Binder 3 PDF

CA FINAL
FINANCIAL REPORTING - NEW

LECTURE SUPPORT MODULE
BOOK 3
PREFACE
Dear Friends,
At the outset let me congratulate you for having taken up this

challenging and promising professional career.
It gives me immense pleasure in presenting this workbook on Financial

Reporting. The aim is to impart expert knowledge on various topics
which are of current importance world over.
This book is intended primarily for students who are preparing for CA
Final Paper 1 Financial Reporting (New Syllabus). The work book
basically confines to classroom discussions. The author is indebted to all
the standard works on the various aspects of the subject.
I gratefully acknowledge the support of all my friends and well-wishers in

helping me bring out this workbook.
CA Ajith Rohith G - B.com, FCA
1st May 2021

ABOUT ARG CLASSES
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It is indeed worthwhile to attend to ARG classes.
Areas of Concentration:
 Financial Reporting
 Financial Management
 Cost Accounting
ABSORB REFRESH RETRIEVE

INDEX
Sl No Chapter Page No
Ind AS 27,28,103,110,111,112 – Consolidated Financial
1 Statements 1-71
2 Ind AS 103 – Business Combinations 72-121
3 Ind AS 16 – Property Plant and Equipment 122
HAPPY LEARNING EXPERIENCE

LOGIC SCHOOL OF MANAGEMENT CA FINAL PAPER 1
LECTURE SUPPORT MODULE FINANCIAL REPORTING NEW SYLLABUS
CONSOLIDATED FINANCIAL STATEMENTS
Introduction
Consolidated and Separate Financial Statements of Group Entities
Consolidated financial statements present the financial position of an entire group

including the parent and its group companies. Whereas the separate financial statements
present the financial position of a single entity for which the financial statements are
prepared.
Consolidation of an investee shall begin from the date the investor obtains control of the
investee and cease when the investor loses control of the investee.
Control
As per Ind AS 110 ‘Consolidated Financial Statements’, an investor controls an

investee if and only if the investor has all the following:
(a) power over the investee;
(b) exposure, or rights, to variable returns from its involvement with the investee; and
(c) the ability to use its power over the investee to affect the amount of the investor’s
returns.
Control
Power to direct relevant Exposure to variable Linkage between

activities returns power and variable
return
The above definition is very wide and control assessment does not depend only on
voting rights instead it depends on the following as well:
• Potential voting rights;

• Rights of non-controlling shareholders; and
• Other contractual right of the investor if those are substantive in nature.
Indicators of
Control
More than 50% Power to appoint Investor have currently

Voting rights and remove board excersiable potential
of directors voting rights
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CA AJITH ROHITH G FCA B.COM
Note 1:
Power over the investee is derived from

 existing rights ( ie substantive)
 That give a current ability
 To direct relevant activities
Rights where the holder has a practical

ability to exercise
Substantative
Rights
Substantative right should be
considered in the assessment of
Control
Existing Rights
These are rights which give the holder
protection without giving him any power
to make decisions or direct relevant
Protective activities
Rights
ignore while assessing power / control
Note: Existing Rights like Potential Equity Shares like Options, Convertible
instruments should be considered in the assessment of control only if they are
substantive i.e. the holder has a practical ability to exercise
Note: A lenders right to restrict borrower’s activity is a protective right and it cannot
give control to the Lender
Practical ability to
exercise
Conversion Price Economic Impact
other cases
Deeply out of
in/at/slightly out Favourable Unfavourable
Money
of money
Conversion not Coversion Conversion Conversion

Likely Rights likely Likely Unlikely
not Rights Rights Rights not
Substatative Substantative Substantatuve Substattative
2|Page
Current Ability
The rights held by the investor should be exercisable before the decision on relevant
activities can be taken.
Example: An optionally convertible debentures does not give a current ability if it can
be converted after 2 years, whereas it gives a current ability if it can be converted at
anytime.
Relevant Activities
These are operating and financing activities that significantly affect the return of the
Company. Judgement needs to be applied in order to determine the relevant
activities. In case different investors have right to different relevant activities, then the
entity would generally be under Joint Control.
Financial Statements
Separate Financial Statemenst Consolidated Financial Statement
on Date of Subsequend
Governed by Ind AS 27
acquistion Consolidation
Preparation and Publishing Governed by Ind Governed by

is mandatory as per AS 103 for Ind AS 110,
Companies Act 2013 Sec Subsidiaries Ind AS 28
129(3)
Associate and JV
dealt by Ind AS 28
Note: Preparation of Consolidated Financial Statements are mandatory as

per Companies Act 2013 Sec 129(3) and also as part of SEBI Listing
agreement
Ind AS covered in this chapter
Ind AS 27 ‘Separate Financial Statements’: This Ind AS prescribes the principles of

accounting and disclosure of investment in subsidiaries, associates and joint ventures in
the separate financial statements of an entity.
3|Page
Ind AS 103 ‘ Business Combinations’: This Ind AS deals with computation of Purcahse
consideration, Net Assets taken over, treatment of pre-existing relationship,determination
of Goodwill/BPG and NCI on date of acquisition.
Ind AS 110 ‘Consolidated Financial Statements’: This Ind AS provides the criteria for
evaluation of whether an entity controls one or more other entities to treat them as
subsidiaries of the entity. It also explains the procedures for preparation of consolidated
financial statements including the requirements for elimination of inter-company
transactions, accounting of non-controlling interests, accounting of loss of control over
subsidiaries and many more.
Ind AS 28 ‘Investments in Associates and Joint Ventures’: This Ind AS describes the
principles of determining whether an investor has significant influence over an investee
whereby the investee will be treated as an associate of the investor. Further, this Ind AS
explains the principles of application of equity method of accounting for accounting of
investments in associates and joint ventures in the consolidated financial statements.
Ind AS 111 ‘Joint Arrangements’: This Ind AS explains the principles of determining
whether an investment by an entity in an arrangement with one or more other parties can
be treated as a joint arrangement or not. Also, it explains how to classify such joint
arrangement between joint operation and joint venture.
Ind AS 112 ‘Disclosures of Interests in Other entities’: This Ind AS provides the
requirements for an entity to disclose certain information in its financial statements with
respect to its interests in other entities.
Accounting for Investment
SFS CFS
Investment in Other Investment in Investment in

Subsidiaries, Investments Subsidiary Associate or JV
Assosciates, JV
Apply Ind AS Investment will be Apply Equity
As per Ind AS 109 cancelled againgst Method as per
27 Net Assets on DOA Ind AS 28
FVTPL or
Cost or FV Difference is Investment will
FVTOCI
Model GW or BPG not be
cancelled
4|Page
Step Acquisition – Control Establised
When ever Subsidiary, Associate, JV comes into existence then we need to first bring the
existing investment to Fairvalue on the Date of Acquisition.
Ex : Investment under Ind AS 109 to Subsidiary
10 % ( No Control) 60 % (Control)
Ex : Investment under Ind AS 109 to Associate
10 % (No Control) 45 % ( Significant Influence)
Ex : Investment in Associate to Subsidiary
25 % ( Significant Influence) 60 % (Control)
Note: Goodwill or BPG is always computed on Date when control is

obtained
Goodwill computed above is annualy tested for impairment under Ind AS

36 in CFS
Step Acquisition – No effect on Control
Whenever Holding Company acquires additional stake in subsidiary or dispose of some

stake without affecting control then such transaction are treated as transaction with
equity participants (i.e. transactions with owners in their capacity as owners).
Parent buys shares from non-controlling interest
60 % 80%
Parent sells shares to non-controlling interest
70 % 55%
Subsidiary issues new shares to non-controlling interest in a capital raising exercise

resulting in dilution in stake of parent – Deemed Disposal
Note: Such Transaction will not affect the GW or BPG computed earlier.
5|Page
Calculation of goodwill / capital reserve and determination of non- controlling

interest
Particulars Amount
Cost of Investment
Cash Paid to buy Investment in Subsidiary XXX
+ FV of Shares issued XXX
+ FV of Assets given XXX
+ PV of Deferred Consideration XXX
+ FV of Contingent Consideration XXX
+ FV of Contingent Consideration XXX
+ FV of Previously held Equity Interest XXX
+ FV Attribuable to Replacement of SBPP of Subsidiary XXX XXXX
NCI on Date of Acquisition XXXX
Less: FV of Net Assets of Subsidiary on DOA XXXX
Goodwill or Bargain Purchase Gain XXXX
Treatment of Bargain Purchase Gain
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.
then 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.
In all other cases, BPG shall be recognised directly in equity as a capital reserve.
Measurement of non-controlling interest
Non-controlling interest is the equity not attributable, directly or indirectly, to a parent.
Non-controlling interest in the acquiree are present ownership interests and entitle their
holders to a proportionate share of the entity’s net assets in the event of liquidation.
6|Page
For each business combination, the acquirer shall measure at the acquisition date
components of non-controlling interest that give the holder ownership interest in the
acquiree at either:
 Fair value or
 The present ownership instruments’ proportionate share in the recognised amounts
of the acquiree’s identifiable net assets
NCI can become -ve due to allocation of post acquisition losses of Subsidiary
As per AS 21 - Maximum Dr to Minority Interest is equal to the extend of unpaid

amount on shares held by them.
If shares were fully paid up then Minority Interest could not become -ve
Revaluation of Assets and Liabilities of Subsidiary
On acquisition of Subsidiary, we are required to determine the Fair Value of Identified

Assets and Liabilities of Subsidairy. We should also consider the Deferred Tax impact on
account of such fair value impact.
If Subsidairy company already have Goodwill or Deferred Revenue Expenditure/

Preliminary Expenditure in their Financial Statements – These are no Identified Assets.
Hence those items should not be considered for Computing the Fair Value of Asset and
Liabilities taken over .
Treatment of uneven items
While analysing the Reserves and surplus of Subsidiary we need to be careful with
respect to uneven items like Abnormal gain, abnormal Loss, Final Dividend, Interim
dividend, capitalization of reserves fro Bonus etc.
Consequential Adjustment on account of Revaluation
Particulars Consequential Impact

PPE Depreciation
Stock Cost of Goods Sold
Trade Receivales Bad Debts write off
Trade Payables Write Back of Creditors
Goowill Impairment
Impairment Loss with respect to Goowill will be adjusted in consolidated Financial

statements as follows.
7|Page
Treatment of Impairment Loss on Goodwill
If NCI @ PSNA If NCI @ FV
Partial Goodwill Full Goodwill
Recognise Impairment loss in Allocate Impairment Loss to

Consolidated P/L Consolidated P/L and NCI
Treatment of unrealized Profits
URP on
Non Current Asset

Inventory Transfer Transfer
URP on Inventory transfer
On consolidation, the unrealized profit on closing inventories will be eliminated from the
group’s profit, and the closing inventories of the group will be recorded at cost to the
group.
URP
Down Stream Upstream

Transaction Transaction
Adjust in # 3 Summary (Post Acqn

Adjust in # 6 and BS Change) and BS
Unrealised losses resulting from intra-group transactions that are deducted in arriving at
the carrying amount of assets are also eliminated unless cost cannot be recovered.
8|Page
URP on Non Current Asset transfer
Similar to the treatment described above for unrealized profits in inventories, unrealized
inter- company profits arising from intra-group transfers of Property, Plant and
Equipment, Intangible Assets and Investment Property are also eliminated from the
consolidated financial statements.
Here URP = Unamortised Profit

Unamortised Profit = Total profit on transfer less depreciation impact
URP
Down Stream Upstream

Transaction Transaction
Adjust in # 3 Summary (Post Acqn

Adjust in # 6 and BS Change) and BS
Treatment of Cumulative Preference Shares Equity in Subsidiary
Para B 95 Appendix B to Ind AS 110 If a subsidiary has outstanding cumulative

preference shares that are classified as equity and are held by non-controlling interests,
the entity shall compute its share of profit or loss after adjusting for the dividends on such
shares, whether or not such dividends have been declared.
R Ltd. Hold 80% stake on Y Ltd. Y Ltd. Has also issued 10% cumulative preference
shares worth Rs 10,00,000 to the non-controlling interest. During the year, Y Ltd. Earned
profit of Rs 5,00,000. Y Ltd. Has not declared any dividend on cumulative preference
share for current year. In such case, the profit attributable to R Ltd. For current year
would be as follows:
Particulars Amount
Total Profit of Y Ltd 5,00,000
Dividend on Preference Shares ( Attributable to NCI) 1,00,000
Net Profit available to Ordinary Share holders 4,00,000
Profit Attributable to Parent 3,20,000
Profit Attributable to NCI 80,000
Investment in Subsidiary recorded at Fair Value in SFS
If Parent company opted to show investment in subsidiary at FV in SFS, then at the time
of consolidation we should reverse the Fair Value change recognised earlier either in
Consolidated P/L or Consolidated OCI.
9|Page
Warm up
# Example 1: Year Beginnig acquisition – Reserves and Surplus on DOA available

H Ltd Acquired 8,000 Shares in Sltd on 1st April 2021 for Rs 5,00,000. Investment in S Ltd
was carried at cost in SFS of H Ltd.
Assets H Ltd S Ltd

PPE 2,00,000 7,00,000
12,000 Shares in S Ltd at cost 5,00,000 Nil
Current Assets 1,80,000 4,80,000
Total 8,80,000 11,80,000

Equity and Liabilities H Ltd S Ltd
Equity Shares of Rs 10 fully paid 2,00,000 1,50,000
General Reserve 3,00,000 5,00,000

P&L Account: 2,80,000 4,50,000
Current Liabilities 1,00,000 80,000
Total 8,80,000 11,80,000
On the date of Acquisition S Ltd had GR balance Rs 3,00,00 and P/L balance at Rs
2,00,000.
H Ltd also agreed to pay deferred consideration of Rs 50,000 after 2 years and also
agreed to pay a contingent consideration if Net Profit exceeded Rs 50 Lakhs afer 2 years.
The Fair Value of the contingent consideration is Rs 30,000. Appropriate Discount rate is
10% p.a
On the 10th May 2021 there was a fire accident and goods costing Rs 25,000 were
damaged and insurance company agreed a claim of Rs 10,000
1st June 2021 S Ltd declated and Paid Final Dividend for the FY 20-21 @ 10%
15th September Abnormal Gain Rs 20,000
1st October S Ltd issued bonus shares in the ratio 1:2 by capitalizing General Reserve.
You are required to prepare a consolidated Balance Sheet of H Ltd as at 31 st March

2022.
# Example 2: Mid Year acquisition – Reserves and Surplus on DOA available.
H Ltd Acquired 8,000 Shares in Sltd on 1st August 2021 for Rs 5,00,000. Investment in S
Ltd was carried at cost in SFS of H Ltd.
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Assets H Ltd S Ltd

PPE 2,00,000 7,00,000
Total 8,80,000 11,80,000


P&L Account: 2,80,000 4,50,000
Total 8,80,000 11,80,000
On the date of Acquisition S Ltd had GR balance Rs 3,00,00 and P/L balance at Rs
2,00,000
10% p.a

2022.
# Example 3: Mid Year acquisition – Reserves and Surplus on a DOA not

available.ie GR and PL balance on a prior date available.
H Ltd Acquired 8,000 Shares in Sltd on 1st August 2021 for Rs 5,00,000. Investment in S
Ltd was carried at cost in SFS of H Ltd.
Assets H Ltd S Ltd
11 | P a g e
PPE 2,00,000 7,00,000
Total 8,80,000 11,80,000


P&L Account: 2,80,000 4,50,000
Total 8,80,000 11,80,000
On 1st April 2021 S Ltd had GR balance Rs 3,00,00 and P/L balance at Rs 2,00,000
10% p.a

2022.
# FS 1: Investment at cost and NCI at PSNA

The Balance Sheet of H Ltd and its subsidiary S Ltd on 31st March 2013 were as
under.
Assets H Ltd S Ltd

Land & Building 6,00,000 Nil
Plant & Machinery 20,00,000 Nil
Furniture & Fixtures 90,000 1,00,000
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Stock 4,00,000 7,50,000

Debtors 1,00,000 2,80,000
Cash in Hand 10,000 15,000
Cash at Bank Nil 1,05,000
Bills Receivable Nil 1,00,000
Total 38,50,000 13,50,000
Liabilities H Ltd S Ltd
General Reserve
Opening Balance 2,00,000 Nil
Current Year Transfer 1,00,000 1,00,000
P&L Account:
Opening Balance 4,00,000 2,00,000
Profit for the year 5,00,000 2,50,000
Bills Payable 1,50,000 Nil
Creditors 3,00,000 3,00,000
Bank Overdraft 2,00,000 Nil
Total 38,50,000 13,50,000
All the 30,000 shares in S Ltd were acquired by H Ltd on 1st October 2012.Bills
receivable held by S Ltd are all accepted by H Ltd. Included in debtors of S Ltd is a
sum of Rs 60,000 owing by H ltd in respect of goods supplied by S Ltd.
Stock of Rs 7,50,000 held by S Ltd consists of Rs 60,000 goods purchased from H

Ltd, who had charged profit at 25% on cost.
During June 2012 goods costing Rs 6000 were destroyed due to fire in the godown of
S Ltd against which the insurer paid only Rs 2,000.

2013.
# FS 2: Investment at Fair Value and NCI at FV

The Balance Sheet of H Ltd and S Ltd as at 31 st March 2013 were as under
Assets H Ltd S Ltd

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Fixed Assets 9,00,000 4,00,000

Investment in S Ltd @ Fair Value 6,00,000 Nil
Sundry Debtors 1,60,000 90,000
Inventory 2,10,000 1,20,000
Cash & Bank 2,30,000 90,000
Total 21,00,000 7,00,000
Equity Shares of Rs 10 9,00,000 3,00,000
General Reserve 5,00,000 30,000
P&L Account: 6,00,000 2,00,000
Sundry Creditors 1,00,000 1,70,000
Total 21,00,000 7,00,000
H Ltd has acquired 75% of S Ltd shares at Rs 5,90,000 on 1st July 2012. S Ltd had
an opening balance of Rs 1,00,000 in profit and loss account from which it paid
dividend for 2011-12 at 20% on 30th September 2012. The dividend received by H
Ltd is included in its Profit and Loss account.
H Ltd opted to show Investment in S Ltd at FVTPL.
Inventory of H Ltd includes Rs 20,000 out of purchases made from S Ltd on which
margin of 25% was charged on cost.
It was decided to Value NCI @ Fair Value. On the Date of acquisition FV per Share
of S Ltd was Rs 27/Share.
Prepare consolidated Balance Sheet as at 31st March 2013.
# FS 3: Investment at Fair Value and NCI at PSNA

On 31.03.2013 the Balance Sheet of H Ltd and its subsidiary S Ltd stood as follows.
Assets H Ltd S Ltd

Land & Building 2,718 -
Plant & Machinery 4,905 4,900
Furniture & Fittings 1,845 586
Investment in S Ltd @ FV 3,000 -
Stock 3,949 1,956
Debtors 2,600 1,363
Cash & Bank 1,490 204
Bills Receivable 360 199
Sundry Advances 520 -
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Total 21,387 9,208

Equity Shares of Rs 10 12,000 4,800
General Reserve 2,784 1,380
P&L Account 3,915 1,620
Bills Payable 372 160
Sundry Creditors 1,461 854
Provision for Taxation 855 394
Total 21,387 9,208
Additional informations:
a) H Ltd purchased 180 lakhs shares in S Ltd on 1.4.2012 for Rs 2900. H Ltd opted
to show Investment in S Ltd at FVTPL. On the date of acquisition the balance of
general reserve and profit and loss account of S Ltd stood at Rs 3,000 lakhs and Rs
1,200 Lakhs respectively.
b) On 4.7.2012 S ltd declared a dividend of 20% for the year ended 31.03.2012 and
H Ltd credited the dividend received to its profit and loss account.
c) On 1.1.2013 S Ltd issued 3 fully paid up shares for every 5 shares held as bonus
shares out of the balance in General reserve as on 31.03.2012
d) On 31.03.2013 all the Bills payable in S Ltd Balance Sheet were acceptances in
favour of H Ltd.
e) On 31.03.2013 S Ltd stock includes goods which it had purchased for Rs 100
Lakhs from H Ltd which made a profit of 25% on cost.
Prepare Consolidated Balance Sheet.
# FS 4: NCI at PSNA – Allocation of Post Acquisition Profit/loss.

A Ltd. Acquired 70% equity shares of B Ltd. On 1.4.2021 at cost of Rs 10,00,000
when B Ltd. Had an equity share capital of Rs 10,00,000 and other equity of Rs
80,000.
In the four consecutive years B Ltd fared badly and suffered losses of
Rs 2,50,000, Rs 4,00,000, Rs 5,00,000 and Rs 1,20,000 respectively.
Thereafter in 2025-2026, B Ltd. Experienced turnaround and registered an annual
profit of Rs 50,000. In the next two years i.e. 2026-2027 and 2027-2028, B Ltd.
Recorded annual profits of Rs 1,00,000, and Rs 1,50,000 respectively.
Show the non- controlling interests and goodwill at the end of each year for the
purpose of consolidation. Assume that the assets are at fair value.
# FS 5: Non-controlling interest and goodwill
From the following data, determine in each case:

 Non-controlling interest at the date of acquisition (using proportionate share
method) and at the date of consolidation
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 Goodwill or Gain on bargain purchase.

