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CA Final · Financial Reporting · Ind AS 103 Business Combinations

Sunrise Textiles Ltd acquires 100% of Kaveri Mills Ltd. Fair value of consideration is ₹80 crore. Identifiable net assets at fair value are ₹95 crore. Management has clear evidence of why this is a bargain purchase, after reassessing that all assets and liabilities were correctly identified and measured. How does Ind AS 103 require the ₹15 crore gain to be recognised?

The ₹15 crore gain is recognised in other comprehensive income and accumulated in equity as capital reserve. Ind AS 103 departs from IFRS 3, which uses profit or loss. Direct recognition in equity applies only where there is no clear evidence of the reason for the bargain purchase.

  1. AIn profit or loss as other income, as under IFRS 3
  2. BIn other comprehensive income and accumulated in equity as capital reserveCorrect
  3. CDirectly in equity as capital reserve without passing through OCI
  4. DAs a deduction from the carrying amount of non-current assets acquired

Explanation

Ind AS 103 differs from IFRS 3. Bargain purchase gain is recognised in OCI and accumulated in equity as capital reserve. Direct recognition in equity applies only when there is no clear evidence of the underlying reason for classifying the combination as a bargain purchase. Here clear evidence exists, so the direct-equity route is wrong.

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