A Limited and B Limited are engaged in the manufacture of pharmaceuticals. On 1st June, 2024, A Limited acquired 15% of equity shares of B Limited.…

CA Final · Financial Reporting · PYQS · May 2025
A Limited and B Limited are engaged in the manufacture of pharmaceuticals. On 1st June, 2024, A Limited acquired 15% of equity shares of B Limited. On 1st October, 2024, A Limited obtains control of B Limited when it acquires a further 55% of B Limited's shares, thereby resulting into a total holding of 70%. The fair value of the shares of B Limited was - 40 per share as on that date. Prior to the acquisition of additional 55% stake by A Limited on 1st October, 2024, the Balance Sheets of the two companies stood as under: (₹ in lakhs) Particulars A Ltd. B Ltd. Assets Non-Current Assets Property, Plant and Equipment 600 400 Investments (6,00,000 Shares of B Ltd. acquired on 1st June, 2024) 210 - Current Assets Inventories 500 150 Financial Assets Trade receivables 450 300 Cash and cash equivalents 400 100 Other Current Assets 200 230 Non-current assets held for sale - 250 Total 2,360 1,430 Equity and Liabilities Equity Share Capital – Equity Shares of 100 each 500 - Share Capital – Equity Shares of 10 each - 400 Other Equity 810 225 Non-Current Liabilities Financial Liabilities Long-term Borrowings 250 200 Long-term Provisions 50 70 Deferred Tax Liability 40 - Current Liabilities Financial Liabilities Short-term Borrowings 400 285 Trade Payables 310 250 Total 2,360 1,430 In consideration of the additional stake acquired by A Limited on 1st October, 2024, it agreed to pay to each selling shareholder of B Limited a sum of 15 per share in cash and issue 1 Equity Share of 100 each of A Limited in lieu of 8 Equity Shares of 10 each held by the selling shareholder in B Limited. The fair value of the shares of A Limited as on 1st October, 2024 is 160 per share. In addition to the above: (a) A Limited agreed to pay an additional payment as consideration that is higher of 35 lakhs and 25% of any excess profit in the first year, after acquisition over its profits in the preceding one year made by B Limited. This additional amount would be due after 2 years. B Limited has earned - 10 lakhs profit in the preceding year and expects to earn another - 20 lakhs. (b) A Limited also agreed to pay one of the promoter shareholders of B Limited a payment of 15 lakhs provided he stays with the company for two years after acquisition. (c) A Limited* had a certain equity settled share-based payment award (Original award) which was replaced by the new award issued by B Limited**. As per the original terms, the vesting period was 4 years and as of the acquisition date, the employees of B Limited have already served 2 years of service. As per the replaced award, the vesting period is reduced to one year (one year from the acquisition date). The fair value of the award on the acquisition date was as under: (i) Original Award: ₹ 5 lakhs (ii) Replacement Award: ₹ 8 lakhs (d) The fair value exercise resulted in the following: (i) The fair value of Property, Plant and Equipment and Inventory of B Limited as on 1st October, 2024 was - 480 lakhs and - 170 lakhs respectively. (ii) The carrying value of Non-Current Asset held for sale of 250 lakhs of B Limited represents its fair value less cost to sell in accordance with the relevant Ind AS. (iii) B Limited has developed and patented a new drug for Parkinson disease which has been approved for clinical use. The cost of developing the drug was - 140 lakhs. Based on early assessment of its sales success, the valuer has estimated its market value at - 200 lakhs. (iv) B Limited had a lawsuit for infringement of Trademark pending with a competitor who had made a claim of 50 lakhs. B Limited has disclosed the same as a contingent liability as it is not probable that the amount would be payable. Management reliably estimated the fair value of the liability to be - 10 lakhs. Any sum which would be paid in respect of the lawsuit would be tax deductible. (e) The cost of capital of A Limited is 10%. The appropriate discount factor for 1 @ 10% payable at the end of 1st year is 0.91 and 2nd year is 0.83. (f) The applicable tax rate for both the entities is 30%. Unless stated otherwise, all items have a fair value and tax base equal to their carrying amounts at the acquisition date. A Limited chooses to measure the Non-Controlling Interest in B Limited as per Proportionate Share of identifiable net assets method. You are required to prepare the opening Consolidated Balance Sheet of A Limited as on 1st October, 2024 as per the applicable Ind AS. Working Notes should form part of your answer.

Suggested Answer and Working Notes:

