Ind AS 103 Business Combinations: Acquisition Method and Goodwill

Understand Ind AS 103 Business Combinations

Key rules to remember

Goodwill

Goodwill = (Consideration transferred + Non-controlling interest + Fair value of previously held equity interest) − Fair value of net identifiable assets acquired

Net identifiable assets = identifiable assets − liabilities assumed, all at acquisition-date fair value. A positive result is goodwill.

Bargain purchase gain

If net identifiable assets > (Consideration + NCI + previously held interest), the difference is a bargain purchase gain

Reassess identification and measurement first. Under Ind AS 103 the gain is recognised in other comprehensive income and accumulated in capital reserve, unless there is no clear evidence of a bargain purchase, in which case it goes directly to capital reserve.

Consideration transferred

Consideration = Fair value of cash + shares issued + other assets given + contingent consideration

Acquisition-related costs are excluded and are expensed.

Measurement of NCI

NCI at fair value, or at proportionate share of net identifiable assets

Choice is made transaction by transaction for NCI that are present ownership interests. Full-fair-value choice gives full goodwill.

Core principle

Identifiable assets and liabilities are measured at acquisition-date fair value

Exceptions exist, such as deferred tax and employee benefits, which follow their own standards.

How to solve Ind AS 103 Business Combinations questions

1. 1Decide whether the target is a business and whether the deal is under common control. If so, Ind AS 103 main body may not apply.
2. 2Identify the acquirer: the entity that obtains control. Check who issues shares, board control and relative size in case of reverse acquisition.
3. 3Fix the acquisition date, the date control is obtained. Use it for all fair values.
4. 4Compute consideration transferred at fair value, including contingent consideration. Remove acquisition costs and expense them.
5. 5List identifiable assets and liabilities at fair value, including unrecorded intangibles. Adjust for deferred tax if the data is given.
6. 6Measure NCI, if any, under the permitted option.
7. 7Compute goodwill or bargain purchase gain using the formula, and state the accounting treatment.
8. 8Give journal entries or the consolidated balance sheet extract and conclude.

Quickest way: Net asset comparison in three lines

Common mistakes in Ind AS 103 Business Combinations

• Using book values of the target's assets instead of fair values

  Students copy the balance sheet figures given first in the question.

  Fix: Always replace book values with the fair values given for the acquisition date. Use book value only if no fair value is given.

• Adding legal and advisory fees to the consideration

  Older practice capitalised these costs, so students treat them as part of cost.

  Fix: Expense acquisition-related costs as incurred. Keep them out of the goodwill computation.

• Ignoring unrecorded intangibles such as brands or customer lists

  The target's books do not show them.

  Fix: Recognise identifiable intangibles at fair value separately from goodwill if the question gives their value.

• Amortising goodwill

  Students carry over the old practice or AS 14 style treatment.

  Fix: State that goodwill is not amortised but tested for impairment at least annually.

• Taking a bargain purchase gain straight to profit or loss

  It looks like income.

  Fix: Reassess first, then recognise in other comprehensive income and accumulate in capital reserve. Credit capital reserve directly only where there is no clear evidence of a bargain purchase.

• Leaving out contingent consideration

  It is payable later, so students see it as not yet incurred.

  Fix: Include its acquisition-date fair value in consideration, with a liability or equity credit as applicable.

Worked examples