Ind AS 103 - Business Combinations | 24 mins Superfast Revision | CA Final Financial Reprting

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[00:00:00]So hi there today we are going to revise 103 index 103 all the important concepts all right so without wasting any time let's move on to the concepts directly so total 19 concepts from 1 to 19 I'll just tell you all the names of the concepts and then we'll go in detail on them one by one all right so the very first one is definition of business combination the second one is your uh what is control third Step one is business elements. Fourth is asset acquisition. Fifth is accounting for business combination. Six steps. Then uh sixth is step one identify acquirer.

[00:00:41]Then uh date of acquisition. Then is PC.

[00:00:44]Then we talk about post combination awards. Then we talk about direct cost incurred for acquiring business for acquiring asset. All right. Then 11th point we talk about INA. Then we talk about NCI that goodwill GBP. Okay. Then we talk about the next point and that is your point of common control transaction. 15th point we talk about demer then we talk about reverse acquisition. Then concentration test.

[00:01:12]18th point I'll make you aware at that time only. And 19th point we talk about determining what is part of business combination. All right. So the very first point is that definition of business combination. So what is the definition of business combination? So business combination is a transaction where acquirer obtains control over the acquiries business. Okay. So what is control then? Okay. So this control is divided into two parts. By acquiring more than 50% stake in the acquiry.

[00:01:42]Okay. And the second one is by acquiring all assets and liabilities of the acquiry. All right. So let's first focus on this part. All right. By acquiring more than 50% stake of the acquiry. So this is further divided into two. Parent company, subsidiary company. subsidiary company. Uh this I mean this index does not deal with uh subsidiary companies.

[00:02:01]So let's not focus on that. Parent company further divided into two SFS, CFS. SFS please refer uh index 27 for that. CFS is again divided into two. Day one that is date of acquisition of control. Okay. Date of acquisition of control and year end CFS. So for this one day one date of acquisition of control refer index 103. And for ER and CFS you have to refer Ind.

[00:02:28]All right. And the controls uh next part was about by acquiring all assets and liabilities of equities business. This is again divided into two parent company subsidiary company. Subsidiary companies closed now. So let's uh forget it. Let's directly come on parent. So parent company parent company uh SFS CFS will will not be different. They will be one and the same. So parent has to record all the assets and liabilities of the subsidiary company as well in AS103.

[00:02:56]So this was all about control. All right. So right now we focused on business composition definition and port is control. Now third point is business elements. So there are three elements in business. What are those three elements?

[00:03:09]Input, process, output. Input includes assets like PP, intangibles, inventories etc. Then process. What is process?

[00:03:18]asset use that is a process. All right. And output what is included in output? Profit, dividend also the future prospects of earning are a part of output. So only if these three elements are present in an organization that organization will be known will be classified as a business.

[00:03:38]All right. So these three points are done. Fourth point we talk about asset acquisition. So in case of asset acquisition we acquired only few assets and not the entire business. Whereas in business combination we acquired the entire business of the subsidiary company. That was just the clarification which was to be given. That's it. Done.

[00:03:59]Okay. Then we talk about fifth point that is accounting for business combination. Six steps. So what are those six steps? Step number one identify acquirers. Step number two data acquisition. Step number three, purchase consideration issued by the parent company to the subsidiary company. Step number four, INA of the subsidiary company. All right. Step number five is NCI and the step number six is goodwill or GB. So these were just the six steps.

[00:04:26]All right. For remembering them. All right. Now let's move on to each of these steps one by one. So the six point talks about step one that is identify the acquirer.

[00:04:38]So who is the acquirer?

[00:04:39]Acquirer is the parent company who issues the purchase consideration. All right. Correct. Then next point we talk about date of acquisition. So this date of acquisition depends on certain facts and circumstances that we have to find out. All right. Then only we can find this date of acquisition. All right.

[00:04:55]There is no specific date of acquisition. Completely depends on the facts and circumstances given in the question. All right. Yeah. So next is the eighth point. We talk about step three that is purchase consideration.

[00:05:07]The very important part. All right. So this purchase concentration is divided into five. Uh purchase concentration can be discharged by the parent company in five types. First one is cash asset shares debentures. They are to be recorded at they are to be recorded at fair value.

