Pipara & Co LLP

business combinations

Objective
  1. The objective of this Indian Accounting Standard (Ind AS) is to improve the relevance, reliability and comparability of the information that a reporting entity provides in its financial statements about a business combination and its effects. To accomplish that, this Ind AS establishes principles and requirements for how the acquirer:
    1. recognises and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree;
    2. recognises and measures the goodwill acquired in the business combination or a gain from a bargain purchase1; and
    3. determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.

# This Ind AS was notified vide G.S.R. 111(E) dated 16th February, 2015 and was amended vide Notification No. G.S.R. 365(E) dated 30th March, 2016, G.S.R. 310(E) dated 28th March, 2018, G.S.R. 273(E) dated 30th March, 2019, G.S.R. 274(E) dated 30th March, 2019, G.S.R. 463(E) dated 24th July, 2020, G.S.R. 419(E) dated 18th June, 2021 and G.S.R. 255(E) dated 23rd March, 2022.

1 In this standard as well as in all other Indian Accounting Standards, reference to bargain purchase gain arising on a business combination includes amounts recognised in paragraphs 34 and 36A of this Ind AS, as the case may be, unless otherwise specified.

Scope
  1. This Ind AS applies to a transaction or other event that meets the definition of a business combination. This Ind AS does not apply to:
    1. the accounting for the formation of a joint arrangement in the financial statements of the joint arrangement itself.
    2. the acquisition of an asset or a group of assets that does not constitute a business. In such cases the acquirer shall identify and recognise the individual identifiable assets acquired (including those assets that meet the definition of, and recognition criteria for, intangible assets in Ind AS 38, Intangible Assets) and liabilities assumed. The cost of the group shall be allocated to the individual identifiable assets and liabilities on the basis of their relative fair values at the date of purchase. Such a transaction or event does not give rise to goodwill.
    3. [Refer Appendix 1]

2A The requirements of this Standard do not apply to the acquisition by an investment entity, as defined in Ind AS 110, Consolidated Financial Statements, of an investment in a subsidiary that is required to be measured at fair value through profit or loss.

2B Appendix C deals with accounting for combination of entities or businesses under common control.

Identifying a business combination
  • 2An entity shall determine whether a transaction or other event is a business combination by applying the definition in this Ind AS, which requires that the assets acquired and liabilities assumed constitute a business. If the assets acquired are not a business, the reporting entity shall account for the transaction or other event as an asset acquisition. Paragraphs B5–B12D provide guidance on identifying a business combination and the definition of a business.

 

