CMA Final - CFR

Accounting for Business Combination

Acquisition Method / Purchase Method:
Step 1: Calculation of Purchase Consideration;
Step 2: Recognising and measuring the identifiable assets acquired, the liabilities
assumed;
Step 3: Recognising and measuring any non-controlling interest in the acquiree;
Step 4: Recognising and measuring goodwill or a gain from a bargain purchase.

1. Purchase Consideration [Q1, 2]

Amount
Particulars (₹)
Acquisition Date Fair Value of assets transferred (including
XX
cash)
Acquisition Date Fair Value of Shares issued XX
Acquisition Date Fair Value of Contingent Consideration XX
Acquisition Date Present Value of Deferred Consideration XX
Total Purchase Consideration XX

2. Fair Value of Identifiable Net Assets [Q3]

Particulars Amount (₹)
Fair Values of Identifiable Assets XX
Less: Fair Values of Identifiable Liabilities XX
Fair Value of Identifiable Net Assets XX
OR
Particulars Amount (₹)
Equity Share Capital on Acquisition Date XX
Add: Other Equity on Acquisition Date XX
Book Value of Identifiable Net Assets XX
Add/Less : Revaluation Gain / Loss XX
Fair Value of Identifiable Net Assets XX

Note:
a. Only assets and liabilities related to the Business combination deal should
be recognized.
b. Acquirer may recognize certain intangible assets and Contingent Liabilities
not recorded by the acquiree earlier.

CA BISHNU KEDIA 1 Business Combination

CORPORATE FINANCIAL REPORTING

3. Non-Controlling Interest (NCI)

Non-Controlling Interest is calculated using:
a. Full Goodwill Method (at Fair Value) – 1st preference or
b. Partial Goodwill Method (at Proportionate Share in Net Assets) – 2nd
preference
Using Full Goodwill Method,
NCI = (No. of shares not held by Parent on acquisition date) * Fair Value/share

Using Partial Goodwill Method,

NCI = Identifiable Net Assets * Share of NCI in acquiree company

If the question mentions to use Fair Value method, however no data of Fair
Value is given in the question, then we need to use unitary method to calculate
the value of NCI.

4. Goodwill / Gain on Bargain Purchase

Particulars Amount (₹)
Consideration XX
Add: NCI XX
XX
Less : Fair Value of Identifiable Net Assets (XX)
Goodwill (Gain on Bargain Purchase) XX

Journal entries in the Consolidated Accounts (Accounting as per Ind AS 103)

Particulars Amount (Rs.) Amount (Rs.)
(Dr) (Cr)
Identified Assets taken over of Acquiree A/c
…Dr
Goodwill (if any) …Dr Balancing figure
To Purchase Consideration A/c
To Identified Liabilities taken over of
Acquiree A/c
To Non-Controlling Interest A/c
To Previously held equity interest in
acquiree A/c
To Gain from a Bargain Purchase A/c (if Balancing figure
any)

Business Combination 2 CA BISHNU KEDIA

 CMA Final - CFR
Takeover [Q4, 5, 6, 7]
In a Business Combination, acquiree can either continue to exist or cease to exist. If
Acquiree Ceases to exist, It is a case of Takeover. There will be No NCI. Acquisition
Method is applied in Standalone Books itself. Consolidated Financial Statements is
not prepared separately.
Further, Accounting is also done in the books of Acquiree to close the books.

100% Subsidiary [Q8, 9]

Acquiree continues to exist but there is no NCI. Acquisition Method is applied in
Consolidated Financial Statements which is required to be prepared separately in
addition to the Separate Standalone Financial Statements prepared as per Ind AS 27.
Accounting in the books of Acquiree to close the books is not done.

Less than a 100% Subsidiary [Q10, 11, 12, 13]

Acquiree continues to exist and there is NCI. Acquisition Method is applied in
Consolidated Financial Statements which is required to be prepared separately in
addition to the Separate Standalone Financial Statements prepared as per Ind AS 27.
Accounting in the books of Acquiree to close the books is not done.

Amalgamation (Not necessarily a CCT) [Q14]

Two or more companies are wound up and a new company is formed to take over their business. At
least three companies are involved. Two or more companies are wound up to form a single resultant
company.

Common Control Transactions (CCT) [Q15]

If in a business combination all the combining entities or businesses are ultimately

controlled by the same party or parties both before and after the business combination,
and that control is not transitory, it is a business combination under common control.
Appendix C of Ind AS 103 deals with accounting for combination of entities or
businesses under common control.
Common control business combinations will include transactions, such as transfer of
subsidiaries or businesses, between entities within a group. The extent of non-
controlling interests in each of the combining entities before and after the business

CA BISHNU KEDIA 3 Business Combination

CORPORATE FINANCIAL REPORTING

combination is not relevant to determining whether the combination involves entities

under common control. This is because a partially owned subsidiary is nevertheless
under the control of the parent entity.
Business combinations involving entities or businesses under common control shall be
accounted for using the pooling of interest method. The pooling of interest method is
considered to involve the following:
(i) The assets and liabilities of the combining entities are reflected at their
carrying amounts.
(ii) No adjustments are made to reflect fair values or recognize any new assets or
liabilities.
(iii) The equity share capital will be recorded at nominal value only.
Consideration in excess of equity share capital will be recorded as goodwill
(Capital reserve in case of deficiency).
The other equity of the transferor shall be carried by the transferee in the same form in
which they appeared in the financial statements of the transferor.

On the date of acquisition, the accounting of business combination in case of

common control transactions will be done using the following steps:
Step 1) Identifying the Transferee [Acquirer] Company

Step 2) Determine the Date of Acquisition

Step 3) Determine the Purchase Consideration (PC)

Step 4) All Assets, Liabilities and Reserves of Transferor Company taken over at Book
Value

Step 5) Non-Controlling Interest (NCI) is not applicable

Step 6) Calculation of Gain or loss on restructuring [Capital Reserve Cr /Dr]

Purchase Consideration XXX
(-) Net assets including reserves taken over of transferee XXX
Gain/ (Loss) on restructuring XXX

Business Combination 4 CA BISHNU KEDIA

 CMA Final - CFR

Step 7) Journal Entry on date of acquisition by Transferee (Acquirer) Company

Particulars Amount (Rs.) Amount (Rs.)
(Dr) (Cr)
Assets taken over of Transferor Co. A/c …Dr Book Value
Goodwill ...Dr Balancing
figure
To Purchase Consideration A/c
To Liabilities taken over of Transferor A/c Book Value
To Reserves taken over of Transferor A/c Book Value
To Gain on Restructuring (Capital Reserve) Balancing
figure

Step 8) Preparation of Consolidated Balance Sheet of Transferee [Acquirer] on

Acquisition Date. Here we take all Items (Assets/ Liabilities/ Share Capital/ Reserves)
at Carrying amount of transferee [Acquirer] company’ balance sheet on Acquisition
Date and give effect of above journal entry.

Amalgamation being a CCT [Q16, 17]

Two or more companies are wound up and a new company is formed to take over their
business. At least three companies are involved. Two or more companies are wound up
to form a single resultant company. If the combined entity is controlled by the same
party or parties as before the business combination it is a Common Control Transaction.

Demerger (CCT) [Q19, 20]

In case of Demerger in nature of Common Control, Transferee Company will apply
Pooling of Interest Method for Accounting of demerger with an EXCEPTION that
reserves of demerged company (acquiree) will not be taken over.
Journal entry in the books of demerged company:
Particulars Amount (Rs.) Amount (Rs.)
(Dr) (Cr)
Liabilities transferred to resulting company A/c …Dr Book Value
Loss on Restructuring (Capital Reserve) ...Dr Balancing
figure
To Assets transferred to Resulting company A/c Book Value
To Gain on Restructuring (Capital Reserve) Balancing
figure

CA BISHNU KEDIA 5 Business Combination

CORPORATE FINANCIAL REPORTING

Reverse Acquisition [Q18, 21, 22, 23]

A reverse acquisition occurs when the entity that issues securities (the legal acquirer) is
identified as the acquiree for accounting purposes. The entity whose equity interests are
acquired (the legal acquiree) must be the acquirer for accounting purposes for the
transaction to be considered a reverse acquisition.

On the date of acquisition, the accounting of business combination in case of

reverse acquisition will be done using the following steps:
Step 1) Identifying the Acquirer Company
Company who actually pays the PC – Legal Acquirer – Accounting Acquiree
Company to whom PC is paid – Legal Acquiree – Accounting Acquirer

Step 2) Determine the Date of Acquisition

Step 3) Calculation of Deemed/ Notional Purchase Consideration (PC)

It is the amount of PC on the assumption that if accounting acquirer has paid to
the accounting acquiree.
This Deemed PC is assumed as given by issuing Equity Shares to Accounting
Acquiree

Step 4) All Net Assets of Accounting Acquiree taken over at Fair Value

Step 5) Non-Controlling Interest (NCI) is not applicable

Step 6) Calculation of Goodwill/ Gain on Bargain Purchase

Deemed/ Notional Purchase Consideration XXX
(-) Net assets taken over of Accounting Acquirer XXX
XXX
Step 7) Journal Entry on date of acquisition by Acquirer Company

Particulars Amount (Rs.) Amount (Rs.)

(Dr) (Cr)
Assets of Accounting Acquiree …Dr Fair value
Goodwill A/c ……Dr Balancing
To Liabilities of Accounting Acquiree Figure Fair value
To Purchase Consideration Value of
Business

Business Combination 6 CA BISHNU KEDIA

 CMA Final - CFR
To Gain on bargain purchase Balancing
Figure
Step 8) Preparation of Consolidated Balance Sheet of Accounting Acquirer on
Acquisition Date.
Here we take all Items (Assets/ Liabilities/ Share Capital/ Other Equity) at
Carrying amount of Accounting Acquirer and give effect of business
combination entry in Step 7

Note: In consolidated Balance Sheet,

1. Name will be written of Legal Acquirer
2. No. of shares issued in equity share capital of combined entity will be
written as original legal shares.

A Business Combination achieved in Stages (Step Acquisition):[Q24, 25, 26, 27, 28]
An acquirer sometimes obtains control of an acquiree in which it already held an equity
interest. This is a business combination achieved in stages or a step acquisition.
In a business combination achieved in stages, the acquirer shall remeasure its previously
held equity interest in the acquiree at the acquisition-date fair value and recognize the
resulting gain or loss, if any, in profit or loss.

On the date of acquisition, the accounting of business combination in case of step-

up acquisition will be done using the following steps:

Step 1) Date of crossing 50% stake in Acquiree company will be considered as

acquisition date

Step 2) Calculation of Purchase Consideration (PC)

Purchase consideration XXX
+ Fair Value of previously held investment before acquisition date XXX
Purchase Consideration XXX
Step 3) Journal Entry on date of acquisition by Accounting Acquirer Company

If previously held stake was earlier remeasured at Fair Value through OCI, the balance
in OCI is transferred to P/L.

However, If previously held investment in acquiree is 20% or more then share of

acquirer co. in OCI due to revaluation reserve will be directly reclassified to retained
earnings.

CA BISHNU KEDIA 7 Business Combination

CORPORATE FINANCIAL REPORTING

Step-up acquisition is not possible in case where business combination is done by

obtaining control through acquiring net assets of acquiree company.

Equity transactions - Purchase of Shares from / Sale to Non-controlling Interest not Resulting in
Loss of Control of the Acquirer: [Q29, 30]
When there is an increase in parent’s ownership interest by purchase of a part/full of non-controlling
interest, it is Equity Transaction (transaction with owner in the capacity of owner). Any profit or loss
on the transaction will be transferred to Other Equity of the Parent in consolidated accounting. Thus,
the Acquirer shall debit NCI for acquisition of additional stake or credit NCI for sale of a part of holding,
thereby not loosing control indeed. The difference between the NCI (debit/credit) and the payments
received shall be accounted to Other Equity (debit for loss and credit for profit for the transaction).
Goodwill will not be affected for the change of stake retaining control.

In case of Sale of Stake, NCI to be credited will be calculated as:

= (Carrying amount of Net Assets and Goodwill X % increase in NCI) / 100%

In case of Purchase of Stake, NCI to be debited will be calculated as:

= (Carrying amount of NCI X % decrease in NCI) / existing % of NCI

Loss of Control: [Q31]

Carrying amount of Net Assets, Goodwill, NCI is derecognized. Fair Value of retained
investments is recognised and consideration received is also recognised. Balancing
figure is Gain or Loss on disposal of subsidiary taken to Other Equity.

Particulars Amount (Rs.) Amount (Rs.)

(Dr) (Cr)
Bank A/c…Dr Proceeds
NCI A/c ……Dr C.A.
Retained Investments A/c...Dr Fair value
Loss on Disposal (Other Equity)…..Dr b.f.
To Net Assets A/c C.A.
To Goodwill A/c C.A.
To Gain on Disposal (Other Equity) b.f.

Impairment of Goodwill: [Q32]

If NCI measured at Fair Value i.e. Full Goodwill Method, Impairment loss will be
proportionately allocated to Consolidated Other Equity and NCI.

If NCI measured at Proportionate Net Asset i.e. Partial Goodwill Method, Impairment
loss will be allocated fully Consolidated Other Equity.

Business Combination 8 CA BISHNU KEDIA

 CMA Final - CFR

Deferred Taxes: [Q33]

If Tax Base of an asset or a liability is given in the question, we have to calculate the
resulting Deferred tax asset or Deferred tax liability and include in the calculation of
Net Assets.

Acquirer Share Based Payment Awards Exchanged for Awards held by Acquiree’s
Employees: [Q34]
The value of the replacement awards will have to be allocated between the pre-
combination and post combination period.
Pre-combination period amount will be included in the purchase consideration.
Post-combination period amount will be recorded as an employee compensation cost
over the remaining vesting period.