[00:05:24]Okay. Next we talk about default considerations. So what is this default consideration? What is the meaning of default considerations? So the consideration which the parent company promises to pay or to give to the subsidiary company in few years on guaranteed basis is called as deferred consideration. Deferred consideration is always to be recorded at the present value. All right. And then let's now now talk about the journal entries. All right. So the journal entries while passing the while recording the deferred consideration is I account debit to PC PC cash and deferred consideration account provision for deferred consideration at present value but now you have to remember this that uh you have recorded this deferred consideration at present value but you are going to pay this deferred consideration at future value.

[00:06:17]So what you will need to do is you will need to do the unwinding of interest. At every year end you will have to pass these entries till this liability comes at future values. So at every every year end what entry will you pass? P&L account debit to P&L account debit to provision for deferred consideration.

[00:06:35]All right. And once this liability this provision for deferred consideration comes at future value. You have to pay it off. That is entry will be provision for deferred consideration account debit to cash or bank account. So this was all about deferred consideration. Let's now move on contingent consideration.

[00:06:50]Consideration. Yeah. So what is the meaning of contingent consideration? So the consideration which the parent company promises to pay to the subsidiary company in few years on conditional basis. On conditional basis it's called as contingent consideration.

[00:07:06]All right. Contingent consideration is always included in PC at fair value. All right. Let me now tell you the summary of this contingent consideration is divided into two. If it is paid in the form of cash or variable number of shares and if it is paid in the form of fixed number of shares. So if it is paid in the in the form of cash or variable number of shares again divided into two day one day one pay and year end pay day one you will include this PC you will include this contingent consideration in PC at fair value at year end you will rememeasure this through PN. All right.

[00:07:42]or contingent concentration in the form of fixed number of shares to again day one you will include this contingent concentration in PC at fair value at year end you don't have to rememeasure it you don't have to remeasure it all right I hope you have understood this so this uh this was the part of contingent consideration then we talk about contingent payment to employee shareholders if it is in the capacity of employees employees don't include it in the purchase consideration however if it is given in the capacity of shareholders then you have to include this contingent payment to employee shareholders in purchase consideration. I hope this point is also clear.

[00:08:22]Then we talk about the point of precombination SBP award. So there is a formula which you have to remember for this and the formula is total fair value of original um total fair value of original awards into expired period divided by total original vesting period or total revised vesting period whichever is higher. All right in this way you get this pre amount. Okay. Then what journal entry will you pass in that case? So account to purchase consideration for consideration for contention consideration SVP reserve account that's it done all right we talk about n post combination awards the formula is total fair value of replaced awards minus precombination SP awards as simple as that nothing rocket science in this. So for post combination is done. Next we next we talk about the 10th point and that is direct cost incurred for acquiring business. It will be expensed out uh in P&L. The entry will be P&L accountable to cash or bank account and direct cost incurred for acquiring asset. Okay, we have to capitalize this in the cost of asset.

[00:09:43]11th point and that is about okay. So now we move on to the 11th point and that is about in A. All right. So point number one to to be understood here is that parent company will take over all the assets and liabilities of the subsidiary company at fair value in CFS.

[00:09:59]Point number two parent company will also record those assets which were not there in subsidiary's balance sheet provided it meets the definition of asset for parent. For example, parent purchased customer database from subsidiary company. All right, parent will definitely record it even though it is a self-generated asset for the subsidiary company. So they have not recorded it but parent will definitely record it because parent has purchased that asset.

[00:10:25]Done. Next we talk about the third point and that is classification of asset or liability will be done as per the parent. Exception to this is lease. All right. Now there are some seven clarifications which you have to remember about ina. The very first one is that contingent liability. Okay.

[00:10:42]Contingent liability is recorded at fair value on the date of acquisition. Point number two we talk about deferred tax.

[00:10:50]So deferred tax you have to include this in INA as per India 12 calculations. Third point we talk about employee benefits related assets and liabilities in the subsidiaries books of accounts will be recorded in parent CFS as per India's 19 values.

[00:11:06]Next we talk about non-current asset held for sale in subsidiaries books of accounts will be recorded in parent CFS at FBLCTS that is fair value less cost to sales. All right. Next we talk about indemnification asset. So only if indemnification liability is taken over by the parent company. Uh in that case only indemnification asset will also be a part of in this case you have to remember one thing and that is indemnification asset amount can never exceed the amount of liability. So these five clarifications are six clarification is about reacquired rights. So when uh so when any asset has been sold by the parent company to subsidiary company before their parent subsidiary relation then such asset will be recorded in the parent company at fair value on the date of acquisition.

