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Financial Reporting · Ind AS 101 First-time Adoption of Ind AS

Ind AS 101 Optional Exemptions: Business Combinations and Deemed Cost

Updated 5 October 2026 · Fact-checked

Ind AS 101 lets a first-time adopter skip full retrospective restatement through optional exemptions. The business combination exemption in Appendix C lets you avoid restating past deals before a chosen date. The deemed cost exemptions in Appendix D let you treat fair value or a previous GAAP carrying amount as cost. Apply your choice consistently.

Understand Optional Exemptions: Business Combinations and Deemed Cost

A first-time adopter must prepare an opening Ind AS balance sheet at the date of transition, using Ind AS in force at the end of its first Ind AS reporting period. Doing this fully retrospectively would be costly. So Ind AS 101 gives optional exemptions that you may choose to use or not. The business combination exemption is in Appendix C. The deemed cost exemptions and the other optional exemptions are in Appendix D.

The business combination exemption (Appendix C) lets you choose not to apply Ind AS 103 retrospectively to past business combinations. You may pick any date on or before the date of transition and apply Ind AS 103 only to combinations on or after that date. (Choosing the transition date itself is the same as restating none.) Combinations before the chosen date keep their previous GAAP accounting, subject to specific adjustments. The main ones: assets and liabilities acquired that Ind AS does not recognise are removed, items Ind AS requires are recognised, and goodwill is tested for impairment at the transition date. Goodwill is also adjusted for intangibles that must be reclassified into it. The same date also applies to the related Ind AS 110 and Ind AS 28 requirements for those entities.

The deemed cost exemption (Appendix D) has two routes, and they work differently.

  • Fair value as deemed cost may be chosen item by item. For property, plant and equipment (PPE), you may measure an item at the transition date at its fair value and use that as deemed cost. The same is available for investment property and for intangibles. For intangibles, the recognition criteria and the revaluation criteria in Ind AS 38, including the active market criterion, must be met for the fair value route.
  • Alternatively, you may use a previous GAAP revaluation as deemed cost, if at the revaluation date it was broadly comparable to fair value, or to cost or depreciated cost adjusted for a price index.

For investments in subsidiaries, joint ventures and associates in separate financial statements, you may measure each at cost under Ind AS 27, or at deemed cost. Deemed cost is either fair value at the date of transition in the separate financial statements, or the previous GAAP carrying amount at that date. You may choose investment by investment. Any adjustment to carrying amount goes to retained earnings (or another equity category, if appropriate) at the transition date.

This topic also has a special Indian feature, the paragraph D7AA route. If you use the cost model, you may elect to continue the previous GAAP carrying amount as deemed cost for PPE (after adjusting for decommissioning liabilities), for intangible assets and for investment property. The election is made class-wise: if you take it for PPE, it covers all items of PPE, and the same applies to each of the other classes. Read the question to see which class it refers to. The cost model condition belongs to D7AA only. The fair value route and the previous GAAP revaluation route are not restricted to the cost model.

Key rules to remember

Deemed cost, PPE (fair value route)
Deemed cost = Fair value at date of transition
May be chosen item by item. Difference between fair value and previous GAAP carrying amount goes to retained earnings (or revaluation reserve where relevant) in the opening balance sheet.
Deemed cost, previous GAAP route (D7AA)
Deemed cost = Previous GAAP carrying amount at date of transition (PPE: adjusted for decommissioning liabilities)
Available under the cost model for PPE, intangible assets and investment property. The election is made class-wise for each, not asset by asset. The fair value route is not limited to the cost model.
Business combination exemption date
Ind AS 103 applies only to combinations on or after the chosen date; the chosen date may be any date on or before the date of transition (choosing the transition date itself means no past combination is restated)
Earlier combinations keep previous GAAP accounting, with required adjustments and goodwill impairment test at the transition date.
Investment in subsidiary, JV or associate in separate FS
Carrying amount = Cost (Ind AS 27) or Deemed cost (fair value or previous GAAP carrying amount at transition)
May be chosen investment by investment.
Opening adjustment
Adjustment to retained earnings = Deemed cost − Previous GAAP carrying amount
Positive means increase in equity, negative means reduction. Ignore deferred tax only if the question tells you to; otherwise recognise it under Ind AS 12.