CA BISHNU KEDIA 9 Business Combination

CORPORATE FINANCIAL REPORTING

Questions:
Question 1 [Workbook Q1]

On 1 June, 2021, AK Ltd. acquired a 65% stake in BK Ltd., a company engaged in manufacturing
machinery components. BK Ltd. has 1,05,000 equity shares of ₹10 each, and the quoted market price
of its shares was ₹14 per share on the acquisition date. The fair value of BK Ltd.’s identifiable net assets
on 1 June, 2021, was ₹90,00,000.

As part of the purchase consideration, AK Ltd.:

1. Paid ₹52,00,000 in cash.

2. Issued 55,000 equity shares at a market price of ₹27 per share (nominal value ₹10 each).
3. Agreed to an additional consideration of ₹15,00,000, payable if BK Ltd.’s cumulative profit for the
next three years exceeds ₹1,15,00,000. On the acquisition date, it was deemed probable that the
extra consideration would be paid, and its fair value was assessed at ₹10,80,000. BK Ltd. incurred
₹1,53,000 as acquisition-related costs. The Non-controlling Interest (NCI) is measured at fair
value.
How will AK Ltd. account for the acquisition of BK Ltd. under Ind AS 103? Provide detailed workings and
pass the necessary journal entries.

Solution:

Computation of Goodwill/Capital reserve on consolidation as per Ind AS 103:

Particulars ₹
Cost of investment:
Share exchange (55,000 x 27) 14,85,000
Cash consideration 52,00,000
Contingent consideration 10,80,000
Consideration transferred at date of acquisition [A] 77,65,000
Fair value of non-controlling interest at date of acquisition [B] 5,14,500
(1,05,000 × 35% × 14)
Total [C] = [A] + [B] 82,79,500
Net assets acquired at date of acquisition [D] (90,00,000)
Capital Reserve [D] - [C] 7,20,500

Capital Reserve [D] - [C]

Journal entry at the date of acquisition: (by AK Limited as per Ind AS 103)

Particulars Dr. (₹) Cr. (₹)

Identifiable net assets 90,00,000
To Equity share capital (55,000 × 10) 5,50,000
To Securities Premium (55,000 × 17) 9,35,000
To Cash 52,00,000
To Provision for contingent consideration to BK Ltd. 10,80,000
To Non-controlling Interest 5,14,500
To Capital Reserve 7,20,500

Business Combination 10 CA BISHNU KEDIA

 CMA Final - CFR
Note:

In a business combination, acquisition-related costs (including stamp duty) are expensed in the period
in which such costs are incurred and are not included as part of the consideration transferred. Therefore,
₹1,53,000 incurred by BK Ltd. in relation to acquisition, will be ignored by AK Ltd.

Question 2 (Contingent Consideration) [Institute Material – Illustration 11]

D Ltd. has acquired 100% of the equity of F Ltd. on March 31, 2021. The purchase consideration
comprises of an immediate payment of ₹10 lakhs and two further payments of ₹1.21 lakhs if the Return
on Equity exceeds 20% in each of the subsequent two financial years. A discount rate of 10% is used.
Compute the value of total consideration at the acquisition date.

Solution:
Particulars ₹ in Lakhs
Immediate cash payment 10
Fair value of contingent consideration [1.21/1.1 +1.21/(1.1)2 ] 2.10
Total purchase consideration 12.10

Question 3 (Contingent Liability) [Institute Material – Illustration 13]

Z Ltd. acquired C Ltd. on April 1, 2021. For a lawsuit contingency C Ltd. has a present obligation as
on April 1, 2021 and the fair value of the obligation can be reliably measured as ₹50,000. As of the
acquisition date it is not believed that an out flow of cash or other assets will be required to settle this
matter. What amount should be recorded by Z Ltd. under Ind AS for this contingent liability of C Ltd.?

Solution:
Contingent liabilities of the Acquiree are recognized as of the acquisition date if there is a present
obligation (even if it is not probable that an outflow of resources embodying economic benefits will be
required to settle the obligation, contrary to Ind AS 37) and the fair value of the obligation can be
measured reliably. Hence, a liability of ₹ 50,000 would be recorded by Z.

Question 4 [Institute Material – Illustration 1(a)]

A Ltd. takes over B Ltd. for ₹ 12,60,000. Fair Value (FV) of B’s net assets at time of acquisition amounts
₹ 11,80,000. Required: Calculate Goodwill & Record Journal Entries in the books of A Ltd.

Solution:
In (individual set) the books of A Ltd., the Acquirer, net assets of B Ltd., the Acquiree, will be
recognized and measured at fair value and the consideration will be settled at fair value. The excess of
consideration over net assets will be recognized as Goodwill.
Purchase consideration ₹ 12,60,000; Fair Value of Net Assets ₹ 11,80,000
Goodwill = Consideration – Net Assets = ₹ (12,60,000 – 11,80,000) = ₹ 80,000

In Books of A:
Net Assets A/c Dr. ₹ 11,80,000
Goodwill A/c Dr. ₹ 80,000
To Consideration A/c ₹ 12,60,000

In books of B: All Accounts would be closed through Realisation Account.

CA BISHNU KEDIA 11 Business Combination

CORPORATE FINANCIAL REPORTING
Question 5 [Institute Material – Illustration 2(a)]
On March 31, 2021, P Ltd acquired Q Ltd. by issue of 3,00,000 equity shares (₹10) that were trading at
₹16 on March 31.
The summarized Balance Sheets of the companies as at March 31, 2021 (before acquisition):
(Amount in ₹)
(Book Value) (Market Value)
Particulars
P Ltd. Q Ltd. P Ltd. Q Ltd.
Net Assets 80,00,000 42,00,000 110,00,0000 45,00,000
Equity Sh. Cap 60,00,000 25,00,000
Other Equity 20,00,000 17,00,000

Show acquisition journal entry under Ind AS 103 and summarized balance sheet after business
combination. Also show the necessary accounting in the books of the Acquiree.

Solution:
In books of P Ltd.:
Purchase consideration (at fair value) = 3,00,000×₹16 = ₹48,00,000.
FV of Net Assets ₹45,00,000
Goodwill = Consideration – Net Assets = ₹ (48,00,000 – 45,00,000) = ₹3,00,000.

Journal (individual set of P Ltd.)

Particulars ₹ ₹
Net Assets A/c Dr. 45,00,000
Goodwill A/c Dr. 3,00,000
To, Consideration A/c 48,00,000
Consideration A/c Dr. 48,00,000
To, Equity Share Capital A/c 30,00,000
To, Security Premium A/c 18,00,000

Summarized Individual Balance sheet of K Ltd. as at March 31, 2021 (Post-acquisition)

Workings:
Particulars ₹ ₹
Net Assets:
Carrying amount of Acquirer P Ltd. 80,00,000
Fair Value of Acquiree Q Ltd. 45,00,000
1,25,00,000
Goodwill 3,00,000
Total Net Assets 1,28,00,000
Equity:
Equity Share Capital
Existing 60,00,000
Issue for consideration 30,00,000
90,00,000
Other Equity:

Business Combination 12 CA BISHNU KEDIA

 CMA Final - CFR
Particulars ₹ ₹
Carrying amount 20,00,000
Security Premium (on issue of shares) 18,00,000

38,00,000
Total Equity 1,28,00,000

No consolidated or separate set is required.

In books of Q:
Accounts are closed through Realisation Account
Particulars Dr. Cr.
Realisation A/c Dr. 42,00,000
To, Net Assets A/c 42,00,000
Equity Shares in K Ltd. A/c Dr. 48,00,000
To, Realisation A/c 48,00,000
Realisation A/c Dr. 6,00,000
To, Equity Shareholders’ A/c 6,00,000
Equity Share Capital A/c Dr. 25,00,000
Other Equity A/c Dr. 17,00,000
To, Equity Shareholders’ A/c 42,00,000
Equity Shareholders’ A/c Dr. 48,00,000
To, equity Shares in K Ltd. 48,00,000

Dr. Realisation Account Cr.

Particulars ₹ Particulars ₹
Net Assets A/c 42,00,000 Equity Shares in P A/c 48,00,000
Equity Shareholders’ A/c 6,00,000
48,00,000 48,00,000

Dr. Equity Shareholders’ Account Cr.

Particulars ₹ Particulars ₹
Equity Share Capital A/c 25,00,000
Equity Shares in P Ltd. A/c 48,00,000 Other Equity A/c 17,00,000
Realisation A/c 6,00,000
48,00,000 48,00,000

Question 6 [Institute Material – Illustration 6]

On March 31, 2011, A Ltd absorbed B Ltd. A Ltd. issued 60,000 equity shares (₹10 par value) that were
trading at ₹25 on March 31. The book value of B’s net assets was ₹12,00,000, Equity Share Capital
₹5,00,000 and Other Equity ₹7,00,000 on March 31. The fair value of net assets of B Ltd. was assessed
at ₹13,00,000.
Show journal entries complying Ind AS.

CA BISHNU KEDIA 13 Business Combination

CORPORATE FINANCIAL REPORTING
Solution:
It is a business combination under Ind AS 103. Accounting in the books of A Ltd. is done under
acquisition method. Net assets and consideration are recognized at fair value, and their difference is
recognized as Goodwill/ Gain on Bargain Purchase.
Workings:
Consideration = 60000 × ₹25 = ₹15,00,000
Goodwill = ₹15,00,000 – ₹13,00,000 = ₹2,00,000

Journal Entries in books of A Ltd.

Particulars ₹ ₹
Net Assets A/c Dr. 13,00,000
Goodwill A/c Dr. 2,00,000
To, Consideration A/c 15,00,000
Consideration A/c Dr. 15,00,000
To, Equity Share Capital A/c 6,00,000
To, Security Premium A/c 9,00,000

Question 7 [PYQ – December 2023 - Question 5]

Following is the extract from the Balance Sheets of two companies, BETA Ltd. and DELTA Ltd. as at
31st March, 2023.

Particulars BETA Ltd. DELTA Ltd.

I. Assets
(1) Non-Current Assets
(i) Property, Plant & Equipment 10,00,000 5,00,000
(ii) Financial Assets
20,000 Shares in BETA Ltd. - 2,00,000
(2) Current Assets
(i) Inventories 2,00,000 1,00,000
(ii) Trade Receivables 3,00,000 1,00,000

Total Assets 15,00,000 9,00,000

II. Equity and Liabilities

(1) Equity
(i) Equity Share Capital (Rs. 10) 10,00,000 6,00,000
(ii) Other Equity (Reserve) 2,00,000 1,10,000

(2) Current Liabilities

(i) Trade Payables 3,00,000 1,90,000

Total Equity & Liabilities 15,00,000 9,00,000

BETA Ltd. was to absorb DELTA Ltd. on the basis of intrinsic value of the shares, the purchase
consideration was to be discharged in the form of fully paid shares. A sum of Rs. 40,000 is owed by
BETA Ltd. to DELTA Ltd. Also included in the stocks of BETA Ltd. Rs. 60,000 goods supplied by
DELTA Ltd. at cost plus 20%. Absorption was completed on 31.03.2023

Business Combination 14 CA BISHNU KEDIA

 CMA Final - CFR
You are required to prepare the Consolidated Balance Sheet of BETA Ltd. after acquisition of
DELTA Ltd.
(Workings relating to fair value of shares of the companies, purchase consideration and number of
shares to be issued by BETA Ltd. and amount of goodwill or gain on bargain purchase should form part
of your answer)

Solution:

Company actually paying the PC Acquirer BETA Ltd

Company to whom PC is paid Acquiree DELTA Ltd
Transaction Absorbing entire company
Date of Acquisition 31st March 2023
Date of Consolidation 31st March 2023

Calculation of Fair Value of shares of BETA Ltd.

Property, Plant & Equipment 10,00,000
Inventories 2,00,000
Trade Receivables 3,00,000
Less: Trade Payables -3,00,000
Net Assets of BETA Ltd. 12,00,000
No. of shares (10,00,000/10) 1,00,000
Intrinsic Value of shares of BETA Ltd. 12

Calculation of Fair Value of shares of DELTA Ltd.

Property, Plant & Equipment 5,00,000
Investment in Beta Ltd. (20,000*12) 2,40,000
Inventories 1,00,000
Trade Receivables 1,00,000
Less: Trade Payables -1,90,000
Net Assets of DELTA Ltd. 7,50,000
No. of shares (6,00,000/10) 60,000
Intrinsic Value of shares of DELTA Ltd. 12.5

Calculation of Purchase Consideration

Net Assets of DELTA Ltd. 7,50,000
Less: Value of 20000 shares of Beta Ltd ` @ 12 (2,40,000)
Net Assets of Delta Ltd. acquired 5,10,000
Shares to be issued ` @ 12/share 42,500
Consideration (42500*12) 5,10,000

CA BISHNU KEDIA 15 Business Combination

CORPORATE FINANCIAL REPORTING

Calculation of Goodwill or Capital Reserve

Purchase Consideration 5,10,000
Less: Net Assets taken over of acquiree company
Net Assets of DELTA Ltd. 5,10,000
(-) Unrealised gain included in inventory of DELTA
(10,000) (5,00,000)
Ltd.
Goodwill/ (Capital Reserve) 10,000

Consolidated Balance Sheet

BETA DELTA
Adjustment Amount
Particulars Ltd. Ltd.
I. Assets
(1) Non-Current Assets
(i) Property, Plant & Equipment 10,00,000 5,00,000 15,00,000
(ii) Goodwill 10,000 10,000
(iii) Financial Assets
20,000 Shares in BETA Ltd. - 2,00,000 (2,00,000) -
(2) Current Assets
(i) Inventories 2,00,000 1,00,000 (10,000 ) 2,90,000
(ii) Trade Receivables 3,00,000 1,00,000 (40,000) 3,60,000
Total Assets 15,00,000 9,00,000 21,60,000

II. Equity and Liabilities

(1) Equity
(i) Equity Share Capital
10,00,000 6,00,000 (1,75,000) 14,25,000
[(10,00,000+42,500)*10]
(ii) Other Equity (Reserve) 2,00,000 1,10,000 (1,10,000) 2,00,000
(iii) Securities Premium (42,500*2) 85,000 85,000
(2) Current Liabilities
(i) Trade Payables 3,00,000 1,90,000 (40,000) 4,50,000
Total Equity & Liabilities 15,00,000 9,00,000 21,60,000

Question 8 [Institute Material – Illustration 1(b)]

A Ltd. acquires 100% shares of B Ltd. for ₹ 12,60,000. Fair Value (FV) of B Ltd.’s net assets at time of
acquisition amounts ₹ 11,80,000.
Required: Calculate Goodwill & Record Journal Entries in the books of A Ltd. and B Ltd.