[00:11:59]That's it. All right. This is that last point we talk about is here in yeah is that contingent asset should never form part of the contingent asset or subsidiary company should never form part of a I mean it that will be never taken over in par that's it so I think step 11 I mean step 11th point is done I hope you're clear with that all right then we talk about NCI NCI is divided into two fair value and TSA fair value. How do you calculate NCI? Number of shares of NCI into fair value per share of subsidiary company.

[00:12:40]Fair value per share of subsidiary company. Correct. But fair value NCI on the date of acquisition obviously.

[00:12:53]So again now we come on the 12th point and that is NCI. NCI is divided into two fair value PSA fair value fair value how do you calculate NCI by this way total number of shares of NCI into into fair value per share of subsidiary company on the date of acquisition okay and PSNA how are you going to calculate this NCI ina into NCI stake NCI percentage whatever is there you have to always remember that whenever NCI is at fair value you get full goodwill and you have to always remember when NCI is at TSNA Okay, you get partial goodwill. I hope things are very very clear. All right, so this was the 12th point we talked about. 13th point is about your goodwill GDP. It's very simple. So what is how do you calculate basically goodwill GDP?

[00:13:41]You have to take PC plus NCI plus previously held investment minus INA you'll get this goodwill GDP. All right, previously held investment. How are you going to calculate that? number of shares held previously by the parent company subsidiary company into into fair value per share fair value per share of the subsidiary company on the date of acquisition has to be taken all right only then you'll get this previously held investment done uh that's it then third point is that gain on previously held investment if any is there then the journal entry for that is P&L account debit to uh yeah yeah yeah what is the entry in that case the entry in that case is investment account debit investment account debit to consolidated P&L account investment account debit to consolidated P&L account all right done then we talk about goodwill so if goodwill comes if goodwill comes where you will classify it in assets assets non-current assets PP intangible assets goodwill will be classified here if there is GBP what does this mean It means that you have purchased the subsidiary at a discounted price. So as for index 103 this is very rare and they tell us I mean as for industry uh they tell us that we have to find the reasons for such a rare thing to happen. So if the reason is clear you have to transfer this GBP to OCI and from there it will go to all the equity capital reserve.

[00:15:14]But if the reason is not clear okay for this particular GBP then you have to directly transfer this GBP to other equity capital reserve that's give end so this was all about so this was all about till point number 13 all right now we will move on to common control transaction that is point number 14 so first let's understand the meaning of this so when before takeover and after takeover The ultimate controlling party is the same. That is called as common control transaction.

[00:15:50]Before take over and after takeover, the ultimate controlling party is the same.

[00:15:53]It is called as the common control transaction. There are total six steps.

[00:15:56]I'll just brief you about them. Step one again identify the acquirer. Step two, date of acquisition. Step three PC. But here you have to remember that PC will be issued only in shares at face value.

[00:16:08]Step four INA to be recorded at book value. INA to be recorded at book value plus reserves of subsidiary to be considered. Step five, NCI is not applicable here. And step six, the difference if any between PC and INA will be transferred to capital reserve.

[00:16:23]That's it. Common control transaction is done. Then we we move on to the 15th point and that is about de merger. So what is de merger? So when any company transfers its non-performing division to a new company and that is the case of de merger. The company which transfers the non-performing division is called as the selling company demerged company uh acquiry. All right. And the company which and the company to which this non-performing division is transferred is called as the purchasing company resident company acquirer. All right. So de merger is further divided into two under common control not under common control. So for a de merger to be under common control two conditions have to be satisfied. Point number one. Point number one is that um the selling company the demer company or the acquiry should have a major shareholder more than 50% stake and point number two the purchasing company resulting company or the acquirer should issue PC in shares then and only then it will be a de merger under common control else it will be a de merger not under common control now let's focus onto the accounting of this thing so if it is a de merger under common control it is divided into two in The books of selling company, demerge company, acquiry. What will be the entry? Liability account debit to asset account at carrying amount. Whatever difference will be transferred to capital reserve demer under common control entries in the books of purchasing company reserant company acquirer. What will be the entry? INA account debit at book value to PC in shares at face value. Difference penny will be transferred again to capital reserve. All right. Next we move on to de merger not under common control.

