = 2,000.
3. Journal in the books of S (Accounting purpose acquirer)
Non - current assets Dr. 2,000
Current assets Dr. 1,000
Goodwill Dr. 500
To Non-current Liabilities 700
To Current Liabilities 800
To Consideration 2,000
Consideration Dr. 2,000
To Equity Share Capital (40* x10) 400
To Securities Premium (40 x50) 1,600
*Consideration Payable is Rs. 2,000
Quoted Price (fair Value) per share of S limited is Rs. 50
Thus, to Discharge consideration of Rs. 2,000 , S limited shall issue Rs. 2,000/ Rs. 50 = 40 Shares
4. Consolidated Balance Sheet on 31-03-2022 in books of S Ltd.
Particulars Amount (Rs.)
Non Current Assets 5,000
Goodwill 500
Current Assets 2,000
Total 7,500
Equity Share Capital (800 +400) 1,200
Other Equity 1,600s +Sec. Prem. 1,600 3,200
Non Current Liabilities 1,900
Current Liabilities 1,200
Total 7,500
20.2
DA Ltd. and TA Ltd. were amalgamated to form a new company DATA Ltd. on 31-03-20 who
issued requisite number of equity shares of Rs. 10 to take over the businesses of DA and TA. The
abstract of balance sheets of the companies on 31-03-20:
Rs. Lakhs
DA TA
PPE 7,500 8,000
Financial Assets 800 500
Equity Share Capital 6,000 10,000
Other Equity 3,000 1,000
Borrowings 2,000 3,000
Current Liabilities 2,000 1,000
Fair value of the following items is given:

PPE 8,000 6,000
Fair Value of Business 7,500 15,000
However the control of DATA Ltd. is taken by the management of TA Ltd.
Show the Consolidated balance sheet.
Solution:
1.DATA Limited , technically is Legal acquirer but TA Ltd. is having the control over DATA Ltd.,
as such, it is considered a reverse acquisition and in the Consolidated balance sheet, assets and
liabilities of TA Ltd. would be shown at carrying amount but items of DA Limited shall be at Fair
Value.
2.
Fair Value of Business that is Net Assets 7,500 15,000
Share of each company in the merged company 1/3 2/3
3. Fair value per share of TA = 15,000/1,000 = Rs. 15
4. Consideration payable by TA to DA is : 7,500 in 7,500/15 = 500 lakh shares
Thus total consideration = 500 lakh shares of Rs. 10 each at Rs. 5 premium = 7,500.
5. Consolidated Balance Sheet
Rs. in Lakhs
Assets Amount
Non Current Assets
PPE (8000+8000) 16,000
Financial Assets 1,300
Current Assets (5000 + 6500) 11,500
Total 28,800
Equity
Equity Share Capital 17,500
Other Equity Note Note: 2 3,300
Borrowings 5,000
In the Consolidated balance sheet, assets and liabilities of TA Ltd. would be shown at carrying
amount but items of DA Limited shall be at Fair Value.
Note:
1.
PPE 8,000
Financial Assets 800
Current Assets 5,000
13,800
Borrowings 2,000
4,000
Net Assets (13,800 – 4,000) 9,800
Consideration 7,500
Gain on Bargain Purchase (9,800 – 7,500) 2,300
2. Other Equity = Other Equity of TA + Gain on Bargain Purchase = 1,000+2,300 = 3,300

01 - Business Comb. - C - 1-77

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

01 - Business Comb. - C - 1-77

Uploaded by

Copyright:

Available Formats

Online /Pen-Drive Video classes

Prepare Smarter with

3. Does not applies to

account for the transaction or other event as an asset acquisition.

21. A business combination achieved in stages

Illustrative Case Studies and Problems

Fair Value of previously held Equity Interest NA NA

Journal Entry in the two situations will be as under— Dr Cr Dr Cr

Section: 2 - Determination of Business

Section - 3: Identifying Acquiring Enterprise

Analysis and Conclusion:

Analysis and Conclusion:

Section - 4 - Determination of Acquisition Date

 Appointed date as per shareholder agreement  April 1, 2019

Section - 5 : Business Combination Achieved in Stages

Section - 6 : Contingent Consideration

Section - 7 : Retention of the original lease classification

Section - 8: Contingent Liability

Section - 9 : Possible Intangible Asset

Section: Measurement Period

Enterprise Ltd. : Balance Sheet after reconstruction

Equity And Liabilities

Secured loans against working 100

To Equity share capital A/c 250

Issued, Subscribed and Paid-up capital 1 crore

Balance Sheet of Khajana Ltd. after the scheme of arrangement

Cost 600 300 900

transfer of the division to Mini Ltd., the consideration being allotment to

Assets Note No. Amount

(2) Discharge of Purchase Consideration (PC):

Section - 14 - Highly Advance Level

Assets Professional Ltd Dynamic Ltd

Non-controlling interest (516.50 x 30%) 154.95

Equity and Liabilities

2 – Ledger Accounts In The Books Of Acquiree Company

Buildings 200,000 Debentures 1,00,000

#-3 : Entries in the books of Acquirer Company

Less liabilities taken over Creditors 70,000

Purchase consideration / net 5,70,000

# 2 – ledger accounts in the books of Acquiree Company

Acquirer Company Account

Shareholders a/c – profit 93,000

Entries In The Books Of Acquirer Company-

Identifiable assets taken over # 7,50,000

2. 1500,000 1,00,000 equity shares of Rs. 10 each @ Rs. 15

# 3 – ledger accounts in the books of Acquiree Company

Acquirer Company Account

#-3 : Entries in the books of Acquirer Company

Assets and liabilities taken over diff. T/F to GW a/c

Less liabilities taken over Creditors 1,50,000

Purchase consideration / net assets 5,90,000

# 2 – ledger accounts in the books of Acquiree Company

Acquirer Company Account

Entries in the books of Acquirer Company-

Identifiable assets taken over# WN 8,40,000

To, Share Capital 5,00,000

# 2 – ledger accounts in the books of Acquiree Company

Acquirer Company Account

Profit and loss 70,000 Share Capital 5,00,000

# - 3 - Entries in the books of Acquirer Company-

Identifiable assets taken over # 5,00,000

4 – Ledger Accounts In The Books Of Acquiree Company