Solution:
Here, B Ltd. is 100% subsidiary and its legal separate existence is continued. It is a business
combination to be accounted under Ind AS 103. Here, B Ltd. is the Acquiree and A Ltd. is the Acquirer.
In the books (consolidated set) of A Ltd., the Acquirer, net assets of B Ltd., the Acquiree, will be
recognized and measured at fair value and the consideration will be settled at fair value. The excess of
consideration over net assets will be recognized as Goodwill. At the same time in the stand-alone set of
A Ltd. (Separate set), Investment in Subsidiary will be recognized as per Ind AS 109 and Ind AS 103
will not apply.
Purchase consideration: ₹ 12,60,000; Fair Value of Net Assets: ₹ 11,80,000
Goodwill = Consideration – Net Assets = ₹ (12,60,000 – 11,80,000) = ₹ 80,000

Business Combination 16 CA BISHNU KEDIA

 CMA Final - CFR

In Consolidated Books of A Ltd.

Net Assets A/c Dr. ₹ 11,80,000
Goodwill A/c Dr. ₹ 80,000
To Consideration A/c ₹ 12,60,000

In Standalone Books of A Ltd.

Investment in B Ltd. A/c Dr. ₹ 12,60,000
To Consideration A/c ₹ 12,60,000

In Books of B Ltd.: No Accounting

Question 9 [Institute Material – Illustration 2(b)]

On March 31, 2021, P Ltd acquired 100% shares of Q Ltd. P Ltd. issued 3,00,000 equity shares (₹10)
that were trading at ₹16 on March 31.
The summarized Balance Sheets of the companies as at March 31, 2021 (before acquisition):
(Amount in ₹)
(Book Value) (Market Value)
Particulars
P Ltd. Q Ltd. P Ltd. Q Ltd.
Net Assets 80,00,000 42,00,000 110,00,0000 45,00,000
Equity Sh. Cap 60,00,000 25,00,000
Other Equity 20,00,000 17,00,000
Show acquisition journal entry under Ind AS 103 and summarized balance sheet after business
combination. Also show the necessary accounting in the books of the Acquiree.

Solution:
Purchase consideration (at fair value) = 3,00,000 ×₹16 = ₹48,00,000.
FV of Net Assets ₹45,00,000
Goodwill = Consideration – Net Assets = ₹ (48,00,000 – 45,00,000) = ₹3,00,000
Journal (in Consolidated set of P Ltd.)
Particulars ₹ ₹
Net Assets A/c Dr. 45,00,000
Goodwill A/c Dr. 3,00,000
To, Consideration A/c 48,00,000
Consideration A/c Dr. 48,00,000
To, Equity Share Capital A/c 30,00,000
To, Security Premium A/c 18,00,000

Summarized Consolidated Balance sheet of P Ltd. and its subsidiary Q [Link] at March 31 (post-
acquisition)
Particulars ₹ ₹
Net Assets:
Carrying amount of Acquirer P 80,00,000
Fair Value of Acquiree Q 45,00,000
1,25,00,000
Goodwill 3,00,000

CA BISHNU KEDIA 17 Business Combination

CORPORATE FINANCIAL REPORTING
Total Net Assets 1,28,00,000
Equity:
Equity Share Capital
Existing 60,00,000
Issue for consideration 30,00,000
90,00,000
Other Equity:
Carrying amount 20,00,000
Security Premium (on issue of shares) 18,00,000
38,00,000
Total Equity 1,28,00,000

Journal (Separate set of P Ltd.)

Particulars ₹ ₹
Investment in Shares of Q Ltd. A/c Dr. 48,00,000
To, Equity Share Capital A/c 30,00,000
To, Security Premium A/c 18,00,000

Summarized Separate Balance sheet of P Ltd. as at March 31 (post-acquisition)

Particulars ₹ ₹
Net Assets:
Carrying amount of Acquirer K 80,00,000
Investment in Shares of L 48,00,000
1,28,00,000
Total Net Assets 1,28,00,000
Equity:
Equity Share Capital
Existing 60,00,000
Issue for consideration 30,00,000
90,00,000
Other Equity:
Carrying amount 20,00,000
Security Premium (on issue of shares) 18,00,000
38,00,000
Total Equity 1,28,00,000
In books of P Ltd. No entry

Question 10 [Institute Material – Illustration 12]

C Ltd. acquires 60% share in D Ltd. for cash payment of ₹2,00,000. The fair value of non-controlling
interest is ₹1,00,000. This amount was determined with reference of market price of D’s ordinary shares
before the acquisition date.
Calculate NCI and goodwill following:
(i) Fair Value approach
(ii) Proportionate shares of identified net asset in acquire approach

Business Combination 18 CA BISHNU KEDIA

 CMA Final - CFR

when on the acquisition date, the aggregate value of D’s identifiable net assets is:
(a) ₹2,40,000;
(b) ₹3,30,000.

Solution:
Particulars (ia) (ib) (iia) (iib)
Consideration 2,00,000 2,00,000 2,00,000 2,00,000
NCI 1,00,000 1,00,000 96,000x 1,32,000y
Net assets 2,40,000 3,30,000 2,40,000 3,30,000
Goodwill (1+2-3) 60,000 56,000 2,000
Gain on Bargain Purchase (3-1-2) 30,000
x - 40% × ₹ 2,40,000 = ₹ 96,000
y - 40% × ₹ 3,30,000 = ₹ 1,32,000
[Under Ind AS 103, Goodwill is not amortized but tested for annual impairment in accordance with Ind
AS 36]

Question 11 [Institute Material – Illustration 1(c)]

A Ltd. acquires 80% shares of B Ltd. for ₹12,80,000. Fair Value (FV) of B Ltd.’s net assets at time of
acquisition amounts ₹ 14,80,000. Non-Controlling Interests are recognized at fair value.
Required: Calculate Goodwill & Record Journal Entries in the books of A Ltd. and B Ltd.

Solution:
Here, B Ltd. is 80% subsidiary of A Ltd. and its legal separate existence is continued after acquisition
of control. It is a business combination to be accounted under Ind AS 103. Here, B Ltd. is the Acquiree
and A Ltd. is the Acquirer. In the books (consolidated set) of A Ltd., the Acquirer, net assets of B Ltd.,
the Acquiree, will be recognized and measured at fair value and the consideration will be settled at fair
value. For the 20% interests of the other shareholders, Non-Controlling Interests (NCI) will be
recognized at fair value as stated in the problem. The excess of aggregate of consideration and NCI over
net assets will be recognized as Goodwill. At the same time in the stand-alone set of A Ltd. (Separate
set), Investment in Subsidiary will be recognized as per Ind AS 109 and Ind AS 103 will not apply.

Purchase consideration ₹ 12,80,000; Fair Value of Net Assets ₹14,80,000

NCI = Purchase consideration × (Share of NCI/Share of holding by the Acquirer)

= ₹12,80,000 × (20/80) = ₹ 3,20,000

Goodwill = Consideration + NCI – Net Assets

= ₹ (12,80,000 + 3,20,000 – 14,80,000) = ₹ 1,20,000

In Consolidated Books of A Ltd.

Net Assets A/c Dr. ₹ 14,80,000
Goodwill A/c Dr. ₹ 1,20,000
To Consideration A/c ₹ 12,80,000
To NCI A/c ₹ 3,20,000

CA BISHNU KEDIA 19 Business Combination

CORPORATE FINANCIAL REPORTING
In Standalone Books of A Ltd.
Investment in B Ltd. A/c Dr. ₹ 12,80,000
To Consideration A/c ₹ 12,80,000

In Books of B Ltd.: No Accounting

Question 12 [Institute Material – Illustration 4]

Z Ltd. acquired a 60% interest in P Ltd. on January 1, 2021. Z paid ₹960 Lakhs in cash for their interest
in P Ltd. The fair value of P Ltd.’s assets is ₹2,400 Lakhs, and the fair value of its liabilities is ₹900
Lakhs. Provide the journal entry for the acquisition using Ind AS, assuming that Z Ltd. does not wish
to report the NCI at fair value.
Show acquisition journal entry under Ind AS 103.

Solution:
i. FV of Net Assets = ₹ (2,400 – 900) Lakhs = ₹ 1,500 Lakhs
ii. Share of Parent in Acquirer = 60% and Share of Non-controlling Interest in Acquiree = 100% –
60% = 40%
NCI (at proportionate net asset value) = 40%×₹ 1,500 Lakhs = ₹ 600 Lakhs
Goodwill = A – B = ₹ (960 + 600) Lakhs – ₹ 1,500 Lakhs = ₹ 60 Lakhs [where, A = Consideration +
NCI, and B = Net Assets]

Journal for consolidation

Particulars ₹ in Lakhs ₹ in Lakhs
Assets A/c Dr. 2,400
Goodwill A/c [W.N. iii] Dr. 60
To, Consideration A/c 960
To, Acquired liabilities A/c 900
To, non-controlling interests A/c [W.N. ii] 600
Consideration A/c
Dr. 960
To, Cash 960

Question 13 [Institute Material – Illustration 5]

On 1 January 2021 M Ltd. acquires 80 per cent of the equity interests of P Ltd. by issue of equity shares
of paid-up value of ₹100 Lakhs (market value ₹240 Lakhs). The identifiable assets are measured at
₹380 Lakhs and the liabilities assumed are measured at ₹60 Lakhs. Non-controlling Interest is measured
at proportionate net asset value. Pass journal.

Solution:
Working Note 1: Amount of the identifiable net assets acquired ₹ (380 – 60) = 320
Working Note 2: Non-controlling Interest = ₹ 320 × 20% = 64
Working Note 3: Gain on Bargain Purchase = B – A = ₹ 320 – ₹ (240 + 64) = 16
M Ltd. would record its acquisition of control of P Ltd. in its consolidated financial statements as
follows:
Journal for Consolidation
Particulars ₹ in Lakhs ₹ in Lakhs

Business Combination 20 CA BISHNU KEDIA

 CMA Final - CFR
Identifiable Assets Acquired A/c Dr. 380
To, Consideration A/c 240
To, Liabilities assumed A/c 60
To, Non-controlling Interest in P Ltd. A/c 64
To, Gain on the Bargain Purchase A/c 16
Note: The gain on bargain purchase will be recognized in other comprehensive income and accumulated
in other equity as capital reserve.

Question 14 [Workbook Q 7]

Red Ltd. and White Ltd. have been operating independently since 1st April 2021. On account of
potential synergies, both companies decided to amalgamate their businesses. The amalgamation became
effective from 1st April 2023, resulting in the formation of a new company, Pink Ltd., which took over the
businesses of both Red Ltd. and White Ltd.

The summarized Balance Sheets of Red Ltd. and White Ltd. as at 31st March 2023 are presented below:

Liabilities Red Ltd. (₹) White Ltd. (₹)

Share Capital:
Equity share of ₹ 10 each 15,00,000 14,50,000
Revaluation Reserve 1,00,000 2,00,000
General Reserve 1,65,000 85,000
Profit & Loss Account
Opening Balance 1,50,000 1,20,000
Profit for the Year 2,00,000 1,30,000
15% Debentures of ₹ 100 each (Secured) 4,00,000 5,00,000
Trade payable 3,10,000 1,20,000
28,25,000 26,05,000
Assets Red Ltd. (₹) White Ltd. (₹)
Land and Buildings 3,20,000 7,40,000
Plant and Machinery 16,00,000 12,60,000
Investments 1,00,000 60,000
Inventory 2,20,000 1,50,000
Trade Receivable 4,25,000 2,65,000
Cash at Bank 1,60,000 1,30,000
28,25,000 26,05,000

Additional Information:

1) The authorized capital of the newly formed company, Pink Ltd., will be ₹50,00,000, divided into
2,00,000 equity shares of ₹25 each.
2) The trade payables of Red Ltd. include an amount of ₹15,000 payable to White Ltd., and the trade
receivables of White Ltd. include ₹15,000 receivable from Red Ltd.
3) The Land & Buildings and inventory of Red Ltd. and White Ltd. are to be revalued as follows:

Particulars Red Ltd. (₹) White Ltd. (₹)

Land and Buildings 5,20,000 10,40,000

CA BISHNU KEDIA 21 Business Combination

CORPORATE FINANCIAL REPORTING
Inventory 1,80,000 1,25,000

Details of Purchase Consideration and Discharge:

i. Equity Shares: Pink Ltd. will issue 1,80,000 fully paid-up equity shares of ₹25 each, allocated
in proportion to the profitability of Red Ltd. and White Ltd. during the preceding two
financial years.
ii. Debentures: Pink Ltd. will issue 18% debentures of ₹100 each to the 15% debenture holders of
Red Ltd. and White Ltd. The number of debentures will be such that the total interest payable
remains unchanged.
Requirement:

Prepare the Balance Sheet of Pink Ltd. after amalgamation. Note that the amalgamation is classified
as being in the nature of a purchase.