 Amount of holding company’s share of profit in the consolidated Balance Sheet
assuming holding company’s own retained earnings to be Rs 2,00,000 in each
case
DOA 1.04.20X1 DOC 31.03.20X2

Case Subsidiary % Cost
SC [A] RE [B] SC [C] RE [D]
Case 1 A 90% 1,40,000 1,00,000 50,000 1,00,000 70,000
Case 2 B 85% 1,04,000 1,00,000 30,000 1,00,000 20,000
Case 3 C 80% 56,000 50,000 20,000 50,000 20,000
Case 4 D 100% 1,00,000 50,000 40,000 50,000 56,000
The company has adopted an accounting policy to measure Non-controlling interest

at NCI’s proportionate share of the acquiree’s identifiable net assets. It may be
assumed that the fair value of acquiree’s net identifiable assets is equal to their
book values.
Consequential Adjustment on account of Revaluation
# Example 4:
Land revalued on DOA say Book Value Rs 5,00,000 and Fair Value Rs 7,00,000
subsequently sold for Rs 7,00,000.
Stock revalued on DOA say Book Value Rs 5,00,000 and Fair Value Rs 5,50,000
subsequently sold for Rs 6,00,000.
Stock revalued on DOA say Book Value Rs 5,00,000 and Fair Value Rs 5,50,000
subsequently sold 3/4th for Rs 4,60,000.
Discuss the impact when we prepare Statement of Changes in Net Assets.
Unrealised Profits
# Example 5: Upstream Transaction

A parent owns 60% of a subsidiary. The subsidiary sells some inventory to the parent for
Rs 35,000 and makes a profit of Rs 15,000 on the sale. The inventory is in the parent’s
balance sheet at the year end. Examine the treatment of intra-group transaction and pass
the necessary journal entry.
Answer:
Consolidated Revenue Dr 35,000
To Cost of Sales 20,000
To Inventory 15,000
The reduction of group profit of Rs 15,000 is allocated between the parent company and
non- controlling interest in the ratio of their interests 60% and 40%.
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# Example 6: Downstream
In the above illustration, assume that it is the parent that makes the sale. The parent
owns 60% of a subsidiary.
Answer:
To Inventory 15,000
In this case, since it is the parent that has made the sale, the reduction in profit of Rs
15,000 is allocated entirely to the parent company.
# Example 7: Downstream
A Ltd, a parent company sold goods costing Rs 200 lakh to its 80% subsidiary B Ltd. At
Rs 240 lakh. 50% of these goods are lying at its stock. B Ltd. Has measured this
inventory at cost i.e. at Rs 120 lakh. Show the necessary adjustment in the consolidated
financial statements (CFS). Assume 30% tax rate.
Answer:
A Ltd. shall reduce the inventories of of B Ltd., by Rs 20 lakh in CFS. This will
increase expenses and reduce consolidated profit by Rs 20 lakh. Lt shall also create
deferred tax asset of Rs 6 lakh since accounting base of inventories (Rs 100 lakh) is
lower than its tax base (Rs 120 lakh).
# Example 8: Downstream transfer of PPE

A Ltd. (which is involved in the business of selling capital equipment) a parent
company sold a capital equipment costing Rs 100,000 to its 80% subsidiary B Ltd.
At Rs 120,000. The capital equipment is recorded as PPE by B Ltd. The useful life
of the PPE on the date of transfer was 10 years. Show the necessary adjustment in
the consolidated financial statements (CFS).
Answer:
To PPE 18,000
To Depreciation 2,000
# FS 6
P Ltd acquired 12,000 shares in F Ltd for Rs.1,70,000 on 1st April 2012. The
balance sheets of the two companies on 31st December 2012 were as follows:
Assets P Ltd F Ltd

Goodwill 3,00,000 70,000
Land and Building 4,00,000 1,00,000
Plant and Machinery 5,00,000 1,00,000
Investments in S Ltd at Cost 1,70,000 -
17 | P a g e
Stock 2,00,000 40,000

Book Debts 3,00,000 85,000
Cash and Bank 80,000 62,000
Bills Receivables 50,000 30,000
Loan to P Ltd. - 50,000
Total 20,00,000 5,37,000
Liabilities P Ltd F Ltd
Share Capital (Rs.10/-each) 10,00,000 3,00,000
General Reserve 4,20,000 50,000
Profit &Loss a/c 2,60,000 85,000
Loan from F Ltd (including interest) 57,500
Sundry Creditors 1,82,500 42,000
Bills Payable 80,000 60,000
Total 20,00,000 5,37,000
On January 1, 2012 the General Reserve and Profit and Loss a/c of F Ltd stood as
Rs.1,50,000 and Rs 40,000 out of which a dividend of 15% on the capital of
Rs.2,00,000 was paid on June 2012.
At the same time, a bonus issue of one share (fully paid) for every two shares held,
was also made out of General Reserve.
Bills payable of F Ltd. Represents bill issued in favour of P Ltd. of which the company
still held Rs.40,000 of the bills accepted by F Ltd. The entire closing stock of F Ltd.
represents goods supplied by P Ltd. at cost plus 20%.
P Ltd and F Ltd agreed that for services rendered P Ltd. should charge
Rs.500/month from F Ltd. entries for this were not made when the accounts were
drawn up. The loan to P Ltd. was made by F Ltd. on Jan 1, 2012.
Prepare consolidated balance sheet of the two companies as on 31.12.2012.
# FS 7
On 1st Jan 2010, A Ltd acquired 8,000 shares of Rs.10 each of B Ltd at Rs.90,000. Altd
opted to carry the Investment in subsidiary at cost. There were no further acquisition in
Subsidiary during the year. The respective Balance Sheet as on 31.12.2012 are given
below.
Assets A Ltd B Ltd

Fixed Assets 60,000 1,10,000
Investments 1,00,000 15,000
Sundry Debtors 25,000 20,000
Stock 30,000 40,000
Bank 32,000 24,000
Total 2,47,000 2,09,000
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Liabilities A Ltd B Ltd

Share Capital (Rs.10/-each) 1,00,000 1,00,000
General Reserve 40,000 26,000
Profit & Loss a/c 36,000 35,000
Sundry Creditors 71,000 48,000
Total 2,47,000 2,09,000
Additional Information:
a) At the time of acquiring shares of B Ltd. had Rs.24,000 in Reserve and
Rs.15,000 in Profit and Loss a/c.
b) B Ltd paid 10% dividend in 2010, 12% in 2011, 15% in 2012 for 2009, 2010
and 2011 respectively. All dividends received have been credited to Profit
and Loss a/c of A Ltd.
c) One bonus share for 5 fully paid shares held has been declared by B Ltd. out
of the pre acquisition reserve on 31st Dec.2012. No effect has been given to
that in the above accounts.
d) On 1st Jan.2010, Building of B Ltd. which stood in the books at Rs 1.5 Lakhs
was revalued at Rs.1,60,000 but no adjustment has been made in the books.
Depreciation has been charged @ 10%p.a. on reducing balance method.
e) In 2012 A ltd. purchased from B Ltd goods for Rs.10, 000 on which B Ltd.
made a profit of 20% on sales,25%of such goods are lying unsold on
31.12.2012.
Prepare Consolidated Balance sheet as on 31.12.2012.
# FS 8 – Partial Disposal Control not affected

Entity P sells a 20% interest in a wholly- owned subsidiary to outside investors for
Rs. 100 lakh in cash. The carrying value of the subsidiary's net assets is Rs. 300
lakh, including goodwill of Rs. 65 lakh from the subsidiary's initial acquisition.
Pass journal entries to record the transaction.
Answer:
As per para B96 of Ind AS 110, where proportion of the equity of NCI changes, then
group shall adjust controlling and non-controlling interest and any difference between NCI
(60 lakhs) is adjusted and fair value of consideration received (100 lakhs) to be attributed
to parent in other equity ie. 40 lakhs.
Cash Dr 100
To NCI 60
To OCE 40
# FS 9 – Step Acquisition Control not affected

Entity A acquired 60% of entity B two years ago for Rs. 6,000. At the time entity B's
fair value was Rs.10,000. It had net assets with a fair value of Rs. 6,000 (which for
the purposes of this example was the same as book value). Goodwill of Rs. 2,400
was recorded (being Rs. 6,000 -(60% x Rs. 6,000). On 1 October 20X0, entity A
acquires a further 20% interest in entity B, taking its holding to 80%. At that time the
fair value of entity B is Rs. 20,000 and entity A pays Rs. 4,000 for the 20% interest.
19 | P a g e
At the time of the purchase the fair value of entity B's net assets is Rs. 12,000 and
the carrying amount of the non- controlling interest is Rs. 4,000.
Pass journal entries to record the transaction.
Answer:
NCI Dr 2,000
OCE Dr 2,000
To Cash 4,000
# FS 10 – Deemed Disposal – Control Lost

In March 20X1 a group had a 60% interest in subsidiary with share capital of 50,000
ordinary shares. The carrying amount of goodwill is Rs. 20,000 at March 20X1
calculated using the partial goodwill method. On 31 March 20X1, an option held by
the minority shareholders exercised the option to subscribe for a further 25,000
ordinary shares in the subsidiary at Rs. 12 per share, raising Rs. 3,00,000. The net
assets of the subsidiary in the consolidated balance sheet prior to the option's
exercise were Rs. 4,50,000, excluding goodwill.
Calculate gain or loss on loss of interest in subsidiary due to option exercised by
minority shareholder.
Answer:
Calculation of group gain on deemed disposal Rs.’000
For simplicity, it has been assumed the fair value per share is equal to the
subscription price.
As control of the subsidiary is lost, the retained interest is recognized at its fair value
at the date control is lost. The resulting remeasurement gain is recognized in profit
and loss.
NCI Dr 1,80,000 4,50,000 X 40%

Investment @ FV Dr 3,60,000 30,000 Shares X 12
To GW 20,000
To NA 4,50,000
To Gain on Disposal 70,000
# FS 11 – Full Disposal – Control Lost

A parent purchased an 80% interest in a subsidiary for Rs. 1,60,000 on 1 April 20X1
when the fair value of the subsidiary's net assets was Rs. 1,75,000. Goodwill of Rs.
20,000 arose on consolidation under the partial goodwill method. An impairment of
goodwill of Rs. 8,000 was charged in the consolidated financial statements to 31
March 20X3. No other impairment charges have been recorded. The parent sold its
investment in the subsidiary on 31 March 20X4 for Rs. 2,00,000. The book value of
the subsidiary's net assets in the consolidated financial statements on the date of
the sale was Rs. 2,25,000 (not including goodwill of Rs. 12,000). When the
subsidiary met the criteria to be classified as held for sale under Ind AS 105, no
write down was required because the expected fair value less cost to sell (of 100%
of the subsidiary) was greater than the carrying value.
20 | P a g e
The parent carried the investment in the subsidiary at cost, as permitted by Ind AS
27.Calculate gain or loss on disposal of subsidiary in parent's separate and
consolidated financial statements as on 31st March 20X4.
Answer:
In SFS
The parent's separate statement of profit and loss for 20X3-20X4 would show a gain
on the sale of investment of Rs. 40,000 calculated as follow:
Rs.’000
Sale proceeds 200
Less: cost of investment in subsidiary (160)
Gain on sale in parent's account 40
In CFS
However, the group's statement of profit & loss for 20X3-20X4 would show a gain on
the sale of subsidiary of Rs. 8,000 calculated as follows:
Cash Dr 2,00,000
NCI Dr 45,000 2,25,000 X 20%
To GW (WN # 1) 12,000
To NA 2,25,000
To Gain on Disposal 8,000
WN # 1
The goodwill on consolidation (assuming partial goodwill method) is calculated as
follows: Rs .’000
Fair value of consideration at the date of acquisition 1,60,000
Non-controlling interest measured at proportionate share of the
acquiree's identifiable net assets (1,75,000 X 20%) 35,000
Less: fair value of net assets of subsidiary at date of acquisition (1,75,000)
Goodwill arising on consolidation 20,000
Impairment at 31 March 20X3 (8,000)
Goodwill at 31 March 20X4 12,000
# FS 12: Partial disposal when subsidiary becomes an associate

AT Ltd. Purchased a 100% subsidiary for Rs 50,00,000 on 31st March 20X1 when
the fair value of the net assets of BT Ltd. Was Rs. 40,00,000. Therefore, goodwill is
Rs. 10,00,000. AT Ltd. Sold 60% of its investment in BT Ltd. On 31st March 20X3 for
Rs. 67,50,000, leaving the AT Ltd. With 40% and significant influence. At the date of
21 | P a g e
disposal, the carrying value of net assets of BT Ltd. Excluding goodwill is Rs.
80,00,000. Assume the fair value of the investment in associate BT Ltd. Retained is
proportionate to the fair value of the 60% sold, that is Rs. 45,00 000.
Calculate gain or loss on sale of proportion of BT Ltd. In AT Ltd.’s separate and
consolidated financial statements as on 31st March 20X3.
Answer:
AT Ltd.’s standalone statement for profit or loss of 20X2-20X3 would show a gain on the
sale of investment of a Rs. 37,50,000 calculated as follows:
Particulars Amount in Lakhs

Sale Proceeds 67.50
Cost of Investment – 60% of 50 Lakhs 30.00
Profit on sale 37.50
In the consolidated financial statements, the group will calculate the gain or loss on
disposal differently. The carrying amount of all of the assets including goodwill is
derecognized when control is lost. This is compared to the proceeds received and the fair
value of the investment retained.
Bank Dr 67,50,000 Sale Proceeds

NCI Dr Nil 100 % Subsidiary
Investment @ FV Dr 45,00,000 Given
To GW 10,00,000
To NA 80,00,000
To Gain on Disposal 22,50,000
The gain on loss of control would be recorded in consolidated statement of profit and
loss. The gain or loss includes the gain of Rs. 13,50,000 [Rs. 67,50,000 – (Rs. 90,00,000
x 60%)] on the portion sold. However, it also includes a gain on remeasurement of the
40% retained interest of Rs. 9,00,000 (Rs. 36,00,000* to Rs. 45,00,000). The entity will
need to disclose the portion of the gain that is attributable to remeasuring any remaining
interest to fair value, that is, Rs. 9,00,000.
# FS 13: Disposal of Shares and Loss of Control

As at the beginning of its current financial year, AB Limited holds 90% equity interest
in BC Limited. During the financial year, AB Limited sells 70% of its equity interest in
BC Limited to PQR Limited for a total consideration of Rs. 56 crore and consequently
loses control of BC Limited. At the date of disposal, fair value of the 20% interest
retained by AB Limited is Rs. 16 crore and the net assets of BC Limited are fair
valued at Rs. 60 crore.
These net assets include the following:
22 | P a g e
a) Debt investments classified as fair value through other comprehensive income

(FVOCI) of Rs. 12 crore and related FVOCI reserve of Rs. 6 crore.
b) Net defined benefit liability of Rs. 6 crore that has resulted in a reserve relating
to net measurement losses of Rs. 3 crore.
c) Equity investments (considered not held for trading) of Rs. 10 crore for which
irrevocable option of recognising the changes in fair value in FVOCI has been
availed and related FVOCI reserve of Rs. 4 crore.
d) Net assets of a foreign operation of Rs. 20 crore and related foreign currency
translation reserve of Rs. 8 crore.
In consolidated financial statements of AB Limited, 90% of the above reserves were
included in equivalent equity reserve balances, with the 10% attributable to the non-
controlling interest included as part of the carrying amount of the non-controlling
interest.
Answer:
Paragraph B98(c) of Ind AS 110 states that on loss of control over a subsidiary, a
parent shall reclassify to profit or loss, or transfer directly to retained earnings if
required by other Ind AS, the amounts recognised in other comprehensive income in
relation to the subsidiary on the basis specified in paragraph B99.
As per paragraph B99, if a parent loses control of a subsidiary, the parent shall
account for all amounts previously recognised in other comprehensive income in
relation to that subsidiary on the same basis as would be required if the parent had
directly disposed of the related assets or liabilities.
Therefore, if a gain or loss previously recognised in other comprehensive income

would be reclassified to profit or loss on the disposal of the related assets or
liabilities, the parent shall reclassify the gain or loss from equity to profit or loss (as a
reclassification adjustment) when it loses control of the subsidiary. If a revaluation
surplus previously recognised in other comprehensive income would be transferred
directly to retained earnings on the disposal of the asset, the parent shall transfer the
revaluation surplus directly to retained earnings when it loses control of the
subsidiary.
In view of the basis in its consolidated financial statements, AB Limited shall:
 re-classify the FVOCI reserve in respect of the debt investments of Rs.5.4 crore
(90% of Rs. 6 crore) attributable to the owners of the parent to the statement of
profit or loss in accordance with paragraph B5.7.1A of Ind AS 109, Financial
Instruments which requires that the cumulative gains or losses previously
recognised in OCI shall be recycled to profit and loss upon derecognition of the
related financial asset. This is reflected in the gain on disposal. Remaining 10%
(i.e., Rs. 0.6 crore) relating to non-controlling interest (NCI) is included as part of
the carrying amount of the non-controlling interest that is derecognised in
calculating the gain or loss on loss of control of the subsidiary;
23 | P a g e
 transfer the reserve relating to the net measurement losses on the defined
benefit liability of Rs. 2.7 crore (90% of Rs.3 crore) attributable to the owners
of the parent within equity to retained earnings. It is not reclassified to profit or
loss. The remaining 10% (i.e., Rs. 0.3 crore) attributable to the NCI is included as
part of the carrying amount of NCI that is derecognised in calculating the gain or
loss on loss of control over the subsidiary. No amount is reclassified to profit or
loss, nor is it transferred within equity, in respect of the 10% attributable to the
non-controlling interest.
 reclassify the cumulative gain on fair valuation of equity investment of Rs.3.6

crore (90% of Rs. 4 crore) attributable to the owners of the same parent from
OCI to retained earnings under equity as per paragraph B5.7.1 of Ind AS 109,
Financial Instruments, which provides that in case an entity has made an
irrevocable election to recognise the changes in the fair value of an investment in
an equity instrument not held for trading in OCI, it may subsequently transfer the
cumulative amount of gains or loss within equity. Remaining 10% (i.e., Rs. 0.4
crore) related to the NCI are derec ognised along with the balance of NCI and
not reclassified to profit and loss.
 reclassify the foreign currency translation reserve of Rs.7.2 crore (90% × Rs. 8
crore) attributable to the owners of the parent to statement of profit or loss as per
paragraph 48 of Ind AS 21, The Effects of Changes in Foreign Exchange Rates,
which specifies that the cumulative amount of exchange differences relating to
the foreign operation, recognised in OCI, shall be reclassified from equity to profit
or loss on the disposal of foreign operation. This is reflected in the gain on
disposal. Remaining 10% (i.e., Rs. 0.8 crore) relating to the NCI is included as
part of the carrying amount of the NCI that is derecognised in calculating the gain
or loss on the loss of control of subsidiary, but is not reclassified to profit or loss
in pursuance of paragraph 48B of Ind AS 21, which provides that the cumulative
exchange differences relating to that foreign operation attributed to NCI shall be
derecognised on disposal of the foreign operation, but shall not be reclassified to
profit or loss.
The impact of loss of control over BC Limited on the consolidated financial

statements of AB Limited is summarised below:
(Rupees in crore)
Amount Amount PL RE
Particular
(Dr) (Cr) Impact Impact
Gain / Loss on Disposal on Investments
Bank 56
Non-controlling interest (Derecognised) 6
Investment at FV (20% Retained) 16
To Gain on Disposal (PL) balancing figure 18 18
ToNet assets of subsidiary 60
Reclassification of FVTOCI reserve on
24 | P a g e
debt instruments to profit or loss

FVTOCI reserve on debt instruments (6 cr. x 5.4
90%)
To Profit and loss 5.4 5.4
Reclassification of net measurement loss
reserve to profit or loss
Reserve and Surplus 2.7 -2.7
To Net measurement loss reserve (FVTOCI) 2.7
[(3 cr. x 90%)]
Reclassification of FVTOCI reserve on
equity instruments to retained earnings
FVTOCI reserve on equity instruments (4 3.6
cr.x 90%)
To Reserve and Surplus 3.6 3.6
Foreign currency translation reserve
reclassified to profit or loss
Foreign currency translation reserve 7.2
(FVOCI) [8 cr. x 90%]
To Profit and loss 7.2 7.2
Total 30.6 0.9
Consolidated Statement of P&L
 Time Proportion is required if Acquired or Disposed during the year.

 Adjustments relating to previous years should be ignored
 Fair Value Consequential adjustment is relevant.
 Cancell the Profit or loss on disposal of Subsidiary recognised in SFS of H Ltd.
Elimination to be done when prepapring Consolidated P&L
a) Cancel Inter - Group Sales and Purchases at Selling Price irrespective of

Closing Stock
Sales A/c Dr XXXX

To Cost of Sales XXXX
b) Cancel Unrealised Profit with respect to Closing Stock
Cost of Sales A/c Dr XXXX

To Inventory XXXX
c) Cancel Dividend paid with in the group
Other Income A/c Dr XXXX

25 | P a g e
To Retained Earnings XXXX

(SOCIE)
d) Cancel Intra Group Loan - Interest
Other Income A/c Dr XXXX

To Finance Cost XXXX
Disposal of Direct Subsidiary and now becomes associate ie from 80% to 25%
Consolidate upto date of disposal line by line
Pass the Disposal Entry – The gain /loss on disposal belongs to Parent Company
alone
Reverse the gain or loss recognised by Parent in SFS at the time of disposal
Post Disposal recognize the share of Associate in P&L and OCI – Equity Method
Piecemeal Disposal of Subsidiary where control is maintained ie from 80% to

60%
Do not affect comsolidated P&L except reversal of gain or loss recognised by Parent
in SFS at the time of disposal.
Part Disposal of in-Direct Subsidiary and now indirect associate ie S Ltd’s

Investment in SS reduced from 80% to 25%
The Gain / loss on disposal belongs to Subsidiary i.e, indirectly Parent and NCI of S
Ltd
# FS 14: Consolidated P/L

The statements of profit or loss for P and S for the year ended 31 March 2021 are
shown below. P acquired 75% of the ordinary share capital of S several years ago.
P S
Rs.000 Rs.000
Revenue from Operation 2,400 800
Other Income – Dividend from S Ltd 1.5
Cost of sales and expenses (2,160) (720)
Profit before tax 241.5 80
Tax (115) (38)
Profit for the year 126.5 42
Prepare the consolidated statement of profit or loss for the year.
Answer:
Consolidated statement of profit or loss for the year ended 31 August 20X4
Rs.000
Revenue 3,200
26 | P a g e
(2,400 + 800)
Cost of sales and expenses
(2,880)
(2,160 + 720)
Profit before tax 320
Tax
(115 + 38) (153)
Profit for the year 167
Rs.000
Attributable to:
Parent (167 – NCI) 156.5
Non-controlling interest (W1) 10.5
Non-controlling interest
NCI share of subsidiary profit for the year
25% x Rs.42 = Rs.10.5
# FS 15: Consolidated P/L

On 1 April 2020 Z acquired 60% of the ordinary shares of X. The following
statements of profit or loss have been produced by Z and X for the year ended 31
March 2021.
Z X
Rs. ‘000 Rs. ‘000
Revenue from Operation 1,260 520
Cost of sales (420) (210)
Gross profit 840 310
Distribution costs (180) (60)
Administration expenses (120) (90)
Profit from operations 540 160
Other Income - Dividend income from X 36
Profit before taxation 576 160
Taxation (130) (26)
446 134
27 | P a g e
During the year ended 31 March 2021 Z had sold Rs. 84,000 worth of goods to X.
These goods had cost Z Rs. 56,000. On 31 March 2021 X still had Rs. 36,000 worth
of these goods in inventories (held at cost to X).
Prepare the consolidated statement of profit or loss to incorporate Z and X for
the year ended 31 March 2021.
Note: Goodwill on consolidation has not been impaired.
Answer:
Consolidated statement of profit or loss for the year ended 31 March 2021
Rs. 000
Revenue
1,696
(1,260 + 520 - 84)
Cost of sales
(558)
(420 + 210 – 84 + 12)
Gross profit 1,138
Rs. 000
Distribution costs (180+ 60) (240)
Administrative expenses (120 + 90) (210)
Profit from operations 688
Taxation (130+ 26) (156)
Profit for the year 532
Amount attributable to:
Equity holders of the parent (532 - NCI) 478.4
Non-controlling interests 53.6
# FS 16: Consolidated P/L Mid Year Acquisition

P bought 70% of S on 1 July 2020. The following are the statements of profit or loss
of P and S for the year ended 31 March 2021:
P S
Rs. Rs.
Revenue 31,200 10,400
Cost of sales (17,800) (5,600)
Gross profit 13,400 4,800
Operating expenses (8,500) (3,200)
Profit from operations 4,900 1,600
Investment income 2,000 -
28 | P a g e
Profit before tax 6,900 1,600

Tax (2,100) (500)
Profit for the year 4,800 1,100
The following information is available:
(i) On 1 July 2020, an item of plant in the books of S had a fair value of Rs. 5,000 in
excess of its carrying amount. At this time, the plant had a remaining life of 10
years. Depreciation is charged to cost of sales.
(ii) During the post-acquisition period S sold goods to P for Rs. 4,400. Of this
amount, Rs. 500 was included in the inventory of P at the year-end. S earns a
35% margin on its sales.
(iii) Goodwill amounting to Rs. 800 arose on the acquisition of S, which had been
measured using the fair value method. Goodwill is to be impaired by 10% at the
year-end. Impairment losses should be charged to operating expenses.
(iv) S paid a dividend of Rs. 500 on 1 January 2021.
Required: Prepare the consolidated statement of profit or loss for the year ended 31
March 2021
Answer:
Rs.
Revenue (31,200 + (9/12 x 10,400) 34,600
Cost of Sales (17,800 + (9/12 x 5,600) + 375 - 4,400 + 175) (18,160)
Gross profit 16,450
Operating expenses (8,500 + (9/12 x 3,200) + 80) (10,980)
Profit from operations 5,470
Investment Income (2,000 - 350) 1,650
Profit before tax 7,120
Tax (2,100 + (9/12 x 500) (2,475)
Profit for the year 4,645
Profit attributable to:
NCI 58.5
Group 4,580.5
4,645
29 | P a g e
# FS 17:
H ltd acquired 60% shares of S Ltd on 1st April 2020 for Rs 2,80,000/-. Given below
is the B/S and Statement of P&L of both Companies on 31st March 2020.
Balance Sheet as at 31st March 2020

