On 31st December, 20X1, Entity A issues 2.5 shares in exchange for each ordinary share of Entity B. All of Entity B's shareholders exchange their…

Identifying the acquirer As a result of Entity A issuing 150 ordinary shares, Entity B's shareholders own 60 per cent of the issued shares of the combined entity (i.e., 150 of the 250 total issued shares). The remaining 40 per cent are owned by Entity A's shareholders. Thus, the transaction is determined to be a reverse acquisition in which Entity B is identified as the accounting acquirer while Entity A is the legal acquirer. Calculating the fair value of the consideration transferred If the business combination had taken the form of Entity B issuing additional ordinary shares to Entity A's shareholders in exchange for their ordinary shares in Entity A, Entity B would have had to issue 40 shares for the ratio of ownership interest in the combined entity to be the same. Entity B's shareholders would then own 60 of the 100 issued shares of Entity B – 60 per cent of the combined entity. As a result, the fair value of the consideration effectively transferred by Entity B and the group's interest in Entity A is 1,600 (40 shares with a fair value per share of 40). The fair value of the consideration effectively transferred should be based on the most reliable measure. Here, the quoted market price of Entity A's shares provides a more reliable basis for measuring the consideration effectively transferred than the estimated fair value of the shares in Entity B, and the consideration is measured using the market price of Entity A's 100 shares with a fair value per share of 16. Measuring goodwill Goodwill is measured as the excess of the fair value of the consideration effectively transferred (the group's interest in Entity A) over the net amount of Entity A's recognised identifiable assets and liabilities, as follows: Particulars ₹ Consideration effectively transferred 1,600 Net recognised values of Entity A's identifiable assets and liabilities Current assets 500 Non-current assets 1,500 Current liabilities (300) Non-current liabilities (400) (1,300) Goodwill 300 Consolidated balance sheet at 31st December, 20X1 The consolidated balance sheet immediately after the business combination is: Particulars ₹ Non-current assets [3,000 + 1,500] 4,500 Goodwill 300 Current assets [700 + 500] 1,200 Total assets 6,000 Shareholders' equity Issued equity 250 ordinary shares [600 + 1,600] 2,200 Retained earnings 1,400 Total shareholders' equity 3,600 Non-current liabilities [1,100 + 400] 1,500 Current liabilities [600 + 300] 900 Total liabilities 2,400 Total liabilities and shareholders' equity 6,000 The amount recognised as issued equity interests in the consolidated financial statements (2,200) is determined by adding the issued equity of the legal subsidiary immediately before the business combination (600) and the fair value of the consideration effectively transferred (1, 600). However, the equity structure appearing in the consolidated financial statements (i.e., the number and type of equity interests issued) must reflect the equity structure of the legal parent, including the equity interests issued by the legal parent to affect the combination.