Solution:

Balance Sheet of Pink Ltd. as at 1st April, 2023

Particulars Note No ₹
I. Assets
(1) Non- Current assets
(a) Property, Plant and Equipment 1 44,20,000
(b) Non-current investments 1,60,000
(2) Current assets
(a) Current investments -
(b) Inventories 3,05,000
(c ) Trade receivable 6,75,000
(d) Cash and cash equivalents 2,90,000
Total 58,50,000
II. Equity and Liabilities
(1) Equity
(a) Share capital 2 45,00,000
(b) Other equity 3 1,85,000
(2) Non- Current Liabilities 4
(a) Long -Term borrowings 7,50,000
(3) Current Liabilities
(a) Trade payable 4,15,000
Total 58,50,000

Notes to Accounts

Particulars ₹ ₹
Property, Plant and Equipment
Tangible assets
Land and Buildings 15,60,000
Plant and Machinery 28,60,000 44,20,000

Business Combination 22 CA BISHNU KEDIA

 CMA Final - CFR
Share Capital
Equity Share Capital
Authorized share capital:
2,00,000 Equity Share of ₹ 25 each 50,00,000
1,80,000 Equity shares of ₹ 25 each 45,00,000
(all the above shares are allotted as fully paid up pursuant to
contracts without payment being received in cash)
Other Equity
Capital Reserve 1,85,000
Long Term Borrowings
Secured Loans
18% of Debentures (₹ 100 each) 7,50,000

Working Notes:

W1: Calculation of net assets taken over

Particulars Red Ltd. (₹) White Ltd.

Assets Taken over: (₹)
Land and Buildings 5,20,000 10,40,000
Plant and Machinery 16,00,000 12,60,000
Investments 1,00,000 60,000
Inventory 1,80,000 1,25,000
Trade Receivable (W3) 4,25,000 2,50,000
Cash at Bank 1,60,000 1,30,000
(i) 29,85,000 28,65,000
Liabilities taken over:
Debentures (W2) 3,33,333 4,16,667
Trade payables (W3) 2,95,000 1,20,000
Net Assets taken over (ii) 6,28,333 5,36,667
(i) - (ii) 23,56,667 23,28,333

W2: Calculation of value of Debentures to be issued in Pink Ltd.

Red Ltd.

Existing Debenture interest @ 15% ₹ 4 lakhs x 15/100.

Debentures
60,000 to be issued in Pink Ltd. @ 18% to maintain the
same amount of interest ₹ 60000 x 100/18 3,33,333

White Ltd.

Existing Debenture interest @15% ₹ 5 lakhs x

15/100.
Debentures to be issued in Pink Ltd. @ 18% to maintain the ₹ 75000 x 100/18
75,000amount of interest
same
4,16,667

CA BISHNU KEDIA 23 Business Combination

CORPORATE FINANCIAL REPORTING
W3: Trade receivable and trade payable

Trade receivable Red Ltd. (₹) White Ltd.

Balances before amalgamation 4,25,000 (₹)
Less: receivable from Red - 2,65,000
-15,000
Trade Payable 4,25,000 2,50,000
Balances before amalgamation 3,10,000 1,20,000
Less: Due to white -15,000 -
2,95,000 1,20,000

W4: Computation of Purchase Consideration:

Particulars Red Ltd. White Ltd. (₹)

(₹)
Equity Shareholders
Equity based on two year profit
Op balance (i.e. FY21-22, as started w.e.f. 01/04/2021) 1,50,000 1,20,000
Profit of the year (i.e. FY 22-23) 2,00,000 1,30,000
Total 3,50,000 2,50,000
1,80,000 × 350 × ₹ 25
(350+250) 26,25,000 18,75,000
1,80,000 × 250 × ₹ 25
(350+250)
Total Purchase consideration (a) 26,25,000 18,75,000
Net Assets takeover (W N - 1) (b) 23,56,667
Goodwill (a-b) 2,68,333
Capital reserve (b-a) 4,53,333

Goodwill arising from amalgamation shall be adjusted against Capital Reserve arising from
amalgamation, and only balance of ₹ 1,85,000 is to be shown in the Balance Sheet of Pink Ltd as capital
reserve.

Question 15 [Institute Material – Illustration 8]

On March 31, 2011, A Ltd externally reconstructed into B Ltd. B Ltd. issued 80,000 equity shares at
the nominal value of ₹10 per share. The book value of A Ltd.’s net assets on March 31 was ₹12,00,000
represented by Capital ` 6,00,000 and Other Equity ` 6,00,000. The fair value of net assets was assessed
at ₹15,00,000. Show journal entries complying Ind AS.

Solution:
It is a transaction of Business Combination Under Common Control under Ind AS 103 Appendix C,
where control lies with the same parties before and after the transaction.
Pooling of Interest method will be applied. Consideration is measured only at nominal value of shares,
Difference of consideration and carried amount of Other Equity with the net assets will be recognized
as Goodwill or Capital Reserve. Net assets and Other Equity of the transferee company will be carried

Business Combination 24 CA BISHNU KEDIA

 CMA Final - CFR
at book value.
Workings:
Consideration = 80000 ×₹10 = ₹8,00,000
Goodwill = ₹8,00,000 +₹6,00,000 -₹12,00,000 = ₹2,00,000
Journal in books of B Ltd.
Particulars ₹ ₹
Net Assets A/c Dr. 12,00,000
Goodwill A/c Dr. 2,00,000
To, Consideration A/c 8,00000
To, Other Equity A/c 6,00,000
Consideration A/c 8,00,000
Dr.
To, Equity Share Capital A/c 8,00,000

Question 16 [Institute Material – Illustration 7]

On March 31, 2011, A Ltd and B Ltd. were amalgamated into C Ltd., control of the businesses lying
with the same parties as before. C Ltd. issued 80,000 equity shares to A Ltd. and 75,000 equity shares
to B Ltd. at the nominal value of ₹10 per share. The book value of A Ltd.’s net assets was ₹12,00,000,
Equity Share Capital ₹5,00,000 and Other Equity ₹7,00,000 on March 31. The fair value of net assets
of A Ltd. was assessed at ₹16,00,000. The book value of B Ltd.’s net assets was ₹10,00,000, Equity
share capital ₹4,00,000 and Other Equity ₹6,00,000 on March 31. The fair value of net assets of B Ltd.
was assessed at ₹15,00,000.
Show journal entries complying Ind AS.

Solution:
It is a transaction of Business Combination Under Common Control under Ind AS 103 Appendix
C, where control lies with the same parties before and after the transaction.
Pooling of Interest method will be applied. Consideration is measured only at nominal value of shares.
Difference of consideration and other equity carried, with net assets be recognized as Goodwill or Capital
Reserve. Net assets and Other Equity of the transferee company will be carried at book value.
Workings:
(Amount in ₹)
Consideration to A Ltd. = 80,000 × ₹10 = 8,00,000
Consideration to B Ltd. = 75,000 ×₹10 = 7,50,000
Total Consideration = 15,50,000
Other Equity of A Ltd. and B Ltd. = 7,00,000 + 6,00,000 = 13,00,000
Total Net assets = 12,00,000 + 10,00,000 = 22,00,000
Goodwill = 15,50,000 + 9,00,000 = 6,50,000

Journal in books of C Ltd.

Particulars ₹ ₹
Net Assets of A Ltd. A/c Dr. 12,00,000
Net Assets of B Ltd. A/c Dr. 10,00,000
Goodwill A/c Dr. 6,50,000
To, Consideration A/c (₹ 8,00,000 + ₹ 7,50,000) 15,50,000
To, Other Equity A/c (`7,00,000 + `6,00,000) 13,00,000

CA BISHNU KEDIA 25 Business Combination

CORPORATE FINANCIAL REPORTING
Consideration A/c 15,50,000
Dr.
To, Equity Share Capital A/c 15,50,000

Question 17 [Institute Material – Illustration 19]

DA Ltd. and TA Ltd. were amalgamated to form a new company DATA Ltd. on 31-03-2021 who issued
requisite number of equity shares of ₹10 to take over the businesses of DA and TA. The abstract of
balance sheets of the companies on 31-03-2021:
(₹ in Lakhs)
Particulars DA Ltd. TA Ltd. DATA Ltd.
PPE 7,500 8,000 15,500
Financial Assets 800 500 1,300
Current Assets 4,700 6,500 11.200
Equity Share Capital 6,000 8,000 14,000
Other Equity 3,000 3,000 6,000
Borrowings 2,000 3,000 5,000
Current Liabilities 2,000 1,000 3,000
Pass journal entries in the books of DA, TA and DATA Ltd. and show balance sheet abstract after
merger.

Solution:
The combining entities or businesses are ultimately controlled by the same party or parties both before
and after the business combination. It is a business combination under common control, and pooling of
interest method of accounting is be followed.
WN 1. Carrying amount after merger:
(₹ in Lakhs)
Particulars DA Ltd. TA Ltd. DATA Ltd.
PPE 7,500 8,000 15,500
Financial Assets 800 500 1,300
Current Assets 4,700 6,500 11,200
Equity Share Capital 6,000 8,000 14,000
Other Equity 3,000 3,000 6,000
Borrowings 2,000 3,000 5,000
Current Liabilities 2,000 1,000 3,000

WN 2. Purchase consideration:
(₹ in Lakhs)
Particulars DA Ltd. TA Ltd. DATA Ltd.
Equity Share Capital 6,000 8,000 14,000
Other Equity 3,000 3,000 6,000
Equity 9,000 11,000 20,000
Share 9/20 11/20 20/20

Particulars DA Ltd. TA Ltd. DATA Ltd.

Purchase consideration (9/20)×14,000 (11/20)×14,000 14,000
= 6,300 = 7,700

Business Combination 26 CA BISHNU KEDIA

 CMA Final - CFR

Journal in the books of transferor company DA Ltd.

(₹ in Lakhs)
Particulars Dr. Cr.
Current Liabilities A/c Dr. 2,000
Borrowings A/c Dr. 2,000
Realisation A/c Dr. 9,000
To, PEE A/c 7,500
To, Current Assets A/c 4,700
To, Financial Assets A/c 800
(Transferred to Realisation A/c)
Shares in DATA Ltd. A/c Dr. 6,300
To, Realisation A/c (Consideration) 6,300
Equity Shareholders A/c Dr. 2,700
To, Realisation A/c 2,700
(Loss on Realisation)
Equity Share Capital A/c Dr. 6,000
Other Equity A/c Dr. 3,000
To, Equity Shareholders A/c 9,000
Equity Shareholders A/c Dr. 6,300
To, Shares in DATA Ltd.A/c 6,300

Journal in the books of transferor company TA Ltd.

(₹ in Lakhs)
Particulars Dr. Cr.
Current Liabilities A/c Dr. 1,000
Borrowings A/c Dr. 3,000
Realisation A/c Dr. 11,000
To, PPE A/c 8,000
To, Current Assets A/c 6,500
To, Financial Assets A/c 500
(Transferred to Realisation A/c)
Shares in DATA Ltd. A/c Dr. 7,700
To, Realisation A/c 7,700
(Consideration)

(₹ in Lakhs)
Particulars Dr. Cr.
Equity Shareholders A/c Dr. 3,300
To, Realisation A/c 3,300
(Loss on Realisation)
Equity Share Capital A/c Dr. 8,000
Other Equity A/c Dr. 3,000

CA BISHNU KEDIA 27 Business Combination

CORPORATE FINANCIAL REPORTING
To, Equity Shareholders A/c 11,000
Equity Shareholders A/c Dr. 7,700
To, Shares in DATA Ltd.A/c 7,700
In the books of Transferee company DATA Ltd. - Journal Entries
(₹ in Lakhs)
Particulars Dr. Cr.
PPE A/c Dr. 15,500
Current Assets A/c Dr. 11,200
Financial Assets A/c Dr. 1,300
To, Consideration A/c 14,000
To, Borrowings A/c 5,000
To, Current Liabilities A/c 3,000
To, Other Equity* 6,000
Consideration A/c Dr. 14,000
To, Equity Share Capital A/c 14,000

Balance sheet abstract of DATA Ltd. as at 31.03.2021

Particulars ₹ in lakhs
PPE 15,500
Financial Assets 1,300
Current Assets 11,200
Total 28,000
Equity Share Capital 14,000
Other Equity 6,000
Borrowings 5,000
Current Liabilities 3,000
Total 28,000

Question 18 [PYQ – December 2024 - Question 5]

LS Ltd. and MS Ltd. were amalgamated to form a new company LMS Ltd. on 31-03-24 who issued
requisite number of equity shares of ₹10 each to take over the businesses of LS Ltd. and MS Ltd. The
abstract of balance sheets of the companies on 31-03-24:
(₹ in Lakhs)
Particulars LS Ltd MS Ltd
PPE 15,000 16,000
Financial Assets 1,600 1,000
Current Assets 9,400 13,000
Equity Share Capital 12,000 20,000
Other Equity 6,000 2,000
Borrowings 4,000 6,000
Current Liabilities 4,000 2,000

Business Combination 28 CA BISHNU KEDIA

 CMA Final - CFR

Fair value of the following items is given:

(₹ in Lakhs)
Particulars LS Ltd MS Ltd
PPE 16,000 12,000
Current Assets 10,000 14,000
Fair Value of Business 15,000 30,000

However, the control of LMS Ltd. is taken by the management of MS Ltd. Show the Balance Sheet
after amalgamation.