Assets: H Ltd S Ltd
Non-Current Assets
PPE 6,00,000 4,00,000
Investment in S at Cost 2,80,000
10,50,000 7,00,000
Equity and Liabilities:
Share Capital 5,00,000 2,00,000
Retained Earning 2,00,000 1,70,000
Other Components of Equity 1,00,000 46,000
Non-Current Liability 1,10,000 1,50,000
Current Liability 1,40,000 1,34,000
10,50,000 7,00,000
Statement of P&L for the year ended 31st March 2021

Particulars H Ltd S Ltd
Rs Rs
Revenue 6,00,000 3,00,000
Other Income 50,000 40,000
Total 6,50,000 3,40,000
Cost of Sales 4,00,000 2,00,000
Employee Benefits 70,000 25,000
Finance Cost 40,000 22,000
Depreciation 20,000 10,000
Other Expenses 50,000 28,000
Total Expense 5,80,000 2,85,000
Profit Before Tax 70,000 55,000
Less: Tax Expense 18,000 15,000
PAT 52,000 40,000
30 | P a g e
Other Comprehensive Income

Remeasurement Loss on DBP (5,000) (4,000)
OCI for the Year (5,000) (4,000)
On the Date of Acquisition the balance in Retained earnings of S Ltd were Rs

1,50,000 and Other Components of equity were Rs 50,000 and the Fair Value of
Indentifiable Net Assets was Rs 4,20,000.The remaining excess of the Fair Value
over net assets of S Ltd was due to increase in value of PPE, remainig life 5 years.
H Ltd wishes to use the “Full Goodwill” Method and the Fair Value of NCI on DOA
was Rs 1,80,000. There has been no issue of Shares since acquisition and goodwill
on acquisition was impaired by 15% as on 31st March 2021.
On 15th July S Ltd declared and paid final dividend of 10% for the year 2019-20.
H Ltd sold goods costing Rs 50,000 at a profit of 10% on cost to S Ltd and half of
such goods remained in the Closing Stock of S Ltd
S Ltd made a sale of Rs 50,000 at a profit of 20% on Sales to H Ltd and 25% of such
goods remained in the Closing Stock of H Ltd
You are required to prepare Consolidated Banalce Sheet and Statemenet of P&L of
the Group.
# FS 18:
In previous question if DOA is 1st July 2019 and the Opening Balance of RE and
OCE were Rs 1,50,000 and 50,000 respectively and the Fair Value of Indentifiable
Net Assets was Rs 4,50,000 on DOA. The remaining excess of the Fair Value over
net assets of S Ltd was due to increase in value of PPE, remainig life 5 years.
# FS 19:
P acquired 70% of S three years ago; when S retained earnings were Rs. 4,30,000.
The Financial Statements of each company for the year ended 31 March 2021 are as
follows:
Balance Sheet as at 31 March 2021
P S
Rs.000 Rs.000
Non-current assets
Property, Plant and Equipment 900 400
Investment in S at cost 700 -
Current assets 300 600
1,900 1,000
Share capital (Rs. 1) 200 150
Share premium 50 -
31 | P a g e
Retained earnings 1,350 700

1,600 850
Non-current liabilities 100 90
Current liabilities 200 60
1,900 1,000
Statements of profit or loss for the year ended 31 March 2021
P S
Rs.000 Rs.000
Revenue 1,000 260
Cost of sale (750) (80)
Gross profit 250 180
Operating expenses (60) (35)
Profit from operations 190 145
Finance costs (25) (15)
Investment income 20 -
Profit before tax 185 130
Tax (100) (30)
Profit for the year 85 100
You are provided with the following additional information:

(i) S had plant in its Balance Sheet at the date of acquisition with a carrying
amount of Rs. 100,000 but a fair value of Rs. 120,000. The plant had a
remaining life of 10 years at acquisition. Depreciation is charged to cost of
sales.
(ii) The P group values the non-controlling interests at fair value. The fair value of
the non-controlling interests at the date of acquisition was Rs. 250,000.
Goodwill has been impaired by a total of 30% of its value at the reporting date,
of which one third related to the current year.
(iii) At the start of the year P transferred a machine to S for Rs. 15,000. The asset
had a remaining useful economic life of 3 years at the date of transfer. It had a
carrying amount of Rs. 12,000 in the books of P at the date of transfer.
(iv) During the year S sold some goods to P for Rs. 60,000 at a mark-up of 20%.
40% of the goods remained unsold at the year- end. At the year-end, S books
32 | P a g e
showed a receivables balance of Rs. 6,000 as being due from P. This disagreed
with the payables balance of Rs. 1,000 in P books due to P having sent a
cheque to S shortly before the year end which S had not yet received.
(v) S paid a dividend of Rs. 20,000 on 1 March 2021.
Required: Prepare the consolidated Balance Sheet and consolidated statement of

profit or loss for the year ended 31 March 2021.
Answer:
Consolidated Balance Sheet as at 31 March 2021
Rs. 000
Non-current assets
Goodwill 245
Property, plant and equipment (900 + 400 + 20 – 6 – 2 (P)) 1,312
Current assets (300 + 600 - 4 (P) - 6 + 5) 895
2,452
Share capital 200
Share premium 50
Retained earnings 1,456.5
1,706.5
2,003
Non-current liabilities 9100 + 90) 190
Current liabilities 9200 + 60 – 1) 259
2,452
Rs.000
Revenue (1,000 + 260 – 60) 1,200
Cost of sales (750 + 80 – 60 + 2(Dep’n) + 4(P) + 2(P) (778)
Gross profit 422
Operating expenses (60 + 35 + 35 (IMP)) (130)
Profit from operations 292
Finance costs (25 + 15) (40)
Investment income (20 – (70% x 20)) 6
Profit before tax 258
33 | P a g e
Tax (100 + 30) (130)

Profit after tax 128
Attributable to:
Parent shareholders 110.3
128
Consolidated Cash Flow Statement
# FS 20:
Entity A acquired a subsidiary, Entity B, during the year. Summarised information
from the Consolidated Statement of Profit and Loss and Balance Sheet is provided,
together with some supplementary information.
Consolidated Statement of Profit and Loss Amount (Rs.)

Revenue 3,80,000
Cost of sales (2,20,000)
Gross profit 1,60,000
Depreciation (30,000)
Other operating expenses (56,000)
Interest cost (4,000)
Profit before taxation 70,000
Taxation (15,000)
Profit after taxation 55,000
Consolidated balance sheet Assets 20X2 (Rs) 20X1 (Rs)

Cash and cash equivalents 8,000 5,000
Trade receivables 54,000 50,000
Inventories 30,000 35,000
Property, plant and equipment 1,60,000 —
Goodwill 18,000 —
Total assets 2,70,000 1,70,000
Liabilities
Trade payables 68,000 60,000
Income tax payable 12,000 11,000
Long term debt 1,00,000 64,000
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Total liabilities 1,80,000 1,35,000

Shareholders’ equity 90,000 35,000
Total liabilities and shareholders’ 2,70,000 1,70,000
Other information
All of the shares of entity B were acquired for Rs.74,000 in cash. The fair values of
assets acquired and liabilities assumed were:
Particulars Amount (Rs.)

Inventories 4,000
Trade receivables 8,000
Cash 2,000
Property, Plant and Equipment 1,10,000
Trade payables (32,000)
Long term debt (36,000)
Goodwill 18,000
Cash consideration paid 74,000
Prepare Consolidated Statement of Cash Flows for the year 20X2, as per Ind AS 7.
Answer:
This information will be incorporated into the Consolidated Statement of Cash Flows
as follows:
Statement of Cash Flows for the year ended 20X2 (extract)
Amount Amount
(Rs.) (Rs.)
Cash flows from operating activities
Profit before taxation 70,000
Adjustments for non-cash items:
Depreciation 30,000
Decrease in inventories (W.N. 1) 9,000
Decrease in trade receivables (W.N. 2) 4,000
Decrease in trade payables (W.N. 3) (24,000)
Interest paid to be included in financing activities 4,000
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Taxation (11,000 + 15,000 – 12,000) (14,000)

Net cash generated from operating activities 79,000
Cash flows from investing activities
Cash paid to acquire subsidiary (74,000 – 2,000) (72,000)
Net cash outflow from investing activities (72,000)
Cash flows from financing activities
Interest paid (4,000)
Net cash outflow from financing activities (4,000)
Increase in cash and cash equivalents during the year 3,000
Cash and cash equivalents at the beginning of the year 5,000
Cash and cash equivalents at the end of the year 8,000
Working Notes:
1. Calculation of change in inventory during the year Rs.

Total inventories of the Group at the end of the year 30,000
Inventories acquired during the year from subsidiary (4,000) 26,000
Opening inventories 35,000
Decrease in inventories 9,000
2. Calculation of change in Trade Receivables during the year Rs.

Total trade receivables of the Group at the end of the year 54,000
Trade receivables acquired during the year from subsidiary (8,000) 46,000
Opening trade receivables 50,000
Decrease in trade receivables 4,000
3. Calculation of change in Trade Payables during the year Rs.

Trade payables at the end of the year 68,000
Trade payables of the subsidiary assumed during the year (32,000)
36,000
Opening trade payables 60,000
Decrease in trade payables 24,000
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Indirect Subsidiary – Chain Holding
Meaning of chain control - A parent company can establish control over subsidiary
directly or indirectly. Chain-holding refers to situations wherein a parent is controlling
a subsidiary indirectly, i.e., having a controlling interest over a company indirectly.
This may happen in number of ways, for example, parent company (P Ltd.) holding
controlling interest in a subsidiary (S1 Ltd.), which in turn is holding a controlling
interest in another company (S2 Ltd.). In this case, P Ltd. is having an indirect control
over S2 Ltd. through its direct subsidiary S1 Ltd.
P Ltd
S1 Ltd
S2 Ltd
Types of Problems
Chain Holding Triangular Holding
Situation 1: Sub-subsidiaries – Chain Holding
Parent P holds 80% in Subsidiary (S1)

Subsidiary 1 holds 60% in Sub-subsidiary (S2)
In the above case, P holds a controlling interest in S1 which in turn holds a

controlling interest in S2.
Analysis:
S1 ownes 60 % of S2
ie., P indirectly owns 80% of 60% = 48% of S2 and non-controlling interest (NCI) in
S1 indirectly owns 20% of 60% = 12% of S2
The non-controlling interest (NCI) in S2 itself owns the remaining 40% of the S2
equity.
The chain of control thus makes S2 sub-subsidiary of P which owns only 48% of its
equity.
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Date of effective control:

The date the sub-subsidiary (S2) comes under the control of the holding company is
either:
 The date P acquired S1 if S1 already holds shares in S2, or

 If S1 acquires shares in S2 later, i.e. after the acquisition by P in S1, then such
date of acquisition by S1.
Situation 2: Sub-subsidiaries – Triangular Holding
Parent
80%
10%
Subsidiary S1
75%
Sub-subsidiary S2
In this case, S2 is a sub-subsidiary of P with additional shares held directly by P.
In the above case, there is:

a) Direct non-controlling share (NCI) in S1 of 20%
b) Direct non-controlling share (NCI) in S2 of (25-10) 15%
c) Indirect non-controlling share (NCI) in S2 of 20% x 75% 15% 30%
P Ltd Directly owns 10 % in S2 and indirectly owns 80% of 75% = 60% of S2.
Therefore, P Ltd directly and in directly holds 70 % in S2 and NCI of S2 is 30%.
Treatment of goodwill and non-controlling interest where a parent holds an

indirect interest in a subsidiary
Example :
A parent company (entity A) has an 80% owned subsidiary (entity B). Entity B makes
an acquisition for cash of a third company (entity C), which it then wholly owns.
Goodwill of Rs 1,00,000 arises on the acquisition of entity C.
How should that goodwill be reflected in consolidated financial statement of entity A?

Should it be reflected as
case a) 100% of the goodwill with 20% then being allocated to the non- controlling
interest, or
case b) 80% of the goodwill that arises?
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Answer:
Assuming that entity B prepares consolidated financial statements, 100% of the
goodwill would be recognized on the acquisition of entity C in those financial
statements. Entity A should reflect 100% of goodwill and allocate 20% to the non-
controlling interest in its consolidated financial statements.
This is because the non-controlling interest is a party to the transaction and the
goodwill forms part of the net assets of the sub group (in this case, the sub group
being the group headed by entity B).
# FS 21: Chain holding

Prepare the consolidated Balance Sheet as on 31st March, 20X2 of a group of
companies comprising P Limited, S Limited and SS Limited. Their balance sheets on
that date are given below:
P Ltd. S Ltd. SS Ltd.

Assets
Non-Current Assets
Property, Plant and Equipment 320 360 300
Investment:
32 lakh shares in S Ltd. 340
24 lakh shares in SS Ltd. 280
Current Assets
Inventories 220 70 50
Financial Assets
Trade Receivables 260 100 220
Bills Receivables 72 - 30
Cash in hand and at Bank 228 40 40
1440 850 640
Equity and Liabilities
Shareholder’s Equity
Share Capital (Rs. 10 per share) 600 400 320
Other Equity
Reserves 180 100 80
Retained earnings 160 50 60
Current Liabilities
Financial Liabilities
Trade Payables 470 230 180
Bills Payable
P Ltd. 70
SS Ltd. 30 - -
1440 850 640
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The following additional information is available:

1. P Ltd. Holds 80% shares in S Ltd. And S Ltd. Holds 75% shares in SS Ltd. Their
holdings were acquired on 30th September, 20X1.
2. The business activities of all the companies are not seasonal in nature and
therefore, it can be assumed that profits are earned evenly throughout the year.
3. On 1st April, 20X1 the following balances stood in the books of S Ltd. And SS
Ltd.
Particulars S Ltd SS Ltd

Reserves 80 60
Retained Earnings 20 30
4. Rs 10 lakhs included in the inventory figure of S ltd, is inventory which has been
purchased from SS Ltd at cost plus 25%.
5. The parent company has adopted an accounting policy to measure non-

controlling interest at fair value (quoted market price) applying Ind AS 103.
Assume market prices of S Ltd and SS Ltd are the same as respective face
values.
Answer:
Consolidated Balance Sheet of the Group as on 31st March, 20X2
Particulars Notes Rs in Lakhs
Assets
Non-current assets
Property, plant and equipment 980
Current assets
(a) Inventory 338
(b) Financial assets
Trade receivable 580
Bills receivable 2
Cash and cash equipment 308
Total assets 2,208
EQUITY & LIABILITIES
Equity attributable to owners of parent
Share Capital 600
Other Equity
Reserve 194
Retained Earnings 179.8
Capital Reserve 188
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Total equity 1328

LIABILITIES
Non-current liabilities Nil
Current liabilities
(a) Financial Liabilities
(i) Trade payables 880
Total liabilities 880
Total equity and liabilities 2,208
Consolidation of Foreign Subsidiary
Translation from Functional Currency of Subsidiary to Presentation Currency

of Group – Ind As 21
Rules of Translation
 Assets and Liabilities for each balance sheet presented are translated at the
closing rate at the date of that balance sheet;
 Income and Expenses are translated at exchange rates at the dates of relevant
transactions; Average rates for the period if often used if they are a reasonable
approximation;
 Equity Share capital and Pre-Acquisition Reserves are translated used Exchange
Rate in date of Acquisition.
 all resulting exchange differences should be recognised in other comprehensive

(generally referred to as the foreign currency translation reserve or currency
translation adjustment) until disposal of the foreign operation;
Note: When the exchange differences relate to a foreign operation that is

consolidated but not wholly-owned, accumulated exchange differences arising from
translation and attributable to non-controlling interests are allocated to, and
recognized as a part of, non-controlling interest in the consolidated balance sheet.
Note: Exchange differences arising from loans that form part of the parent’s net
investment in the foreign operation and gains and losses related to hedges of a net
investment in a foreign operation shall be recognised in OCI in Consolidated
Financial Statements. (foreign currency translation reserve)
Net Investment in a Foreign Operation
Net investment in a foreign operation is the amount of the reporting entity’s interest in
the net assets of that operation.
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A monetary item receivable from or payable to a foreign operation may form part of
the net investment in a foreign operation if the settlement of the monetary item is
neither planned nor likely to occur in the foreseeable future.
A loan to a foreign entity which is repayable on demand might seem to be a short-

term item, rather than part of capital. However, if there is demonstrably no intent or
expectation to demand repayment (eg, the short-term loan is getting rolled over
continuously, whether or not the the foreign subsidiary is able to repay it), the loan
has the same economic effect as that of a capital contribution.
On the other hand, when there is a long-term loan with a fixed maturity period (say,
10 to 15 years) it does not automatically qualify to be treated as being part of the net
investment simply because it is of a long duration, unless management has
expressed its intention to renew the loan at maturity and accordingly, the period of
repayment is not foreseeable.
Treatment of Exchange difference arising on a monetary item that forms part of

a reporting entity’s net investment in a foreign operation
Such exchange differences are recognised in profit or loss in the separate financial
statements of the reporting entity and/or the individual financial statements of the
foreign operation, as appropriate:
 If such an item is denominated in the functional currency of the reporting

entity, an exchange difference arises in the foreign operation’s individual
financial statements.
 If such an item is denominated in the functional currency of the foreign
operation, an exchange difference arises in the reporting entity’s separate
financial statements.
 If such an item is denominated in a currency other than the functional currency
of either the reporting entity or the foreign operation, an exchange difference
arises in the reporting entity’s separate financial statements and in the foreign
operation’s individual financial statements.
In the Consolidated Financial Statements, such exchange differences are

recognised initially in other comprehensive income and then reclassified from
equity to profit or loss on disposal of the net investment.
Intra-Group Transactions
• Although intra-group balances are eliminated on consolidation, any related foreign

exchange gains or losses will not be eliminated. This is because the group has a real
exposure to a foreign currency since one of the entities will need to obtain or sell
foreign currency in order to settle the obligation or realise the proceeds received.
• Accordingly, in the consolidated financial statements of the reporting entity, the

exchange difference arising on such intra group transactions is recognised in the
statement of profit or loss account, unless it arises from a monetary item that forms
part of a reporting entity’s net investment in a foreign operation in which case it is
taken to other comprehensive income.
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•A Group may have intra-group transactions like sale and purchase of various assets
such as property, plant and equipment, intangible assets or inventory. These
transactions could result in intra-group profits or losses. At the time of consolidation,
these profits / losses are eliminated until the profit or loss is realized i.e. when the
asset is sold outside the group, depreciated, amortised or written off as per the
requirements of Ind AS 110. The elimination of intra-group profits / losses arising
from such transactions, like sales between entities that are consolidated, should be
based on the spot rate i.e. the exchange rate of the date of the sale.
Example 1:
The functional and presentation currency of parent P is USD while the functional
currency of its subsidiary S is EURO. P sold goods having a value of USD 100 to S
when the exchange rate was USD 1 = Euro 2. At year-end, the amount is still due
and the exchange rate is USD 1 = Euro 2.2. How should the exchange difference, if
any, be accounted for in the consolidated financial statements?
Example 2:
H Ltd sold pharmaceuticals bottles to S Ltd for Euro 12 lacs on 1st February, 20X1.
The cost of these bottles was Rs 830 lacs in the books of H Ltd at the time of
sale. At the year-end i.e. 31st March, 20X1, all these bottles were lying as closing
stock with S Ltd. What should be the accounting treatment for the above?
Following additional information is available:
Exchange rate on 1st February, 20X1 1 Euro = Rs 83
Exchange rate on 31st March, 20X1 1 Euro = Rs 85
Goodwill and Fair Value Adjustments arising from a Business Combination
• Any goodwill and any fair value adjustments to the carrying amounts of assets and
liabilities arising on a foreign operation’s acquisition are treated as assets and
liabilities of the foreign operation.
• Hence they are expressed in the functional currency of the foreign operation and
should be translated at the closing exchange rate as is the case for other assets and
liabilities.
Disposal of Foreign Operation
Full Disposal
 A disposal may arise, for example, through sale, liquidation or repayment of
share capital. On disposal of the foreign operation, the cumulative exchange
differences relating to that foreign operation recognised in other comprehensive
income and accumulated in equity are reclassified from equity to profit or loss
(reclassification adjustment) when the gain or loss on disposal is recognised.
 On disposal of a subsidiary that includes a foreign operation, the cumulative
amount of the exchange differences related to that foreign operation that have
been attributed to the non- controlling interests is derecognised, but it is not
reclassified to profit or loss.
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Partial Disposal – Control Lost

In addition to the disposal of an entity’s entire interest in a foreign operation, the
following partial disposals are accounted for as disposals:
 when the partial disposal involves the loss of control of a subsidiary that includes
a foreign operation, regardless of whether the entity retains a non-controlling
interest (NCI) in its former subsidiary after the partial disposal; and
 when the retained interest after the partial disposal of an interest in a joint
arrangement or a partial disposal of an interest in an associate that includes a
foreign operation is a financial asset that includes a foreign operation.
Partial Disposal – Control Retained

In the case of the partial disposal of a subsidiary that includes a foreign operation,
the entity re-attributes the proportionate share of the cumulative amount of the
exchange differences recognised in other comprehensive income to the NCI in that
foreign operation.
# FS 22: Consolidation of Foreign Subsidiary

H ltd acquired 60% shares of S Inc a US Company on 1 st April 2019. Given below is
the B/S of both Companies on 31st March 2020.
Assets: H Ltd S Inc

Rs $
Non Current Assets
PPE 1,50,000 1,750
Investment in S 63,050
Current Assets 82,750 250
2,95,800 2,000
Share Capital 1,00,000 1,000
Retained Earning 80,000 500
Non Current Liability 75,000 300
Current Liability 40,800 200
2,95,800 2,000
On the Date of Acquisition, the balance in Retained earnings of S Inc was $ 300 and
the Fair Value of Indentifiable Net Assets were $ 1,375. The excess of the Fair Value
over net assets of S Inc was due to increase in value of Land.
The Fair Value of NCI on Date of Acquisition was $ 645.
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An impairment review of Goodwill was undertaken as at 31st March 2020. The

goodwill is to be impaired by 20%.
The following Exchange rates were relevant for preparation of Group Financial
Statements
On 1st April 2019 - $1 = Rs 65.00
On 31st Mar 2019 - $1 = Rs 69.00
Avg Rate for the Year - $1 = Rs 66.50
Investment in Subsidiary was maintained at Cost as Per Ind AS 27

On 1st April H Ltd acquired a Property in US for $ 500. The property is depreciated
over 20 yrs on a straight-line basis. On 31st March 2020, the property was revalued
to $ 490, however no impact was given in books of H Ltd.
You are required to prepare Consolidated Banalce Sheet of the Group.
What will be change to your answer if S Ltd paid a dividend of $30 on 1 June
2019 when the exchange rate was $1 = Rs 67
# FS 23: Consolidation of Foreign Subsidiary

H ltd acquired 80% shares of S Ltd on 1st June 2019 for Rs 3,36,000/-. Given below
is the B/S of both Companies on 31st March 2020.
Assets: H Ltd S Inc