How to solve Optional Exemptions: Business Combinations and Deemed Cost questions

Use this sequence for any question on business combinations or deemed cost under Ind AS 101.

  1. 1Fix the date of transition: the start of the earliest comparative period presented. Every measurement is at this date.
  2. 2Identify the item: PPE, intangible, investment property, investment in subsidiary, JV or associate, or a past business combination.
  3. 3Pick the exemption the question allows. If the question gives fair value, use the fair value route. If it gives previous GAAP carrying amount only, use that.
  4. 4For business combinations, find the chosen cut-off date. Combinations before it stay under previous GAAP, with adjustments. Combinations on or after it are restated under Ind AS 103.
  5. 5Compute deemed cost and the difference from the previous GAAP carrying amount.
  6. 6Post the difference to retained earnings (or the right equity component) and add the deferred tax effect if required.
  7. 7Check that you did not carry forward items Ind AS does not allow, and test goodwill for impairment at the transition date.
  8. 8State the conclusion in provision, facts, conclusion form.

Quickest way: Three-question shortcut

When to use it: When you have little time and the question gives numbers for several assets.

  1. Question 1: Is the entity a first-time adopter and what is the transition date? Write it down.
  2. Question 2: For each asset, does the question give fair value, a revalued previous GAAP amount, or only the carrying amount? Choose that as deemed cost.
  3. Question 3: What is the gain or loss versus the old book value? Take it to retained earnings in the opening balance sheet, and note deferred tax in one line.

Common mistakes in Optional Exemptions: Business Combinations and Deemed Cost

  • Taking the fair value difference to profit or loss

    Students treat the revaluation like a normal Ind AS 16 revaluation in the current year.

    Fix: The adjustment is at the transition date, and goes to retained earnings (or another equity category), not profit or loss.

  • Using the D7AA previous GAAP carrying amount election under the revaluation model

    Students forget that the D7AA election is available only where the entity uses the cost model.

    Fix: Check the policy chosen under Ind AS 16, 38 and 40. Only the D7AA previous GAAP carrying amount election requires the cost model. Fair value as deemed cost and previous GAAP revaluation as deemed cost are not restricted to the cost model.

  • Restating all past business combinations

    Students assume retrospective application is mandatory, as in other standards.

    Fix: The exemption is optional. If you use it, apply Ind AS 103 only to combinations on or after the chosen date (any date on or before the date of transition), and leave earlier combinations under previous GAAP with the required adjustments.

  • Skipping the goodwill impairment test at the transition date

    Students carry goodwill forward as it appears in previous GAAP books.

    Fix: Test goodwill under Ind AS 36 at the transition date, whether or not there is any sign of impairment. Any loss goes to retained earnings.

  • Applying deemed cost to subsidiaries in consolidated statements

    Students mix up separate financial statements with consolidated ones.

    Fix: The investment deemed cost exemption is for separate financial statements. In consolidated statements, subsidiaries are consolidated, not carried at cost.

  • Treating the D7AA previous GAAP carrying amount election as an asset-by-asset choice

    Students carry over the item-by-item freedom of the fair value route.

    Fix: Fair value as deemed cost may be chosen item by item. The previous GAAP carrying amount election under D7AA is made class-wise (all PPE, or all intangibles, or all investment property), not asset by asset.

Worked examples

Example 1

ABC Ltd adopts Ind AS for the first time with a date of transition of 1 April 2025. A plant has a previous GAAP carrying amount of ₹80,00,000 on that date. A registered valuer assesses its fair value at ₹1,10,00,000. ABC elects fair value as deemed cost for this plant and ignores deferred tax. Show the entry and the opening carrying amount.

Show the solution
  1. Date of transition is 1 April 2025, so measure the plant at that date.
  2. Deemed cost = fair value = ₹1,10,00,000.
  3. Adjustment = ₹1,10,00,000 − ₹80,00,000 = ₹30,00,000 increase.
  4. Entry: Dr Plant (PPE) ₹30,00,000; Cr Retained earnings ₹30,00,000, in the opening Ind AS balance sheet.
  5. Depreciation is then charged on ₹1,10,00,000 over the remaining useful life.

