Accounting for Business Combination and Restructuring: formula sheet

Key formulas

Goodwill (acquisition method)

Goodwill = Consideration transferred + Non-controlling interest + Fair value of previously held interest − Net identifiable assets at fair value

A negative result is a bargain purchase gain, recognised after reassessing the identification and measurement of assets and liabilities.

Net identifiable assets

Fair value of identifiable assets acquired − Fair value of liabilities assumed

Includes identifiable intangibles not in the target's books. Goodwill already in the target's books is excluded.

Method for common control (Appendix C, para 8)

Common control combination → pooling of interests method

Assets and liabilities at carrying amounts; no fair value adjustments; only adjustments to harmonise accounting policies (para 9).

Difference in common control (Appendix C, para 12)

Share capital issued + additional consideration − Share capital of transferor → transferred to capital reserve

Present it separately from other capital reserves with disclosure of nature and purpose. Securities are recorded at nominal value (para 10).

Reserves in pooling (Appendix C, paras 11 and 12)

Identity of reserves preserved; transferor's retained earnings aggregated with transferee's, or transferred to General Reserve, if any

Reserves available for dividend before the combination remain available after it.

Goodwill (paragraph 32)

Goodwill = [Consideration transferred + NCI + Fair value of previously held interest] − Net identifiable assets acquired (assets − liabilities, acquisition-date amounts)

A positive result is goodwill. A negative result is a bargain purchase, after the review in paragraph 36.

Purchase consideration (net payment approach)

Consideration = Cash + Fair value of other assets transferred + Fair value of shares issued + Fair value of contingent consideration + Present value of deferred payments

This follows the Ind AS 103 principle: acquisition-date fair value of what is transferred. Exclude acquisition-related costs.

Purchase consideration (net asset approach)

Consideration = Value of assets taken over − Liabilities taken over

An older AS 14-style convention, not an Ind AS 103 method. Use it only when the question says the acquirer takes over specified assets and liabilities and pays their net value.

NCI at proportionate share

NCI = NCI % × Acquisition-date amounts of the acquiree's identifiable net assets (recognised and measured under Ind AS 103)

This option gives goodwill attributable to the parent only. Some items are not measured at fair value under Ind AS 103, so do not assume fair value for every item.

NCI at fair value

NCI = Acquisition-date fair value of the shares held by non-controlling shareholders

This option gives full goodwill, including the NCI's share.

Business combination achieved in stages

Add acquisition-date fair value of the acquirer's previously held equity interest to the goodwill calculation

This is paragraph 32(a)(iii). The old stake is remeasured at acquisition date.

Four steps of the acquisition method (paragraph 5)

Identify acquirer → Fix acquisition date → Recognise and measure assets, liabilities and NCI → Measure goodwill or bargain purchase gain

Use this as your answer outline.

Bargain purchase gain

Gain = Net identifiable assets acquired − (Consideration + NCI + Previously held interest), when positive

Recognise only after reassessing identification and measurement (paragraph 36).

Pooling: difference to capital reserve

Difference = (Share capital issued + Cash or other consideration) − Share capital of transferor

Appendix C. If the transferor's share capital is higher, the difference is a credit to capital reserve. If it is lower, it is a debit. Show it separately from other capital reserves.

Pooling: measurement

Assets and liabilities at carrying amounts; shares issued at nominal value

No fair value adjustments. Adjust only to harmonise accounting policies. Non-cash assets given as consideration are taken at fair value.

Pooling: reserves

Transferee's reserve = Transferee's own + Transferor's reserve of the same type

Identity is preserved. Transferor's retained earnings are aggregated with the transferee's, or moved to General Reserve.

Acquisition method: consideration

Consideration = Fair value of shares + Cash + Fair value of contingent consideration

Acquisition-related costs are not part of consideration. Expense them.

Acquisition method: goodwill

Goodwill = Consideration − Fair value of identifiable net assets acquired

A negative figure is a bargain purchase. Reassess the identification and measurement first, then recognise it as capital reserve.

