Business combinations

Slide 1
Contents
1. Scope and Key Definitions
2. Acquisition Method - the four step approach
• Identify the acquirer
• Determine the acquisition date
• Recognise and measure identifiable assets acquired, liabilities
assumed and any non controlling interest
• Recognise and measure goodwill or gain from bargain purchase as
capital reserve
3. Other key concepts –Loss of control, Step-up acquisitions, Common
control transactions etc.
4. Key disclosure requirements
5. Key differences between IFRS and Ind AS
6. Key differences between Ind AS 103 and AS 14

Slide 2
Scope and Key Definitions

Slide 3
Scope

Scope

• Applies to all transactions or other events that meet the

definition of a business combination
• Does not apply to:
• Formation of joint arrangements
• Purchase of assets/group of assets
• Acquisition of subsidiaries by investment companies
that are carried at fair value

Slide 4
What is a business combination?

• A transaction or event
• acquirer obtains control*
• of one or more business

Acquisition of Combination by
majority equity contract
stake

Unincorporated
Legal merger
business

* Guidance on control is given in IndAS 110

Slide 5
What is a business?
‘An integrated set of activities and assets that is capable
of being conducted and managed for the purpose of
providing a return in the form of dividends, lower costs or
other economic benefits directly to investors or other
owners, members or participants.’

+ = > Ability to create

Input Processes OUTPUTS

Slide 6
What is a business?

 Not all processes need to be acquired

 Administrative, billing, payroll and accounting processes are not

required in order for a set of activities and assets to constitute a
business for accounting purposes.

 Nearly all businesses have liabilities as well as assets. However,

liabilities do not need to be present for a business to exist.

 A business consists of inputs and processes applied to the inputs that

have the ability to create outputs. Outputs, specifically revenue or
saleable products or services, are not required to qualify as a business.

Slide 7
Quick Quiz?
• Computer entity A acquires software development entity B. Entity B
has been formed to make hand-held device applications.
• The current activities of the company include researching and
developing its first product and creating a market for the product.
• The company has not generated any revenues and has no existing
customers.
• Entity B’s workforce is composed primarily of programmers. Entity B
has the intellectual property, software and fixed assets required to
develop applications.
Is this an acquisition of business?

Yes, It is likely that a business has been acquired because entity B has access
to the inputs (IP, software and fixed assets) and processes necessary to
manage and produce outputs. The lack of outputs, such as revenue and a
product, does not prevent the company from being considered a business.
Slide 8
Quick Quiz?
• A shipping & warehousing co. (‘X’) provides shipping/storage
services
• A consumer retail company (‘Y’) plans to purchase several
warehouses from X to use the warehouses to enhance its distribution
system.
• Y acquires the land and warehouses from X but does not take over
the warehousing contracts with third parties, employees, warehouse
equipment, or information technology systems.
Is this an acquisition of business or asset?

Asset
(Y has only acquired a group of assets. It has not acquired the related inputs
and processes capable of producing outputs)

Slide 9
Differences between business
combination and asset acquisition
Area Business combination Asset or group of assets
Measurement of Recorded at fair value. Recorded at cost; cost is
assets and allocated over the group of
liabilities assets based on relative fair
value.
Transaction Expense as incurred. Capitalised as part of the
costs cost.
Contingent Recognised if represents Not recognised; subject to
liabilities present obligation that Ind AS 37.
assumed arises from past events and
its fair value can be
measured reliably with
subsequent changes to
profit or loss.