Rs $
Non Current Assets
PPE 3,00,000 2,50,000
Investment in S 4,61,000
10,55,000 4,25,000
Share Capital 5,00,000 2,00,000
Retained Earning 1,50,000 1,50,000
Other Components of Equity 30,000 20,000
Non Current Liability 1,75,000 30,000
Current Liability 2,00,000 25,000
10,55,000 4,25,000
On the Date of Acquisition the balance in Retained earnings of S Ltd were Rs 80,000
and Other Components of equity were 12,000 Rs and the Fair Value of Indentifiable
Net Assets was Rs 3,20,000 excluding Patent. The Indentifiable Net Assets included
a Patent which had a Fair Value Rs 50,000. This has not been recognised in the
Financial Statement so of S Ltd. The Patent had a remaining term of 5 Years to run
45 | P a g e
and is not renewable. The remaining excess of the Fair Value over net assets of S
Inc was due to increase in value of Land.
H Ltd wishes to use the “ Full Goodwill” Method and the Fair Value of Shares of S ltd
on Date of Acquisition was Rs 25/-. There has been no issue of Shares since
acquisition and goodwill on acquisition is not impaired.
H Ltd acquired a further 10% interest from NCI on 31st March 2020 for a cash
Consideration of Rs 45,000.
H Ltd commenced a long-term bonus scheme for employees on 1 st April 2019. Unser
the scheme employees receive a cumulative bonus on the completion of 5 years of
service. The bonus is 20% of the total of the annual salary of the employees. The
total salary of the employees for the current year Totalled Rs 80,000 and a discount
rate of 8% is assumed. Additionally it is assumed that all employees will receive the
bonus and that Salaries will rise by 5 % per year
You are required to prepare Consolidated Banalce Sheet of the Group.
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IND AS 28: INVESTMENTS IN ASSOCIATES AND JOINT VENTURES

Ind AS 28 prescribes following:
 guidance on accounting of investments in associates and
 the requirements for the application of the equity method when accounting for
investments in associates and joint ventures.
An associate is an entity over which the investor has significant influence. Hence, to
assess whether an investee is an associate or not, an entity needs to understand the
term ‘significant influence’.
Significant influence is the power to participate in the financial and operating policy
decisions of the investee but is not control or joint control of those policies.
Presumption of significant influence
 If an entity holds (directly or indirectly through a subsidiary) 20% or more of

the voting rights of an investee then it is presumed that the entity has
significant influence, unless it can be clearly demonstrated that it is not the
case.
 Conversely, if the entity holds, (directly or indirectly through a subsidiary), less

than 20% of the voting power of the investee, it is presumed that the entity
does not have significant influence, unless such influence can be clearly
demonstrated.
Equity Method of Consolidation

The equity method is a method of accounting whereby the investment is initially
recognised at cost and adjusted thereafter for the post-acquisition change in the
investor’s share of the investee’s net assets. The investor’s profit or loss includes its
share of the investee’s profit or loss and the investor’s other comprehensive income
includes its share of the investee’s other comprehensive income.
Under the equity method of accounting, an investor shall pass following

entries at various stages of investment:
1. Initial entry to record investment done in associate or joint venture at cost
2. Recording of investor’s share in the profit / loss of the associate or joint venture
after the date of acquisition
3. Recording of investor’s share in the other comprehensive income of the

associate or joint venture after the date of acquisition.
4. Distributions received from an investee.
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Calculation of goodwill / capital reserve and calculation of share in profit / loss

of associate or joint venture
An investment is accounted for using the equity method from the date on which it
becomes an associate or a joint venture. On acquisition of the investment, an entity
shall identify the goodwill or capital reserve.
Goodwill
Any excess of the cost of the investment over the entity’s share of the net fair value
of the investee’s identifiable assets and liabilities is treated as goodwill. Goodwill is
included in the carrying amount of the investment. Amortisation of that goodwill is not
permitted.
Capital reserve.
Any excess of the entity’s share of the net fair value of the investee’s identifiable
assets and liabilities over the cost of the investment is treated as capital reserve. It is
recorded directly in equity.
While recording the entity’s share in the profit / loss of the investee, the entity needs
to make certain adjustment to that share of profit / loss. For example, adjustment
shall be made for:
 depreciation of the depreciable assets based on their fair values at the
acquisition date.
 impairment losses such as for goodwill or property, plant and equipment.
Cumulative preference shares issued by associate or joint venture
If an associate or a joint venture has outstanding cumulative preference shares that

are held by parties other than the entity and are classified as equity, the entity should
compute its share of profit or loss after adjusting for dividend on such shares,
whether or not the dividends have been declared.
Upstream and downstream transactions between the entity and its associate or
joint venture
An entity (or a subsidiary of the entity) may enter into upstream or downstream
transactions with its associate or joint venture.
 ‘Upstream’ transactions are, for example, sales of assets from an associate or a

joint venture to the investor.
 ‘Downstream’ transactions are, for example, sales or contributions of assets from
the investor to its associate or its joint venture.
There may be some gain / loss resulting from such transactions. The entity shall
record such gain / loss in its financial statements only to the extent of the investors’
interests in the Associate or Joint Venture.
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Accounting for Investment in Associates in CFS
# FS 24
On 1st April 2019, Investor Ltd. acquires 35% interest in XYZ Ltd. Investor Ltd.
determines that it is able to exercise significant influence over XYZ Ltd. Investor Ltd.
has paid total consideration of Rs. 47,50,000 for acquisition of its interest in XYZ Ltd.
At the date of acquisition, the book value of XYZ Ltd.’s net assets was Rs. 90,00,000
and their fair value was Rs. 1,10,00,000. Investor Ltd. has determined that the
difference of Rs. 20,00,000 pertains to an item of property, plant and equipment
(PPE) which has remaining useful life of 10 years.
During the year, XYZ Ltd. made a profit of Rs. 8,00,000. XYZ Ltd. paid a dividend of
Rs. 12,00,000 on 31st March, 2020. XYZ Ltd. also holds a long-term investment in
equity securities. Under Ind AS, investment is classified as at FVTOCI in accordance
with Ind AS 109 and XYZ Ltd. recognized an increase in value of investment by Rs.
2,00,000 in OCI during the year. Ignore deferred tax implications, if any.
Calculate the closing balance of Investor Ltd.’s investment in XYZ Ltd. as at 31st
March, 2020 as per the relevant Ind AS.
(RTP – NOVEMBER 2020)
Answer:
Calculation of Investor Ltd.’s investment in XYZ Ltd. under equity method:
Rs. Rs.
Acquisition of investment in XYZ Ltd.
Share in book value of XYZ Ltd.’s net assets (35% of 31,50,000
Rs. 90,00,000)
Share in fair valuation of XYZ Ltd.’s net assets [35% of 7,00,000
(Rs. 1,10,00,000 – Rs. 90,00,000)]
Goodwill on investment in XYZ Ltd. (balancing figure) 9,00,000
Cost of investment 47,50,000
Profit during the year
Share in the profit reported by XYZ Ltd. (35% of Rs. 2,80,000
8,00,000)
Adjustment to reflect effect of fair valuation [35% of (Rs. (70,000)
20,00,000/10 years)]
Share of profit in XYZ Ltd. recognised in income by 2,10,000
Investor Ltd.
Long term equity investment
FVTOCI gain recognised in OCI (35% of Rs. 2,00,000) 70,000
Dividend received by Investor Ltd. during the year [35% (4,20,000)
of Rs. 12,00,000]
Closing balance of Investor Ltd.’s investment in 46,10,000
XYZ Ltd.
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# FS 25:
Given below are the balance sheets of A Ltd.(the Investor Company), B Ltd (An
associate) and S Ltd.(a subsidiary) as on 31.03.2021:-
B Ltd.(40%) S Ltd.(80%)
A Ltd
Associates Subsidiary
Share Capital 1,000 300 200
Reserves and Surplus 2,000 500 300
Loan funds 1,000 200 100
Total Sources:- 4,000 1,000 600
Net Block 3,100 600 400
Investments
In subsidiary 400
In 40% shares of Banu Ltd. 400
Net Current Assets 100 400 200
Total:- 4,000 1,000 600
A Ltd. acquired shares in B Ltd. and S Ltd. at the beginning of the financial year
2020-21 when balances of Reserves and Surplus of B Ltd. and S Ltd. were
Rs.600lacs and Rs.400 lacs respectively. The subsidiary and associate have
sustained loss of Rs.100 lacs each during 2020-21, but neither B Ltd. nor S Ltd. have
declared any dividend.
# FS 26:
S Ltd. has a subsidiary L Ltd, and an associate K Ltd balance sheets of the three
companies as on 31st March, 2021 were as under:
Balance Sheet of S Ltd

Liabilities Amount Assets Amount
Equity Share Capital 1,00,00,000 Fixed Assets 90,00,000
General Reserve 10,00,000 Investments
Profit and Loss A/c 30,00,000 :-30,000 equity shares in 4,20,000
L Ltd. purchased on
01.10.2020
Provisions 800,000 :-8,000 equity shares in 88,000
K Ltd. purchased on
01.04.2020
Inventories 24,24,000
Sundry Debtors 20,00,000
Bills Receivables due 30,000
from K Ltd.
Cash and Bank Balance 3,38,000
Loans to :-L Ltd. 2,00,000
:-K Ltd. 3,00,000
Total:- 1,48,00,000 Total:- 1,48,00,000
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Balance Sheet of L Ltd

Liabilities Amount Assets Assets Amount
Equity Share Capital 4,00,000 Fixed Assets 2,40,000
General Reserve 1,60,000 Investments 2,60,000
Profit and Loss A/c Sundry Debtors 3,60,000
Cash and Bank
Balance as on 01.04.2020 80,000
Balance 1,40,000
Current Profits 1,00,000 1,80,000
Loans from S Ltd.(taken
2,00,000
on 01.01.2021
Sundry Creditors 60,000
Total:- 10,00,000 Total:- 10,00,000
Balance Sheet of K Ltd

Liabilities Assets Assets Amount
Equity Share Capital 2,40,000 Fixed Assets 3,40,000
Bank Loan 1,00,000 Investments 3,50,000
General Reserve 1,10,000 Sundry Debtors 1,50,000
Cash and Bank
Profit and Loss a/c 60,000
Balance
Balance as on 01.04.2020 25,000
Current Profits 50,000 75,000
Loan from S Ltd.(taken on
3,00,000
01.07.2020
Bills Payable 50,000
Sundry Creditors 25,000
Total:- 9,00,000 Total:- 9,00,000
Additional information:
1) Equity capital of all companies consisted of fully paid up shares of Rs 10 each.
2) L Ltd’s fixed assets include assets worth Rs 25,000 purchased from S Ltd. in
November, 2020. These cost S Ltd. Rs 20,000.
3) K Ltd. had in its inventories goods worth Rs 60,000 purchased from S Ltd. and
the latter invoiced goods at a markup of 25% over cost.
4) Loans to the subsidiary and associate carry a rate of interest of 16% p.a.
Prepare a consolidated balance sheet of S Ltd. along with its subsidiaries as on 31st
March, 2021. Show all the workings as a part of your answer.
# FS 27: Treatment of Subsidiary of Associate in CFS

Entity H holds a 20% equity interest in Entity S (an associate) that in turn has a 100%
equity interest in Entity T. Entity S recognised net assets relating to Entity T of Rs. 10,000
in its consolidated financial statements. Entity S sells 20% of its interest in Entity T to a
third party (a non-controlling shareholder) for Rs. 3,000 and recognises this transaction
as an equity transaction in accordance with the provisions of Ind AS 110, resulting in a
credit in Entity S's equity of Rs. 1,000.
51 | P a g e
The financial statements of Entity H and Entity S are summarised as follows before
and after the transaction:
Before
H's consolidated financial statements
Assets (Rs.) Liabilities (Rs.)
Investment in S 2,000 Equity 2,000
Total 2,000 Total 2,000
S's consolidated financial statements

Assets (from T) 10,000 Equity 10,000
The financial statements of S after the transaction are summarised below:
After
S's consolidated financial statements
Assets (from T) 10,000 Equity 10,000
Cash 3,000 Equity transaction Impact with
non- controlling interest 1,000
Equity attributable to owners 11,000
Non-controlling interest 2,000
Although Entity H did not participate in the transaction, Entity H's share of net assets
in Entity S increased as a result of the sale of S's 20% interest in T. Effectively, H's
share in S's net assets is now Rs. 2,200 (20% of Rs. 11,000) i.e., Rs. 200 in addition
to its previous share.
How this equity transaction that is recognised in the financial statements of Entity S
reflected in the consolidated financial statements of Entity H that uses the equity
method to account for its investment in Entity S?
November 2020
Answer:
Ind AS 28, states, inter alia, that when an associate or joint venture has subsidiaries,
associates or joint ventures, the profit or loss, other comprehensive income, and net
assets taken into account in applying the equity method are those recognised in the
associate’s or joint venture’s financial statements (including the associate’s or joint
venture’s share of the profit or loss, other comprehensive income and net assets of
its associates and joint ventures), after any adjustments necessary to give effect to
uniform accounting policies.
The change of interest in the net assets / equity of the associate as a result of the
investee’s equity transaction is reflected in the investor’s financial statements as
52 | P a g e
‘share of other changes in equity of investee’ (in the statement of changes in equity)
instead of gain in Statement of profit and loss, since it reflects the post-acquisition
change in the net assets of the investee as per the provisions of Ind AS 28 and also
faithfully reflects the investor’s share of the associate’s transaction as presented in
the associate’s consolidated financial statements.
Thus, in the given case, Entity H recognises ` 200 as change in other equity instead
of in statement of profit and loss and maintains the same classification as of its
associate, Entity S, i.e., a direct credit to equity as in its consolidated financial
statements.
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Ind AS 111 - JOINT ARRANGEMENTS
Ind AS 111, Joint Arrangements, describes principles for financial reporting by

parties to a joint agreement.
The accounting treatment will be decided based on the substance of the

arrangement and the kind of interest investors have in it
CONCEPT OF JOINT CONTROL
Two or more parties are said to be in joint arrangement only when there is joint
control. It requires that all the decisions about the relevant activities are being taken
unanimously by the parties sharing control.
Joint Control
Unanimous Decision
Collective Control Making
Single Party cannot control The Group of parties who

the relevant activities. A exercise joint control should
group of partis needs to unanimously vote for decision
vote together in order to making to happen
direct relevant activities
anu Party which is a part of

Joint Control can prevent other
parties from making decisions
on relevant activities
 Collective control - Here, no single party enjoys full control. Then management
needs to check whether all parties or group of parties are having collective
control over these activities.
 Unanimous decision - The requirement for unanimous consent means that

any party with joint control of the arrangement can prevent any of the other
parties, or a group of the parties, from making unilateral decisions (about the
relevant activities which most significantly affects returns) without its consent.
There may be cases where the contract necessitates a minimum percentage of the
voting rights to make decisions about the relevant activities. If that minimum required
proportion of the voting rights can be achieved by more than one combination of the
parties agreeing together, that arrangement is not a joint arrangement.
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Question 1:
Two parties A & B agree in their contractual arrangement to establish an
arrangement. Each has 50% of the voting rights. The contract specifies that at least
51% of the voting rights are required to make decisions with respect to the relevant
activities. Do A & B have joint control over the arrangement?
(Study Material)
Answer.
A & B have implicitly agreed that they have joint control of the arrangement as all the
relevant decisions can be made only when both the A & B agree.
Question 2:
There is an arrangement in which Ram and Shyam each have 35% of the voting
rights in the arrangement with the remaining 30% being widely dispersed. Decisions
about the relevant activities require approval by a majority of the voting rights. Do
Ram & Shyam have joint control over the arrangement?
(Study Material)
Answer.
Ram and Shyam have joint control of the arrangement only if the contractual
arrangement specifies that decisions about the relevant activities of the arrangement
require both Ram and Shyam agreeing.
Question 3:
An arrangement has three parties: Om has 50% of the voting rights in the
arrangement and Jay and Jagdish each have 25%. The contractual arrangement
between Om, Jay and Jagdish specifies that at least 75% of the voting rights are
required to make decisions about the relevant activities of the arrangement. Discuss
the different combinations of joint control that can affect the decision making of the
relevant activities of the arrangement?
(Study Material)
Answer.
Om can block any decision, it does not control the arrangement because it needs the
agreement of either Jay or Jagdish. Om, Jay and Jagdish collectively control the
arrangement. However, there is more than one combination of parties that can agree
to reach 75% of the voting rights (ie either Om and Jay or Om and Jagdish).
In such a situation, to be a joint arrangement the contractual arrangement between

the parties would need to specify which combination of the parties is required to
agree unanimously to decisions about the relevant activities of the arrangement.
Question 4:
Two entities, E and F, set up an entity and sign a joint operating agreement. The
board contains three directors appointed by and representing each entity. The board
is the entity's main decision-making body. Decisions are made by simple majority.
Each party has a 50% interest in the net profit generated. Discuss whether the entity
is jointly controlled by E & F.
(Study Material)
Answer:
Entities E and F are likely to have joint control, because each party has a 50%
interest in net profit and both have a right to appoint three directors. This is because
the three directors representing a single shareholder would generally be presumed to
55 | P a g e
vote in accordance with the wishes of that shareholder. So the consent of both entity
E and entity F would be required for decision making, and this would represent joint
control.
Question 5:
Entity C and entity D operates in a telecommunication industry and entered into a
joint arrangement in order to combine their 4G access networks. The purpose of this
arrangement is to reduce operating cost for both parties, make capital infrastructure
savings and obtain economies of scale from jointly managing and maintaining a
consolidated network.
All significant decisions about strategic investing and financing activities are decided
by a simple majority of the voting rights. Entity C and entity D each have one vote in
the decision-making process.
Discuss whether it is a joint arrangement or not.
(Study Material)
Answer:
All decisions about the relevant activities require consent of both parties, so the
arrangement is a joint arrangement. The contractual arrangement does not explicitly
require unanimous consent, but the fact that all decisions must be made by majority
leads to implicit joint control.
Question 6:
NFG Limited is owned by numerous shareholders with the following holdings:
Shareholders N owns 51%
Shareholders F owns 30%
The rest of the shares are widely held by other investors, altogether 19%.
NFG Limited's articles of association require a 75% majority to approve decisions
about any of the entity's relevant activities. They also outline that each shareholder is
entitled to vote in proportion to its respective ownership interest. Is NFG ltd jointly
controlled?
(Study Material)
Answer:
NFG Limited is jointly controlled by shareholders N and F. based on their ownership
interest (collectively 81%), they must act together to make decisions regarding NFG
Limited's relevant activities. Shareholder N does not control NFG Limited, as it
cannot unilaterally make decisions because a 75% majority is required.
Question 7:
Company AB and Company CD enter into an agreement for the production and sale
of garments. In the industry, there are three activities that will significantly make
impact on the returns of the arrangement:
Production of the garments — Company AB makes all the decisions for this activity.
Sales and Marketing activities — Company CD is makes all the decisions for these
activities.
Both the companies must approve all financial related matters
Discuss whether company AB and CD have joint control over the arrangement?
(Study Material)
Answer:
56 | P a g e
In first two matters, unanimous consent is not required as long as parties are working
within the approved budgets and financial constraints. Thus, the parties have liberty
to perform their respective responsibilities.
Here, the parties have to examine which of the three activities most significantly
affect the returns of the arrangement. If any of the first two activities determine the
profits of the arrangement significantly, there is no joint control over the arrangement.
However, there may be the case where the financial policies majorly impact the
execution of other two activities and hence determine the profit of the arrangement.
Since unanimous consent is required for financial policies, management may
conclude that there is joint control.
Question 8:
Entities P and Q set up a joint venture company, entity PQ by signing a joint
operating agreement. Both investors delegate one director to entity PQ's board of
directors. Both directors have to agree unanimously on the decisions on the annual
budget. The joint operating agreement also sets up an operating committee and
specifies power delegated by the board of directors to the committee.
The operating committee has the main operational decision-making responsibility.
Decisions are made by simple majority in this committee. Only entity P can appoint
members to the operating committee.
Discuss if Entity PQ is a joint arrangement or not.
(Study Material)
Answer.
Entity PQ is not a joint arrangement; entity P has control over entity PQ. Decisions
about relevant activities are not made at the board of directors level but at the
operating committee level. Entity P has control over the operating committee
because it can appoint its members. The fact that the directors have veto rights over
the annual budget is important, but the operating committee in this example has the
power to control entity PQ's relevant activities.
Question 9:
Hari and Ram enter into a contractual arrangement to buy a two storied music store,
which they will lease to other parties. Hari will be responsible for leasing first floor
and Ram will be responsible for leasing second floor. They can make all decisions
related to their respective floors and keep all of the income with respect to their
floors. Ground floor will be jointly managed — all decisions and with respect to
ground floor must be unanimously agreed between Hari and Ram. Discuss the
applicability of Ind AS 111.
(Study Material)
Answer.
There are three arrangements:
First floor that Hari controls and hence will not be accounted under Ind AS - 111.
Second floor that Ram controls and thus will not be accounted under Ind AS - 111.
Ground floors that Hari and Ram jointly control is a joint arrangement (within the
scope of lnd-AS111).
Question 10:
M Limited and N Limited set up a joint venture company, MN Limited, by signing a
joint operating agreement. Both investors delegate three directors each to entity
MN's board of directors. Decisions are made by simple majority. In the event of a
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deadlock, the chairman (a director of N Limited) has the casting vote. Does N Limited
has control over MN Limited?
(Study Material)
Answer. It is likely that N Limited has control over MN Limited, as decisions made on
behalf of N Limited cannot be prevented by M Limited.
Question 11:
ECL Limited has a wholly owned subsidiary, entity B, that holds a portfolio of
buildings. ECL Limited wishes to reduce its exposure to this market. It sells 50% of
its investment in entity B to Investment Bank. ECL Limited and Investment Bank
enter into a contractual agreement, whereby decisions regarding entity B's relevant
activities are made jointly. ECL Limited continues to act as asset manager of entity B
for a specified fee, and decisions are made in line with the entity B's pre- approved
budgets and business plan. Is entity B jointly controlled?
(Study Material)
Answer: Entity B is jointly controlled, as ECL Limited and investment bank are
required to agree unanimously on relevant activities, and ECL Limited must manage
the entity's operations in line with these decisions.
Question 12:
CDEF limited is a strategic co-operation between investors C, D, E and F to provide
property development services. CDEF Limited is an incorporated entity, and the
investors' share ownership is 20:30:25:25 respectively. There is a formal contractual
agreement in place that requires a voting majority on all relevant activities. Investors
C, D and E have informally agreed to vote together. This informal agreement has
been effective in practice.
Does C, D & E have control over the joint arrangement?
(Study Material)
Answer:
To make decisions, it is sufficient to have agreement from any three out of the four
investors. In this case, a single investor cannot prevent a majority decision. However,
three of the investors have agreed to make unanimous decisions. Investors C, D and
E, therefore, have joint control over CDEF Limited, with investor F having significant
influence at best. The agreement between investors C, D and E does not have to be
formally documented as long as there is evidence of its evidence (for example, via
correspondence and minutes of meetings).
58 | P a g e
Question 13:
Shareholders C and D form a new joint arrangement (entity CD). Entity CD's article
of association including a clause stating that all shareholders must unanimously
agree on the entity's relevant activities. The shareholders have not entered into any
other agreement to manage the activities of entity CD. Determine whether clause in
CD's articles of association is sufficient to meet the definition of joint arrangement?
(Study Material)
Answer:
Entity CD meets the definition of a joint arrangement even though there is no
separate joint venture agreement. The clause in entity CD's articles of association is
sufficient for meeting the definition of a joint arrangement, provided entity CD's
articles of association are legally binding.
59 | P a g e
JOINT ARRANGEMENTS
A joint arrangement is an arrangement where two or more parties have joint control
over an entity under the contractual agreement.
TYPES OF JOINT ARRANGEMENTS
Joint Arrangement
No Separate Entity Separate Entity
Joint Operation Joint

Joint Venture
Always Operation
if parties have direct

interest in assets/liabilities Other Cases
or
output needs to be exclusively

provided to venturers only
 Joint Operations: In case of joint operations, each party (known as “Joint