Profit or loss on realisation

Σ credits (liabilities taken over + purchase consideration + sale proceeds of assets not taken over) − Σ debits (book value of all assets transferred to realisation, whether taken over or sold + liquidation expenses borne by transferor)

A positive balance is a profit, credited to equity shareholders' account. A negative balance is a loss, debited to it.

Amount due to equity shareholders

Equity share capital + reserves and surplus (credit balances) + realisation profit − realisation loss − accumulated losses

Preference shareholders are normally settled first at the amount they are entitled to.

Cash left to pay shareholders

Opening bank + cash from sale of assets not taken over + cash consideration − liabilities paid in cash − liquidation expenses paid

This must agree with the cash balance in the equity shareholders' account. If not, recheck the workings.

Entry for assets transferred

Realisation A/c Dr. (book value of all assets other than cash and bank, including assets to be sold) to Assets A/c (each one)

Cash and bank are usually excluded, unless the question says the transferee takes them over. Assets not taken over are still debited here; the cash from their sale is credited to realisation later.

Entry for purchase consideration

Transferee Co. A/c Dr. to Realisation A/c

Then: Shares in Transferee Dr., Bank Dr. to Transferee Co. A/c, as and when received.

Reduction in equity share capital

Number of shares × (old paid-up value per share − new paid-up value per share)

Debit Equity Share Capital (old) and credit Capital Reduction Account. Then re-issue at the new face or paid-up value.

Sacrifice by creditors or debenture holders

Old claim − amount agreed to be accepted

Debit the liability, credit Capital Reduction Account. Any amount settled in cash or fresh securities is a separate entry.

Capital Reduction Account closing rule

Total credits (all sacrifices and gains) = Total debits (all write-offs and losses)

Use the account to write off the debit balance of the Statement of Profit and Loss, goodwill, other intangibles, fictitious assets and asset write-downs. Any credit balance left goes to Capital Reserve.

Balance sheet check after the scheme

Total assets (after write-offs) = Equity + Preference + Debentures + Other liabilities (after sacrifices)

The Statement of Profit and Loss debit balance must be nil after the scheme unless the scheme says otherwise.

Entry for write-off of losses and assets

Capital Reduction A/c Dr. to Statement of Profit and Loss, Goodwill, Other assets (write-down)

Pass a single compound entry. Any asset appreciated is credited to Capital Reduction Account instead.

Net assets of the demerged undertaking

Net assets = Assets transferred − Liabilities transferred

Use book values for common control pooling and fair values for the acquisition method.

Difference in the resulting company (common control)

Difference = (Share capital issued + other consideration) − Share capital of the transferor

Per Appendix C, para 12 this difference is transferred to capital reserve and shown separately from other capital reserves, with its nature and purpose disclosed. If the transferor's share capital is higher, the result is a credit to capital reserve. The reserves of the transferor are carried over with their identity preserved, so they are not part of this difference.

Gain or loss in a slump sale

Gain or loss = Lump-sum consideration − Net book value of the undertaking

A positive result is a gain. Do not give separate values to individual assets.

Goodwill (acquisition method)

Goodwill = Consideration − Fair value of net identifiable assets acquired

A negative result is a bargain purchase gain, recognised as per Ind AS 103.

Common control disclosures

Para 13 of Appendix C: (a) names and nature of business, (b) date control obtained, (c) shares issued and percentage exchanged, (d) difference and its treatment

Give these in the first financial statements after the combination.

Share exchange ratio (swap ratio)

Swap ratio = Value per share of transferor ÷ Value per share of transferee

Values per share come from the valuation method used, usually a weighted mix of net asset, earnings and market value. Weights must be stated by the question.

Shares to be issued

Shares issued = Shares of transferor × Swap ratio

Where the ratio is given as 'x shares for every y shares held', use x ÷ y.

Purchase consideration (share-based)

Purchase consideration = Shares issued × Value per share of the transferee's shares

Use the fair value of the shares issued as the question specifies. Add any cash paid.

Reserves in a common control combination (Ind AS 103, Appendix C, para 12)

Capital reserve = Share capital of transferor − (Share capital issued + additional cash or other assets)

The identity of reserves is preserved. This difference goes to capital reserve, shown separately with its nature and purpose disclosed.