Solution:
Balance Sheet of LMS Ltd as on 31st March, 2024
Note Amount
Particulars
No. (₹ in Lakhs)
ASSETS:
Non-current Assets:
PPE 32,000
Financial Assets 2,600
Current Assets 23,000
Total 57,600
EQUITY AND LIABILITIES:
Equity:
Equity Share Capital 30,000
Other Equity 1 11,600
Borrowings 10,000
Current Liabilities 6,000
Total 57,600

Note 1: Other equity = ₹ (2,000+4,600+5,000) = ₹ 11,600 Lakh

Notes to accounts (₹ in lakhs)

1. Property, plant and equipment
Property, plant and equipment of MS Ltd. at its carrying amount 16,000
Property, plant and equipment of LS Ltd. at its fair value 16,000
Total 32,000

2. Financial assets
Financial assets of MS Ltd. at its carrying amount 1,000
Financial assets of LS Ltd. at its fair value (equal to carrying amount) 1,600
Total 2,600

3. Current assets
Current assets of MS Ltd. at its carrying amount 13,000
Current assets of LS Ltd. at its fair value 10,000
Total 23,000

CA BISHNU KEDIA 29 Business Combination

CORPORATE FINANCIAL REPORTING

4. Equity share capital

Authorized -
Issued, subscribed and fully paid -
3,000 equity shares of ₹ 10 each 30,000
Total
30,000

5. Other equity
Other equity of MS Ltd. Securities premium 2,000
Gain on bargain purchase 5,000
Total 4,600
11,600

6. Borrowings
Borrowings of MS Ltd. Borrowings of LS Ltd. 6,000
Total 4,000
10,000

7. Current liabilities
Current liabilities of MS Ltd. 2,000
Current liabilities of LS Ltd. Total 4,000
6,000

Working Notes:

(i) Nature of acquisition and the manner of preparing Balance Sheet after amalgamation
As per paragraph B 19 of Ind AS 103, it is a case of reverse acquisition in which LS Ltd. is the
legal acquirer (accounting acquiree) and MS Ltd. is the legal acquiree (accounting acquirer)
because MS Ltd. gets 2/3rd share and thereby control in the combined entity whereas LS Ltd. gets
only 1/3rd share in the combined entity i.e., LMS Ltd. as supported by the following computation:

LS Ltd. MS Ltd.
Particulars
(₹ in Lakhs) (₹ in Lakhs)
Fair Value of Business 15,000 30,000
Share of each company in the merged
1/3 2/3
company

To prepare the consolidated balance sheet of LMS Ltd. after amalgamation, as per paragraph B22
of Ind AS 103, the assets and liabilities of the accounting acquirer are shown at their pre-
combination carrying amounts and the assets and liabilities of the legal acquirer (the accounting
acquiree) are recognized and measured as per Ind AS 103 i.e., at their fair values.

Besides, the retained earnings and other equity balances of the accounting acquirer before
business combination are also reflected.

The issued equity interests in the consolidated financial statements are determined by adding the
issued equity interest of the accounting acquirer outstanding immediately before the business
combination to the fair value of the accounting acquiree.

Business Combination 30 CA BISHNU KEDIA

 CMA Final - CFR
(ii) Computation of form and amount of consideration for LS Ltd.

(a) Fair value of business of MS Ltd. ₹30,000 lakhs

(b) Number of equity shares of MS Ltd. 2,000 lakhs
(c) Fair value per equity share of MS Ltd. (a/b) ₹15
(d) Fair value of business of LS Ltd. being the consideration of LS Ltd. ₹15,000 lakhs
(e) Number of equity shares to be issued by MS Ltd. for LS Ltd.(d/c) 1,000 lakhs

(iii) Computation of gain on bargain purchase of business of LS Ltd.

Particulars ₹ In lakhs
(i) Acquisition date fair value of the identifiable assets acquired -
(a) Property, plant and equipment 16,000
(b) Current assets 10,000
(c) Financial assets 1,600
Total 27,600
(ii) Acquisition date fair value of the identifiable liabilities assumed -
(a) Borrowing 4,000
(b) Current liabilities 4,000
Total 8,000
(iii) Acquisition date fair value of the net of identifiable assets 19,600
acquired and liabilities assumed (i-ii)
(iv) Consideration transferred 15,000
(v) Gain on bargain purchase (iii-iv) 4,600

Question 19 [Workbook Q 5]

AK Limited operates through two divisions, A and B. Division A has been generating steady profits, while
Division B has been consistently incurring losses. The draft extract of the Balance Sheet as at 31/03/2023
for each division is as follows:

(₹ crore)

Particulars A B Total
Fixed Assets Cost 600 1,200 1,800
Depreciation -400 -750 -1,150
Net Fixed Assets (A) 200 450 650
Current Assets 460 900 1,360
Less: Current Liabilities 60 750 810
Net Current Assets (B) 400 150 550
Total (A) + (B) 600 600 1200
Financed by: -
Loan Funds - 700 700
Capital: Equity * 10 each 50 - 50
Surplus 550 -100 450
Total 600 600 1,200

Division B, along with its assets and liabilities, was sold for ₹50 crore to ASN Limited. ASN Limited
allotted 2 crore shares of ₹10 each to the members of AK Limited at a premium of ₹15 per share, in full

CA BISHNU KEDIA 31 Business Combination

CORPORATE FINANCIAL REPORTING
settlement of the consideration, in proportion to their shareholding in the company. One of the members
of AK Limited held 52% of the shares in the company.

There is no other transaction. You are required to:

i. Pass journal entries in the books of AK Limited.

ii. Prepare the Balance Sheet of AK Limited after passing the entries in (i) along with notes to
accounts for ‘Other Equity’
iii. Prepare the Balance Sheet of ASN Limited along with notes to accounts for ‘Share Capital’.

Solution:

(1) In the given scenario, this demerger will meet the definition of common control transaction.
Accordingly, the transfer of assets and liabilities will be derecognized and recognized as per book value
and the resultant loss or gain will be recorded as capital reserve in the books of demerged entity (AK
Ltd.).

Journal of AK Ltd.:

( in crore)

Particulars Debit Credit

Loan Funds 700
Current Liabilities 750
Provision for Depreciation 750
To Fixed Assets 1,200
To Current Assets 900
To Capital Reserve 100
(Being division B along with its assets and liabilities sold to ASN Ltd. for
50 crore)

(ii) Balance Sheet of AK Ltd. (after demerger)

( in crore)

Particulars Note No Amount

Non-current assets
Property, Plant and Equipment 200
Current assets 460
660
EQUITY AND LIABILITIES
Equity 1 50
Equity share capital (of face value of 10 each) 2 550
Other equity
Liabilities
Current liabilities
Current liabilities 60
660

Business Combination 32 CA BISHNU KEDIA

 CMA Final - CFR
Notes to Accounts:

Particulars In crore
1. Equity Share Capital 50
5 crore equity shares of face value of 10 each
Consequent to transfer of Division B to newly incorporated company ASN Ltd.,
the members of the company have been allotted 2 crore equity shares of 10 each
at a premium of 15 per share of ASN Ltd., in full settlement of the consideration in
proportion to their shareholding in the company
2. Other Equity
Surplus (550-100) 450
Add: Capital Reserve on reconstruction 100
550

Balance Sheet of ASN Ltd

(in crore)

Particulars Note No Amount

ASSETS
Non-current assets
Property, Plant and Equipment 450
Current assets 900
1,350
EQUITY AND LIABILITIES
Equity
Equity share capital (of face value of ₹ 10 each) 1 20
Other equity 2 (120)
Liabilities
Non-current liabilities
Financial liabilities
Borrowings 700
Current liabilities
Current Liabilities 750
1,350

Notes to Accounts:

Particulars ₹
Share Capital
Issued and Paid-up capital 20
2 crore Equity shares of ₹ 10 each fully paid up
(All the above shares have been allotted to the members of AK Ltd. on takeover of
Division B from AK Ltd. as fully paid-up pursuant to contract without payment
being received in cash)
Other Equity (120)
Capital reserve (100)

CA BISHNU KEDIA 33 Business Combination

CORPORATE FINANCIAL REPORTING

Question 20 [Institute Material – Illustration 18]

Z Ltd has two divisions X and Y. On 31.03.2021 the division-wise extract of the balance sheet was:
(₹ in Crores)
Particulars X Y Total
PPE 350 600 950
Prov. for Depreciation (300) (400) (700)
Current assets 300 400 700
350 600 950
Equity Share Capital (₹10 per share) 50 -- 50
Other Equity 250 (150) 100
Borrowings 360 360
Current Liabilities 50 390 440
350 600 950
Q Ltd, a new company is formed to take over division Y by issue of 1 crore equity shares of ₹10 at a
premium of ₹15 per share to (i) the shareholders of Z ltd (ii) to Z Ltd.
Pass journal entries and prepare balance sheet after reconstruction in the books of both Z Ltd and Q Ltd
(a) based on (i) above and (b) based on (ii) above.

Solution:
As the control of division Y was with the shareholders of Z Ltd before the demerger and after division
Y is taken over by Q Ltd the control of Q Ltd is still lying with the same shareholders of Z Ltd, this is
a transaction identified as business combination under common control, where the transferee is Q Ltd.
and the transferor is Z Ltd. Pooling of interest is the method of accounting to be applied.
Z Ltd. shall close all its accounts for division Yand Q Ltd will record all the assets and liabilities at
carrying amount (as in the books of the transferor). The equity share capital will be recorded at nominal
value only. Consideration in excess of equity share capital will be recorded as goodwill (Capital reserve
in case of deficiency). The other equity shall be cancelled in the books of transferor and shall be carried
by the transferee in the same form is which they appeared in the financial statements of the transferor.
In the given problem the consideration is settled by issue of equity shares at a premium. Under pooling
of interest method of accounting, only nominal value will be considered (the accounting of both the
transferor and transfers will remain unaffected for ignoring the share premium altogether).
When shares are issued to shareholders of Z Ltd

Journal in the books of Z Ltd.

Particulars Dr. (₹ in Crore) Cr. (₹ in Crore)
Borrowing A/c Dr. 360
Current Liabilities A/c Dr. 390
Prevision for Depreciation A/c Dr. 400
To, PPE A/c 600
To, Current Assets A/c 400
To, Other Equity A/c 150
(Assets liabilities and other equity are closed, and consideration 10 is not accounted being received
by the shareholders directly)

Business Combination 34 CA BISHNU KEDIA

 CMA Final - CFR

Balance sheet of Z Ltd. after reconstructions

(₹ in Crore)
Particulars Note Amount
Assets
Non-current assets
PPE 50
Current assets 300
Total 350
Equity and Liabilities
Equity
Equity share capital 50
Other Equity 250
Liabilities
Current Liabilities 50
Total 350

Journal in books of Q Ltd

Dr. (₹ in
Particulars Cr. (₹ in Crore)
Crore)
PPE A/c Dr. 200
Current Assets A/c Dr. 400
Other Equity + A/c Dr. 150
Goodwill 1 A/c Dr. 10
To, Borrowing A/c 360
To, Current liabilities A/c 390
To, Consideration A/c 10
(+Other equity recognized)
Consideration A/c Dr. 10
To, Equity Share Capital A/c 10

Balance Sheet of Q Ltd.

Particulars Note Amount (₹ in Crore)
Assets
Non-current assets
PPE 200
1
Goodwill 10
Current Assets 400
Total 610
Equity and Liabilities
Equity
Equity share capital 10

CA BISHNU KEDIA 35 Business Combination

CORPORATE FINANCIAL REPORTING

Other Equity (*preserved in the same form of the transferor) (150)

Liabilities
Borrowings 360
Current Liabilities 390
Total 610
1
Goodwill is the excess of the amount recorded as share capital issued over the share capital of the
transferor. Here Y Division share capital is Zero. Hence, Goodwill = (10 – 0) crore = 10 crore.
For shares issued to Z Ltd
When shares issued by Q Ltd. are received by Z Ltd. in Z Ltd.’s accounts investment is recognized.

Journal of Z Ltd
Particulars Dr. Cr.
(₹ in Crore) (₹ in Crore)
Borrowing A/c Dr. 360
Current Liabilities A/c Dr. 390
Provision for Depreciation A/c Dr. 400
Investment A/c Dr. 10
To, PPE A/c 600
To, Current Assets A/c 400
To, Other Equity A/c 150
To, Reconstruction A/c (Profit transferred to Other Equity) 10*

Z Ltd. Balance Sheet After Reconstructions

Particulars Note Amount (₹ in Crore)
Assets
Non-current assets
PPE 50
Financial asset-Investment 10
Current Assets 300
Total 360
Equity and Liabilities
Equity
Equity share capital 50
Other Equity (250 + 10*) 260
Liabilities
Current Liabilities 50
Total 360
The recording in the books of Q Ltd will remain same as is (a).

Business Combination 36 CA BISHNU KEDIA

 CMA Final - CFR

Question 21 [Institute Material – Illustration 15]

Entity A acquires 80% shares of Entity B and satisfies the consideration by issue of three shares of
Entity A for every share of Entity B. Market price of ₹10 share of Entity A is ₹25.
The summarized Balance Sheets:
Particulars A (₹) B (₹)
Net Assets 30,000 20,000
Equity 30,000 20,000
No. of Equity Shares 1,000 750
Is it a reverse acquisition?

Solution:
80% of 750 = 600 shares of Entity B are acquired and Entity A issues 600 × 3 = 1800 shares to Entity
B. Now, shareholders of Entity A hold 1000 shares and shares holders of Entity B hold 1800 shares
effectively, the group is controlled by Entity B. This is a case of reverse acquisition. In such case
accounting will be done in books of Entity A, the legal acquirer, but it would be assumed that Entity B
is the accounting acquirer and accordingly assets and liabilities of Entity A would be identified and
effective consideration would be calculated.

In case of amalgamation also ‘reverse acquisition’ may take place when it is indicated that after Entity
A and Entity B amalgamated into Entity C, shareholders of Entity B would control Entity C. Although
Entity C is the legal acquirer, in the books recording will be done assuming that Entity B is the acquirer.

Question 22 [Institute Material – Illustration 16]

Reverse Acquisition takes place as H Ltd. acquires 100% equity shares of S Ltd on 31-03-2021. From
the following data pass journal entries and prepare consolidated and separate Balance Sheet in the books
of H Ltd.
(₹ in Lakhs)
Particulars H Ltd. (₹) S Ltd. (₹)
Non-Current Assets 2,000 3,000
Current Assets 1,000 1,000
Total 3,000 4,000
Equity Share Capital H: 100 shares; S: 80 shares 1,000 800
Other Equity 500 1,600
Non-Current Liabilities 700 1,200
Current Liabilities 800 400
Total 3,000 4,000
H Ltd. and S Ltd. shares are quoted at ₹20 and ₹50 respectively on 31-03-2021. H Ltd. issues shares in
exchange ratio based on quoted price. Fair Value of NC asset of H ₹2,400, S ₹3,200.

