IND AS 103 Business Combinations

1 IND AS 103 Business Combinations 1 Transition from IGAAP to IND-AS 2 IGAAP IND-AS No comprehensive standard dealing with all Business Combinations . AS 14 - Amalgamation. (Book value based accounting of mergers except Purchase Method) AS 10 Slump sale (demerged division). AS 21 - Consolidation. (Cal of GW, CR, A/L) Applies to most Business Combinations . Fair value based accounting in all cases. Additional guidance in respect of common control transactions. Scope Exclusions From IND AS - 103 Formation of Joint Arrangement; Acquisition of assets or a group of assets that does not constitute Business ; Acquisition by an investment entity, as per Ind AS 110, CFS, of an investment in a subsidiary that is measured at FVTPL; Appendix-C deals with accounting for combination of entities or Business under common control.

2 3 Accounting of Assets or a Group of Assets Acquirer shall indentify and recognize individual identifiable assets and liabilities assumed. Cost of group shall be allocated to individual identifiable assets and liabilities on basis of their relative fair value at date of purchase. Does not give rise to goodwill. 4 Accounting of Assets or a Group of Cont 5 What is Business ? Integrated set of activities and assets; Capable of being conducted and managed; Provides return in the form of dividends or lower costs or other economic benefits directly to investors, owners, members or participants.

3 For example, acquisition of a shell or shelf company is not a Business combination because no Business is being acquired. 6 Elements of Business :- Any economic resource that creates outputs when process applied to it. :- Any system, standard or rule when applied to an input creates output. :- Results of input and process that provide return in form of dividends, lower cost or economic benefits. In the absence of evidence to contrary particular set of assets or activities in which goodwill is present is a Business . 7 Example of Business 8 Thermal power generating company:- Coal supply, water supply Plant and equipments (CHP, BTG, switch yard, transmission line) Other ancillary systems such as steam and water system, air and flue gas system, cooling water system, ash dyke.

4 Operation and maintenance Power supply agreement or (PPA) Definition of Control According to Ind AS 110 (CFS):- Investor controls an investee if and only if the investor has all the following: Power over the investee; Exposure to variable returns from its involvement with the investee; and Use of power over the investee to affect the amount of the investor's returns. 9 Business Combinations - Application 10 What is Business Combinations A transactions or other events in which Acquirer Obtains control of One or more Business .

5 Transactions sometimes referred to as true mergers or mergers of equals are also Business Combinations . 11 Identifying a Business Combinations Acquirer might obtain control in variety of ways:- By transferring cash, cash equivalents or other assets (including net assets that constitute a Business ); By incurring liabilities; By issuing equity interest; By providing more than one type of consideration; or Without considerations. 12 Scope This Ind AS applies to all transactions or other events that meets definition of Business combination .

6 13 Variety of ways for Business Combinations For example :- Becomes subsidiary of acquirer; Net assets or Business is legally merged into acquirer; One combining entity transfers net assets, or equity interest to another combining entity; Newly formed entity. 14 Key Steps of Acquisition Method Accounting the acquirer; the acquisition date; and measuring identifiable assets acquired and liabilities assumed; and measuring non-controlling interest in the acquiree; consideration; what is part of Business combination transaction; and measuring goodwill or a gain from bargain purchase; and period adjustment / true up of provisional accounting; 15 1.

7 Indentifying the Acquirer The acquirer is the entity that obtains control of acquiree. Usually the entity that issues its equity interest, except reverse acquisitions . Additional factors:- Largest portion of voting rights in combined entity; Single owner or group of owners holds largest minority voting interest in combined entity; 16 1. Indentifying the Acquirer .. cont; Ability to elect or appoint or to remove majority of members of the governing body of combined entity; Whose senior management dominates management of combining entity; Entity that pays premium over pre- Combinations fair value of equity interest; Combining entity whose relative size is greater.

8 17 2. Determining the Acquisition Date Date on which acquirer obtains control of acquiree; Generally the date on which acquirer:- legally transfers consideration; Assumes assets and liabilities. Acquisition date may precedes closing date if written agreement provides that acquirer obtains control before closing date. Sometimes referred as closing date. 18 2. Determining the Acquisition Date .. cont Practical challenges in indian scenario:- Shareholders approval; Section 391-394 of Companies Act, 1956 (Appointed date, effective date, high court approval); Regulatory approval (CCI, SEBI, Stock Exchanges); Open offers.

9 Consider all facts and circumstances. 19 3. Recognizing and measuring identifiable assets acquired and liabilities assumed An item is recognized as assets and liability only if:- It meets definition of assets or a liability at acquisition date; ( cost acquirer incur in future to exit activity of acquiree or to terminate employment of or relocate an acquiree s employees are not liabilities) It must be part of Business combination transaction rather than separate transaction. 20 3. Recognizing and measuring identifiable assets acquired and liabilities assumed.

10 Cont Acquirer recognizes separately from goodwill, the identifiable intangible assets acquired in Business Combinations even though not recognized in books of acquiree such as brand name, patent, etc. 21 3. Recognizing and measuring identifiable assets acquired and liabilities assumed .. Cont At acquisition date acquirer need to classify/designate acquired assets and liabilities assumed as necessary to apply other Ind AS. :- Classification of financial assets and liabilities measured as at amortized cost, FVTPL or FVTOCI. Designation of a derivative instrument as a hedging instrument.