Answer: The plant is carried at ₹1,10,00,000 in the opening Ind AS balance sheet, and retained earnings rises by ₹30,00,000 (before deferred tax).

Example 2

XYZ Ltd, a first-time adopter with a date of transition of 1 April 2025, prepares separate and consolidated financial statements. In its separate financial statements it holds a 100% subsidiary S Ltd. The previous GAAP carrying amount of the investment is ₹5,00,00,000 and its fair value on 1 April 2025 is ₹4,20,00,000. XYZ elects deemed cost based on fair value for S Ltd. In 2022, XYZ also acquired 100% of T Ltd, which is also a subsidiary. In its separate financial statements XYZ elects the previous GAAP carrying amount as deemed cost for the investment in T Ltd. XYZ chooses 1 April 2024 as the cut-off date under the business combination exemption. State the treatment of the investment in S Ltd and T Ltd in the separate financial statements and of the T Ltd acquisition in the consolidated financial statements.

Show the solution
  1. Separate financial statements: investments in subsidiaries may use deemed cost, which is fair value or previous GAAP carrying amount at the transition date.
  2. For S Ltd, XYZ elected fair value, so deemed cost = ₹4,20,00,000.
  3. Adjustment = ₹4,20,00,000 − ₹5,00,00,000 = ₹(80,00,000), a reduction.
  4. Entry in the separate financial statements: Dr Retained earnings ₹80,00,000; Cr Investment in S Ltd ₹80,00,000.
  5. For T Ltd, XYZ elected the previous GAAP carrying amount as deemed cost, so the investment stays at that amount in the separate financial statements and there is no opening adjustment. The deemed cost election for the investment is separate from the choice of date under the business combination exemption.
  6. Consolidated financial statements: both subsidiaries are consolidated, not carried at cost or deemed cost. The T Ltd acquisition took place in 2022, before the chosen cut-off date of 1 April 2024, so Ind AS 103 is not applied to it.
  7. In XYZ's consolidated financial statements, the T Ltd acquisition stays under previous GAAP accounting, with required adjustments: derecognise assets and liabilities Ind AS does not allow, and recognise those it requires. Goodwill is adjusted for these recognition and derecognition adjustments and for intangibles that must be reclassified into or out of goodwill. The adjusted goodwill is then tested for impairment at 1 April 2025.

Answer: In the separate financial statements, the investment in S Ltd is carried at ₹4,20,00,000 with ₹80,00,000 debited to retained earnings, and the investment in T Ltd stays at its previous GAAP carrying amount as deemed cost. In the consolidated financial statements, the 2022 acquisition of T Ltd is not restated under Ind AS 103, but its goodwill is adjusted for intangible reclassifications and for recognition or derecognition adjustments, and then tested for impairment at 1 April 2025.

Exam tips

  • Write the date of transition first. Many marks depend on measuring at that date.
  • In a case question, name the exemption by its effect, for example fair value as deemed cost, and state that it is optional.
  • Always show the adjustment against retained earnings with a debit and credit entry.
  • Separate consolidated from separate financial statements before you touch investments in subsidiaries.
  • If a combination date is given, compare it with the chosen cut-off date before deciding whether Ind AS 103 applies.

Practice questions from Ind AS 101 First-time Adoption of Ind AS

Optional Exemptions: Business Combinations and Deemed Cost: frequently asked questions

Is the deemed cost exemption mandatory under Ind AS 101?

No. It is optional. You may choose it for items you want, or restate retrospectively under the relevant Ind AS.

Can previous GAAP carrying amount be deemed cost for PPE?

Yes, where the entity uses the cost model, it may elect under paragraph D7AA to continue the previous GAAP carrying amount at the date of transition as deemed cost for PPE, after adjusting for decommissioning liabilities. The same election is available for intangibles and for investment property under the cost model. The election is made class-wise, not asset by asset.

Where does the difference on deemed cost go?

It goes to retained earnings, or another equity category if appropriate, in the opening Ind AS balance sheet. It does not go to profit or loss.

What does the business combination exemption actually relieve you from?

It relieves you from restating past combinations under Ind AS 103 before a chosen date. Some adjustments are still needed, including a goodwill impairment test at the transition date.