Slide 10
Differences between business
combination and asset acquisition
Area Business combination Asset or group of assets
Goodwill May be recognised. Not recognised.
Deferred taxes Deferred tax assets and Initial recognition exemption
liabilities, related to any applies; deferred tax assets
temporary differences, tax and liabilities for temporary
carry-forwards and differences are not
uncertain tax positions are recognised.
recorded.
Contingent Recorded at fair value on Generally recorded at fair
consideration the date of acquisition. value on the date of purchase.
Subsequent changes in the An accounting policy election
fair value of contingent may be made to record the
consideration not classified subsequent changes in fair
as equity are recorded in value against the asset’s cost
profit or loss until settled. (Ind AS 16) or in profit or loss
(Ind AS 109).
Slide 11
Acquisition Method

Slide 12
The acquisition method - the four step
approach
Step 1 – Identify the acquirer

Step 2 – Determine the acquisition date

Step 3 – Recognise and measure identifiable assets acquired,

liabilities assumed and any non controlling interest

Step 4 – Recognise and measure goodwill or gain from bargain

purchase as capital reserve

Slide 13
Step 1 - Identify the acquirer
• Acquirer is the entity that obtains control of the other entity

• Some factors to be considered in determining the acquirer:

- Entity that transfers the cash or other assets or incurs the
liabilities
- Entity that issues its equity interests (except in the case of
reverse acquisitions)
- Entity that is larger, based on fair value, assets, revenues or
profits.
Slide 14
Reverse Acquisition
When the entity that issues securities (the legal acquirer) is identified as
the acquiree for accounting purposes and the entity whose equity
interests are acquired (the legal acquiree) must be the acquirer for
accounting purposes.

For example:
When a private operating entity wants to become a public entity but does
not want to register its equity shares. The private entity will arrange for a
public entity to acquire its equity interests in exchange for the equity
interests of the public entity.

(a) Public entity (Legal Acquirer) – is the acquiree for accounting purposes;

(b) Private entity (Legal Acquiree) – is the acquirer for accounting

purposes.
Substance over Form

Slide 15
 Identifying the acquirer – New entity formed
to effect a business combination (Example)
A shareholders B shareholders A&B shareholders

Entity A Entity B New Co.

Entity A Entity B

The Co
As New business combination
is a new is carried
entity that has out by setting
been formed to issueup a newinstruments
equity entity (Newto
Co)
effect that issues
a business 100 shares to
combination, INDentity A's shareholders
AS 103 and 50
para B17 requires oneshares
of theto
entity B's
combining shareholders
entities in exchange
that existed forcombination
before the the transfer (that
of theis,
shares
entityinA or
those
entity entities.
B) to The number
be identified of shareson
as the acquirer reflects the relative
the basis fair values
of the evidence of
available.
the entities before the combination. Who is the acquirer? Slide 16
Step 2 - Determine the
acquisition date
• Date on which the acquirer obtains control of the acquiree.

• Generally the date on which the acquirer legally transfers the

consideration, acquires the assets and assumes the liabilities.
However, it could be different.

• If acquisition is subject to substantive pre-conditions – date on

which last of those pre-conditions is satisfied.

• For guidance on control, reference should be made to IndAS 110

on Consolidation.

• Can get judgmental!

Slide 17
Business Combination without consideration

Such circumstances include:

a) The acquiree repurchases its own shares that the acquirer manages
to gain control

b) Minority veto rights lapse

The acquisition method applies to such business combinations and

the acquisition date for these business combinations is the date
control is obtained through the other transaction or event.
Slide 18
Determine the consideration

What forms part of the consideration?

Principles:
• Sum of the assets transferred, the liabilities incurred and equity
issued (For eg. Cash, other assets, contingent consideration, equity
instruments, options and warrants)
• Measured at fair value (FV) at acquisition date
• Deferred consideration also forms part of the consideration
• Exclude items not part of consideration (transaction costs,
settlement of pre-existing relationships)
• Contingent consideration

Slide 19
Contingent consideration
Acquisition date accounting

Recognition At acquisition date

Measurement Fair Value

Classification Debt or Equity

Slide 20
Contingent consideration - Post
acquisition accounting
Contingent consideration classified as:
• Re-measure at FV
Ind AS 109
Liability

• No re-measurement
Equity • Settlement within equity

Slide 21
Consideration - Example
On 15 July 2014, Company A agreed with the shareholders of Company B to
acquire 100% of B for a total consideration of INR100m. The consideration
includes the following:

