Summary Notes on Ind AS 103: Business Combinations

1. Objective
Ind AS 103 prescribes the principles and requirements for:

 Recognising and measuring identifiable assets acquired, liabilities assumed, and

non-controlling interest (NCI) in a business combination,

 Determining goodwill or a gain from a bargain purchase,

 Disclosing information to evaluate the nature and financial effects of business

combinations.

🔑 Core principle: Acquisition Method (formerly “Purchase Method”) — only permitted

method.

2. Scope
✅ Applies to all business combinations, including:

 Mergers, acquisitions, takeovers, amalgamations,

 Combinations achieved in stages ("step acquisitions"),

 Combinations by contract alone (e.g., control via agreement, not shareholding).

❌ Excludes:

 Combinations of entities under common control (covered by Ind AS 103 Appendix B

— pooling of interests method may be used subject to specific conditions),

 Formation of joint ventures (Ind AS 111),

 Acquisition of assets or group of assets that do not constitute a business (accounted

for as asset acquisition).

📌 What is a "Business"?
A business is an integrated set of activities and assets that is capable of being conducted and
managed to provide a return. It includes at least one input + one process that together
significantly contribute to ability to create outputs (goods/services).

✅ Key test: Is there substitutable process? (e.g., skilled workforce, systems, contracts).
❌ Purchasing a building + tenants (but no management process) → not a business.

3. Key Definitions

Term Definition

Acquirer The entity that obtains control of the acquiree. Identified using guidance
Term Definition

in Ind AS 110 (Consolidated Financial Statements).

Acquiree The business being combined.

Date on which the acquirer obtains control (usually when

Acquisition Date
possession/voting rights transferred, key management appointed).

Fair value of assets given, liabilities incurred, and equity instruments

Consideration
issued by acquirer to obtain control. Includes contingent consideration
Transferred
(at FV).

Equity in a subsidiary not attributable to the parent. May be measured

Non-Controlling
at: (a) FV, or (b) proportionate share of acquiree’s identifiable net assets
Interest (NCI)
(entity shall choose policy and apply consistently).

Excess of consideration transferred + NCI + previously held equity

Goodwill
interest over net identifiable assets acquired.

4. The Acquisition Method – 5 Key Steps

Step Requirement

Entity that obtains control (assess voting rights, board control,

1. Identify the
management authority, etc.). In reverse acquisitions, legal subsidiary
Acquirer
= accounting acquirer.

2. Determine the Date control is transferred (e.g., closing date, regulatory approval
Acquisition Date date).

At acquisition-date fair value, regardless of probability or

3. Recognise & measurability (unlike standalone accounting). Includes: <br>–
Measure Identifiable Contingent liabilities (if FV can be measured reliably), <br>– Intangible
Assets & Liabilities assets (if separable or arise from legal/contractual rights), <br>–
Deferred tax assets/liabilities (Ind AS 12).

4. Recognise &
Measure Non- Choose one policy: <br>– Fair value, or <br>– Proportionate share of
Controlling Interest acquiree’s identifiable net assets. Apply consistently.
(NCI)

5. Recognise &
Measure Goodwill or
See formula below.
Gain from Bargain
Purchase
5. Goodwill Calculation

Goodwill=Consideration Transferred+Fair Value of Previously Held Equity Interest (if any)

+Fair Value of NCI (or proportionate share)−Fair Value of Net Identifiable Assets AcquiredGo
odwill=++−Consideration TransferredFair Value of Previously Held Equity Interest (if any)Fair
Value of NCI (or proportionate share)Fair Value of Net Identifiable Assets Acquired

📌 Net Identifiable Assets = Fair value of identifiable assets – Fair value of liabilities assumed.

⚠️Negative Goodwill (Bargain Purchase):

If result is negative → recheck measurement. If still negative → recognise as gain in P&L on
acquisition date (only after reassessment).

📌 Goodwill is not amortised but tested annually for impairment (Ind AS 36).

6. Consideration Transferred

Includes:

 Cash, other assets given up,

 Liabilities incurred (e.g., earn-outs),

 Equity instruments issued (measured at FV on acquisition date),

 Contingent consideration (e.g., earn-outs based on future profits) → measured at

fair value at acquisition date and classified as liability or equity.

🔁 Subsequent changes in contingent consideration:

 Liability-classified: remeasured to FV → changes in P&L (except if related to post-

combination services → treated as compensation).

 Equity-classified: not remeasured (settled by issuing shares).

7. Special Situations

Situation Accounting Treatment

Business
Previously held equity interest (e.g., 25% → 70%) is remeasured to fair
Combination
value at acquisition date. Resulting gain/loss recognised in P&L.
Achieved in Stages

Acquisition by Still a business combination if control obtained (e.g., management

Contract Only contract, variable interest entity).
Situation Accounting Treatment

❌ Not covered by main Ind AS 103.<br>→ Use pooling of interests

Combination under method (Appendix B):<br>– Assets/liabilities at carrying amounts (not
Common Control FV),<br>– No goodwill,<br>– Retained earnings merged. (Rare;
requires genuine common control before and after.)

Deferred Tax in Recognise all deferred tax assets/liabilities arising from temporary
Combinations differences on acquisition (even if not recognised by acquiree).

8. Disclosures (Extensive)
An entity must disclose for each material business combination:

 Names and descriptions of acquiree(s),

 Acquisition date,

 % of voting equity acquired,

 Fair value of consideration transferred (breakdown: cash, shares, contingent),

 Fair value of NCI,

 Fair value and classification of each class of assets/liabilities (incl. contingent

liabilities),

 Amount of goodwill and expected amortisation/deductibility for tax,

 Revenue, profit/loss of acquiree from acquisition date to year-end,

 Pro forma revenue & profit if combination had occurred at start of period,

 Contingent consideration arrangements.

9. Key Practical Challenges

 Fair Valuation: Requires significant judgement (e.g., intangibles, contingent liabilities,

complex earn-outs).

 CGU Allocation: Goodwill must be allocated to Cash-Generating Units (CGUs) for

impairment testing (Ind AS 36).

 Restructuring Provisions: Cannot recognise future restructuring costs as part of

combination (unless acquiree had pre-existing liability — Ind AS 37).

 Transaction Costs: ❌ Expensed as incurred (e.g., legal, advisory, due diligence) — not
part of consideration.
10. Comparison: Ind AS 103 vs. AS 14 (Old Indian GAAP)

Feature Ind AS 103 AS 14

Method Acquisition Method only Pooling of interests or Purchase method

Carrying amount (Pooling) or Fair Value

Assets/Liabilities Fair Value
(Purchase)

Capitalised, tested for Amortised over ≤ 5 years (Purchase), not

Goodwill
impairment recognised (Pooling)

NCI Explicitly recognised Implicit in reserves

Contingent
FV at acquisition date Recognised only when payable
Consideration

✅ Effective Date
Mandatory for business combinations with acquisition date on or after 1 April 2016.

💡 Quick Mnemonic: “A-CQUIRE”

 Acquirer identified

 Control determines acquisition date

 Qualify assets/liabilities at fair value

 Unrecognised intangibles must be recognised

 Include NCI & contingent consideration

 Re-measure previous equity interest (step acquisition)

 Expense transaction costs (don’t capitalise!)