[00:18:04]Again divided into two entries in the books of selling company demerged company acquiry. Again the same entry liability account debit to asset account. Whatever different I mean yeah and carrying amount obviously whatever difference if any will be transferred to capital reserve and now the most important de merger not under common control and in the books of purchasing company resulting company or acquirer what will be the entry here INA account debit at fair value to PC at fair value difference if anyone be transferred to goodwill or GDP please remember this very important all right so we have to go to the next point and that is 16th point we talk about reverse acquisition So what is the meaning of reverse acquisition? So when parent issues more PC in shares to subsidiary company than itself then that becomes the case of reverse acquisition. All right. So here what we have to do is we have to in rough prepare one parent CFS we have to write equity share capital parent opening shares we have to write plus uh plus PC issued in shares to subsidiary company or the parent company. Whatever the shares are issued we have to write you have to take the total number of shares. We have to divide it into two parent and subsidiary. Parent uh at the I mean where the parent is written there we have to write the opening shares in parent CFS and where subsidiary is written there we have to write the PC issued in shares to subsidiary. Then we have to find out the percentage holding of both of them in the parent CFS. Okay.

[00:19:31]Once that we identify, please note that parent here is the legal acquirer and subsidiary is the legal acquiry. But parent here is the accounting acquiry and subsidiary here is the accounting acquirer. All right. Then if this question comes what exactly we have to do in the problem again it's step step number one you have to identify the accounting acquirer which is the subsidiary company. Step number two date of acquisition. Step number three here we don't have to find PC. We have to find deemed PC. Formula is accounting acquirer opening shares divided by accounting acquirer percentage minus accounting acquirer opening shares into accounting acquirer share price. All right. Share price fair value. All right. Fair value share price. You have to take in this way you get this deemed PC amount. Step number four you have to find in a of the accounting acquiry at fair value. Correct? So far so good.

[00:20:26]Step five NCI is not there here. And step six is again whatever the difference is there will be transferred to goodwill or GB. Yeah. Whatever difference is there will be transferred to goodwill or GV because uh how you have divided deemed PC minus I that's it. So whatever difference is there you'll be transferred to goodwill or G.

[00:20:44]So that's it. We have completed reverse acquisition. Now very simple and small points are left and that is concentration test. So what is concentration test? So the main logic behind performing this test is to check whether the transaction is an asset acquisition or business combination. We perform three steps here. Step one, fair value of fair value of assets acquired.

[00:21:05]How do you find out that?

[00:21:08]You take PC plus NCI plus previously held investment minus cash and DTA plus all liabilities excluding DTL. You get this fair value assets acquired. All right. Step two, you find out the single major single major class of asset of the subsidiary company. And then step three, what you do is step two divided by step one into 100, you get some percentage.

[00:21:32]If this percentage is 90% or more, then the test is met and this is an asset acquisition and not a business combination. But if this percentage is lower and the test is not met, then it is not an asset acquisition. This is a business combination. That's it. So this is also done. Next I was going to talk about this point informatory point which I was going to talk about. So that this is if the parent company does not take over the SBP plan of the subsidiary company then this SBP reserve of the subsidiary company will be recognized as NCI and CFS that's it this much only is there and then the last point we focus on is determining what is part of business competition transactions. So basically when parent pays PC to subsidiary company but if this PC includes some old transaction settlement then how are you going to determine this old transaction settlement amount because then final PC if you have to calculate it is going to be PC minus old transaction settlement amount. So for determining the old transaction settlement amount it's divided into two non-contractual relationship between par and subsidiary or contractual relationship between par and subsidiary.

[00:22:43]So if it is a non-contractual relationship between parent and subsidiary, how are you going to find out the old transaction settlement amount? That is going to be fair value of old transaction on the date of acquisition. All right. And if there is a contractual relationship between between the parent and subsidiary then the old transaction settlement account amount is going to be lower off lower of fair value minus carrying amount of that common asset or penalty settlement amount whichever is lower. That's it. In this way you get your old transaction settlement amount. You deduct this from PC and then you get the final PC which you'll consider for the calculations.

[00:23:20]All right. So this was all about the revision. This was all about the concepts of INS103.

[00:23:28]I hope you have uh you have been benefited by this because this is one of the fastest revision of all the concepts of ind3. you'll not get it anywhere because I have I searched the same on YouTube while revising I did not get it anywhere. So I hope why not benefit the entire YouTube family with this. All right. So if you find this useful, please share it ahead because this will definitely be of help to many of them.

[00:23:56]All right, at the end of the video I'll just say the same thing I keep on saying and that is keep struggling, keep grinding, keep hustling because that's the game of life is the hunger and silence. your duty to feed your hunger with your good good good deeds. All right, take care. Bye-bye. Signing off.