Solution:
I. It is a business combination. H Ltd. issues 2.5 shares for every one share of S Ltd. (50/20). Thus 200
shares (80 × 2.5) of H Ltd. are issued to owners of S Ltd., who become 2/3rd owner of the group
interest (200 out of total 300 shares, 100 shares belonging to the owners of H Ltd.). For accounting
purpose, the subsidiary company S Ltd., (holding 2/3rd of the group interest) the legal acquiree is
considered as the accounting acquirer. It is a reverse acquisition. As 100% shares of S Ltd. are

CA BISHNU KEDIA 37 Business Combination

CORPORATE FINANCIAL REPORTING
acquired there is no non-controlling interest.
II. Consideration transferred:
Of the group 100 shares are held by owners of H Ltd. and 200 shares are held by owners of S Ltd.
Effective consideration from the view point of accounting acquirer S Ltd. is the fair value of 100
shares held by H = 20×100 = 2,000, which is equivalent to 40 shares of S Ltd. at 50. In the
consolidated set maintained by H Ltd., recording will be made as if S Ltd. is acquiring H Ltd. Thus,
net assets of H Ltd. will be recognized at fair value and net assets and equity of S Ltd. will be
recognized at carrying amount.
III. Goodwill:
Particulars ₹ in Lakhs
Net Assets of H identified (2,400 + 1,000 - 700 - 800) 1,900
Consideration transferred 2,000
Goodwill (2,000 – 1,500) 100

Journal assuming S Ltd. as the Accounting acquirer :

Particulars Dr. (₹ in Lakhs) Cr. (₹ in Lakhs)
Non-Current Assets A/c Dr. 2,400
Current Assets A/c Dr. 1,000
Goodwill A/c Dr. 100
To, Non-current Liabilities A/c 700
To, Current Liabilities A/c 800
To, Consideration A/c 2,000
Consideration A/c 2,000
Dr.
To, Equity Share Capital A/c 2,000

Consolidated Balance Sheet on 31-03-2021 (in books of H Ltd.)

(₹ in Lakhs)
Consolidated (Book Value
Particulars Separate
of S + FV of H Ltd.)
Non-current Assets 2,000 5,400
Goodwill 100
Financial asset – Investment 2,000
Current Assets 1,000 2,000
Total 5,000 7,500
Equity Share Capital – 300 shares of H Ltd. 3,000 2,800
(Carrying amount of S Ltd. + Issue by H Ltd. = 800 + 2000)
Other Equity 500 1,600
Non-Current Liabilities 700 1,900
Current Liabilities 800 1,200
Total 5,000 7,500
* Equity structure i.e. Number of shares reflects the legal parent H Ltd, although amount of equity is the
carrying value of S plus purchase consideration by issue of shares.
[Note: There is mismatch between the number of shares and the Balance Sheet amount if nominal value
is considered. This is maintained in the standard without any explanation.]

Business Combination 38 CA BISHNU KEDIA

 CMA Final - CFR

Question 23 [Institute Material – Illustration 17]

DA Ltd. and TA Ltd. were amalgamated to form a new company DATA Ltd. on 31-03-21 who issued
requisite number of equity shares of ₹10 to take over the businesses of DA Ltd. and TA Ltd. The abstract
of balance sheets of the companies on 31-03-21:
(₹ in Lakhs)
Particulars DA TA
PPE 7,500 8,000
Financial Assets 800 500
Current Assets 4,700 6,500
Equity Share Capital 6,000 10,000
Other Equity 3,000 1,000
Borrowings 2,000 3,000
Current Liabilities 2,000 1,000

Fair value of the following items is given:

(₹ in Lakhs)
Particulars DA TA
PPE 8,000 6,000
Current Assets 5,000 7,000
Fair Value of Business 7,500 15,000

However, the control of DATA Ltd. is taken by the management of TA Ltd. Show the merged balance
sheet.

Solution:
TA Ltd. having the control over DATA Ltd., it is considered a reverse acquisition and in the merged
balance sheet, assets and liabilities of TA Ltd. would be shown at carrying amount.
(₹ in Lakhs)
Particulars DA Ltd. TA Ltd.
Fair Value of Business 7,500 15,000
Share of each company in the merged company 1/3 2/3
Fair value per share of TA Ltd. = ₹15,000/1000 = ₹15
Consideration payable by TA Ltd. to DA Ltd. is ₹7,500/15 = 500 lakh shares
Or, No. of shares held by TA Ltd. for 2/3 share in DATA Ltd. = 1000 lakh shares; no. of shares to be
issued to DA for 1/3 share = 500.
Thus, total consideration = 500 lakh shares of ₹10 each at ₹ 5 premium = ₹7,500.
(₹ in Lakhs)
Particulars Note ₹
Assets
Non -Current Assets
PPE (8000 + 8000) 16,000

CA BISHNU KEDIA 39 Business Combination

CORPORATE FINANCIAL REPORTING

Financial Assets 1,300

Current Assets (5000 + 6500) 11,500
Total 28,800
Equity and Liabilities
Equity
Equity Share Capital 1500 (1000 + 500) lakh shares of ₹10 15,000
Other Equity Note 1 5,800
Borrowings 5,000
Current Liabilities 3,000
Total 28,800

Note 1:
Particulars ₹
PPE 8,000
Financial Assets 800
Current Assets 5,000
13,800

Particulars ₹
Borrowings 2,000
Current Liabilities 2,000
4,000
Net Assets 9,800
Consideration 7,500
Gain on Bargain Purchase 2,300
Other Equity = Other Equity of TA + Gain on Bargain Purchase + security premium = ₹
(1,000+2,300+2,500) = ₹5,800

Question 24 [Institute Material – Illustration 9]

Entity A acquired 35 % of Entity B on 01-04-2019 for ₹35,000. On 31-03-2020, fair value of shares of
Entity B is ₹42,000, thus ₹7,000 reported under OCI in 2019-20. On 01-07-2020 Entity A further
acquired 40% stake in Entity B. Consideration paid is ₹60,000.
Entity A identifies the net assets of Entity B at fair value of ₹1,20,000 at the acquisition date, value 35%
shares at ₹45,000. NCI is valued at proportionate net assets. Show workings and Journal entries.

Solution:
Entity A will make transfer to P&L Account
Particulars ₹
Gain on disposal of 35% investment (45,000 – 42,000) 3,000
Gain previously reported in OCI (42,000 - 35,000) 7,000
Total transfer to P & L Account 10,000

Business Combination 40 CA BISHNU KEDIA

 CMA Final - CFR
Entity A will measure goodwill as follows
Particulars ₹
Fair Value of consideration given for controlling interest 60,000
Non-controlling interest (25% × 1,20,000) 30,000
Fair Value of previously held interest 45,000
Total 1,35,000
Less: Fair value of net assets of acquire (1,20,000)
Goodwill 15,000

Journal Entries
Particulars ₹ ₹
Investment A/c Dr. 3,000
OCI A/c Dr. 7,000
To, Profit and Loss A/c 10,000
Net Assets A/c Dr. 1,20,000
Goodwill A/c Dr. 15,000
To, Consideration A/c 60,000
To, Investment A/c 45,000
To, NCI A/c 30,000
Note: If an entity already has control of the acquiree (suppose, already held 60% of the equity and for
further purchase of 30% there this is no step acquisition.)

Question 25 [PYQ – December 2024 - Question 8(c)]

A Ltd. acquired 35% of B Ltd. in 2023-24 for ₹ 3,50,000. Fair value of shares of B Ltd. (35%) being ₹
4,20,000, ₹ 70,000 was reported under OCI. In April 2024, A Ltd. further acquired 40% stake in B Ltd.
for a consideration of ₹ 6,00,000. A Ltd. identifies the assets of B Ltd. as 12,00,000 and values 35%
shares (previously held) at ₹ 4.50,000.

i. Calculate the amount to be transferred to Profit and Loss Statement in 2023-24.

ii. Also calculate value of Goodwill/Gain on bargain purchase on acquisition of control.

Solution:

Amount to be transferred to Profit and Loss A/c

Gain on disposal of 35% investment ₹ 30,000

Gain previously reported in OCI ₹ 70,000
Total transfer to P& L ₹ 1,00,000

Computation of Goodwill/Gain from Bargain Purchase

Fair value of consideration given for controlling interest ₹ 6,00,000
Non-controlling interest ₹ 3,00,000
Fair value of previously held interest ₹ 4,50,000
₹ 13,50,000
Less: Fair value of net assets of acquiree ₹ 12,00,000
Goodwill ₹ 1,50,000

CA BISHNU KEDIA 41 Business Combination

CORPORATE FINANCIAL REPORTING

Question 26 [Institute Material – Illustration 14]

P Ltd. acquired 25% shares of S Ltd. on 01.04.2019 in cash. P Ltd. further acquired on 01.04.2020 45%
shares of B Ltd. payable by issue of 30000 shares of ₹10 (market price ₹15). On that date Debentures
of S Ltd. were exchanged for 10% Debenture of P Ltd. A contingent consideration is also payable, fair
value of which at 01.04.2020 was estimated at ₹45,000. P Ltd. paid transaction cost ₹20,000. Non-
Controlling Interest is recognized at fair value.
The fair values of assets and liabilities of S Ltd. are stated below:
01.04.2019 01.04.2020 31.03.2021
Fair Value
(₹) (₹) (₹)
PPE 3,80,000 4,00,000 4,50,000
Current Assets 4,00,000 4,20,000 4,30,000
Creditors 30,000 36,000 40,000

On 31.03.2021 P Ltd. further purchased 20% shares in S Ltd. at ₹ 2,50,000 in cash. Profits made by S
Ltd. during 2020-21 amounted to ₹80,000.
The abstracts of Balance Sheet of P Ltd. (consolidated with Associate S Ltd.) and S Ltd. (stand alone
or individual) on 31.03.20 are given below:
(Amount in ₹)
Particulars P Ltd. S Ltd. Particulars P Ltd. S Ltd.
Equity Share Capital 4,60,000 2,50,000 PPE 1,80,000 1,60,000
Investment in 25%
shares in S Ltd. (valued
under equity
Other Equity 3,70,000 3,00,000 2,30,000
method with share of
post-acquisition profits
₹16,000)
10% Debentures 90,000 10,000 Current Assets 5,60,000 4,40,000
Creditors 50,000 40,000
Total 9,70,000 6,00,000 Total 9,70,000 6,00,000

i. Pass journal entries in the books of P Ltd. for acquisition of shares on 01.04.2019, on 01.04.2020 and
on 31.03.2021 (both in consolidated and separate set of accounting).
ii. Show the Separate and Consolidated balance sheet as at 01.04.2020.
iii. Also measure the balance of NCI and Goodwill that would appear in the consolidated balance sheet and
Investment in separate balance sheet of P Ltd. as at 31.03.2021.

Solution:
Note that the fair values of assets and liabilities of S Ltd. as on 01.04.2020 and 31.03.2022 are not
relevant.
Journal in books of P Ltd.
Explanation 1:
On 01.04.2020: Acquisition of 25% shares having Significant Influence on Associate S Ltd.
Ind AS 28 is applicable. P Ltd. has to prepare Consolidated Balance Sheet measuring investment in

Business Combination 42 CA BISHNU KEDIA

 CMA Final - CFR
associate under Equity method and Separate Balance Sheet measuring investment in securities at cost
or as per Ind AS 109. Ind AS 27 requires preparation of Separate Financial Statements also.
Workings:
Calculation of Cost of Acquisition:
Particulars ₹
Investment in 25% shares in S Ltd. on 31.03.2021 2,30,000
Less: Post-acquisition Profits (01.04.2019 to 31.03.2021) 16,000
Cost of Acquisition at 01.04.2020 2,14,000

Journal both in Consolidated and Separate Set on 01.04.2020

Date Particulars Dr. (₹) Cr. (₹)
Investment in shares of S Ltd. A/c Dr. 2,14,000
01.04.2020
To, Cash A/c 2,14,000

However, on 31.03.2021 in Separate Set no entry is required.

But in Consolidated Set, following Journal Entry is passed:

Date Particulars Dr. (₹) Cr. (₹)

Investment in shares of S Ltd. A/c Dr. 16,000
31.03.2021
To, Profit and Loss A/c 16,000
Note: Thus, in Separate Balance Sheet of P Ltd. on 31.03.2021, Other Equity stood at ₹ 3,70,000 – ₹
16,000 = ₹ 3,54,000.

Explanation 2:
On 01.04.2021: Further acquisition of 45% shares in S Ltd. It is acquisition in steps leading to having
control of S Ltd with total holding of (25% + 45%) = 70% shares. At the acquisition date 01.04.2020 it is
business combination under Ind AS 103 to be accounted applying Acquisition method. P Ltd. is the
Acquirer and S Ltd. is the Acquiree.

Debentures exchanged are not part of Purchase Consideration and Transaction cost is expensed in
Statement of Profit & Loss of the Acquirer.

