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CA Final · Financial Reporting · Ind AS 103 Business Combinations

Kaveri Pharma Ltd acquired Godavari Labs Ltd and concluded the transaction is a bargain purchase. Management cannot establish clear evidence for the underlying reason for classifying the combination as a bargain purchase. What is the treatment of the gain under Ind AS 103?

When there is no clear evidence for the underlying reason for the bargain purchase, Ind AS 103 requires the gain to be recognised directly in equity as capital reserve, not through other comprehensive income or profit or loss.

  1. ARecognise it in other comprehensive income and then transfer to capital reserve
  2. BRecognise it in profit or loss for the period
  3. CRecognise it directly in equity as capital reserveCorrect
  4. DReduce the fair values of the acquired non-current assets until it is nil

Explanation

Ind AS 103 recognises a bargain purchase gain in OCI and accumulates it in equity as capital reserve. However, where there is no clear evidence for the underlying reason for classifying the combination as a bargain purchase, the gain is recognised directly in equity as capital reserve. The OCI route is therefore wrong in this case.

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