• Company A will reimburse the shareholders of Company B for

transaction costs of INR 2m

• Shareholders (two persons) of company B will work as General

Managers in Company B after it is acquired by A for a period of three
years. Annual salary for GM position in company A is INR 1m

• B had filed a legal case against company A in 2012 which is still

outstanding. A has agreed to settle it for INR 2m

Determine the amount of consideration for the acquisition

Slide 22
Consideration - Example (continued)

INR’m
Total amount agreed 100
Less:
Transaction costs (2)
Remuneration of B’s shareholders for
future services (INR 1m x 2 x 3) (6)
Settlement of past legal case with B (2)
Sub - total (10)

Consideration for acquisition of Company B 90

Slide 23
Step 3 - Recognise and measure identifiable assets
acquired, liabilities assumed and any NCI

Recognition principles

 Recognize, separately from goodwill, the identifiable assets

acquired, the liabilities assumed and any non-controlling
interest (NCI) in the acquire

 Recognition of asset or a liability only if it meets the definition of an

asset or a liability at the acquisition date.

 Identifiable assets and liabilities assumed include items not

recognized in the acquiree’s financial statements.

 Goodwill in the books of acquiree is not an identifiable asset

Slide 24
Recognition and Measurement exceptions

Recognition exceptions Measurement exceptions

Contingent liabilities (Ind-AS 37) Reacquired rights

Share based payment (Ind-AS 102)
Assets held for sale (Ind-AS 105)

Both recognition and

measurement exceptions

Income taxes (Ind-AS 12)

Employee benefits (Ind-AS 19)
Indemnification assets

Slide 25
Intangible assets

• Acquirer recognises intangible assets previously not recognised by

the acquiree - At fair value
• Intangible asset - To meet the contractual/legal or separability
criteria

Marketing-related Customer-related Artistic-related

Intangible assets Intangible Assets Intangible assets
(Ex – Trade marks) (Ex – Customer base) (Ex–Copy rights)

Contract-based Technology-based
Intangible assets Intangible assets
(Ex – Use rights) (Ex - Computer software)

Slide 26
Non-controlling interest (NCI)

• NCI is seen as equity participant providing finance to the acquired

business

• Ind AS 103 provides two choices (full or partial goodwill method):

- Measure NCI at fair value; or
- Measure NCI at its share of fair value of acquired net assets

• Above choice available for each business combination

Slide 27
Non-controlling interest - example

• AB Limited bought a 40% stake in CD Limited for INR 120m.

• It already holds a 20% interest in CD Limited.

• 100% of the FV of assets, liabilities and contingent liabilities of CD

Limited on the date of acquisition is INR 200m.

Calculate goodwill under proportionate share method and

fair value method

Slide 28
Non-controlling interest - example

At proportionate value At fair value

Goodwill Goodwill
(INR 60m) Consideration (INR 100m)
Consideration (INR120m)
(INR120m)
Assets, Previous interest Assets,
liabilities and (INR 60m) liabilities and
Previous interest contingent contingent
(INR 60m) liabilities liabilities
(INR 200m) NCI (INR 200m)
NCI (40%) (INR 120m)
(INR 80m)

Slide 29
Step 4 - Recognise and measure goodwill or gain
from bargain purchase as capital reserve

Excluded elements

Goodwill/
Bargain purchase
Consideration

=
Previous interest Assets, liabilities
(acquisition date FV) and contingent
liabilities
Non-controlling interest
(NCI)
Slide 30
Goodwill – Key Points
• In the absence of evidence to the contrary, a particular set of assets
and activities in which goodwill is present shall be presumed to be a
business. (Rebuttable presumption)

• The acquirer subsumes into goodwill:

(a) value of an acquired intangible asset that is not identifiable
(Example - Assembled workforce)

(b) value attributed to items that do not qualify as assets

(Example - potential contracts)