Acquisition-related costs (Ind AS 103, para 53)

Acquisition-related costs = expensed when incurred and services received

The exception is the cost of issuing debt or equity securities, which follows Ind AS 32 and Ind AS 109.

Quick revision

• A business combination is a transaction or event where an acquirer obtains control of one or more businesses.
• Mergers of equals are also business combinations under Ind AS 103.
• Goodwill = (consideration + non-controlling interest + fair value of previously held interest) − net identifiable assets at acquisition date.
• Goodwill is an asset for future benefits from assets not individually identified and separately recognised.
• Under Ind AS 103, a bargain purchase gain goes to other comprehensive income and accumulates in equity as capital reserve.
• If there is no clear evidence for the bargain purchase reason, the gain goes directly to equity as capital reserve.
• Common control: all combining entities are ultimately controlled by the same party both before and after, and the control is not transitory.
• In common control deals, the identity of the reserves is preserved in the transferee's statements.
• Transferor's retained earnings are aggregated with the transferee's, or moved to General Reserve if any.
• Any difference between share capital issued plus other consideration and the transferor's share capital goes to a separately presented capital reserve.
• Goodwill is not amortised; it is carried at cost less accumulated impairment losses under Ind AS 36.
• First financial statements after a common control deal must disclose names, nature of business, control date, shares issued and the difference treatment.

Common mistakes

• Applying fair values to a common control combination. Fix: Test for common control first. Appendix C para 9 says assets and liabilities are at carrying amounts, with no fair value adjustments.
• Assuming a partly owned subsidiary is not under common control. Fix: Appendix C para 4 says the extent of non-controlling interests is not relevant, as a partially-owned subsidiary is still under the parent's control.
• Using the acquiree's book values instead of fair values for net assets. Fix: Rebuild the net asset figure from the fair value notes before you touch the goodwill formula. Put adjustments in a table.
• Including legal or advisory fees in purchase consideration. Fix: Acquisition-related costs are expensed. Only what is transferred to the sellers goes into consideration.
• Revaluing assets to fair value in a common control combination. Fix: Under pooling, use carrying amounts only. Adjust only to harmonise accounting policies.
• Recording shares issued at fair value or market price in a pooling question. Fix: Appendix C says securities are recorded at nominal value. Only non-cash assets given as consideration are at fair value.
• Debiting assets in the realisation account at the price the transferee pays instead of at book value. Fix: In the transferor's books, always use book values. The agreed value only affects the purchase consideration.
• Forgetting to credit liabilities taken over, or crediting liabilities that the transferee does not take over. Fix: Tick each balance sheet item against the scheme. A liability not taken over is settled by you, so it does not go to the realisation account unless a gain or loss arises.
• Writing off the Statement of Profit and Loss debit balance directly against share capital Fix: Always credit the Capital Reduction Account with sacrifices and debit it with write-offs. Do not net capital against losses directly unless the question says so.
• Treating a reduction in face value as a reduction in the number of shares Fix: Check whether the scheme changes the value per share or the number of shares. Compute the reduction as shares × change in value per share, or as the number of shares cancelled × value, as stated.

Exam tips

• Begin every answer by classifying the deal as common control or not. This one line decides the method and earns marks.
• Quote the paragraph idea in plain words, such as 'carrying amounts, no fair value adjustments, reserves keep their identity'. Examiners reward the correct rule.
• For acquirer-identification questions, list the facts you used: voting rights, who pays or issues shares, board control, relative size. Then state a conclusion.
• In MCQs, watch the words 'partially owned' and 'not consolidated'. Appendix C paras 4 and 5 say neither changes whether common control exists.
• Show the goodwill formula in full, even when the arithmetic is short.
• In MCQs, check the NCI basis first. Many wrong options come from using the wrong basis.
• Always show the fair value table and the consideration build-up separately. Marks are awarded for each component.
• If the question gives a bargain purchase, write one line on the reassessment before showing the gain. Examiners look for it.