Operators”) recognizes its share of assets, liabilities, revenues and expenses
of the joint arrangement
Note: All the joint arrangements which are not structured through separate
vehicle are Joint operations.
If the parties have right to individual assets and obligation for liabilities, then it
will be a joint operation.
 Joint Ventures: In a joint venture, each party (known as “Joint Venturer”)

recognizes its interest in a joint venture as an investment. The investment is
accounted for using the equity method in accordance with Ind AS 28
Note: Two parties may conduct a joint arrangement where the assets and
liabilities of the separate vehicle are not individually controlled by the parties.
Assets and liabilities so held are the assets and liabilities of the separate
vehicle. Hence it will be a Joint venture.
60 | P a g e
Question 14:
Three separate aerospace companies form an alliance to jointly manufacture an
aircraft. They carry responsibility for different areas of expertise such as :
 Manufacturing engines
 Manufacturing fuselage and wings; and
 Aerodynamics
They carry out different parts of the manufacturing process, each using its own
resources and expertise in order to manufacture, market and distribute the aircraft
jointly. The three entities share the revenues from the sale of aircraft and jointly incur
expenses. The revenues and common costs are shared, as agreed in the consortium
contract.
Parties also incur their own separate costs such as labour costs, manufacturing
costs, supplies, inventory of unused parts and work in progress. Each party
recognizes its separately incurred costs in full. Would the arrangement be classified
as joint operation?
(Study Material)
Answer:
This arrangement is classified as a joint operation because:
 The arrangement is not structured through a separate vehicle;
 Each party has obligations for the costs it incurs separately; and
 The contractual agreement outlines that each party is entitled to a share of
revenue and associated costs from the sale of aircrafts based on the pre-
determined agreement.
Question 15:
Two parties structure a joint arrangement in an incorporated entity. Each party has a
50 per cent ownership interest in the incorporated entity. The incorporation enables
the separation of the entity from its owners and as a consequence the assets and
liabilities held in the entity are the assets and liabilities of the incorporated entity.
 Identify the type of arrangement?
 If the parties modify the features of corporation though a contractual
arrangement such that each has an interest in assets and each is liable for
liabilities what type of joint arrangement would that be?
(Study Material)
Answer:
On assessment of the rights and obligations conferred upon the parties by the legal
form of the separate vehicle indicates that the parties have rights to the net assets of
the arrangement. In this case it would be classified as joint venture.
If the parties modify the features of the corporation through their contractual
arrangement so that each has an interest in the assets of the incorporated entity and
each is liable for the liabilities of the incorporated entity in a specified proportion.
Such contractual modifications to the features of a corporation can cause an
arrangement to be a joint operation.
Question 16:
P and Q form a joint arrangement PQ using a separate vehicle. P and Q each own
50% of the Capital in PQ. However, the contractual terms of the joint arrangement
state that P has the rights to all of Machinery and the obligation to pay Bank Loan in
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PQ. P and Q have rights to all other assets in PQ, and obligations for all other
liabilities in PQ in proportion to their capital share (i.e., 50%).
PQ's balance sheet is as follows (in Rs.):
Balance Sheet
Liabilities Rs. Assets Rs.
Capital 1,50,000 Machinery 2,50,000
Bank Loan 75,000 Cash 50,000
Other Loan 75,000
3,00,000 3,00,000
What would you record in P's financial statements to account for its rights and
obligations in PQ?
(Study Material)
Answer:
Under Ind AS 111, we would record the following in its financial statements, to
account for its rights to the assets in PQ and its obligations for the liabilities in PQ.
This may differ from the amounts recorded using proportionate consolidation.
Machinery 250,000
Cash 25,000
Bank Loan 75,000
Other Loan 37,500
Question 17:
Two parties structure a joint arrangement in an incorporated entity (entity D) in which
each party has a 50 per cent ownership interest. The purpose of the arrangement is
to manufacture materials required by the parties for their own, individual
manufacturing processes. The arrangement ensures that the parties operate the
facility that produces the materials to the quantity and quality specifications of the
parties. The legal form of entity D (an incorporated entity) through which the activities
are conducted initially indicates that the assets and liabilities held in entity D are the
assets and liabilities of entity D. The contractual arrangement between the parties
does not specify that the parties have rights to the assets or obligations for the
liabilities of entity D.
 What type of joint arrangement would entity D be?
 Would your classification change if the parties instead of using the share of
output themselves sold to third parties?
 If the parties changed the terms of contractual arrangement such that entity D
would be able to sell the output to third parties, would your answer be the same
as in part (i) above?
(Study Material)
Answer:
The legal form of entity D and the terms of the contractual arrangement indicate that
the arrangement is a joint venture.
However, the parties also consider the following aspects of the arrangement:
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 The parties agreed to purchase all the output produced by entity D in a ratio of
50:50. Entity D cannot sell any of the output to third parties, unless this is
approved by the two parties to the arrangement. Because the purpose of the
arrangement is to provide the parties with output they require, such sales to
third parties are expected to be uncommon and not material.
 The price of the output sold to the parties is set by both parties at a level that
is designed to cover the costs of production and administrative expenses
incurred by entity D. On the basis of this operating model, the arrangement is
intended to operate at a break-even level.
From the fact pattern above, the following facts and circumstances are relevant:
 The obligation of the parties to purchase all the output produced by entity D
reflects the exclusive dependence of entity D upon the parties for the
generation of cash flows and, thus, the parties have an obligation to fund the
settlement of the liabilities of entity D.
 The fact that the parties have rights to all the output produced by entity D
means that the parties are consuming, and therefore have rights to, all the
economic benefits of the assets of entity D.
These facts and circumstances indicate that the arrangement is a joint operation.
The conclusion about the classification of the joint arrangement in these

circumstances would not change if, instead of the parties using their share of the
output themselves in subsequent manufacturing process, the parties sold their share
of the output to third parties.
If the parties changed the terms of the contractual arrangement so that the
arrangement was able to sell output to third parties, this would result in entity D
assuming demand, inventory and credit risks. In that scenario, such a change in the
facts and circumstances would require reassessment of the classification of the joint
arrangement. Such facts and circumstances would indicate that the arrangement is a
joint venture.
Conditions Yes No
Structure of the Does the legal form give
If yes, the joint
joint arrangement the parties rights to the If no, obtain
arrangement is
assets and obligations for more
concluded to be
the liabilities relating to information.
a joint operation
the arrangement?
Assessing the Do the terms of the
terms of the Contractual arrangement
If yes, the joint
contractual specify that the parties If no, obtain
arrangement is
arrangement have rights to the assets more
concluded to be
and obligations for the information.
a joint operation
liabilities relating to the
arrangement?
63 | P a g e
Assessing other Does the arrangement so

facts and designed that its activities
circumstances mainly provide the parties If yes, the joint
If no, the joint
with an output and so that arrangement is
arrangement is
it depends on the parties concluded to be
a joint venture.
on a regular basis for a joint operation
settling the liabilities of
the arrangement?
Classification of a joint arrangement: assessment of the parties' rights and

obligations arising from the arrangement
Question 18:
Two parties, W and V form a limited company to build and use a pipeline to transport
gas. Each party has a 50% interest in the company. Under their contractual terms,
entities W and F must each use 50% of the pipeline capacity; unused capacity is
charged at the same price as used capacity. Entities W and F can sell their share of
the capacity to a third party without consent from the both investors. The Price
entities W and F pay for the gas transport is determined in a way that ensures all
costs incurred by the company can be recovered. The Joint arrangement is
structured through a separate vehicle. Each party has a 50% interest in the
company. However, the contractual terms require a specific level of usage by each
party and, because of the pricing structure, and the entities have an obligation for the
company's liabilities. What type of joint arrangement the company might be?
(Study Material)
Answer:
This entity might be a joint operation despite its legal form.
64 | P a g e
Question 19:
Entities B and C form a partnership to own and operate a crude oil refinery. Each
party has a 50% interest in the net profits of the partnership. What considerations
would the management have to consider in classifying the arrangement as joint
venture or joint arrangement?
(Study Material)
Answer:
The joint arrangement is structured through a vehicle, and the venture parties each
have a 50% interest in the net profits of the partnership; so this appears to be a joint
venture. However, management needs to evaluate whether the partnership creates
separation, that is simply are the assets and liabilities those of the separate vehicle
or do the parties have direct rights to the assets and have direct obligations for the
liabilities held by the entity . Should the parties to the partnership have a direct
interest in the assets and liabilities, this would indicate a joint operation. Management
should therefore, evaluate the terms of the partnership agreement to assess the
rights and obligations of each party.
Question 20:
Entity K is owned by three institutional investors - M Limited, N Limited and C Limited
- holding 40%, 40% and 20% equity interest respectively. A contractual arrangement
between M Limited and N Limited gives them joint control over the relevant activitie s
of Entity K. It is determined that Entity K is a joint operation (and not a joint venture).
C Limited is not a party to the arrangement between M Limited and N Limited.
However, like M Limited and N Limited, C Limited also has rights to the assets, and
obligations for the liabilities, relating to the joint operation in proportion of its equity
interest in Entity K.
Would the manner of accounting to be followed by M Limited and N Limited on the
one hand and C Limited on the other in respect of their respective interests in Entity
K be the same or different?
You are required to explain in light of the relevant provisions in the relevant standard
in this regard.
(November 2020)
Answer:
Ind AS 111 states that a joint operator shall recognise in relation to its interest in a
joint operation:
(a) its assets, including its share of any assets held jointly;
(b) its liabilities, including its share of any liabilities incurred jointly;
(c) its revenue from the sale of its share of the output arising from the joint operation;
(d) its share of the revenue from the sale of the output by the joint operation; and
(e) its expenses, including its share of any expenses incurred jointly.
A joint operator shall account for the assets, liabilities, revenues and expenses
relating to its interest in a joint operation in accordance with the Ind AS applicable to
the particular assets, liabilities, revenues and expenses.
Further, Ind AS 111 states that a party that participates in, but does not have joint
control of a joint operation shall also account for its interest in the arrangement in
65 | P a g e
accordance with above provisions of the standard, if that party has rights to the
assets, and obligations for the liabilities, relating to the joint operation.
Care-Outs
Ind AS-28
Additional Phrase
Carve out: In Ind AS 28, the phrase, 'unless impracticable to do so' has been added
in the relevant requirements, i.e., paragraph 35.
Reasons: Certain associates, e.g., regional rural banks (RRBs), being associates of
nationalized banks, are not in a position to use the Ind AS as these may be too
advanced for the RRBs. Accordingly, the above-stated words have been included to
exempt such associates.
Transfer to Capital Reserve
Carve out: Further, in IAS 28, when Investors share in Net Assets exceeds Cost of
Investment is recognised in profit or loss while in Ind AS 28, Paragraph- 32 (b) has
been modified on the lines of Ind AS 103, 'Business Combinations', to transfer
excess of the investor's share of the net fair value of the investee's identifiable assets
and liabilities over the cost of investment in capital reserve.
lndAS-103
Transfer to Capital Reserve

As per IFRS: IFRS 3 requires bargain purchase gain arising on business combination
to be recognised in profit or loss as income.
Carve out: Ind AS 103 requires the bargain purchase gain to be recognised in other
comprehensive income and accumulated in equity as capital reserve, unless there is
no clear evidence for the underlying reason for classification of the business
combination as a bargain purchase, in which case, it shall be recognised directly in
equity as capital reserve. A similar carve-out is made in Ind AS 28, Investments in
Associates and Joint Ventures
Reasons: At present, since bargain purchase gain occurs at the time of acquiring a
business, these are considered as capital reserve. Recognition of such gains in profit
or loss would result into recognition of unrealised gains, which may get distributed in
the form of dividends. Moreover, such a treatment may lead to structuring thro ugh
acquisitions, which may not be in the interest of the stakeholders of the company.
Differences IAS/IFRS & Ind AS
Other Differences Ind AS 27, IAS 27
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Separate Financial Statements: IAS 27 requires to disclose the reason for preparing
separate financial statements if not required by law. In India, since the Companies
Act mandates preparation of separate financial statements, such requirement has
been removed in Ind AS 27.
Option to use Equity Method: IAS 27 allows the entities to use the equity method to
account for investment in subsidiaries, joint ventures and associates in their
Separate Financial Statements (SFS). This option is not given in Ind AS 27, as the
equity method is not a measurement basis like cost and fair value but is a manner of
consolidation and therefore would lead to inconsistent accounting conceptually.
Differences AS & Ind AS
Ind AS 28, AS 23
Definition of Significant Influence: In the existing AS 23, 'Significant Influence' has

been defined as 'power to participate in the financial and/or operating policy
decisions of the investee but is not control over those policies'. In Ind AS 28, the
same has been defined as 'power to participate in the financial and operating policy
decisions of the investee but is not control or joint control over those policies'. Ind AS
28 defines joint control also.
Potential Equity Shares: For considering share ownership for the purpose of
significant influence, potential equity shares of the investee held by investor are not
taken into account as per the existing AS 23. As per Ind AS 28, existence and effect
of potential voting rights that are currently exercisable or convertible are considered
when assessing whether an entity has significant influence or not.
Equity Method: Existing AS 23 requires application of the equity method only when
the entity has subsidiaries and prepares Consolidated Financial Statements. Ind AS
28 requires application of equity method in financial statements other than separate
financial statements even if the investor does not have any subsidiary.
Exemption: One of the exemptions from applying equity method in the existing AS
23 is where the associate operates under severe long-term restrictions that
significantly impair its ability to transfer funds to the investee. No such exemption is
provided in Ind AS 28.
Explanation regarding the term 'Near Future': An explanation has been given in
existing AS 23 regarding the term 'near future' used in another exemption from
applying equity method, i.e., where the investment is acquired and held exclusively
with a view to its subsequent disposal in the near future. This explanation has not
been given in the Ind AS 28 as such situations are covered by Ind AS 105, 'Non-
current Assets Held for Saleand Discontinued Operations'.
Investment Classified as Held for Sale: Ind AS 28 requires a portion of an

investment in an associate or a joint venture to be classified as held for sale if the
disposal of that portion of the interest would fulfill the criteria to be classified as held
for sale in accordance with Ind AS 105. AS 23 does not specifically deal with this
aspect.
67 | P a g e
Difference in Reporting Dates: The existing AS 23 permits the use of financial

statements of the associate drawn upto a date different from the date of financial
statements of the investor when it is impracticable to draw the financial statements of
the associate upto the date of the financial statements of the investor. There is no
limit on the length of difference in the reporting dates of the investor and the
associate. As per Ind AS 28, length of difference in the reporting dates of the
associate or joint venture should not be more than three months unless.
Accounting Policies: Both the existing AS 23 and Ind AS 28 require that similar
accounting policies should be used for preparation of investor's financial statements
and in case an associate uses different accounting policies for like transactions,
appropriate adjustments shall be made to the accounting policies of the associate.
The existing AS 23 provides exemption to this that if it is not possible to make
adjustments to the accounting policies of the associate, the fact shall b e disclosed
along with a brief description of the differences between the accounting policies. Ind
AS 28 provides that the entity's financial statements shall be prepared using uniform
accounting policies for like transactions and events in similar circumstances unless,
in case of an associate, it is impracticable to do so.
Share in Losses: As per existing AS 23, investor's share of losses in the associate
is recognised to the extent of carrying amount of investment in the associate. As per
Ind AS 28, carrying amount of investment in the associate or joint venture
determined using the equity method together with any long term interests that, in
substance form part of the entity's net investment in the associate or joint venture
shall be considered for recognising entity's share of losses in the associate or joint
venture.
Ind AS 103 and AS 14
Scope: Ind AS 103 defines a business combination which has a wider scope
whereas the existing AS 14 deals only with amalgamation.
Methods for Accounting: Under the existing AS 14 there are two methods of
accounting for amalgamation viz - the pooling of interest method and the purchase
method. Ind AS 103 prescribes only the acquisition method for every business
combination.
Assets and Liabilities: Under the existing AS 14, the acquired assets and liabilities
are recognised at their existing book values or at fair values under the purchase
method. Ind AS 103 requires the acquired identifiable assets liabilities and non-
controlling interest to be recognised at fair value under acquisition method.
Minority/Non-controlling: Ind AS 103 requires that for each business combination,

the acquirer shall measure any non-controlling interest in the acquiree either at fair
value or at the non-controlling interest's proportionate share of the acquiree's
identifiable net assets. On other hand, the existing AS 14 states that the minority
interest is the amount of equity attributable to minorities at the date on which
investment in a subsidiary is made and it is shown outside shareholders' equity.
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Amortisation of Goodwill: Under Ind AS 103, the goodwill is not amortised but
tested for impairment on annual basis in accordance with Ind AS 36.The existing AS
14 requires that the goodwill arising on amalgamation in the nature of purchase is
amortised over a period not exceeding five years.
Reverse Acquisitions: Ind AS 103 deals with reverse acquisitions whereas the
existing AS 14 does not deal with the same.
Contingent Consideration: Ind AS 103 deals with the contingent consideration in

case of business combination, i.e., 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. The existing AS 14 does not provide specific guidance on this aspect.
Bargain Purchase Gain: Ind AS 103 requires bargain purchase gain arising on
business combination to be recognised in other comprehensive income and
accumulated in equity as capital reserve, unless there is no clear evidence for the
underlying reason for classification of the business combination as a bargain
purchase, in which case, it shall be recognised directly in equity as capital reserve.
Under existing AS 14 the excess amount is treated as capital reserve.
Mandatory preparation of Consolidated Financial Statements: Ind AS 110

makes the preparation of Consolidated Financial Statements mandatory for a parent.
Existing AS 21 does not mandate the preparation of Consolidated Financial
Statements by a parent.
Control: As per AS 21, control is the ownership of more than one-half of the voting
power of an enterprise or control of the composition of the board of directors or
governing body. However, unlike rule based definition given in AS 21, definition of
control in Ind AS 110 is principle based which states that, an investor controls an
investee when it is exposed, or has rights, to variable returns from its involvement
with the investee and has the ability to affect those returns through its power over the
investee.
Clarification on more than one Parent of a Subsidiary: Under AS 21 there can be

more than one parent of a subsidiary therefore existing AS 21 provides clarification
regarding consolidation in case an entity is controlled by two entities. No clarification
has been provided in this regard in Ind AS 110, keeping in view that as per the
definition of control given in Ind AS 110, control of an entity could be with one entity
only.
Difference in Reporting Dates: As per AS 21, difference between the date of the
subsidiary's financial statements and that of the consolidated financial statements
shall not exceed 6 months. However, as per Ind AS 110 the difference shall not be
more than three months.
Uniform Accounting Policies: Both the existing AS 21 and Ind AS 110, require the
use of uniform accounting policies. However, existing AS 21 specifically states that if
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it is not practicable to use uniform accounting policies in preparing the consolidated

financial statements, that fact should be disclosed together with the proportions of
the items in the consolidated financial statements to which the different accounting
policies have been applied. However, Ind AS 110 does not recognise the situation of
impracticability.
Presentation of Non-controlling Interest in CFS: As per existing AS 21 minority

interest should be presented in the consolidated balance sheet separately from
liabilities and equity of the parent's shareholders. However, as per Ind AS 110 non-
controlling interests shall be presented in the consolidated balance sheet within
equity separately from the parent shareholders' equity.
Exclusion from Consolidation: As per existing AS 21, subsidiary is excluded from

consolidation when control is intended to be temporary or when subsidiary operates
under severe long term restrictions. Ind AS 110 does not give any such exemption
from consolidation.
Types of Joint Arrangement/Joint Venture:
Existing AS 27 recognises three forms of joint venture namely:

(a) jointly controlled operations,
(b) jointly controlled assets and
(c) jointly controlled entities.
As per Ind AS 111, a joint arrangement is either

- a joint operation or
- a joint venture.
Such classification of joint arrangement depends upon the rights and obligations of
the parties to the arrangement and disregards the legal structure.
Joint Control: Existing AS 27 provides that in some exceptional cases, an

enterprise by a contractual arrangement establishes joint control over an entity which
is a subsidiary of that enterprise within the meaning of AS 21, 'Consolidated
Financial Statements'. In those cases, the entity is consolidated under AS 21 by the
said enterprise, and is not treated as a joint venture. Ind AS 111 does not recognise
such cases keeping in view the definition of control given in Ind AS 110.
Equity Method: Ind AS 111 provides that a venturer can recognise its interest in
joint venture using only equity method as per Ind AS 28. Existing AS 27 prescribes
the use of proportionate consolidation method only.
Interest in Jointly Controlled Entity: In case of separate financial statements under

existing AS 27, interest in jointly controlled entity is accounted for as per AS 13,
Accounting for Investments, i.e., at cost less provision for other than temporary
decline in the value of investment. Ind AS 111 requires that the joint operator shall
recognise its interest in joint operation and a joint venture in accordance with Ind AS
28, 'Investments in Associates and Joint Ventures'.
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Near Future: An explanation has been given in existing AS 27 regarding the term
'near future' used in an exemption given from applying proportionate consolidation
method, i.e., where the investment is acquired and held exclusively with a view to its
subsequent disposal in the near future.
This explanation has not been given in the Ind AS 111, as such situations are now
covered by Ind AS 105, 'Non-current Assets Held for Sale and Discontinued
Operations'.
Application of the Proportionate Consolidation Method: Existing AS 27 requires

application of the proportionate consolidation method only when the entity has
subsidiaries and prepares Consolidated Financial Statements. Ind AS 111 requires
application of equity method in financial statements other than separate financial
statements in case of a joint venture, even if the venturer does not have any
subsidiary in the financial statements.
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Ind AS 103: Business Combinations

Scope
This Indian Accounting Standard applies to a transaction or other event that meets
the definition of a business combination. This Indian Accounting Standard does not
apply to:
a) the formation of a joint venture.

b) the acquisition of an asset or a group of assets that does not constitute a
business i.e. it is an asset acquisition.
Definitions
A business combination is a transaction in which the acquirer obtains control of

another business
Note: Business combination is different from asset acquisition.
Business Combination
Control Business
Ind As 16 deals with Asset acquisition. As per Ind AS 16 where multiple PPE and
Intangible assets are acquired then those assets will be initially recognised would be
recognised and measured based on an allocation of the overall cost of the
transaction with reference to their relative fair values. No goodwill would be
recognised.
Exampe: Asset Acquisition V/S Business Combination
A Ltd acquired following assets and liabilities from B Ltd

PPE Fair Value - Rs 10,00,000
Stock - Rs 2,00,000
Trade Receivable - Rs 1,00,000
Trade Payables - Rs 50,000
Agreed Consideration was payment in cash - Rs 60,000

Payment in shares Fair Value -Rs 5,00,000
Transfer of Investment Fair Value -Rs 8,00,000 ( BV Rs 7,00,000)
Acquisition related Cost -Rs 40,000
Consequent Tax effect on change in Fair Value generate DTA – Rs 30,000
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Answer:
Revalue Investments Transferred through P/L Rs 1,00,000
Step 1 : PC + Acquisition related Cost = 14,00,000
Step 2 : Allocate total cost of acquisition to Various Assets and Liabilities in

Proportion to their Fair Value
Particulars Fair Value Allocation

PPE 10,00,000 11,20,000
Stock 2,00,000 2,24,000
Trade Receivable 1,00,000 1,12,000
Trade Payable (50,000) (56,000)
12,50,000 14,00,000
Note : No GW/BPG or DT Impact will be recognised in case of asset acquisition.
by transferring cash, other assets
by issuing equity interests
Acquirer Obtains by incurring liabilities

