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CA Final · Financial Reporting · Classification and Measurement of Financial Assets and Financial Liabilities

Kaveri Infra Ltd acquired a business and recognised contingent consideration payable to the sellers, initially at Rs 40 lakh, as part of the Ind AS 103 acquisition. At the next reporting date, the fair value of the obligation rose to Rs 46 lakh because of better-than-expected performance. How should Kaveri account for the change under Ind AS 109?

Kaveri recognises a Rs 6 lakh loss in profit or loss. Contingent consideration in a business combination is measured subsequently at fair value, with changes going to profit or loss, so the increase from Rs 40 lakh to Rs 46 lakh is not added to goodwill.

  1. AAdd Rs 6 lakh to goodwill
  2. BRecognise Rs 6 lakh in other comprehensive income
  3. CRecognise Rs 6 lakh loss in profit or lossCorrect
  4. DLeave the liability at Rs 40 lakh until it is settled

Explanation

Paragraph 4.2.1(e) requires contingent consideration recognised by an acquirer in a business combination to be measured subsequently at fair value, with changes recognised in profit or loss. The increase of Rs 46 lakh minus Rs 40 lakh is Rs 6 lakh, a loss. Adjusting goodwill is wrong because this is not a measurement-period adjustment.

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