P Limited and S Limited are in business of manufacturing garments. P Limited holds 30% of equity shares of S Limited for last several years. P…

CA Final · Financial Reporting · MTP · January 2026
P Limited and S Limited are in business of manufacturing garments. P Limited holds 30% of equity shares of S Limited for last several years. P Limited obtains control of S Limited when it acquires further 65% stake of S Limited's shares, thereby resulting in a total holding of 95% on 31st March, 20X1. The acquisition had the following features: (i) P Limited transfers cash of 50,00,000 and issues 90,000 shares on 31st March, 20X1. The market price of P Limited's shares on the date of issue was 10 per share. The equity shares issued as per this transaction will comprise 5% of the post-acquisition capital of P Limited. (ii) P Limited agrees to pay additional consideration of 4,00,000, if the cumulative profits of S Limited exceeds - 40,00,000 over the next two years. At the acquisition date, it is not considered probable that extra consideration will be paid. The fair value of contingent consideration is determined to be - 2,00,000 at the acquisition date. (iii) P Limited spent acquisition-related costs of 2,00,000. (iv) The fair value of the NCI is determined to be - 5,00,000 at the acquisition date based on market price. P Limited decided to measure non-controlling interest at fair value for this transaction. (v) P Limited has owned 30% of the shares in S Limited for several years. At 31st March, 20X1, the investment is included in P Limited's consolidated balance sheet at 8,00,000. The fair value of previous holdings accounted for using the equity method is arrived at 18,00,000. The fair value of S Limited's net identifiable assets at 31st March, 20X1 is 45,00,000, determined in accordance with Ind AS 103. Analyze the transaction and determine the accounting under acquisition method for the business combination by P Limited.

Suggested Answer and Working Notes:

Identify the acquirer In this case, P Limited has paid cash consideration to shareholders of S Limited. Further, the shares issued to S Limited pursuant to the acquisition do not transfer control of P Limited to erstwhile shareholders of S Limited. Therefore, P Limited is the acquirer and S Limited is the acquiree. Determine acquisition date As the control over the business of S Limited is transferred to P Limited on 31st March 20X1, that date is considered as the acquisition date. Determine the purchase consideration The purchase consideration in this case will comprise of the following: Particulars ₹ Cash consideration 50,00,000 Equity shares issued (90,000 x 10 i.e., at fair value) 9,00,000 Contingent consideration (at fair value) 2,00,000 Fair value of previously held interest 18,00,000 Total purchase consideration 79,00,000 Acquisition cost incurred by and on behalf of P Limited for acquisition of S Limited should be recognised in the Statement of Profit and Loss. As such, an amount of 2,00,000 should be recognised in the Statement of Profit and Loss. Fair value of identifiable assets and liabilities The fair value of identifiable net assets (as given in the question) ₹ 45,00,000. Non-Controlling Interest The management has decided to recognise NCI at its fair value, which is given in the question as 5,00,000. Re-measure previously held interests in case business combination is achieved in stages In this case, the control has been acquired in stages i.e., before acquisition to control, P Limited exercised significant influence over S Limited. As such, the previously held interest should be measured at fair value and the difference between the fair value and the carrying amount as at the acquisition date should be recognised in the Statement of Profit and Loss. As such, an amount of 10,00,000 (i.e. 18,00,000 – 8,00,000) will be recognised in the Statement of Profit and Loss. Determination of goodwill or gain on bargain purchase Goodwill should be calculated as follows: (₹) Total consideration 79,00,000 Recognised amount of any non-controlling interest 5,00,000 Less: Fair value of net identifiable assets (45,00,000) Goodwill 39,00,000

Topics: Ind AS 103

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