The acquisition method
  • An entity shall account for each business combination by applying the acquisition method.
  1. Applying the acquisition method requires:
    1. identifying the acquirer;
    2. determining the acquisition date;
    3. recognising and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree; and
    4. recognising and measuring goodwill or a gain from a bargain purchase.
Identifying the acquirer
  • For each business combination, one of the combining entities shall be identified as the acquirer.
  1. The guidance in Ind AS 110 shall be used to identify the acquirer— the entity that obtains control of another entity, ie the acquiree. If a business combination has occurred but applying the guidance in Ind AS 110 does not clearly indicate which of the combining entities is the acquirer, the factors in paragraphs B14–B18 shall be considered in making that determination.
Determining the acquisition date
  • The acquirer shall identify the acquisition date, which is the date on which it obtains control of the acquiree.
  1. The date on which the acquirer obtains control of the acquiree is generally the date on which the acquirer legally transfers the consideration, acquires the assets and assumes the liabilities of the acquiree—the closing date. However, the acquirer might obtain control on a date that is either earlier or later than the closing date. For example, the acquisition date precedes the closing date if a written agreement provides that the acquirer obtains control of the acquiree on a date before the closing date. An acquirer shall consider all pertinent facts and circumstances in identifying the
  acquisition date.
Recognising and measuring the identifiable assets acquired, the liabilities assumed and any non- controlling interest in the acquiree
Recognition principle
  • As of the acquisition date, the acquirer shall recognise, separately from goodwill, the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree. Recognition of identifiable assets acquired and liabilities assumed is subject to the conditions specified in paragraphs 11 and 12.
Recognition conditions
  1. 3To qualify for recognition as part of applying the acquisition method, the identifiable assets acquired and liabilities assumed must meet the definitions of assets and liabilities in the Conceptual Framework for Financial Reporting under Indian Accounting Standards (Conceptual Framework) issued by the Institute of Chartered Accountants of India at the acquisition date. For example, costs the acquirer expects but is not obliged to incur in the future to effect its plan to exit an activity of an acquiree or to terminate the employment of or relocate an acquiree’s employees are not liabilities at the acquisition date. Therefore, the acquirer does not recognise those costs as part of applying the acquisition method. Instead, the acquirer recognises those costs in its post-combination financial statements in accordance with other Ind AS.
  2. In addition, to qualify for recognition as part of applying the acquisition method, the identifiable assets acquired and liabilities assumed must be part of what the acquirer and the acquiree (or its former owners) exchanged in the business combination transaction rather than the result of separate transactions. The acquirer shall apply the guidance in paragraphs 51–53 to determine which assets acquired or liabilities assumed are part of the exchange for the acquiree and which, if any, are the result of separate transactions to be accounted for in accordance with their nature and the applicable
  3 Substituted vide Notification No. G.S.R. 419(E) dated 18th June, 2021 and, thereafter, substituted vide Notification No. G.S.R. 255 (E) dated 23rd March, 2022.   Ind AS.
  1. The acquirer’s application of the recognition principle and conditions may result in recognising some assets and liabilities that the acquiree had not previously recognised as assets and liabilities in its financial statements. For example, the acquirer recognises the acquired identifiable intangible assets, such as a brand name, a patent or a customer relationship, that the acquiree did not recognise as assets in its financial statements because it developed them internally and charged the related costs to expense.
  2. 4Paragraphs B31–B40 provide guidance on recognising intangible assets. Paragraphs 21A–28B specify the types of identifiable assets and liabilities that include items for which this Ind AS provides limited exceptions to the recognition principle and conditions.
Classifying or designating identifiable assets acquired and liabilities assumed in a business combination
  • At the acquisition date, the acquirer shall classify or designate the identifiable assets acquired and liabilities assumed as necessary to apply other Ind ASs subsequently. The acquirer shall make those classifications or designations on the basis of the contractual terms, economic conditions, its operating or accounting policies and other pertinent conditions as they exist at the acquisition date.
  1. In some situations, Ind ASs provide for different accounting depending on how an entity classifies or designates a particular asset or liability. Examples of classifications or designations that the acquirer shall make on the basis of the pertinent conditions as they exist at the acquisition date include but are not limited to:
    1. classification of particular financial assets and liabilities as measured at fair value through profit or loss or at amortised cost, or as a financial asset measured at fair value through other comprehensive income in accordance with Ind AS 109, Financial Instruments;
    2. designation of a derivative instrument as a hedging instrument in accordance with Ind AS 109; and
  4 Substituted vide Notification No. G.S.R. 273(E) dated 30th March, 2019 and, thereafter, substituted vide Notification No. G.S.R. 255 (E) dated 23rd March, 2022.
  1. assessment of whether an embedded derivative should be separated from a host contract in accordance with Ind AS 109 (which is a matter of ‘classification’ as this Ind AS uses that term).
  1. This Ind AS provides two exceptions to the principle in paragraph 15:
    1. 5classification of a lease contract in which acquiree is the lessor as either an operating lease or a finance lease in accordance with Ind AS 116, Leases; and
    2. classification of a contract as an insurance contract in accordance with Ind AS 104, Insurance Contracts.
The acquirer shall classify those contracts on the basis of the contractual terms and other factors at the inception of the contract (or, if the terms of the contract have been modified in a manner that would change its classification, at the date of that modification, which might be the acquisition date).
Measurement principle
  1. For each business combination, the acquirer shall measure at the acquisition date components of non-controlling interest in the acquiree that are present ownership interests and entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation at either:
    1. fair value; or
    2. The present ownership instruments’ proportionate share in the recognised amounts of the acquiree’s identifiable net assets.

