IND AS103 Business Combination

Business Combination

The term ‘business combination’ in Ind AS 103 is a broader term than ‘amalgamation’. It is defined as a transaction in which an acquirer obtains control of one or more businesses. An acquirer may obtain control in a number of ways including, for example, by transferring cash or other assets, incurring liabilities, issuing equity instruments or without transferring consideration. There is a presumption of control if an entity owns more than 50% of the equity shareholding in another entity, though this may not always be the case.

Business

Ind AS 103 defines a business as 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. A business generally consists of inputs, processes applied to those inputs and the ability to create outputs.

For Example, R Ltd. acquires a group of assets of E Ltd. including the procurement system. R Ltd. also offers employment to E Ltd.’s employees and R Ltd. plans to integrate the acquired plant into its existing accounting and human resources. The acquisition by R Ltd. will constitute to be a business because it contains all of the inputs and processes necessary for it to be capable of creating output to provide return in future. Although the administrative systems (accounting and human resources) of E Ltd. are not acquired by R Ltd., the acquired plant will be integrated into existing system of R Ltd. Since all the acquired group of assets is a business, the acquisition is accounted for as a business combination.

Business combinations occur in a variety of structures. IndAS 103 focusses on the substance of the transaction, rather than the legal form. The determination of whether the activities and assets acquired constitute a business at the acquisition date is made from the view of a market participant, rather than based on how they were used by the seller or how they might be used by the specific acquirer. Therefore, it is not relevant whether the seller operated the set as a business or whether the acquirer intends to operate it as a business.

In most cases, it will be straightforward to determine whether the acquired set of activities and assets constitutes a business. However, in some cases careful analysis of the specific facts and circumstances and the application of judgement will be required. The overall result of a series of transactions is considered if there are a number of transactions among the parties involved. For example, any transaction contingent on the completion of another transaction may be considered linked. Judgement is required to determine when transactions should be linked.

Accounting method

All business combinations within Ind AS 103’s scope are accounted for using the Acquisition Method. The acquisition method views a business combination from the perspective of the acquirer and can be summarised in the following steps:

• •      Identify the acquirer
• •      Determine the acquisition date
• •      Recognise and measure the identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquiree
• •      Recognise and measure the consideration transferred for the acquiree
• •      Recognise and measure goodwill or a gain from a bargain purchase (as capital reserve)

Identifiable Assets: The acquiree’s identifiable assets (including intangible assets not previously recognised), liabilities and contingent liabilities are generally recognised at their fair value (as per Ind AS 113).

Non-Controlling Interest: If the acquisition is for less than 100% of the acquiree, there is a non-controlling interest. The non-controlling interest represents the equity in a subsidiary that is not attributable directly or indirectly to the parent. The acquirer can elect to measure the non-controlling interest at its fair value or at its proportionate share of the identifiable net assets. [Currently, ‘Minority Interest’ arising on consolidation is measured at proportionate share in the book values of the net assets of the subsidiary].

Consideration: The consideration for the combination includes cash and cash equivalents and the fair value of any non-cash consideration given. Any equity instruments issued as part of the consideration are fair valued. If any of the consideration is deferred, it is discounted to reflect its present value at the acquisition date, if the effect of discounting is material. Consideration includes only those amounts paid to the seller in exchange for control of the entity. Consideration excludes amounts paid to settle pre-existing relationships, payments that are contingent on future employee services and acquisition related costs.

Contingent Consideration: Contingent Consideration is a portion of the consideration may be contingent on the outcome of future events or the acquired entity’s performance. Contingent consideration is also recognised at its fair value at the date of acquisition.

Goodwill: Goodwill is recognised for the future economic benefits arising from assets acquired that are not individually identified and separately recognised. Goodwill is the difference between the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired. If the non-controlling interest is measured at its fair value, goodwill includes amounts attributable to the non-controlling interest. If the non-controlling interest is measured at its proportionate share of identifiable net assets, goodwill includes only amounts attributable to the controlling interest–that is, the parent.

Goodwill = Consideration Transferred + Non Controlling Interest in the acquiree – Fair Value of Net Identifiable Assets

Goodwill is recognised as an asset and tested for impairment annually or more frequently if there is an indication of impairment.

Capital Reserve: In some cases such as a distress sale, acquisition may result in a gain rather than goodwill. Before recognising a gain on a bargain purchase, Ind AS 103 requires the acquirer to reassess whether it has correctly identified all of the assets acquired and the liabilities assumed. If there is gain even after such reassessment, Ind AS requires such gains to be recognised either through Other Comprehensive Income (OCI) and then accumulation in equity as Capital Reserve or directly in the Capital Reserves. [IFRS requires that the excess of the fair value of the identifiable net assets over the consideration paid should be recognised in the profit and loss account]

Common Control: For business combinations between entities that are under common control, there is specific guidance included in Ind AS 103. Such business combinations are accounted for using the pooling of interests method. [Common control business combination is not covered under IFRS 3]. Under the pooling of interests method:

• •   All assets and liabilities of the acquiree are reflected at their previous carrying values in the books of the acquirer.
• •   No adjustments are made to reflect any fair values, nor are any new assets recognised.
• •   The only adjustment permitted is the adjustment towards uniform accounting policies.