Consolidated Balance Sheet of A Ltd. and its subsidiary B Ltd. as at 1st October, 2024 Notes No. ₹ in lakhs Assets Non-current assets Property, plant and equipment 1 1,080.00 Goodwill 2 461.95 Intangible assets (patents) 200.00 Current assets Inventories 3 670.00 Financial assets Cash and cash equivalents 4 170.00 Trade receivables 5 750.00 Other current assets 6 430.00 Assets held for sale 250.00 Total 4,011.95 Equity and Liabilities Equity Other equity 7 775.00 Non-controlling interest (W.N.4) 8 1007.50 Non-current liabilities 248.40 Financial liabilities Long-term borrowings 9 450.00 Long-term provisions 10 149.05 Deferred tax liabilities 11 127.00 Current Liabilities Financial liabilities Short-term borrowings 12 685.00 Trade payables 13 560.00 Provision for lawsuit damages 10.00 Total 4,011.95 Notes to Accounts 1. Property, Plant and Equipment Particulars ₹ in lakhs A Ltd. 600.00 B Ltd. 400.00 Add: Fair value gain 80.00 480.00 1,080.00 2. Goodwill Particulars ₹ in lakhs Goodwill on acquisition of B Ltd. (Refer W.N.5) 461.95 3. Inventories Particulars ₹ in lakhs A Ltd. 500.00 B Ltd. 150.00 Add: Fair value given 20.00 170.00 670.00 4. Cash and cash equivalents Particulars ₹ in lakhs A Ltd. 400.00 Less: Paid to B Ltd.'s Shareholders (330.00) 70.00 B Ltd. 100.00 170.00 Note: The additional consideration paid to promoter shareholder is contingent to him/her continuing in employment and hence this will be considered as employee compensation and will be recorded as post combination expense in the income statement by A Ltd. 5. Trade receivables Particulars ₹ in lakhs A Ltd. 450.00 B Ltd. 300.00 750.00 6. Other current assets Particulars ₹ in lakhs A Ltd. 200.00 B Ltd. 230.00 430.00 7. Equity Particulars ₹ in lakhs Equity Share Capital 7,75,000 Equity shares of 100 each (Out of the above, 2,75,000 Equity shares of 100 each allotted to shareholders of B Ltd for consideration other than cash) 775.00 8. Other equity Particulars ₹ in lakhs A. Retained earnings of A Ltd. 810.00 Add: Gain on previously acquired shares of A Ltd. 30.00 840.00 B. Replacement award 2.50 C. Security premium (2,75,000 shares x - 60) 165.00 1007.50 9. Long-term borrowings Particulars ₹ in lakhs A Ltd. 250.00 B Ltd. 200.00 450.00 10. Long term provisions Particulars ₹ in lakhs A Ltd. 50.00 Add: Deferred consideration 29.05 79.05 B Ltd. 70.00 149.05 11. Deferred tax liabilities Particulars ₹ in lakhs Deferred tax liability of A Ltd 40.00 Deferred tax liability (W.N. 2) 87.00 127.00 12. Short term borrowings Particulars ₹ in lakhs A Ltd. 400.00 B Ltd. 285.00 685.00 7 13. Trade payables Particulars ₹ in lakhs A Ltd. 310.00 B Ltd. 250.00 560.00 Working Notes: 1. Calculation of purchase consideration Investment in B Ltd. ₹ in lakhs Shares acquired On 1st June, 2024 15% [(400/10) x 15% x - 40] 240.00 On 1st October, 2024 55% Own equity given (40 x 55%) x 1/8 x 160 440.00 Cash (40 x 55%) x - 15 330.00 Contingent consideration (35 x 0.83) 29.05 Replacement award (5 x 2/4) 2.50 1041.55 2. Calculation of deferred tax on assets and liabilities acquired as part of the business combination Item Book value Fair value Tax base ₹ in lakhs Taxable (deductible) temporary difference Deferred tax assets (liability) @ 30% Property, plant and equipment 400.00 480.00 400.00 80.00 (24.00) Intangible assets 200.00 0.00 200.00 (60.00) Inventories 150.00 170.00 150.00 20.00 (6.00) Trade receivables 300.00 300.00 300.00 - - Cash and cash equivalents 100.00 100.00 100.00 - - Other current assets 230.00 230.00 230.00 - - Non-current asset held for sale 250.00 250.00 250.00 - - (A) 1,430.00 1,730.00 1,430.00 300.00 (90.00) Trade payables 250.00 250.00 250.00 - - Long-term provisions 70.00 70.00 70.00 - - Short-term borrowings 285.00 285.00 285.00 - - Contingent liability 10.00 (10.00) 3.00 (B) 605.00 615.00 605.00 (10.00) 3.00 Deferred tax liabilities (A-B) (87.00) 3. Calculation of fair value of identifiable net assets acquired ₹ in lakhs ₹ in lakhs Property, plant and equipment 480.00 Intangible assets 200.00 Inventories 170.00 Trade receivables 300.00 Cash and cash equivalents 100.00 Non-current asset held for sale 250.00 Other current assets 230.00 Total assets 1,730.00 Less: Long-term borrowings 200.00 Trade payables 250.00 Long-term provisions 70.00 Short-term borrowings 285.00 Contingent liabilities 10.00 Deferred tax liabilities 87.00 Total liabilities (902.00) Net identifiable assets 828.00 4. Calculation of NCI by proportionate share of identifiable net assets Identifiable net assets of S Ltd. on 1st October, 2024 (Refer W.N.3) = ₹ 828.00 lakhs NCI on 1st October, 2024 = 828.00 lakhs x 30% = 248.40 lakhs 5. Calculation of Goodwill Particulars ₹ in Lakhs Fair Value of Net Identifiable Assets 828.00 Less: NCI (248.40) 579.60 Less: Purchase Consideration (1041.55) Goodwill on 1st October, 2024 461.95

Topics: Ind AS 103

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