Control by
by providing more than one type of consideration
without transferring consideration, including by

contract alone
What do you mean by Business?
The term 'business' is deﬁned as an integrated set of activities and assets that is
capable of being conducted and managed for the purpose of providing goods or
services to customers, generating investment income (such as dividends or interest)
or generating other income from ordinary activities.
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Business
Ability to Generate
Input Process
Output
Input: can be PPE, Intangibles that are complete or under development along with
the workforce that creates, or has the ability to create, outputs when one or more
processes are applied to it.
Process: Set of Rules/Conventions that may be written or not. Any system,

standard, protocol, convention or rule that when applied to an input or inputs, creates
output or has the ability to contribute to the creations of outputs.
Output: A business consists of inputs and processes applied to those inputs that
have the ability to contribute to the creation of outputs. Although businesses usually
have outputs, outputs are not required for an integrated set of activities and assets to
qualify as a business.
Note: Ancillary Process like Admin/ Selling and distribution are not covered to
constitute Business as they may not have the ability to generate revenue.
How to identify whether a set of activities acquired by the acquiree is a

Business combination or asset acquisition
Step 1: Apply “ Optional Concentration Test”
Step 2: Apply “Substantive Process Test”
Concentration Test
This is an optional test (the concentration test) that has been introduced to permit a
simplified assessment of whether an acquired set of activities and assets is not a
business.
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Optional Concentration
Test
Passed Failed
Asset Acquisition and not Futher Assessment

Business Combination required
No Further Assessment
Proceed with Step 2
required
Step1 : Calculate Fair Value of
Interest Already Acquired XXX

NCI XXX
Consideration transferred for the set of activities acquired XXX
Step2 : Calculate Fair Value of Assets Acquired
Step 1 XXX
+ FV of Liabilities assumed Excluding DTL XXX
- Cash and Cash Equivalents Acquired + Deferred Tax Assets XXX
Fair Value of Assets Acquired XXX
Step3 : Determine Single Identifiable Assets
If a tangible asset is attached to, and cannot be physically removed and used
separately from, another tangible asset (or from an underlying asset subject to a
lease, as defined in Ind AS 116, Leases), without incurring significant cost, or
significant diminution in utility or fair value to either asset (for example, land and
buildings), those assets shall be considered a single identifiable asset;
A single identifiable asset shall include any asset or group of assets that would be
recognized and measured as a single identifiable asset in a business combination;
when assessing whether assets are similar, an entity shall consider the nature of
each single identifiable asset and the risks associated with managing and creating
outputs from the assets (that is, the risk characteristics);
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The following shall not be considered similar assets:
(i) a tangible asset and an intangible asset;

(ii) tangible assets in different classes unless they are considered a single
identifiable asset;
(iii) identifiable intangible assets in different classes
(iv) a financial asset and a non-financial asset;
(v) financial assets in different classes; and
(vi) identifiable assets that are within the same class of asset but have
significantly different risk characteristics.
𝑺𝒕𝒆𝒑 𝟑
Concentration test = 𝑿 𝟏𝟎𝟎
𝑺𝒕𝒆𝒑 𝟐
Note: ICAI assumes if it is 90% or more, concentration test is passed.
Example : Optional Concentration Test
Entity A holds 20% interest in Entity B. Subsequently Entity A, further acquires 50%
share in Entity B by paying Rs. 300 Crores.
The fair value of assets acquired and Liabilities assumed are as follows:
 Building - Rs. 1000 Crores
 Cash and Cash Equivalent - Rs. 200 Crores
 Financial Liabilities - Rs. 800 Crores
 DTL - Rs. 150 crores
Fair value of Entity B is Rs. 400 Crores and Fair value of NCI is Rs. 120 Crores (400
x 30%).
Fair value of Entity A’s previously held interest is Rs. 80 Crores (400 x 20%)
Entity A needs to determine whether acquisition is an asset acquisition as per

concentration test.
Answer:
i) Fair value of consideration transferred (including fair value of non-

controlling interest and fair value of previously interest held) = 300 + 120 +
80 = Rs. 500 Crores
ii) Fair value of liability assumed (excluding deferred tax) – Rs. 800 crores
iii) Cash and cash equivalent – Rs. 200 crores.
Fair value of gross assets acquired - Rs. 1,100 Crores
In the above scenario, substantially all fair value of gross assets acquired is
concentrated in a single identifiable asset i.e. building. Hence it should be asset
acquisition. (1,000 / 1,100 = 91% of value of gross assets is concentrated into single
identifiable asset i.e. building). A Judgement is required to conclude on the word
substantially as the same is not defined in the standard.
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In our view we have considered 91% of the value as substantial to conclude the
above transaction as asset acquisition.
Substantive Process Test
Check whether minimum one input + Substantive process should create

ability to produce output.
To determine whether acquired process is substantive, following has to be

considered:
Case A ) If a set of activities and assets does not have output at the acquisition date,
an acquired process (or group of processes) shall be considered substantive only if-
 The acquired process is critical to the ability to develop or convert an

acquired input or inputs into outputs; and
 The inputs acquired include both an organised workforce that has the
necessary skills, knowledge, or experience to perform that process (or group of
processes) and along with other resources that the organised workforce need
to develop or convert into outputs.
Those other inputs could include-
(1) Intellectual property that could be used to develop a good or service;

(2) Other economic resources that could be developed to create outputs; or
(3) Rights to obtain access to necessary materials or rights that enable the
creation of future Outputs.
Case B) If a set of activities and assets has outputs at the acquisition date, an
acquired process (or group of processes) shall be considered substantive if, when
applied to an acquired input or inputs,
 The acquired process is critical to the ability to continue producing outputs,

and the inputs acquired include an organised workforce with the necessary skills,
knowledge, or experience to perform that process (or group of processes); or
 The acquired process significantly contributes to the ability to continue producing

outputs and-
(i) is considered unique or scarce; or
(ii) cannot be replaced without significant cost, effort, or delay in the ability
to continue producing outputs.
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Forms of Business Combination
Absorption
Acquisition of
Amalgamation
Business
Forms of
Purchase of a
Business
Division
Combination
Acquisition of
Acquisitions of
Subsidiary
Shares
(Consolidation)
Steps in Business Combinations
Steps
Determine Calculate the

Identify the Calculate Identifiable Net Calculate Calculate
Acquirer the DOA PC NCI GW/BPG
Assets T/O
Step 1 : Acquirer is the entity which obtains control post Business Combination.
Generally the entity paying PC is the acquirer. However the following factors needs
to be considered.
 The relative voting rights in the combined entity after the business
combination: The acquirer is usually the combining entity whose owners as a
group retain or receive the largest portion of the voting rights in the combined
entity. In determining which group of owners retains or receives the largest
portion of the voting rights, an entity shall consider the existence of any unusual
or special voting arrangements and options, warrants or convertible securities.
 The existence of a large minority voting interest in the combined entity if

no other owner or organised group of owners has a significant voting
interest: The acquirer is usually the combining entity whose single owner or
organised group of owners holds the largest minority voting interest in the
combined entity.
 The composition of the governing body of the combined entity: The

acquirer is usually the combining entity whose owners have the ability to elect or
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appoint or to remove a majority of the members of the governing body of the

combined entity.
 The composition of the senior management of the combined entity: The

acquirer is usually the combining entity whose (former) management dominates
the management of the combined entity.
Note: Reverse Acquisition - In such case the legal acquirer is treated as the
Accounting Acquiree and the legal acquiree is treated as Accounting Acquirer
Under Reverse Acquisition the control of the legal acquirer is lost whereas legal
acquiree continues to be ultimately controlled by the same shareholders and hence
there is no loss of control.
Step 2 : Acquisition Date – it is the date when acquirer obtains control over the
acquiree.
 Generally, acquisition date is the date when acquirer pays PC and acquires Net
assets. The date of letter of offer, Board Approval, shareholders approval date
are irrelevant.
 However if parties separately agree to an earlier / later date at which control

would be transferred, then such mutually agrees date would be date of
Acquisition.
Acquisition subject to regulatory Approval
Regulatory Approval is substantative Regulatory Approval is

Procedural/Formality
Rgulator has a power to cancel

the acquisition
DOA = Date Agreed
between Parties
DOA=Date of
Approval
 Step up Acquisition : in case shares are purchased on multiple dates, the the
DOA is the date when control is obtained. ie the date when the cumulative
holding exceeds 50%.
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Note: 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.
Step 3: Determination of PC
Particulars Amount
Cash Paid XXX
+ FV of Equity Shares Issued XXX
+ FV of Debentures/Pref Shares/Other Securities Issued XXX
+ FV of Existing Investment in Acquiree (Special Point) XXX
+ FV of other Assets Transferred Note #1 XXX
+ PV of Deferred Consideration Note #2 XXX
+ FV of Contingent Consideration Note #3 XXX
+ FV of Pre Combination Allocation in case of Replacement Award
XXX
Note #4
Total PC XXX
Direct Cost of Acquisition – In a business combination, acquisition-related costs

(including stamp duty) are expensed in the period in which such costs are incurred
and are not included as part of the consideration transferred.
Such Cost include finder’s fees, due diligence cost , legal fees, investment banker
fees etc.
Note #1: Assets intended to be transferred should be remeasured at FV in the books

of the acquirer and the difference arising on such remeasurement is taken to P&L
Note #2: This refers to a consideration which is payable at a future date agreed on
the DOA. We need to consider the PV of deferred consideration while computing PC.
Subsequently this deferred consideration will be classified as Financial Liability and
Amortised Cost principle applies
Note #3: This refers to a conditional obligation to be settled on a future date based
on certain future events. Contingent Consideration should be included in PC at Fair
Value. Generally FV will be given. If not given we will compute it based on probability
of weighted average of expected payments
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Contingent
Consideration
Initial Subsequent
Recognition Recognition
Obligation to Settled in Own

@ FV whether pay cash Shares
equity settled
or Cash
Settled Financial Liab Fixed No of Variable no of
FVTPL Shares Shares
Equity Financial
No Liability
remeasurement FVTPL
Note #4: Refer Ind AS 102 Share Based Payments
Grant date of Acquisition date Vesting date of Vesting Date

acquiree awards (original) Replacement
acquiree awards Award
▼ ▼ ▼
A
B
Amount included in consideration transferred = FVa x A

Greater of (A + C) and B
Treatment of Existing investment in Acquiree in case of Step Acquisitions
Say already held 25% now again acquired 40%
As per Ind AS 103, the existing investment should be also be considered as part of
PC in their FV. If a business combination achieved in stages, the acquirer shall
remeasure its previously held equity interest in the acquiree at its acquisition-date
fair value and recognise the resulting gain or loss, if any, in profit or loss or other
comprehensive income, as appropriate.
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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.
Investment recognised
Cost FVTPL FVTOCI
P/L P/L OCI
Balance in OCI
transferred to RE
Exam Focus: The thought process is that you have sold the previously held
investment and reacquired 65% fully on the date of Acquisition
Step 4: Calculation of Identifiable Net Assets taken over – As per Ind AS 103 all
Assets and Liabilities of the acquiree should be taken over at Fair Value
When the acquirer applies the recognition principle under business combination it
may record certain assets and liabilities which the acquiree had not recorded earlier
in their financial statements. For example, the acquirer recognises the acquired
identifiable intangible assets, such as a brand name, a patent or a customer
relationship, that the acquiree did not recognise as assets in its financial statements
because it developed them internally and charged the related costs to expense.
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The following points to be kept in mind
Recognition
Contingent Liability
Exception
Reacquired Rights
Measurement
SBP Awards
Exception
Recognition and
Measurement Exceptions Assets Held For Sale
Income Tax
Recognition and
Measurement Employee Benefits
Exception
Indemnification Asset
Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets, defines a

contingent liability as:
(a) a possible obligation that arises from past events and whose existence will be
confirmed only by the occurrence or non-occurrence of one or more uncertain
future events not wholly within the control of the entity; or
(b) a present obligation that arises from past events but is not recognised
because:
i. it is not probable that an outflow of resources embodying economic

benefits will be required to settle the obligation; or
ii. the amount of the obligation cannot be measured with sufficient reliability.
We know that contingent liabilities are not recognised in Books. However at the time
of Business Combination, it should be recognised if represents present obligation
that arises from past events and its fair value can be measured reliably with
subsequent changes to profit or loss.
Therefore, contrary to Ind AS 37, the acquirer recognises a contingent liability

assumed in a business combination at the acquisition date even if it is not probable
that an outflow of resources embodying economic benefits will be required to settle
the obligation.
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Outcome Ind AS 37 Business Combination

Possible obligation Not Recognised Not Recognised
Present obligation – not probable that Not Recognised Recognised if reliably
an outflow of economic benefits will measured
occur
Present obligation – probable that an Not Recognised Not Recognised
outflow of economic benefits will
occur, but cannot be measured
reliably
Subsequent Recognition – till the date of settlement the contingent liability at each
B/s will be recorded at the higher of:
1) Liability recorded on DOA or

2) Liability Determined as per Ind AS 37
A seller in a Business Combination may contractually indemnify the acquirer for the
outcome of a contingency or uncertainty related to all or part of a specific asset or
liability. In other words, the seller will guarantee that the acquirer’s liability will not
exceed a specified amount. As a result, the acquirer obtains an indemnification
asset. The acquirer shall recognise an indemnification asset at the same time that it
recognises the indemnified item measured on the same basis as the indemnified
item, subject to the need for a valuation allowance for uncollectible amounts.
Example: Contingent Liability and Indemnification Asset

ABC Ltd. acquired a beverage company PQR Ltd. from XYZ Ltd. At the time of the
acquisition, PQR Ltd. is the defendant in a court case whereby certain customers of
PQR Ltd. have alleged that its products contain pesticides in excess of the
permissible levels that have caused them health damage
PQR Ltd. is being sued for damages of Rs. 2 crore. XYZ Ltd. has indemnified ABC
Ltd. for the losses, if any, due to the case for amount up to Rs. 1 crore. The fair value
of the contingent liability for the court case is Rs. 70 lakh.
How should ABC Ltd. account for the contingent liability and the indemnification
asset? What if the fair value of the liability is Rs. 1.2 crore instead of Rs. 70 lakh.
Answer:
In the current scenario, ABC Ltd. measures the identifiable liability of entity PQR Ltd.
at Rs. 70 lakh and also recognises a corresponding indemnification asset of Rs. 70
lakhs on its consolidated balance sheet. The net impact on goodwill from the
recognition of the contingent liability and associated indemnification asset is nil.
However, in the case where the liability’s fair value is more than Rs. 1 crore ie. Rs.
1.2 crore, the indemnification asset will be limited to Rs. 1 crore only.
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Example:
ABC Ltd. pays Rs. 50 crore to acquire PQR Ltd. from XYZ Ltd. PQR Ltd.
manufactured products containing fiber glass and has been named in 10 class
actions concerning the effects of these fiber glass. XYZ Ltd. agrees to indemnify
ABC Ltd. for the adverse results of any court cases up to an amount of Rs. 10 crore.
The class actions have not specified amounts of damages and past experience
suggests that claims may be up to Rs. 1 crore each, but that they are often settled
for small amounts.
ABC Ltd. makes an assessment of the court cases and decides that due to the
potential variance in outcomes, the contingent liability cannot be measured reliably
and accordingly no amount is recognised in respect of the court cases. How should
indemnification asset be accounted for?
Answer:
Since no liability is recognised in the given case, ABC Ltd. will also not recognise an
indemnification asset as part of the business combination accounting.
Share Based Payment Awards – Replacement Award
Share Based Payment Award which are replaced by the Purchasing company will be
allocated to PC and Employee benefit expenses based on the rule set out below
Amount included in consideration transferred = FVa x A

Greater of (A + C) and B
Employee Option Expense = FV of New Scheme – Amount Apportioned to PC
Examples Discussed with Ind AS 102 – Share Based Payments
Share Based Payment Awards – Non Replacement Award
Discussed along with NCI
Reacquired Rights
These are the rights which the acquirer before acquisition may have granted to the
acquiree to use certain assets which belongs to the acquirer. It does not matter
whether the asset was recorded in the financial statement of the acquirer or not. For
example, license to use the brand name, Franchisee rights etc. if an acquirer
acquires an acquiree which had certain rights granted to it by the acquirer then the
business combination results in settlement of the right and accordingly any
settlement gain or loss should be considered as a separate transaction from
business combination and will be recorded in the financial statement of the acquirer.
As per Ind AS 103 a reacquired right is an intangible asset which can be separately
identified and should be recognised separately from Goodwill. The acquirer should
measure the value of re-acquired right on the basis of remaining contractual terms of
the related contract without considering the effect of potential renewals. After
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acquisition the intangible asset should be amortised over the remaining contractual
period.
If the terms with respect to reacquired rights are favourable or unfavourable as ie PC

includes payment for Reacquired rights ≠ FV on DOA then the difference will be
treated as gain or loss on settlement of pre existing relationship
Treatment of Pre Existing Relationship Settlement
There may be existing relationship between Acquirer and Acquiree before the
Business combination which may also get settled as part of Business combination.
As per Ind AS 103, PC refers to consideration paid for Acquisition of Business.

Separate compensation for any existing relationship should be separated from the
PC and to be accounted separately.
Ind AS 103 provides that “if the business combination in effect settles a pre-existing
relationship, the acquirer recognises a gain or loss, measured as follows:
Recognise at
Non
FV through Stated Settlement Value
Contractual
Pre Existing P/L to whom contract is
Relationship unfavourable
Recognise
Contractual
Lower of Favourable/unfavourable
Contract Position from the
perspective of the
acquirer
Pre Existing relationship
If Favourable to Acquirer If Unfavourable to Acquirer
PC will be adjusted up PC will be adjusted down
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Example :
Vadapav Ltd. is a successful company has number of own stores across India and
also offers franchisee to other companies. Efficient Ltd. is one of the franchisee of
Vadapav Ltd. and is and operates number of store in south India. Vadapav Ltd.
decided to acquire Efficient Ltd due to its huge distribution network and accordingly
purchased the outstanding shares on 1st April, 20X2. On the acquisition date,
Vadapav Ltd. determines that the license agreement reflects current
market terms.
Answer:
Vadapav 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.
Example :
ABC Ltd. acquires PQR Ltd. for a consideration of Rs. 1 crore. Four years ago, ABC
Ltd. had granted a ten-year license allowing PQR Ltd. to operate in Europe. The cost
of the license was Rs. 2,50,000. The contract allows either party to terminate the
franchise at a cost of the unexpired initial fee plus 20%. At the date of acquisition,
the settlement amount is Rs. 1,80,000 [(Rs. 2,50,000 x 6/10) + 20%].
ABC Ltd. has acquired PQR Ltd., because it sees high potential in the European
market and wishes to exploit it. ABC Ltd. calculates that under current economic
conditions and at current prices it could grant a six-year franchise for a price of Rs.
4,50,000.
How is the license accounted for as part of the business combination?
Answer:
The amount of gain or loss recognised may depend in part on whether the acquirer
had previously recognised a related asset or liability, and the reported gain or loss
therefore may differ from the amount calculated by applying the above
requirements.”
Based on the above in the instant case, the license is recognised at Rs. 4,50,000,
the fair value at market rates of a license based on the remaining contractual life.
The gain or loss on settlement of the contract is the lower of:
• Rs. 3,00,000, which is the amount by which the right is unfavorable to ABC
Ltd. compared to market terms. This is the difference between the amount that ABC
Ltd. could receive for granting a similar right, Rs. 4,50,000, compared to the carrying
value (or the unamortised value) that it was granted for, Rs. 1,50,000 (2,50,000 X
6/10).
• Rs. 1,80,000, which is the amount that ABC Ltd. would have to pay to
terminate the right at the date of acquisition.
The loss on settlement of the contract is Rs. 1,80,000. Therefore, out of the Rs. 1
crore paid, Rs. 98.2 lakh is accounted for as consideration for the business
combination and Rs. 1,80,000 is accounted for separately as a settlement loss on
the re-acquired right.
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Example 1: Pre Existing Non Contractual relationship

A Ltd took over B Ltd. PC Fixed at Rs 1000 Cr. There was a case filed against A Ltd
by B Ltd. Fair Value of Claim is estimated at 80 Cr. A Ltd has not recognised any
liability in its Financial Statement wrt this claim. The Net Assets taken over FV Rs
800 Cr. Discuss how this will be recognised during Business Combination

A Ltd took over B Ltd. PC Fixed at Rs 1000 Cr. There was a case filed against A Ltd
by BLtd. Fair Value of Claim is estimated at 80 Cr. A Ltd had already recognised a
liability to the extend of Rs 10 Cr in its Financial Statement wrt this claim. The Net
Assets taken over FV Rs 800 Cr. Discuss how this will be recognised during
Business Combination

A Ltd took over B Ltd. PC Fixed at Rs 1200 Cr. There was a case filed against B Ltd
by A Ltd. Fair Value of Claim is estimated at 75 Cr. A Ltd had already recognised
any Contingent Asset in its Financial Statement wrt this claim. The Net Assets taken
over FV Rs 950 Cr. Discuss how this will be recognised during Business
Combination
Example 4: Pre Existing Contractual relationship

A Ltd Purchases components from B Ltd and there is a contract entered into
between A Ltd and B Ltd for a 5 year supply of raw material at fixed Price. As per the
terms of contract, A Ltd can terminate the agreement before the end of 5 years by
paying a penalty of Rs 30 million. With 3 years remaining under the supply contract,
A ltd absorbs B Ltd and pays a PC of Rs 400 million. Included in the total FV of B Ltd
is Rs 25 Million related to FV of supply contract with A Ltd. FV of other NA of B Ltd
was Rs 300 million. Discuss how the Accounting will be done at the time of Business
Combination.
Example 5: Pre Existing Contractual relationship

A Ltd absorbed B Ltd for a PC of 1000 million. Prior to acquisition A Ltd had received
loan from B Ltd which carries interest @ Fixed rate. The loan liability appearing in A
Ltd’s B/S is at 100 million. Since the grant of loan market rates have gone up,
consequently the FV of loan liability is estimated to be 90 million. A Ltd has
determined that FV of net assets of B Ltd on the DOA is 920 million. This includes 90
million in respect of fixed rate loan. Discuss how the Accounting will be done at the
time of Business Combination.
Assets held for Sale
As per Ind AS normally all assets taken over is recognised at FV. However with
respect to Assets held for sale, recognition should be at FV less cost to sell.
Employee benefits
The acquirer records the fair value of the obligations for any post retirement
obligation as per the principles of Ind AS 19 which is an exception of the general fair
value rule as per Ind AS 113.
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Contingent Payment linked to Employee Service
Contingent consideration paid for acquisition of business should be part of PC.