For accounting in Consolidated Set:

Working Note 1: Computation of Net Identified Assets at Fair Value as at 01.04.2021

Particulars Fair Value (₹)
PPE 4,00,000
Current Assets 4,20,000
Less: Creditors 36,000
Less: Debenture 10,000
Net Identified Assets at fair value 7,74,000

Working Note 2: Calculation of Consideration (Payable to shareholders of the Acquiree)

Particulars Fair Value (₹)

CA BISHNU KEDIA 43 Business Combination

CORPORATE FINANCIAL REPORTING

Issue of Shares (30,000 × 15) 4,50,000

Contingent Consideration (Fair Value) 45,000
Total Consideration 4,95,000

Working Note 3: Calculation of NCI Share of NCI = 100 – 70 = 30%

NCI at Fair Value = (30/45) × ₹4,95,000 = ₹3,30,000
Working note 4: Calculation of Fair Value of previously held interest ₹
Fair Value for 25% interest (based on Fair Value of Consideration (25/45) × ₹4,95,000 2,75,000
Less: Carried Value 2,30,000
Profit on Revaluation through P&L 45,000

Working Note 5: Calculation of Goodwill ₹

Consideration 4,95,000
Fair value of previously held shares 2,75,000
NCI 3,30,000
Total 11,00,000
Less: Net Identified Assets at fair value 7,74,000
Goodwill 3,26,000

Journal in Consolidated Accounting

Date Particulars Dr. (₹) Cr. (₹)
Investment in shares of S Ltd. A/c Dr. 45,000
01.04.2020 To, P&L A/c 45,000
(Revaluation profit)
PPE A/c Dr. 4,00,000
Current Assets A/c Dr. 4,20,000
Goodwill A/c Dr. 3,26,000
To, Consideration A/c 4,95,000
To, Creditors A/c 36,000
To, 10% Debentures (issued by P Ltd.) A/c 10,000
To, NCI A/c 3,30,000
To, Investment in shares of S Ltd. A/c
2,75,000
Consideration A/c Dr. 4,95,000
To, Equity Share Capital A/c 3,00,000
To, Securities Premium A/c 1,50,000
To, Liability for Contingent Consideration A/c 45,000
Transaction Cost A/c Dr. 20,000
To, Cash A/c 20,000
Profit and Loss A/c Dr. 20,000
To, Transaction Cost A/c 20,000

Journal for Separate Set of Accounting:

Particulars Dr. (₹) Cr. (₹)

Business Combination 44 CA BISHNU KEDIA

 CMA Final - CFR
Investment in Shares of S Ltd. A/c Dr. 4,95,000
Investment in Debentures of S Ltd. A/c Dr. 10,000
To, Equity Share Capital A/c 3,00,000
To, Security Premium A/c 1,50,000
To, Liability for Contingent Consideration A/c 45,000
To, 10% Debenture A/c 10,000
Transaction Cost A/
Dr. 20,000
To, Cash A/c 20,000
Profit and Loss A/c (other equity)
Dr. 20,000
To, Transaction Cost A/c 20,000

On 31.03.2021:
Explanation 3:
Here is an increase in parent’s ownership interest by purchase of a part of non-controlling interest. It is
Equity Transaction (transaction with owner in the capacity of owner). Any profit or loss on the
transaction will be transferred to Other Equity of the Parent in Consolidated Accounting.
Journal in Consolidated Set
Particulars Dr. (₹) Cr. (₹)
NCI A/c (20/30) × ₹ 3,30,000 Dr. 2,20,000
Other Equity (Loss on acquisition) A/c Dr. 30,000
To, Cash A/c 2,50,000

Journal in Separate Set

Particulars Dr. (₹) Cr. (₹)
Investment in shares of S Ltd. A/c Dr. 2,50,000
To, Cash A/c 2,50,000

Abstract of Separate balance sheet of P Ltd. and Consolidated Balance Sheet of the group as at
01.04.2021 (after business combination)
(Amount in ₹)
Working for Working for
Particulars Separate Consolidated
Separate Consolidation
PPE 1,80,000 1,80,000 + 4,00,000 1,80,000 5,80,000
Investment 2,14,000 + 5,05,000 7,19,000
Goodwill Note 5 3,26,000
5,60,000 + 4,20,000 -
Current Assets 5,60,000 -20,000 5,40,000 9,60,000
20,000
Total 14,39,000 18,66,000
Equity Share Capital 4,60,000 + 3,00,000 4,60,000 + 3,00,000 7,60,000 7,60,000
3,54,000 $ +
Other Equity 3,70,000 + 1,50,000 4,84,000 5,45,000
1,50,000– 20,000
(security premium) +
45,000 (investment
revaluation) – 20,000
(transaction cost)

CA BISHNU KEDIA 45 Business Combination

CORPORATE FINANCIAL REPORTING

NCI Note 2 3,30,000

Working for Working for

Particulars Separate Consolidated
Separate Consolidation
12% Debenture 90,000 + 10,000 1,00,000 1,00,000
Liability for contingent
45,000 45,000
consideration
Trade Payables 50,000 50,000 + 36,000 50,000 86,000
Total 14,39,000 18,66,000
$ other equity in Separate Balance Sheet of P Ltd. excluding the 25% share of profits from S Ltd.
on 31.03.2020 = ₹3,70,000 - ₹16,000 = ₹3,54,000.

In Consolidated Set:
After purchase of another 20% share in S Ltd., NCI is reduced to 10% only.
NCI as at 31.03.2022 = (10/30) × balance at 31.03.2020 + 10% of profits of 2021-22 = ₹1,10,000 +
(10/100) × ₹80,000 = ₹1,18,000.
Goodwill = ₹3,26,000 (continued at acquisition date value, unaffected by subsequent transaction) In
Separate Set:
Investment in shares of S Ltd. ₹ (7,19,000 + 2,50,000) = ₹9,69,000

Question 27 [PYQ – December 2023 - Question 8(c)]

K Ltd. holds 30% stake in L Ltd. This investment in L Ltd. is accounted for as an investment in an
associate as per Ind AS 28 and the carrying amount of such investment is Rs. 140 lakhs. K Ltd.
purchases the remaining 70% stake in L Ltd. for a cash consideration of Rs. 980 lakhs. The fair value
of the previously held 30% interest in L Ltd. is measured at Rs. 420 lakhs on the date of acquisition of
70% additional stake. The value of L Ltd.'s identifiable net assets as per Ind AS 103 on that date is Rs.
1,120 lakhs. How should K Ltd. account for the acquisition of additional stake?

Solution:

Journal Entry
In the books of K Ltd.
Amount Amount
Particulars in Rs. Lakhs in Rs. Lakhs
(Dr.) (Cr.)
Net Identifiable Assets A/c Dr 1120
Goodwill A/c – refer working Dr 280
To Bank A/c – given 980
To Investment in Associate A/c – carrying amt 140
To Gain on Fair Value of Previously held stake (P/L) 280

Computation of Goodwill
Particulars Rs. In lakhs

Business Combination 46 CA BISHNU KEDIA

 CMA Final - CFR
Fair Value of Consideration 980
Fair Value of Previously held interest 420
Value of Identifiable Net Assets 1,120
Goodwill 280

Question 28 [PYQ – June 2024 - Question 5]

On 1st April, 2023, M Ltd. acquired 30% of the ordinary shares of N Ltd. For ₹ 8,000 crore. M Ltd.
accounts for its investment in N Ltd. using equity method of accounting as prescribed under Ind AS 28.
On 31st March, 2024, M Ltd. accounts for its share of net assets changes in N Ltd. as per equity method
of accounting as under:
Particulars ₹in crore
Share of profit 700
Share of exchange difference in other comprehensive income (OCI) 100
Share of revaluation reserve of PPE in other comprehensive income (OCI) 50

The carrying amount of the investment of M Ltd. in associate, N Ltd. is, therefore, 8,850 crore (₹8,000
crore + ₹700 crore + ₹100 crore + ₹50 crore).
On 1st April, 2024, M Ltd. acquired further 70% of the ordinary shares of N Ltd. for cash amounting to
₹25,000 crore.
The following additional pieces of information are relevant as on 1st April, 2024:
Particulars ₹in crore
Fair value of 30% interest of M Ltd. in N Ltd. as on 1st April, 2024 9,000
Fair value of net identifiable assets of N Ltd. as on 1st April, 2024 30,000
Based on the above pieces of information, you are required to:
(a) Determine the date of acquisition for M Ltd. Justify your answer.
(b) Determine the gain on previously held interest in N Ltd. and suggest the accounting treatment on
acquisition date as per Ind AS 103.
(c) Compute the amount of goodwill arising on the acquisition of N Ltd.
(d) Pass the necessary journal entry on the acquisition date.

Solution:
(a) Determination of the date of acquisition for M Ltd.
The date of 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. In the given case, the acquisition date is 1st April, 2024 i.e., the date on
which M Ltd. acquires 100% holdings of N Ltd.

(b) Computation of the gain on previously held interest and the accounting treatment to be
adopted on the acquisition date
An entity shall discontinue the use of equity method from the date when its investment ceases
to be an associate or joint venture. If the investment in an associate becomes an investment in
a subsidiary, the entity shall account for its investment as per Ind AS 103 and Ind AS 110. Ind
AS 103 provides that in a business combination achieved in stages, the acquirer is required to
remeasure its previously held equity interest at its acquisition date fair value and recognize any

CA BISHNU KEDIA 47 Business Combination

CORPORATE FINANCIAL REPORTING
gain or loss in profit or loss, or other comprehensive income, as appropriate. In prior reporting
periods, the acquirer may have recognized changes in the value of equity interest in the acquiree
in other comprehensive income. If so, the amount that was recognized in other comprehensive
income shall be recognized on the same basis as would be required if the acquirer had disposed
directly of the previously held equity interest.

Gain on previously held interest in N Ltd.

Fair value of 30% interest of M Ltd. in N Ltd. as on 1st April, 2024 9,000
(-) Carrying amount of the investment in associate N Ltd. (8,850)
Gain on Previously held interest 150

(c) Calculation of Goodwill or Capital Reserve

Particulars ` in crores
Purchase Consideration 25,000
Add: Fair value of previously held 30% interest 9,000
Less: Net Assets taken over of acquiree company (30,000)
Goodwill/ (Capital Reserve) 4,000

(d) Journal Entry – On Acquisition date

Amount Amount
Particulars in ` Lakhs in ` Lakhs
(Dr.) (Cr.)
Net Identifiable Assets A/c Dr 30,000
Goodwill A/c – refer (c) Dr 4,000
Foreign Currency Translation Reserve Dr 100
PPE Revaluation Reserve Dr 50
To Cash A/c – given 25,000
To Investment in Associate A/c – N Ltd. 8,850
To Retained Earnings A/c 50
To Gain on Previously held interest (P/L) 250

Question 29 [Workbook Q 9]

Until 30 September 2024, H Ltd. was holding 90% stake in S Ltd. On this date, it sold 10% stake in S Ltd.
for ₹22,000. At the time of the disposal, the carrying amount of S Ltd.’s net assets and goodwill were
₹1,15,000 and ₹35,000 respectively. The non-controlling interest (NCI) was valued at fair value at
the time of acquisition.

Give accounting treatment in the consolidated financial statements of the H Ltd. group.

Solution:

H Ltd.’s shareholding has decreased from 90% to 80%. H Ltd. still exercises control over S Ltd. and
therefore S Ltd. continues to be a subsidiary.

Business Combination 48 CA BISHNU KEDIA

 CMA Final - CFR
No gain or loss on the sale of the shares is recognized in the consolidated financial statements. Goodwill
is not recalculated. Instead, the transaction is accounted for in equity, as an increase to the non-
controlling interest.

Particulars ₹
Cash proceeds 22,000 Debit
Increase in NCI [10% (₹1,15,000 + ₹35,000)] 15,000 Credit
Increase in other components of equity (Bal. fig.) 7,000 Credit

As per the calculation above, the non-controlling interest should be increased by ₹15,000 and the
difference between the proceeds received and the increase in the non-controlling interest i.e. ₹7,000 will
be recognized as an increase in the equity attributable to the owners of H Ltd

Question 30 [Institute Material – Illustration 10]

On 01.04.2020 Gold Ltd. acquired 75% share of Coal Ltd. at ₹10,80,000, when the fair value of its net
assets was 1000000. During 01.4.2020 to 31-3-2021 Coal Ltd made TCI ₹2,00,000. On 31.3.2021 Gold
Ltd. (a) sold (b) purchased 15% holding to/from outsiders at ₹2,20,000. Pass journal entries for
sale/purchase of partial holding retaining control. NCI is valued at (i) Proportionate net asset value; (ii)
fair value.

Solution:
Workings:
Sale of holding
Carrying amount of 15% holding 15% × ₹10,80,000 + 15% of TCI = ₹1,92,000
Sale price = ₹2,20,000
Gain credited to Other Equity = ₹2,20,000 – ₹1,92,000 = ₹28,000
Journal Entry
Particulars ₹ ₹
Bank A/c Dr. 2,20,000
To, NCI 1,92,000
To, Other Equity 28,000

Purchase of shares from outsiders

NCI recognized at Proportionate net asset value
15% holding 15% × ₹ (10,00,000 + 2,00,000) = ₹1,80,000
Purchase price = ₹2,20,000
Loss debited to Other Equity = ₹2,20,000 – ₹1,80,000 = ₹40,000
Journal Entry
Particulars Dr. (₹) Cr. (₹)
NCI A/c Dr. 1,80,000
Other Equity A/c Dr. 40,000
To, Bank A/c 2,20,000

NCI recognized at fair value

Carrying amount of 15% holding = (15%/75%) × 10,80,000 + 15% of 2,00,000
(TCI) = 2,46,000
Purchase price = 2,20,000

CA BISHNU KEDIA 49 Business Combination

CORPORATE FINANCIAL REPORTING
Gain credited to Other Equity = 2,46,000 – 2,20,000 = 26,000
Journal Entry
Particulars Dr. (₹) Cr. (₹)
NCI A/c Dr. 2,46,000
To, Other Equity 26,000
To, Bank 2,20,000

Question 31 [Workbook Q 8]

On 30 June 2024, AB Ltd. sold a 25% stake in JK Ltd. for ₹215,000. Five years earlier, AB Ltd. had
acquired a 70% stake in JK Ltd. AB Ltd. applies the full goodwill method. Prior to this disposal the
Goodwill has been fully impaired and already written off in full.

Other details of JK Ltd. are as follows:

Net assets at disposal date ₹ 4,20,000

Fair value of a 45% holding at 30 June 2024 ₹3,55,000

Carrying value of the non-controlling interest (NCI) on 30.06.2024 ₹90,000

Show the accounting treatment in the consolidated financial statements

Solution:

The group’s holding in JK Ltd. has reduced from 70% to 45%. Control over JK Ltd. has been lost hence
profit or loss on disposal need to be calculated.

Calculation of profit on disposal for the consolidated statement of profit or loss:

Particulars ₹ ₹
Proceeds 2,15,000
FV of retained interest 3,55,000
5,70,000
Net assets recognised at disposal 4,20,000
Goodwill at disposal -
Less: NCI at disposal date (90,000)
(3,30,000)
Profit on disposal 2,40,000

A 45% shareholding would normally give the investor significant influence over the investee and so
this would meet the definition of an associate. Hence, from 30 June 2024, the investment will be
accounted for using the equity method in the consolidated financial statements and the remaining
investment in JK Ltd. will be recognized at its fair value of ₹3,55,000.