All other components of non-controlling interests shall be measured at their acquisition-date fair values, unless another measurement basis is required by Ind AS.

  1. Paragraphs 24–31 specify the types of identifiable assets and liabilities that include items for which this Ind AS provides limited exceptions to the measurement principle.

5 Substituted vide Notification No. G.S.R. 273(E) dated 30th March, 2019.

Exceptions to the recognition or measurement principles

  1. 6This Ind AS provides limited exceptions to its recognition and measurement principles. Paragraphs 21A–31A specify both the particular items for which exceptions are provided and the nature of those exceptions. The acquirer shall account for those items by applying the requirements in paragraphs 21A–31A, which will result in some items being:
    1. recognised either by applying recognition conditions in addition to those in paragraphs 11 and 12 or by applying the requirements of other Ind ASs, with results that differ from applying the recognition principle and conditions.
    2. measured at an amount other than their acquisition-date fair values.

Exceptions to the recognition principle

7Liabilities and contingent liabilities within the scope of Ind AS 37 or Appendix C, Levies, of Ind AS 37

21A Paragraph 21B applies to liabilities and contingent liabilities that would be within the scope of Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets, or Appendix C, Levies, of Ind AS 37 if they were incurred separately rather than assumed in a business combination.

21B  The Conceptual Framework defines a liability as ‘a present obligation of the entity to transfer an economic resource as a result of past events’. For a provision or contingent liability that would be within the scope of Ind AS 37, the acquirer shall apply paragraphs 15–22 of Ind AS 37 to determine whether at the acquisition date a present obligation exists as a result of past events. For a levy that would be within the scope of Appendix C of Ind AS 37, the acquirer shall apply Appendix C of Ind AS 37 to determine whether the obligating event that gives rise to a liability to pay the levy has occurred by the acquisition date.

21C A present obligation identified in accordance with paragraph 21B might meet the definition of a contingent liability set out in paragraph 22(b). If

6 Substituted vide Notification No. G.S.R. 255(E) dated 23rd March, 2022.

7 Heading and paragraphs 21A-21C inserted vide Notification No. G.S.R. 255(E) dated 23rd March, 2022.

so, paragraph 23 applies to that contingent liability.

8Contingent liabilities and contingent assets

  1. 9Ind AS 37 defines a contingent liability as:
    1. a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non- occurrence of one or more uncertain future events not wholly within the control of the entity; or
    2. a present obligation that arises from past events but is not recognised because:
      1. it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or
      2. the amount of the obligation cannot be measured with sufficient reliability.
  2. 10The acquirer shall recognise as of the acquisition date a contingent liability assumed in a business combination if it is a present obligation that arises from past events and its fair value can be measured reliably. Therefore, contrary to paragraphs 14(b), 23, 27, 29 and 30 of Ind AS 37, the acquirer recognises a contingent liability assumed in a business combination at the acquisition date even if it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation. Paragraph 56 of this Ind AS provides guidance on the subsequent accounting for contingent liabilities.

23A 11Ind AS 37 defines a contingent asset as ‘a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity’. The acquirer shall not recognise a contingent asset at the acquisition date.

8 Substituted vide Notification No. G.S.R. 255(E) dated 23rd March, 2022.

9 Opening paragraph substituted vide Notification No. G.S.R. 255(E) dated 23rd March, 2022.

10 Substituted vide Notification No. G.S.R. 255(E) dated 23rd March, 2022.

11 Inserted vide Notification No. G.S.R. 255(E) dated 23rd March, 2022.

Exceptions to both the recognition and measurement principles

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