Slide 31
Bargain Purchase – Key Points
• In extremely rare circumstances
• Before recognising a gain –
i. Reassess whether all of the assets acquired and all of the liabilities
assumed are correctly identified
ii. Review the procedures used to measure :
a) the identifiable assets acquired and liabilities assumed;
b) the non-controlling interest in the acquiree, if any;
c) the acquirer’s previously held equity interest in the acquiree; and
d) the consideration transferred.
• Clear evidence of the underlying reasons exists - recognise the
resulting gain in OCI and accumulate the same in equity as capital
reserve;
Otherwise recognise directly in equity as capital reserve

Slide 32
Other key concepts

Slide 33
What forms part
Watch out!of–the consideration?
Step acquisitions
• Accounted for as a business combination on gaining control

• Previously held equity interest is measured at fair value on

acquisition date and taken to P&L

Once control is
established, any further
acquisition of interest is
treated as transaction
with shareholders and
impact taken to equity
Slide 34
Step acquisition - Example
• In 2014 AB Ltd acquired 40% stake in CD Ltd for INR 4m.

• In 2015, AB’s carrying value of its 40% stake in CD is INR 5.5m.

• In 2015, AB Ltd. acquires the remaining 60% stake for INR 12m and
gains control.

Determine gain/loss to be recognised in this business

combination.

Slide 35
 Step acquisition
Step-acquisition - Example
- pre-existing interest - Example

In 2015 AB acquires
In 2014 AB Ltd acquires
remaining 60% stake
40% stake in CD Limited
for INR 12m
for INR 4m

2015: 40% stake carrying value GAIN on re-

INR 5.5m. measurement of
2015: FV of 40% was INR 8m associate INR 2.5m in
income statement

Slide 36
Principles
Loss of of losing
controlcontrol

De-recognise assets (inc. goodwill)

and liabilities

De-recognise NCI

Recognise consideration received

Difference to income
statement
Recognise at FV any investment
retained

Reclassify to statement of profit

and loss, any gain or loss
previously recognised in other
comprehensive income
Slide 37
Other key concepts
Measurement period adjustments
• Acquirer to finalise the accounting for a business combination at
the earlier of:
- The date on which it receives all the information; or
- One year after acquisition date
• Adjustments that do not qualify as measurement period
adjustments are recorded in the income statement

Common control transactions

• Accounted for using the pooling of interests method
• All Assets and liabilities are reflected at their previous carrying
values
• No adjustments are made to reflect any fair values. Nor are any new
assets recognised.
• Only adjustment permitted is adjustment towards uniform
accounting policies.
Slide 38
Some disclosure requirements

• Name and a description of the acquiree and the acquisition date

• Percentage of voting equity interests acquired
• Primary reasons for the business combination and how the acquirer
obtained control
• Qualitative description of the factors that make up the goodwill
recognised
• Acquisition-date fair value of the total consideration transferred and
the acquisition-date fair value of each major class of consideration
• Purchase price allocations
• Estimates involved in contingent consideration arrangements and
indemnification assets
The above list is not complete. Please go through the
standard for complete list of disclosures!
Slide 39
Key differences from IFRS 3

Business combinations between entities under

common control

Accounting for bargain purchase gain

No transitional provisions in IndAS 103

Slide 40
Key differences from AS 14
Area Ind AS 103 AS 14
Scope Wider scope Only amalgamations
and mergers
Methods of Acquisition method 2 methods
accounting except common - Purchase method
control business - Pooling of interest
combinations method
Non controlling 2 methods Amount of equity
interest - Fair value attributable to NCI
- Proportionate
share in net assets

Goodwill Tested for Amortised

impairment
Reverse acquisitions Specific guidance Not dealt with
Slide 41
Key differences from AS 14
Area Ind AS 103 AS 14
Contingent Specific guidance Not dealt with
consideration
Bargain purchase gain Capital reserve either Capital reserve
through OCI or
directly
Common control Specific guidance No separate
business combination different from treatment
acquisition method

Slide 42
uestions
Thank You