Question 32 [Workbook Q 4]

Business Combination 50 CA BISHNU KEDIA

 CMA Final - CFR
Four years ago, Sushma Ltd. (Sushma) acquired 80% of the shares in Trio Ltd for ₹1,50,000. On 30
June, Sushma sold all of these shares for ₹3,50,000. The net assets of Trio Ltd at the acquisition date
were ₹74,000, and at the disposal date, they were ₹95,000. Half of the goodwill created at the time of
acquisition had been written off in an earlier year. The fair value of the non-controlling interest in Trio
Ltd at the acquisition date was ₹18,000. Sushma follows the full goodwill method for accounting of
goodwill.

Determine:

(a) the profit or loss for Sushma arising from the disposal of the shares.

(b) the profit or loss for the group arising from the disposal of the shares.

Solution:

(a) Calculation of profit or loss for Sushma arising from the disposal of the shares:

Particulars ₹ ‘000
Sales proceeds 350
Cost of shares sold 150
Profit on disposal 200

(b) Calculation of the profit or loss for the group arising from the disposal of the shares:

Particulars ₹ ‘000 ₹ ‘000

Sales proceeds 350
Net assets at disposal date 95
Goodwill at disposal date (W1) 47
Less: NCI at disposal date (W2) (12.8) (129.2)
Profit on disposal 220.8

Working Notes:

(W1) Goodwill

Particulars ₹ ‘000
Consideration 150
NCI at acquisition 18
FV of net assets at acquisition (74)
Goodwill at acquisition 94
Impairment (₹94 × 50%) (47)
Goodwill at disposal date 47

(W2) NCI at disposal date

Particulars ₹ ‘000
NCI at acquisition 18
NCI % of post-acq’n net assets movement 4.2

CA BISHNU KEDIA 51 Business Combination

CORPORATE FINANCIAL REPORTING
(20% (₹95 - ₹74))
NCI % of impairment (20% x ₹ 47 (W1)) (9.4)
12.8

Question 33 [Workbook Q 2]

In March 2023, ASN Ltd. acquired 100% control in SMC Ltd. through a business combination for a total
consideration of ₹12,250 lakhs. At the acquisition date, the assets and liabilities of SMC Ltd. are as
follows:

Items ₹ In lakhs
Assets
Cash & cash equivalents 890
Trade receivables (net) 5,300
Property, plant and equipment 8,250
Deferred tax asset 405
Liabilities
Trade payables 1,250
Borrowings 5,100
Employee entitlement liabilities 950
Deferred tax liability 375

The property, plant and equipment owned by SMC Ltd. have a fair value of ₹9,000 lakhs, while their tax
written-down value is ₹7,000 lakhs. The trade receivables are net of a doubtful debts allowance of ₹400
lakhs.

For tax purposes:

• Bad debts are deductible only when they are written off against the allowance account by SMC
Ltd.
• Employee benefit liabilities are deductible only upon payment.
SMC Ltd. also holds a brand name which has a fair value of ₹4,500 lakhs as per its independent
valuation. It meets the recognition criteria for intangible assets under Ind AS 103: Business
Combinations. However, the brand has no tax base, and no tax deductions can be claimed for it. The
applicable tax rate is 30%. Unless otherwise stated, it is assumed that all other items have a fair value
and tax base equal to their carrying amounts on the acquisition date.

You are required to:

1. Compute the deferred tax assets and deferred tax liabilities arising from the business
combination. (Do not offset these amounts.)
2. Calculate the goodwill to be recognized on consolidation.

Solution:

Company ASN Ltd. is the acquirer and Company SMC Ltd. is the acquiree

Reconciliation of existing Deferred Tax Asset and Liability in the Balance Sheet:

Business Combination 52 CA BISHNU KEDIA

 CMA Final - CFR
a) The aggregate deferred tax asset is ₹ 405 lakhs, comprised of ₹ 120 lakhs (₹ 400 lakhs × 30%) in
relation to the receivables and ₹ 285 lakhs (₹ 950 lakhs × 30%) in relation to the employee
entitlement liabilities.
b) The aggregate deferred tax liability is ₹ 375 lakhs which is because of difference in tax base and
carrying value of plant & equipment (₹ (8,250 – 7,000) lakhs × 30%).

Computation of Deferred Tax:

Particulars Book value Fair Tax Taxable Deferred DTA/

value Base (Deductible) tax Asset (DTL)
Temporary (Liability)
difference @30%
Cash 890 890 890 - -
Receivables 5,300 5,300 5,700 -400 120 DTA
Plant and 8,250 9,000 7,000 2,000 -600 DTL
Brands
equipment 4,500 - 4,500 -1,350 DTL
Deferred tax asset 405 405
Total assets 20,095
Payables -1,250 -1,250 -1,250 - -
Borrowings -5,100 -5,100 -5,100 - -
Employee Entitlement liabilities -925 -950 - -950 285
Deferred tax liability -375 -1,950
Total liabilities -9,250

DTA = ₹ 405 (120+285) lakhs

DTL = ₹ 1,950 (600+1350) lakhs

Computation of Net Assets of Acquiree:

Particulars Amount
Cash & cash equivalents 890
Trade receivables 5,300
Property, plant and equipment 9,000
Brands 4,500
Deferred tax asset 405
Total assets 20,095
Trade payables -1,250
Borrowings -5,100
Employee Entitlement liabilities -950
Deferred tax liability -1,950
Total liabilities -9,250
Net Assets 10,845

Computation of Consideration Transferred:

CA BISHNU KEDIA 53 Business Combination

CORPORATE FINANCIAL REPORTING

Particulars Amount
Consideration paid 12,250
12,250

Goodwill will be calculated as under:

Particulars Amount
Consideration Transferred 12,250
Non-controlling interest NIL
Less: Fair value of Net identifiable assets -10,845
Goodwill 1,405

Journal Entry – Acquisition Accounting

Particulars In lakhs In lakhs

Identifiable Assets acquired 20,095
Goodwill 1,405
To Consideration Transferred 12,250
To Liabilities assumed 9,250
To Non-controlling interest -

Question 34 [Workbook Q 3]

The Balance Sheet of Buyer Ltd. and Seller Ltd., as at 31st March 2023 is provided below: (in lakhs)

Assets Buyer Ltd. Seller Ltd.

Non-Current Assets:
Property, plant and equipment 450 600
Investments 250 190
Current assets:
Inventories 370 130
Financial assets
Trade receivables 330 180
Cash and cash equivalents 150 260
Others 300 240
Total 1850 1600
Equity and Liabilities
Equity
Share capital-Equity shares of ₹ 100 each for Seller Ltd. & ₹ 10 500 400
each for Buyer Ltd.
Other Equity 700 275
Non-Current liabilities:
Long term borrowings 180 350
Long term provisions 80 80
Deferred Tax liability 20 30

Business Combination 54 CA BISHNU KEDIA

 CMA Final - CFR
Current Liabilities:
Short term borrowings 150 195
Trade payables 220 270
Total 1850 1600

Other information:

i. Buyer Ltd. acquired 75% shares of Seller Ltd. on 1st April, 2023 by issuing its own shares in the
ratio of 1 share of Buyer Ltd. for every 2 shares of Seller Ltd. The fair value of the shares of Buyer
Ltd. was 45 per share.
ii. The fair value exercise resulted in the following:
1) Fair value of Property, Plant and Equipment (PPE) of Seller Ltd. as on 1st April, 2023 was ₹510
lakhs.
2) Buyer Ltd. agreed to pay an additional payment (due after 2 years) as consideration that is
higher of (i) ₹ 28 lakh or (ii) 25% of any excess profits in the first year after acquisition, over
its profits in the preceding 12 months made by Seller Ltd.
Seller Ltd. has earned 25 lakh profit in the preceding year and expects to earn another 10 Lakh
in the year of acquisition.
3) In addition to above, Buyer Ltd. also has agreed to pay one of the founder shareholder- Director
a payment of ₹ 18 lakhs provided he stays with the Company for two years after the acquisition.
4) Seller Ltd. had certain equity settled share-based payment award (original award) which got
replaced by the new awards issued by Buyer Ltd. As per the original term the vesting period
was 4 years and as of the acquisition date the employees of Seller Ltd. have already served 2
years of service. As per the replaced awards, the vesting period has been reduced to one year (one
year from the acquisition date). The fair value of the award on the acquisition date was as follows:
a) Original award - 8 lakhs
b) Replacement award – ₹ 10 lakhs
5) Seller Ltd. had a lawsuit pending with a customer who had made a claim of ₹ 35, lakhs.
Management reliably estimated the fair value of the liability to be ₹ 12 lakhs.
6) The deferred tax liability as on 31.03.2023 appearing in the books of Seller Ltd. is on account of
Property, plant and equipment.
7) Assume that the applicable tax rate for both companies is 30%. Use discounting rate of 10%
wherever it is required.
Based on the above data you are required to prepare opening consolidated balance sheet of Buyer

Ltd. as on 1st April, 2023 along with workings.

Solution:

In this case, Buyer Ltd. has paid consideration to shareholders of Seller Ltd. Therefore, Buyer Ltd. is the
acquirer and Seller Ltd. is the acquiree.

As the control over the business of Buyer Ltd. is transferred to Seller Ltd. on 1st April, 2023 that date
is considered as the acquisition date.

CA BISHNU KEDIA 55 Business Combination

CORPORATE FINANCIAL REPORTING
Computation of Deferred Tax:

The deferred tax liability as on 31.03.2023 is ₹30 lakhs, which is on account of Property, Plant and
equipment (PPE). Since the carrying value of PPE is ₹600 Lakhs the tax base for this item will be ₹ 500
Lakhs. [(600-tax base)×30% = 30].

The calculation of DTA / DTL as on 01.04.2023.

in lakhs
Particulars Book Fair Tax Taxable Deferred tax
value value Base (Deductible) Asset
Temporary (Liability) @
difference 30%
Property, Plant and equipment 600.00 510.00 500.00 -10.00 -3.00
Contingent Liability Nil -12.00 0.00 12.00 3.60
DTA 0.60
(only items where tax base is different from book value have been considered)

Computation of Net Assets of Acquiree:

Particulars Amount
Property, plant and equipment 510.00
Investment 190.00
Inventories 130.00
Financial assets:
Trade receivables 180.00
Cash and cash equivalents 260.00
Others 240.00
Deferred Tax Asset 0.60
1,510.60
Long term borrowings 350.00
Long term provisions 80.00
Deferred tax Liability -
Short term borrowings 195.00
Trade payables 270.00
Contingent liability 12.00

Particulars Amount
907.00
Net assets 603.60

Business Combination 56 CA BISHNU KEDIA

 CMA Final - CFR
Computation of Consideration Transferred:

The consideration transferred will comprise the following:

Particulars Amount
Share capital of Parker Ltd. 400
Number of Shares (in lac) 4
Shares to be issued in the ratio of 2:1 (in lac) 2
Fair value per share 45.00
Consideration Transferred (2,00,000 × 75%×45 per share) (A) 67.50
Deferred consideration after discounting 28 lakhs for 2 years @10% 23.13
[28 x 0.826]- Working Note - I (B)
Replacement award i.e. (8 x 2/4) - Working Note - II (C) 4.00
Total Consideration Transferred (A+B+C) 94.63

Working Note - I: Contingent and Deferred Consideration:

In the given case, ₹28 lakh is the minimum payment to be paid after 2 years and accordingly will be
considered as deferred consideration. The other element of payment is contingent in nature as it is linked
to further performance of the Company. Hence, value for the contingent portion has been ignored and
amount which is certain has been considered with time value effect @ 10%.

Working Note - II: Replacement Award:

At the acquisition date, the employees had not rendered the required service and completed only 50%
of required period of 4 years. Hence, ₹400,000 should be allocated as purchase consideration because this
is the fair value of the original scheme at the acquisition date. The remaining ₹ 4,00,000 is
recognised in the consolidated statement of profit or loss as a post-acquisition expense (employee cost)
when the vesting conditions get satisfied.

Note:

The additional consideration of 25 lakh to be paid to the founder shareholder is contingent to him/ her
continuing in employment and hence has been ignored.

Measurement of NCI:

NCI will be recognized at ₹ 150.90 lakhs (25% of ₹ 603.6 Lakhs (net assets))

Computation of goodwill or gain on bargain purchase:

Particulars ₹ Lakhs
Consideration Transferred 94.63
Non-controlling interest 150.90
Less: Fair value of Net identifiable assets 603.60
Bargain Purchase Gain 358.07

CA BISHNU KEDIA 57 Business Combination

CORPORATE FINANCIAL REPORTING
Consolidated Balance Sheet of David Ltd. as on 1st April, 2023

(₹ in lakhs)

Particulars Amount
Assets
Non-current assets:
Property, plant and equipment (450+510) 960.00
Investment (250 + 190) 440.00
Current assets:
Inventories (370+130) 500.00
Financial assets:
Trade receivables (330 + 180) 510.00
Cash and cash equivalents (150 + 260) 410.00
Others (300 + 240) 540.00
Deferred tax assets 0.60
Total 3360.60
Equity and Liabilities
Equity
Share capital - Equity shares of 100 each (500 +15) 515.00
Other Equity (Working Note - III) 1,114.57
Non-Controlling Interest 150.90
Non-current liabilities:
Financial liabilities:
Long term borrowings (180+350) 530.00
Long term provisions (80+80+23.81) 183.13
Deferred tax liability (20 + 0) 20.00
Current liabilities:
Financial liabilities:
Short term borrowings (150 + 195) 345.00
Trade payables (220 + 270) 490.00
Provision for law suit damages 12.00
Total 3,360.60

Working Note - III: Other Equity:

Other Equity 700.00

Replacement award (SBP Reserve) 4.00
Security Premium Reserve (2,00,000 shares x 75% ×₹35) 52.50
Capital Reserve (Bargain Purchase Gain) 358.07
1114.57

Business Combination 58 CA BISHNU KEDIA