However, if one of the condition of contingent payment is linked to Future
Employment, then this should be treated in nature of employee benefit expense. This
needs to be separately accounted. Cannot be treated as part of PC.
If it is not clear whether an arrangement for payments to employees or selling

shareholders is part of the exchange for the acquiree or is a transaction separate
from the business combination, the acquirer should consider the following indicators:
a) Continuing employment—Arrangements in which the contingent payments are

not affected by employment termination may indicate that the contingent payments
are additional consideration rather than remuneration.
b) Duration of continuing employment—If the period of required employment
coincides with or is longer than the contingent payment period, that fact may
indicate that the contingent payments are, in substance, remuneration.
c) Level of remuneration—Situations in which employee remuneration other than
the contingent payments is at a reasonable level in comparison with that of other key
employees in the combined entity may indicate that the contingent payments are
additional consideration rather than remuneration.
d) Incremental payments to employees—If selling shareholders who do not
become employees receive lower contingent payments on a per-share basis than
the selling shareholders who become employees of the combined entity, that fact
may indicate that the incremental amount of contingent payments to the selling
shareholders who become employees is remuneration.
e) Number of shares owned—The relative number of shares owned by the selling
shareholders who remain as key employees may be an indicator of the substance of
the contingent consideration arrangement. For example, if the selling shareholders
who owned substantially all of the shares in the acquiree continue as key
employees, that fact may indicate that the arrangement is, in substance, a profit
sharing arrangement intended to provide remuneration for post-combination
services. Alternatively, if selling shareholders who continue as key employees
owned only a small number of shares of the acquiree and all selling shareholders
receive the same amount of contingent consideration on a per-share basis, that fact
may indicate that the contingent payments are additional consideration. The pre-
acquisition ownership interests held by parties related to selling shareholders who
continue as key employees, such as family members, should also be considered.
f) Linkage to the valuation—If the initial consideration transferred at the acquisition
date is based on the low end of a range established in the valuation of the acquire
and the contingent formula relates to that valuation approach, that fact may suggest
that the contingent payments are additional consideration. Alternatively, if the
contingent payment formula is consistent with prior profit-sharing arrangements, that
fact may suggest that the substance of the arrangement is to provide remuneration.
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In Process Research and Development
In Process R&D
Initial Recognition Subsequent Recog Ind AS 38
As Per Ind AS 103 @

FV If Development
If Reseach Phase Phase
P/L Capitalise
subject to 5
Conditions
Deferred Tax Adjustment at the time of Business combination
A Ltd took over B Ltd. Purchase consideration was agreed at Rs 2,50,000/- to be

issued in Equity Shares of A Ltd.
The details of Assets and Liabilities taken over were as follows
Particulars Carrying Amount Fair Value Tax Base

Land 1,00,000 1,50,000 1.20,000
Plant and 80,000 65,000 40,000
Machinery
Stock 50,000 45,000 50,000
Debtors 60,000 60,000 60,000
Cash 10,000 10,000 10,000
Creditors 25,000 24,000 25,000
Loan 85,000 85,000 85,000
Tax Rate 30 %. Discuss the deferred tax impact.
Answer : Refer Ind AS 12 Notes
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Deferred Tax Impact on
Assets and Liablities T/O Goodwill on BC
Refer Example Above If DTL - ignore

If DTA - Consider - Vicious Circle
Computation
Accumulated Losses of Acquiree Company
When acquiree has accumulated loss under tax laws that can be claimed by acquirer
as a setoff against its own profits, the DTA on such accumulated loss taken over by
acquirer should be recognised on date of take over. Such DTA should be reverse
when setoff subsequently occurs.
Leases
Acquiree is a lessee
• The acquirer shall recognise right-of-use assets and lease liabilities for leases
identified in accordance with Ind AS 116.
• The acquirer is not required to recognise right-of-use assets and lease liabilities for:
(a) leases for which the lease term ends within 12 months of the acquisition date; or
(b) leases for which the underlying asset is of low value.
• The acquirer shall measure the lease liability at the present value of the remaining
lease payments as if the acquired lease were a new lease at the acquisition date.
• The acquirer shall measure the right-of-use asset at the same amount as the lease
liability, adjusted to reflect favourable or unfavourable terms of the lease when
compared with market terms.
Acquiree is a lessor
In measuring the acquisition-date fair value of an asset, the acquirer shall take into
account the terms of the lease. The acquirer does not recognise a separate asset or
liability if the terms of an operating lease are either favourable or unfavourable when
compared with market terms.
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Measurement Period
In certain cases an acquirer may not have complete information to find the fair value
of the assets of S ltd on acquisition date. In such case Ind AS 103 allows recording
of such assets and liabilities on provisional basis. Therefore Goodwill / BPG on DOA
is also recorded at provisional basis. In case information is subsequently available
with in measurement period, the FV of Assets will be adjusted with a corresponding
adjustment to GW/ BPG if both the conditions are satisfied
A) Additional information is available within one year

B) Additional information pertains to a condition existing on acquisition date
Step 5: Non-controlling Interest in an Acquiree
Non Controlling
Interest
Non Qualifying
Qualifying NCI
NCI
FV Method or
FV Method
PSNA Method
a) Non-controlling interests are measured at fair value

b) Non-controlling interests are measured at proportionate share of identifiable net
assets
Note:
The fair values of the acquirer’s interest in the acquiree and the non-controlling
interest on a per- share basis might differ. The main difference is likely to be the
inclusion of a control premium in the per-share
Non Replacement Award – Share Based Payment Scheme of Subsidiary
Generally on the date of acquisition of shares of Subsidiary, whatever SBPP

announced by subsidiary will continue to hold good. These SPB plans need not be
terminated or replace by Parent at the time of Acquisition.
These Potential Equity Shares are known an non-qualifying NCI, ie once these
stock options are exercise by the employees of S ltd, this results in dilution of
ownership stake of H ltd
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Computation Style, same as what

we discussed above
PreCombination Value taken to

NCI
If it Continues
Subsequent value is treated as

SBPP of Employee Expense with
Subsidary Corresponding Credit to NCI
Accounting as prescibed in Ind

If Replaced
AS 102
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.
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.
Step 6: Calculation Goodwill / Bargain Purchase Gain
The acquirer shall recognise Goodwill as of the acquisition date measured as the
excess of
Part A
The aggregate of:
 the purchase consideration transferred at acquisition-date fair value;
 the amount of any non-controlling interest and
 in a business combination achieved in stages, the acquisition-date fair value
of the acquirer’s previously held equity interest in the acquiree.
Part B
The net of the acquisition-date amounts of the identifiable assets acquired and the
liabilities assumed.
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Concept of Full Goodwill / Proportionate Goodwill
NCI Valued
@ FV @ PSNA
Full Goodwill Approach Proportionate Goodwill
GW of both Parent GW of Parent

and NCI Alone
Note: In extremely rare circumstances, an acquirer will make a bargain purchase in

a business combination in which the net assets value acquired in a business
combination exceeds the purchase consideration.
The acquirer shall recognise the resulting gain in other comprehensive income on
the acquisition date and accumulate the same in equity as capital reserve
Common Control Transaction Appendix to Ind AS 103
A CCT involves acquisition of entities or businesses in which all the combining

entities or business are ultimately controlled or jointly controlled by same parties
before and after combination
Examples
 Merger between fellow Subsidiaries
 Merger of subsidiary with parent
 Conversion of partnership firm into company
 Demerger of a division which is ultimately controlled by same parent company
or same controlling shareholders.
For a transaction to be classified as CCT we need to establish control or joint control

pre and post combination is with with the same parties
CCT should be accounted using pooling of interest method

 All assets and liabilities appearing in the B/S should be taken over at Book
Value
 Securities issued as PC issued will be recorded at Face Value
 All reserves will be taken over at book value
 If any PC is given in cash then treat it as distribution of dividend.
 Difference in the take over entry will be adjusted in Reserves ie no Goodwill
on BPG
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Example: Given Below – B/S of A Ltd and B Ltd as on 31/03/2020

Liabilities A B Assets A B
ESC 1,000 2,000 NCA 5,000 10,000
R/S 5,000 6,000 CA 3,000 6,000
CL 2,000 8,000
8,000 16,000 8,000 16,000
A ltd absorb B Ltd by paying PC of Rs 9000 as 1000 shares of A Ltd having Fair
Value Rs 7 per Share and balance in cash.
NCA have fair value of 10% above book value.
A ltd and B Ltd were both owned by Mr X. Discuss how the accounting will be made.
Demerger
Demerger is an arrangement whereby some part /undertaking of one company is

transferred to another company which operates completely separate from the
original company. Shareholders of the original company are usually given an
equivalent stake of ownership in the new company.
Demerger is undertaken basically for following reasons:
• The first as an exercise in corporate restructuring and

• Second is to give effect of family partitions in case of family owned enterprises.
• A demerger is also done to help each of the segments operate more smoothly, as
they can focus on a more specific task.
Accounting would differ depending on whether it is classified as Business Acquisition

or CCT
This depends on how PC is distributed. There are 3 possibilities
case a) PC issued to Selling Company – CCT

case b) PC issued to All Members of Selling Company – CCT
case c) PC issued to Selected Members of Selling Company as part of some
arrangement by which they are not controlling SH of selling company
In case of Acquisition accounting – Accounting in the books of Selling Company is

covered under distribution of non-cash assets to owners hence assets and liabilities
transferred should be remeasured to Fair value and difference taken to P&L
Assets and Liabilities will be eliminated at Fair Value and Balancing Figure taken to
Distribution /Dividend
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Example: Given Below – B/S of A as on 31/03/2020
Liabilities A Assets A
ESC 10,000 NCA 50,000
R/S 60,000 CA 40,000
CL 20,000
90,000 90,000
On 1/4/2020 A Ltd transferred Div A to C Ltd

Details of Assets and Liabilities pertaining to Division A was as follows
Particulars Book Value Fair Value

NCA 12,000 15,000
CA 8,000 8,000
CL 5,000 5,000
In return C Ltd issued PC

Case a) 10,000 shares to Share Holders of A Ltd
Case b) 10,000 shares to A Ltd
Case c) Paid Cash Rs 10000 to A Ltd
Concepts based Questions
Business
Question 1: 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?
(Study Material)
Answer. 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
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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.
Question 2: Modifying the above question, 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?
(Study Material)
Answer. 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.
Control
Question 3: 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 P'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. Does Company P has control
over Company X?
(Study Material)
Answer. 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.
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By considering all the above factors, Company P concludes that with the acquisition
of the 40,000 snares together with the potential voting rights, it has obtained control
of Company X.
Question 4: A Limited has 48% of the voting rights of B Limited. The remaining
voting rights are held by thousands of shareholders, none individually holding more
than 1% of the voting rights. None of the shareholders has any arrangements to
consult any of the others or make collective decisions. Does A Limited have
sufficiently dominant voting interest to meet power criterion?
Answer. In the above case, based on the absolute size of A Limited’s holding (48%)
and the relative size of the other shareholdings, A Limited may conclude that it has a
sufficiently dominant voting interest to meet the power criterion.
Question 5: An investor A Limited hold 45% of the voting rights of an investee.

Eleven other shareholders, each holding 5% of the voting rights of the investee.
None of the shareholders has contractual arrangements to consult any of the others
or make collective decisions. Can we conclude that investor A Limited has power
over the investee?
Answer. In this case, the absolute size of the investor’s holding and the relative size
of the other shareholdings alone are not conclusive in determining whether the
investor has rights sufficient to give it power over the investee. Additional facts and
circumstances that may provide evidence that the investor has, or does not have,
power shall be considered.
Question 6: A Limited holds 48% of the voting rights of B Limited. X Limited and Y
Limited each hold 26% of the voting rights of B Limited. There are no other
arrangements that affect decision-making. Who has power to take decisions in the
present case?
Answer. In this case, the size of A Limited, voting interest and its size relative to the
shareholdings of X Limited and Y Limited are sufficient to conclude that A Limited
does not have power.
Only two other investors would need to co-operate to be able to prevent investor A
from directing the relevant activities of the investee.
Acquisition date
Question 7: Company A acquired 80% equity interest in Company B for cash

consideration. The relevant dates are as under:
 Date of shareholder agreement 1st June, 20X1
 Appointed date as per shareholder agreement 1st April, 20X1
 Date of obtaining control over the board 1st July, 20X1
 Date of payment of consideration 15thJuly, 20X1
 Date of transfer of shares to Company A 1stAugust, 20X1
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Answer: In this case, as the control over financial and operating policies are
acquired through obtaining board representation on 1st July, 20X1, 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 A did not
have control over Company B as at that date.
Question 8: Can an acquiring entity can 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.
Question 9: On 1st April, X Ltd. agrees to acquire the share of B Ltd. in an all equity
deal. As per the binding agreement X Ltd. will get the effective control on 1st April.
However, the consideration will be paid only when the shareholders’ approval is
received. The shareholders meeting is scheduled to happen on 30th April. If the
shareholders’ 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 case is 1st April. This is because, in the
above scenario, even if the shareholders don’t approve the shares, consideration will
be settled through payment of cash.
Question 10: ABC Ltd. acquired all the shares of XYZ Ltd. The negotiations had
commenced on 1st January, 20X1 and the agreement was finalised on 1st March,
20X1. While ABC Ltd. obtains the power to control XYZ Ltd.'s operations on 1st
March, 20X1, the agreement states that the acquisition is effective from 1st January,
20X1 and that ABC Ltd. is entitled to all profits after that date. In addition, the
purchase price is based on XYZ Ltd.'s net asset position as at 1st January, 20X1.
What is the date of acquisition?
Answer: It is only on 1st March, 20X1 and not 1st January, 20X1, that ABC Ltd. has
the power to direct the relevant activities of XYZ Ltd. so as to affect its returns from
its involvement with XYZ Ltd. Accordingly, the date of acquisition is 1st March, 20X1.
Question 11: ABC Ltd. and XYZ Ltd. are manufacturers of rubber components for a
particular type of equipment. ABC Ltd. makes a bid for XYZ Ltd.'s business and the
Competition Commission of India (CCI) announces that the proposed transaction is
to be scrutinised to ensure that competition laws are not breached. Even though the
contracts are made subject to the approval of the CCI, ABC Ltd. and XYZ Ltd.
mutually agree the terms of the acquisition and the purchase price before
competition authority clearance is obtained. Can the acquisition date in this situation
be the date on which ABC Ltd. and XYZ Ltd. agree the terms even though the
approval of CCI is awaited (Assume that the approval of CCI is substantive)?
Answer: Since CCI approval is a substantive approval for ABC Ltd. to acquire
control of XYZ Ltd.’s operations, the date of acquisition cannot be earlier than the
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date on which approval is obtained from CCI. This is pertinent given that the
approval from CCI is considered to be a substantive process and accordingly, the
acquisition is considered to be completed only on receipt of such approval.
Question 12: On 9 April 20X2, Shyam Ltd. a listed company started to negotiate
with Ram Ltd, which is an unlisted company about the possibility of merger. On 10
May 20X2, the board of directors of Shyam authorized their management to pursue
the merger with Ram Ltd. On 15 May 20X2, management of Shyam Ltd offered
management of Ram Ltd 12,000 shares of Shyam Ltd against their total share
outstanding. On 31 May 20X2, the board of directors of Ram Ltd accepted the offer
subject to shareholder vote. On 2 June 20X2 both the companies jointly made a
press release about the proposed merger.
On 10 June 20X2, the shareholders of Ram Ltd approved the terms of the merger.
On 15 June, the shares were allotted to the shareholders of Ram Ltd.
The market price of the shares of Shyam 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?
(Study Material)
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 aquiree. In the above
scenario, the acquisition date will the date on which the shares were allotted to the
shareholders of Ram Ltd. Although the shareholder approval was obtained on 10
June but the shares were issued only on 15 June and accordingly the 85 will be
considered as the market price.
Step Acquisition
Question 13: On April 1, 20X1, Company A acquired 5% of the equity share capital
of Company B for 1,00,000. A accounts for its investment in B at Fair Value through
OCI (FVOCI) under Ind AS 109, Financial Instruments: Recognition and
Measurement. At March 31, 20X2, A carried its investment in B at fair value and
reported an unrealised gain of Rs. 5,000 in other comprehensive income, which was
presented as a separate component of equity. On April 1, 20X2, A obtains control of
B by acquiring the remaining 95 percent of B.
Required
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Comment on the treatment to be done based on the facts given in the question.
(Study Material)
Answer: At the acquisition date A recognises the gain of Rs. 5,000 in OCI as the
gain or loss is not allowed to be recycled to income statement as per the requirement
of Ind AS 109. A's investment in B would be at fair value and therefore does not
require remeasurement as a result of the business combination. The fair value of the
5 percent investment (1,05,000) plus the fair value of the consideration for the 95
percent newly acquired interest is included in the acquisition accounting.
Question 14: On 1st April, 20X1, PQR Ltd. acquired 30% of the voting ordinary
shares of XYZ Ltd. for Rs 8,000 crore. PQR Ltd. accounts its investment in XYZ
Ltd. using equity method as prescribed under Ind AS 28. At 31st March, 20X2, PQR
Ltd. recognised its share of the net asset changes of XYZ Ltd. using equity
accounting as follows:
Share of profit or loss 700

Share of exchange difference in OCI 100
Share of revaluation reserve of PPE in OCI 50
The carrying amount of the investment in the associate on 31st March, 20X2 was
therefore
Rs 8,850 crore (8,000 + 700 + 100 + 50).
On 1st April, 20X2, PQR Ltd. acquired the remaining 70% of XYZ Ltd. for cash Rs
25,000 crore. The following additional information is relevant at that date:
(Rs in crore)
Fair value of the 30% interest already owned 9,000
Fair value of XYZ's identifiable net assets 30,000
How
should such business combination be accounted for?
Direct cost of Acquisition
Question 14: Should stamp duty paid on acquisition of land pursuant to a business
combination be capitalised to the cost of the asset or should it be treated as an
acquisition related cost and accordingly be expensed off?
Answer: As per Ind AS 103, the acquisition-related costs incurred by an acquirer to

effect a business combination are not part of the consideration transferred. 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. The
acquirer shall account for acquisition related costs as expenses in the periods in
which the costs are incurred
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Question 15: ABC Ltd. acquires PQR Ltd. on 30th June, 20X1. The assets acquired
from PQR Ltd. include an intangible asset that comprises wireless spectrum license.
For this intangible asset, ABC Ltd. is required to make an additional one-time
payment to the regulator in PQR’s jurisdiction in order for the rights to be transferred
for its use. Whether such additional payment to the regulator is an acquisition-related
cost?
Answer: The payment to the regulator represents a transaction cost and will be
regarded as acquisition related cost incurred to effect the business combination
Recognition of Assets and Liabilities acquired under BC
Question 16: ABC Ltd. acquired a beverage company PQR Ltd. from XYZ Ltd. At
the time of the acquisition, PQR Ltd. is the defendant in a court case whereby
certain customers of PQR Ltd. have alleged that its products contain pesticides in
excess of the permissible levels that have caused them health damage.
PQR Ltd. is being sued for damages of Rs. 2 crore. XYZ Ltd. has indemnified ABC
Ltd. for the losses, if any, due to the case for amount up to Rs. 1 crore. The fair
value of the contingent liability for the court case is Rs. 70 lakh.
How should ABC Ltd. account for the contingent liability and the indemnification
asset? What if the fair value of the liability is Rs. 1.2 crore instead of Rs. 70 lakh.
Answer: In the current scenario, ABC Ltd. measures the identifiable liability of entity
PQR Ltd. at Rs. 70 lakh and also recognises a corresponding indemnification asset
of Rs. 70 lakhs on its consolidated balance sheet. The net impact on goodwill from
the recognition of the contingent liability and associated indemnification asset is nil.
However, in the case where the liability’s fair value is more than Rs. 1 crore ie. Rs.
1.2 crore, the indemnification asset will be limited to Rs. 1 crore only.
Question 17: ABC Ltd. pays Rs. 50 crore to acquire PQR Ltd. from XYZ Ltd. PQR
Ltd. manufactured products containing fiber glass and has been named in 10 class
actions concerning the effects of these fiber glass. XYZ Ltd. agrees to indemnify
ABC Ltd. for the adverse results of any court cases up to an amount of Rs. 10 crore.
The class actions have not specified amounts of damages and past experience
suggests that claims may be up to Rs. 1 crore each, but that they are often settled
for small amounts.
ABC Ltd. makes an assessment of the court cases and decides that due to the
potential variance in outcomes, the contingent liability cannot be measured reliably
and accordingly no amount is recognised in respect of the court cases. How should
indemnification asset be accounted for?
Answer: Since no liability is recognised in the given case, ABC Ltd. will also not
recognise an indemnification asset as part of the business combination accounting.
Question 18: Company A, FMCG company acquires an online e-commerce

company E, with the intention to start doing retailing. The e-commerce company has
over the period have 10 million registered users. However, the e-commerce
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company E does not have any intention to sale the customer list. Should this
customer list be recorded as an intangible in a business combination?
(Study Material)
Answer: 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 other players and E 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.
Research and Development

Question 19: ABC Ltd. a pharmaceutical group acquires XYZ Ltd. another
pharmaceutical business. XYZ Ltd. has incurred significant research costs in
connection with two new drugs that have been undergoing clinical trials. Out of the
two drugs, one drug has not been granted necessary regulatory approvals. However,
ABC Ltd. expects that approval will be given within two years. The other drug has
recently received regulatory approval. The drugs’ revenue-earning potential was one
of the principal reasons why entity ABC Ltd. decided to acquire entity XYZ Ltd.
Whether the research and development on either of the drugs be recognised as an
intangible asset in the books of ABC Ltd.?
Reacquired Rights
Question 20: Vadapav Limited is a successful company has number of own stores
across India and also offers franchisee to other companies. Efficient Ltd is one of the
franchisee of Vadapav Ltd and is and operates number of store in south India.
Vadapav Ltd. decided to acquire Efficient Ltd due to its huge distribution network and
accordingly purchased the outstanding shares on 1 April 20X2. On the acquisition
date, Vadapav determines that the license agreement reflects current market terms.
(Study Material)
Answer: Vadapav 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.
Question 21: ABC Ltd. acquires PQR Ltd. for a consideration of Rs. 1 crore. Four
years ago, ABC Ltd. had granted a ten-year license allowing PQR Ltd. to operate in
Europe. The cost of the license was Rs. 2,50,000. The contract allows either party to
terminate the franchise at a cost of the unexpired initial fee plus 20%. At the date of
acquisition, the settlement amount is Rs. 1,80,000 [(Rs. 2,50,000 x 6/10) + 20%].
ABC Ltd. has acquired PQR Ltd., because it sees high potential in the European
market and wishes to exploit it. ABC Ltd. calculates that under current economic
conditions and at current prices it could grant a six-year franchise for a price of Rs.
4,50,000.
How is the license accounted for as part of the business combination?
Answer: The loss on settlement of the contract is Rs. 1,80,000. Therefore, out of the
Rs. 1 crore paid, Rs. 98.2 lakh is accounted for as consideration for the business
combination and Rs. 1,80,000 is accounted for separately as a settlement loss on
the re-acquired right.
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Question 22: Progressive Ltd is being sued by Regressive Ltd for an infringement of
its Patent. At 31st March, 20X2, Progressive Ltd recognised a Rs. 10 million liability
related to this litigation.
On 30th July, 20X2, 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.
Answer: 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.
Measurement Period
Question 23:
Scenario 1:
Bank F acquires Bank E in a business combination in October 20X1. The loan by
Bank E to Borrower B is recognised at its provisionally determined fair value. In
December 20X1, F receives Borrower B's financial statements for the year ended
September 30, 20X1, which indicate significant decrease in Borrower B's income
from operations. Basis this, the fair value of the loan to B at the acquisition date is
determined to be less than the amount recognised earlier on a provisional basis.
Scenario 2:
Bank F acquires Bank E in a business combination in October 20X1. The loan by
Bank E to Borrower B is recognised at its provisionally determined fair value. In
December 20X1, F receives information that Borrower B has lost its major customer
earlier that month and this is expected to have a significant negative effect on B's
operations.
Required:
Comment on the treatment done by Bank F.
(Study Material)
Answer:
Scenario 1: The new information obtained by F subsequent to the acquisition relates
to facts and circumstances that existed at the acquisition date. Accordingly, an
adjustment (i.e., decrease) to in the provisional amount should be recognised for
loan to B with a corresponding increase in goodwill.
Scenario 2: Basis this, the fair value of the loan to B will be less than the amount
recognised earlier at the acquisition date. The new information resulting in the
change in the estimated fair value of the loan to B does not relate to facts and
circumstances that existed at the acquisition date, but rather is due to a new event
i.e., the loss of a major customer subsequent to the acquisition date. Therefore,
based on the new information, F should determine and recognise an allowance for
loss on the loan in accordance with Ind AS 109, Financial Instruments: Recognition
and Measurement, with a corresponding charge to profit or loss; goodwill is not
adjusted.
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Question 24: Entity X acquired 100% shareholding of Entity Y on 1 April 20X1 and
had complete the preliminary purchase price allocation and accordingly recorded net
assets of INR 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
20X2, 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 20X2. Whether the aforesaid
losses can be adjusted with the Goodwill recorded based on the preliminary
purchase price allocation?
(Study Material)
Answer: 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 20X2 will
tantamount to change of estimate and accordingly will not impact the Goodwill
amount.
Question 25: ABC Ltd. acquires XYZ Ltd. in a business combination on 15th
January, 20X1. Few days before the date of acquisition, one of XYZ Ltd.'s customers
had claimed that certain amounts were due by XYZ Ltd. under penalty clauses for
completion delays included in the contract.
ABC Ltd. evaluates the dispute based on the information available at the date of
acquisition and concludes that XYZ Ltd. was responsible for at least some of the
delays in completing the contract. Based on the evaluation, ABC Ltd. recognises Rs.
1 crore towards this liability which is its best estimate of the fair value of the liability
to the customer based on the information available at the date of acquisition.
In October, 20X1 (within the measurement period), the customer presents additional
information as per which ABC Ltd. concludes the fair value of liability on the date of
acquisition to be Rs. 2 crore.
ABC Ltd. continues to receive and evaluate information related to the claim after
October, 20X1. Its evaluation doesn’t change till February, 20X2 (i.e. after the
measurement period), when it concludes that the fair value of the liability for the
claim at the date of acquisition is Rs. 1.9 crore. ABC Ltd. determines that the amount
that would be recognised with respect to the claim under Ind AS 37, Provisions,
Contingent Liabilities and Contingent Assets as at February, 20X2 is Rs. 2.2 crore.
How should the adjustment to the provisional amounts be made in the financial
statements during and after measurement period?
Answer: The consolidated financial statements of ABC Ltd. for the year ended 31st
March, 20X1 should include Rs. 1 crore towards the contingent liability in relation to
the customer claim.
When the customer presents additional information in support of its claim, the
incremental liability of Rs. 1 crore (Rs. 2 crore – Rs. 1 crore) will be adjusted as a
part of acquisition accounting resulting in a corresponding increase in goodwill as it
is within the measurement period.
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The information obtained after 15th January 2012 (Beyond the measurement period)
should be adjusted in P&L. Accordingly the increase in the liability amounting to Rs.
20 lakh (Rs. 2.2 crore– Rs. 2 crore) is recognised in profit or loss.
Contingent Payments to Employee Shareholders
Question 26: 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. Calculate
Purchase Consideration.
(Study Material)
Answer: 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, contingent consideration is accounted as
employee cost and will be accounted as per the other Ind AS 19.
Only USD 20 million is considered as purchase consideration.
Question 27: ABC Ltd. acquires all of the outstanding shares of XYZ Ltd. in a
business combination. XYZ Ltd had three shareholders with equal shareholdings,
two of whom were also senior-level employees of XYZ Ltd. and would continue as
employee post acquisition of shares by ABC Ltd.
• The employee shareholders each will receive Rs. 60,00,000 plus an additional
payment of Rs 1,50,00,000 to 2,00,00,000 based on a multiple of earnings over the
next two years.
• The non-employee shareholders each receive Rs 1,00,00,000.
The additional payment of each of these employee shareholders will be forfeited if
they leave the employment of XYZ Ltd. at any time during the two years following its
acquisition by ABC Ltd. The salary received by them is considered reasonable
remuneration for their services.
How much amount is attributable to post combination services?
Answer: Entire payment of Rs 1 Crore to the non employee shareholders and Rs

1.2 Cr (Rs 60 Lakhs X2) to employee shareholders should form part of PC
The additional consideration of Rs 1,50,00,000 to Rs 2,00,00,000 represents

compensation for post-combination services, as the same represents that part of the
payment which is forfeited if the former shareholder does not remain in the
employment of XYZ Ltd. for two years following the acquisition.
Replacement of Acquiree SBP awards
Question 28: 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
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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.
(Study Material)
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 (INR 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.
NCI
Question 29: Company A acquired 90% equity interest in Company B on April 1,

2010 for a consideration of Rs. 85 crores in a distress sale. Company B did not have
any instrument recognised in equity. The Company appointed a registered valuer
with whose assistance, the Company valued the fair value of NCI and the fair value
identifiable net assets at Rs. 15 crores and Rs. 100 crores respectively. Required
Find the value at which NCI has to be shown in the financial statements
(Study Material)
Answer: In this case, Company A has the option to measure NCI as follows:
 Option 1: Measure NCI at fair value i.e., Rs. 15 crores as derived by the valuer;
 Option 2: Measure NCI as proportion of fair value of identifiable net assets i.e.,
Rs. 10 crores (100 crores x 10%)
Question 30: Classic Ltd. acquires 60% of the ordinary shares of Natural Ltd. a
private entity, for Rs. 97.5 crore. The fair value of its identifiable net assets is Rs.
150 crore. The fair value of the 40% of the ordinary shares owned by non-controlling
shareholders is Rs. 65 crore. Carrying amount of Natural Ltd.’s net assets is Rs. 120
crore.
How will the non-controlling interest be measured?
Answer: Option 1) Non-controlling interests are measured at fair value

Under this method, goodwill represents the difference between the fair value of
Natural Ltd. and the fair value of its identifiable net assets.
Thus, Classic Ltd. will recognise the business combination as follows:
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Identifiable net assets at fair value Dr 150

Goodwill Dr 12.5
To Non-controlling interest 65
To Investment in Natural Ltd. 97.5
Option 2) Non-controlling interests are measured at proportionate share of

identifiable net assets
Identifiable net assets at fair value Dr 150

Goodwill Dr 7.5
To Non-controlling interest 60
To Investment in Natural Ltd. 97.5
Non Replacement SBP awards – NCI Impact
Question 31: P a real estate company acquires Q 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'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 determines that the
market-based measure of the award at the acquisition date is INR 500 (based on
measurement principles and conditions at the acquisition date as per Ind AS 102).
Calculate amount of Share Based Awards to be included in purchase consideration.
(Study Material)
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 precombination period is 500 x 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 an compensation expenses.
Question 32: Company A acquires 70 percent of Company S on January 1, 20X1

for consideration transferred of Rs. 5 million. Company A intends to recognise the
NCI at proportionate share of fair value of identifiable net assets. With the assistance
of a suitably qualified valuation professional, A measures the identifiable net assets
of B at Rs. 10 million. A performs a review and determines that the business
combination did not include any transactions that should be accounted for separately
from the business combination.
Calculate the bargain purchase gain in the process.
(Study Material)
Answer:
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(Rs.)
Identifiable net assets 1,00,00,000
Less: Consideration transferred (50,00,000)
NCI (10 million x 30%) (30,00,000)
Gain on bargain purchase 20,00,000
Question 33: 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.
(Study Material)
Answer:
Let us evaluate each of the steps discussed in the above analysis:
Step 1: 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.
Step 2: 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.
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Step 3: 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 Note # 1 Rs. 20,00,000
As such, the total purchase consideration is Rs. 92,00,000.
Note # 1 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.
Step 4: Determine fair value of identifiable assets and liabilities

The fair value of identifiable net assets is determined at Rs. 60,00,000.
Step 5: 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.
Step 6: Determination of goodwill

(Rs.)
Total consideration 92,00,000
Recognised amount of any non-controlling interest 7,50,000
Less: Fair value of Identifiable Net Assets (60,00,000)
Goodwill 39,50,000
Note # 2 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.
Comprehensive
Question 34: The balance sheet of Professional Ltd and Dynamic Ltd as of 31
March 20X2 is given below:
(Rs. Lakh)
Assets Professional
Dynamic Ltd
Ltd
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Non-Current Assets:
Property plant and equipment 300 500
Investments 400 100
Current assets:
Inventories 250 150
Financial assets – investments 400 230
Trade receivable 450 300
Cash and cash balances 200 100
Total 2,000 1,380
Equity and Liabilities
Equity
Share capital-Equity shares of Rs. 100 each 500 400
Reserve and surplus 730 180
OCI 80 45
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 payables 250 300
Total 2,000 1,380
Other information
(a) Professional acquired 70% of Dynamic Ltd on 1 April 20X2 for by issuing its own
share in the ratio of 1 share of Professional Ltd for every 2 shares of Dynamic
Ltd. The fair value of the shares of Professional Ltd was 40.
(b) The fair value exercise resulted in the following:( all Amountd in Lakhs)
(a) PPE fair value on 1 April 20X2 was 350.
(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 10 lakh profit in
the preceding year and expects to earn another 20 Lakh.
(c) In addition to above, Professional Ltd also had agreed to pay one of the
founder shareholder a payment of 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
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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- INR 5
(ii) Replacement award- INR 8.
(e) Dynamic Ltd had a lawsuit pending with a customer who had made a claim
of 50. Management reliably estimated the fair value of the liability to be 5.
(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 20X2. Assume 10% discount rate
(Study Material)
Common Control Transactions
Question 35: The following is the draft Balance Sheet of Diverse Ltd. having an
authorised capital of Rs. 1,000 crores as on 31st March, 20X1:
ASSETS Amount
Non-current assets
Property, plant and equipment 600
Financial assets
Investments carried at fair value 1,000
Current assets
Other current assets 3,000
4,600
EQUITY AND LIABILITY
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
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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 crores. The
authorised capital of Khajana Ltd. is to be Rs. 500 crores.
(b) Khajana Ltd. is to take over investments at Rs. 800 crores and
unsecured loans at balance sheet value of Rs. 600 crores. 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 crores carrying interest at 15% per
annum and having a right to convert into equity shares of Rs. 10 each at
par on 31.3.20X3. This issue was made to the members of Sunrise 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.
Question 36: Company X, the ultimate parent of a large number of subsidiaries,

reorganises 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 indirectly control the operating and financial
policies of Companies Y.
Before-Reorganisation
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After- Reorganisation
Is it common control?
(Study Material)
Answer: 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 in the scope of Ind AS 103.
Question 37: 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, 20X2, the division-wise draft extract of the Balance Sheet was:
(Rs. in crores)
Laptop Mobile Total
Fixed assets cost 250 500 750
Depreciation (225) (400) (625)
Net Assets (A) 25 100 125
Current assets: 200 500 700
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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.
(Study Material)
Question 38: Maxi Mini Ltd. has 2 divisions - Maxi and Mini. The draft information of
assets and liabilities as at 31st October, 20X2 was as under:
Maxi Mini Total (in
division division 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:
Loans funds - 100 100
(Secured by a charge on fixed assets)
Own funds:
Equity capital 50
(fully paid up Rs. 10 shares)
115 | P a g e
Reserves and surplus 650

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 crores 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, 20X2, 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".
(Study Material)
Reverse Acquisition
Question 39: AX Ltd. and BX Ltd. amalgamated on and from 1st January 20X2. A
new Company ABX Ltd. was formed to take over the businesses of the existing
companies.
Summarized Balance Sheet as on 31-12-20X2

INR 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
EQUITY AND LIABILITIES 13,050 15,200
Equity
Equity share capital (of face value of INR 10
6,000 7,000
each)
Other equity 3,050 2,700
116 | P a g e
Liabilities
Non-current liabilities
Financial 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 1,300 2,900
Fair value of the business 11,000 14,000
(Study Material)
Question 40: On September 30, 20X1 Entity A issues 2.5 shares in exchange for
each ordinary share of Entity B. All of Entity B's shareholders exchange their shares
in Entity B. Therefore, Entity A issues 150 ordinary shares in exchange for all 60
ordinary shares of Entity B.
The fair value of each ordinary share of Entity B at September 30, 20X1 is 40. The
quoted market price of Entity A's ordinary shares at that date is 16.
The fair values of Entity A's identifiable assets and liabilities at September 30, 20X1
are the same as their carrying amounts, except that the fair value of Entity A's non-
current assets at September 30, 20X1 is 1,500.
The statements of financial position of Entity A and Entity B immediately before the
business combination are:
Entity A Entity B
Current assets 500 700
Non-current assets 1,300 3,000
Total assets 1,800 3,700
Current liabilities 300 600
Non-current liabilities 400 1,100
Total liabilities 700 1,700
117 | P a g e
Shareholder’s equity
Retained earnings 800 1,400
Issued equity
100 Ordinary shares 300
60 Ordinary shares 600
Total shareholders’ equity 1,100 2,000
Total liabilities and shareholders’ equity 1,800 3,700
Prepare new Balance Sheet of A Ltd. Post Combination

(Study Material)
First Time Adoption
Question 41: A Ltd. acquired B Ltd. in a business combination transaction. A Ltd.

agreed to pay certain contingent consideration (liability classified) to B Ltd. As part of
its investment in its separate financial statements, A Ltd. did not recognise the said
contingent consideration (since it was not considered probable) A Ltd. considered
the previous GAAP carrying amounts of investment as its deemed cost on first-time
adoption. In that case, does the carrying amount of investment required to be
adjusted for the this transaction?
(Study Material)
Answer: In accordance with Ind AS 101, an entity has an option to treat the previous
GAAP carrying values, as at the date of transition, of investments in subsidiaries,
associates and joint ventures as its deemed cost on transition to Ind AS. If such an
exemption is adopted, then the carrying values of such investments are not adjusted.
Accordingly, any adjustments in relation to recognition of contingent consideration on
first time adoption shall be made in the statement of profit and loss.
Question 42: Ind AS requires allocation of losses to the non-controlling interest,

which may ultimately lead to a debit balance in non-controlling interests, even if there
is no contract with the non-controlling interest holders to contribute assets to the
Company to fund the losses. Whether this adjustment is required or permitted to be
made retrospectively?
(Study Material)
Answer: In case an entity elects not to restate past business combinations, Ind AS
101 requires the measurement of non-controlling interests (NCI) to follow from the
measurement of other assets and liabilities on transition to Ind AS. However, Ind AS
101 contains a mandatory exception that prohibits retrospective allocation of
accumulated profits between the owners of the parent and the NCI. In case an entity
elects not to restate past business combinations, the previous GAAP carrying value
of NCI is not changed other than for adjustments made (remeasurement of the
assets and liabilities subsequent to the business combination) as part of the
transition to Ind AS. As such, the carrying value of NCI in the opening Ind AS
balance sheet cannot have a deficit balance on account of recognition of the losses
attributable to the minority interest, which was not recognised under the previous
118 | P a g e
GAAP as part of NCI in the absence of contract to contribute assets to fund such a
deficit. However, the NCI could have a deficit balance due to remeasurement of the
assets and liabilities subsequent to the business combination as part of the transition
to Ind AS. In case an entity restates past business combination, Ind AS 101 requires
that the balance in NCI as at the date of transition shall be determined
retrospectively in accordance with Ind AS, taking into account the impact of other
elections made as part of the adoption of Ind AS. As such, the NCI could have a
deficit balance on account of losses attributable to the NCI, even if there is no
obligation on the holders of NCI to contribute assets to fund such a deficit.
Question 43: A Ltd. had made certain investments in B Ltd's convertible debt
instruments. The conversion rights are substantive rights and would provide A Ltd.
with a controlling stake over B Ltd. A Ltd. has evaluated that B Ltd. would be treated
as its subsidiary under Ind AS and, hence, would require consolidation in its Ind AS
consolidated financial statements. B Ltd. was not considered as a subsidiary,
associate or a joint venture under previous GAAP. How should B Ltd. be
consolidated on transition to Ind AS assuming that A Ltd. has opted to avail the
exemption from retrospective restatement of past business combinations?
(Study Material)
Answer: Ind AS 101 prescribes an optional exemption from retrospective
restatement in relation to past business combinations. Ind AS 101 prescribes that
when the past business combinations are not restated and a parent entity had not
consolidated an entity as a subsidiary in accordance with its previous GAAP (either
because it was not regarded as a subsidiary or no consolidated financial statements
were required under previous GAAP), then the subsidiary's assets and liabilities
would be included in the parent's opening consolidated financial statements at such
values as would appear in the subsidiary's separate financial statements if the
subsidiary were to adopt the Ind AS as at the parent's date of transition. For this
purpose, the subsidiary's separate financial statements would be prepared as if it
was a first-time adopter of Ind AS i.e. after availing relevant first-time adoption
mandatory exceptions and voluntary exemptions. In other words, the parent will
adjust the carrying amount of the subsidiary's assets and liabilities to the amounts
that Ind AS would require in the subsidiary's balance sheet.
The deemed cost of goodwill equals the difference at the date of transition between:
(a) the parent's interest in those adjusted carrying amount; and
(b) the cost in the parent's separate financial statements of its investment in the
subsidiary.
The measurement of non-controlling interest and deferred tax follows from the
measurement of other assets and liabilities.
It may be noted here that the above exemption is available only under those
circumstances where the parent, in accordance with the previous GAAP, has not
presented consolidated financial statements for the previous year; or where the
consolidated financial statements were prepared in accordance with the previous
GAAP but the entity was not treated as a subsidiary, associate or joint venture under
the previous GAAP. As such, if the consolidated financial statements were required
to be prepared and there is a change in classification of the entity from subsidiary to
associate or vice versa in accordance with Ind AS, then the above exemption does
not apply.
119 | P a g e
Question 44: A Ltd. has a subsidiary B Ltd. On first time adoption of Ind AS by B
Ltd., it availed the optional exemption of not restating its past business combinations.
However, A Ltd. in its consolidated financial statements has decided to restate all its
past business combinations. Whether the amounts recorded by subsidiary need to
be adjusted while preparing the consolidated financial statements of A Ltd.
considering that A Ltd. does not avail the business combination exemption? Will the
answer be different if the A Ltd. adopts Ind AS after the B Ltd?
(Study Material)
Answer: As per Ind AS 101: "A first-time adopter may elect not to apply Ind AS 103
retrospectively to past business combinations (business combinations that occurred
before the date of transition to Ind AS). However, if a first-time adopter restates any
business combination to comply with Ind AS 103, it shall restate all later business
combinations and shall also apply Ind AS 110 from that same date.
For example, if a first-time adopter elects to restate a business combination that
occurred on 30 June 20X0, it shall restate all business combinations that occurred
between 30 June 20X0 and the date of transition to Ind AS, and it shall also apply
Ind AS 110 from 30 June 20X0." Based on the above, if A Ltd. restates past
business combinations, it would have to be applied to all business combinations of
the group including those by subsidiary B Ltd. for the purpose of Consolidated
Financial Statements. Ind AS 101 states, "However, if an entity becomes a first-time
adopter later than its subsidiary (or associate or joint venture) the entity shall, in its
consolidated financial statements, measure the assets and liabilities of the subsidiary
(or associate or joint venture) at the same carrying amounts as in the financial
statements of the subsidiary (or associate or joint venture), after adjusting for
consolidation and equity accounting adjustments and for the effects of the business
combination in which the entity acquired the subsidiary." Thus, in case where the
parent adopts Ind AS later than the subsidiary then it does not change the amounts
already recognised by the subsidiary.
Question 45: A Ltd. acquired B Ltd. in a business combination transaction. A Ltd.

agreed to pay certain contingent consideration (liability classified) to B Ltd. As part of
its investment in its separate financial statements, A Ltd. did not recognise the said
contingent consideration (since it was not considered probable) A Ltd. considered
the previous GAAP carrying amounts of investment as its deemed cost on first-time
adoption. In that case, does the carrying amount of investment required to be
adjusted for this transaction?
(Study Material)
Answer: In accordance with Ind AS 101, an entity has an option to treat the previous
GAAP carrying values, as at the date of transition, of investments in subsidiaries,
associates and joint ventures as its deemed cost on transition to Ind AS. If such an
exemption is adopted, then the carrying values of such investments are not adjusted.
Accordingly, any adjustments in relation to recognition of contingent consideration on
first time adoption shall be made in the statement of profit and loss.
Question 46: Company A intends to restate its past business combinations with
effect from 30 June 2010 (being a date prior to the transition date). If business
combinations are restated, whether certain other exemptions, such as the deemed
cost exemption for property, plant and equipment (PPE), can be adopted?
120 | P a g e
(Study Material)
Answer: Ind-AS 101 prescribes that an entity may elect to use one or more of the
exemptions of the Standard. As such, an entity may choose to adopt a combination
of optional exemptions in relation to the underlying account balances.
When the past business combinations after a particular date (30 June 2010 in the
given case) are restated, it requires retrospective adjustments to the carrying
amounts of acquiree's assets and liabilities on account of initial acquisition
accounting of the acquiree's net assets, the effects of subsequent measurement of
those net assets (including amortisation of non current assets that were recognised
at its fair value), goodwill on consolidation and the consolidation adjustments.
Therefore, the goodwill and equity (including non-controlling interest (NCI)) cannot
be computed by considering the deemed cost exemption for PPE. However, the
entity may adopt the deemed cost exemption for its property, plant and equipment
other than those acquired through business combinations.
121 | P a g e

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CA FINAL

FINANCIAL REPORTING - NEW

At the outset let me congratulate you for having taken up this

It gives me immense pleasure in presenting this workbook on Financial

I gratefully acknowledge the support of all my friends and well-wishers in

CA Ajith Rohith G - B.com, FCA

1st May 2021

He motivates his students to channelize their confidence to excel in studies thereby

It is indeed worthwhile to attend to ARG classes.

ABSORB REFRESH RETRIEVE

HAPPY LEARNING EXPERIENCE

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated and Separate Financial Statements of Group Entities

Consolidated financial statements present the financial position of an entire group

As per Ind AS 110 ‘Consolidated Financial Statements’, an investor controls an

Power to direct relevant Exposure to variable Linkage between

• Potential voting rights;

More than 50% Power to appoint Investor have currently

Power over the investee is derived from

Rights where the holder has a practical

ignore while assessing power / control

Conversion Price Economic Impact

Conversion not Coversion Conversion Conversion

Separate Financial Statemenst Consolidated Financial Statement

Preparation and Publishing Governed by Ind Governed by

Note: Preparation of Consolidated Financial Statements are mandatory as

Ind AS covered in this chapter

Ind AS 27 ‘Separate Financial Statements’: This Ind AS prescribes the principles of

Accounting for Investment

Investment in Other Investment in Investment in

Step Acquisition – Control Establised

Ex : Investment under Ind AS 109 to Subsidiary

Ex : Investment under Ind AS 109 to Associate

10 % (No Control) 45 % ( Significant Influence)

Ex : Investment in Associate to Subsidiary

25 % ( Significant Influence) 60 % (Control)

Note: Goodwill or BPG is always computed on Date when control is

Goodwill computed above is annualy tested for impairment under Ind AS

Step Acquisition – No effect on Control

Whenever Holding Company acquires additional stake in subsidiary or dispose of some

Parent buys shares from non-controlling interest

Parent sells shares to non-controlling interest

Subsidiary issues new shares to non-controlling interest in a capital raising exercise

Calculation of goodwill / capital reserve and determination of non- controlling

Treatment of Bargain Purchase Gain

 the identifiable assets acquired and liabilities assumed;

Measurement of non-controlling interest

Non-controlling interest is the equity not attributable, directly or indirectly, to a parent.

As per AS 21 - Maximum Dr to Minority Interest is equal to the extend of unpaid

Revaluation of Assets and Liabilities of Subsidiary

On acquisition of Subsidiary, we are required to determine the Fair Value of Identified

If Subsidairy company already have Goodwill or Deferred Revenue Expenditure/

Treatment of uneven items

Consequential Adjustment on account of Revaluation

Particulars Consequential Impact

Impairment Loss with respect to Goowill will be adjusted in consolidated Financial

Treatment of Impairment Loss on Goodwill

If NCI @ PSNA If NCI @ FV

Partial Goodwill Full Goodwill

Recognise Impairment loss in Allocate Impairment Loss to

Treatment of unrealized Profits

Non Current Asset

URP on Inventory transfer