CA Final Financial Reporting
CHAPTER WISE TEST 11
Chapters: 12
(All Questions are compulsory)
(Time allowed: 1.5 Hours) (Unit : 40 Marks)
Multiple Choice Questions
1. Under Ind AS 103 "Business combinations" Non-controlling interest can be measured either at:
(i) Fair Value
(ii) Cost of acquisition
(iii) Market value
(iv) The present ownership instruments' proportionate share in the recognised amounts of the
acquiree's identifiable net assets.
(v) The future ownership instruments' proportionate share in the recognised amounts of the
acquiree's identifiable net assets.
(vi) The present ownership instruments' proportionate share in the recognised amounts of the
acquirer's identifiable net assets.
Choose the most appropriate answer:
(a) (i), (iv)
(b) (i)
(c) (ii), (vi)
(d) (ii), (iii), (v) (2 Marks)
Ans: (a)
2. On 15 Jul 2022 AJ Academics Ltd agreed with the shareholders of PJ Ltd to acquire 100% stake in PJ
for total consideration of INR 100 Lakhs which includes the following:
• !l Ltd will reimburse shareholders of PJ Ltd for the transaction cost of INR 2 lakhs;
• Two of the shareholders of PJ Ltd will work as the general Managers, even after PJ is acquired by
AJ. This arrangement will work for a period of 2 years and for which quarterly salary of INR 20,000
is provided each of these individual.
• Further, PJ Ltd had filed a legal case against !J Ltd in the past, which was not settled till the date
of acquisition. AJ Ltd agreed to settle the same for INR 1 lakh.
Determine the amount of consideration for Business Combination?
(a) INR 97 Lakhs
(b) INR 100 Lakhs
(c) INR 93.80 Lakhs
(d) INR 96.20 Lakhs (2 Marks)
Ans: (c)
3. PG Ltd a real estate company acquires IG Ltd another construction company which has an existing
equity settled share-based payment scheme. The awards vest after 5 years of employee service. At
the acquisition date, IG Ltd.'s employees have rendered 2 years of service. None of the awards are
vested at the acquisition date. PG did not replace the existing share-based payment scheme but
reduced the remaining vesting period from 3 years to 2 years. PG Ltd determines that the market-
based measure of the award at the acquisition date is INR 500.
Determine pre and post combination expenses?
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(a) Pre NR 250, Post INR 250
(b) Pre INR 200, Post INR 300
(c) Pre INR 300, Post INR 200
(d) Pre Nil, Post NR 500 (2 Marks)
Ans: (b)
4. P Ltd acquired 100% stake in Q Ltd for a cash consideration of ₹ 105 lakhs. The identifiable net assets
of Q Ltd comprise of the following:
Particular Carrying amount (Tax Base) Fair Value
PPE 60 70
Inventories 40 35
Cash 20 20
Long term debts 15 20
Current debts 7 5
(a) Goodwill of ₹ 5,60,000
(b) BPG of ₹ 5,60,000
(c) Goodwill of 7,00,000
(d) BPG of ₹ 7,00,000 (2 Marks)
Ans: (a)
5. A Ltd acquired B Ltd on 01-10-2020 by issuing 200 shares. Its total share capital post issue comprises
of 300 shares. The share capital of B Ltd till acquisition was 150 shares. The profits available for
equity shareholders of both companies were:
Period / Company A Ltd B Ltd
1-04-2020 to 30-09-2020 ₹ 5000 ₹ 4000
01-10-2020 to 31-3-2021 ₹ 6000
Calculate basic EPS of the combined entity.
(a) ₹ 33.33
(b) ₹ 36.67
(c) ₹ 40
(d) ₹ 53 (2 Marks)
Ans: (c)
Descriptive Questions
1(a) The Balance Sheet of David Ltd. and Parker Ltd. as of 31st March, 20X1 is given below:
(Rs. in lakh)
Assets David Ltd. Parker Ltd.
Non-current assets:
Property, plant and equipment 400 600
Investment 300 200
Current assets:
Inventories 300 100
Financial assets
Trade receivables 400 200
Cash and cash equivalents 150 200
Others 300 300
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Total 1,850 1,600
Equity and Liabilities
Equity
Share capital - Equity shares of Rs. 100 each for Parker 500 400
Ltd. &Rs. 10each for David Limited
Other Equity 700 275
Non-current liabilities:
Long term borrowings 200 300
Long term provisions 100 80
Deferred tax 20 55
Current liabilities:
Short term borrowings 130 170
Trade payables 200 320
Total 1,850 1,600
Other Information:
(i) David Ltd. acquired 70% shares of Parker Ltd. on 1st April, 20X1·by issuing its own shares
in the ratio of 1 share of David Ltd. for every 2 shares of Parker Ltd. The fair value of the
shares of David Ltd. was Rs. 50 per share.
(ii) The fair value exercise resulted in the following :
(1) Fair value of property, plant and equipment (PPE) on 1st April, 20X1 was Rs. 450 lakh.
(2) David Ltd. agreed to pay an additional payment as consideration that is higher of Rs.
30 lakh and 25% of any excess profits in the first year after acquisition, over its profits
in the preceding 12 months made by Parker Ltd. This additional amount will be due
after 3 years. Parker Ltd. has earned Rs. 20 lakh profit in the preceding year and
expects to earn another Rs. 10 lakh.
(3) In addition to above, David Ltd. also has agreed to pay one of the founder shareholder-
Director a payment of Rs. 25 lakh provided he stays with the Company for two years
after the acquisition.
(4) Parker Ltd. had certain equity settled share-based payment award (original award)
which got replaced by the new awards issued by David Ltd. As per the original term,
the vesting period was 4 years and as of the acquisition date the employees of Parker
Ltd. have already served 2 years of service. As per the replaced awards, the vesting
period has been reduced to one year (one year from the acquisition date). The fair
value of the award on the acquisition date was as follows:
Original award - Rs. 6 lakh Replacement award - Rs. 9 lakh
(5) Parker Ltd. had a lawsuit pending with a customer who had made a claim of Rs. 35
lakh. Management reliably estimated the fair value of the liability to be Rs. 10 lakhs.
(6) The applicable tax rate for both entities is 40%.
You are required to prepare opening consolidated balance sheet of David Ltd. as on 1 st April, 20X1
along with workings. Assume discount rate of 8%. (15 Marks)
Answer 1 (a)
Consolidated Balance Sheet of David Ltd as on 1st April, 20X1 (Rs. in lakh)
Amount
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Assets
Non-current assets:
Property, plant and equipment 850.00
Investment 500.00
Current assets:
Inventories 400.00
Financial assets:
Trade receivables 600.00
Cash and cash equivalents 350.00
Others 600.00
Total 3,300.00
Equity and Liabilities
Equity
Share capital - Equity shares of Rs. 100 each 514.00
Other Equity 1,067.49
Non-Controlling Interest 173.70
Non-current liabilities:
Financial liabilities:
Long term borrowings 500.00
Long term provisions (100+80+23.81) 203.81
Deferred tax 11.00
Current liabilities:
Financial liabilities:
Short term borrowings 300.00
Trade payables 520.00
Provision for law suit damages 10.00
Total 3,300.00
Working Notes:
a. Fair value adjustment- As per Ind AS 103, the acquirer is required to record the assets and
liabilities at their respective fair value. Accordingly, the PPE will be recorded at Rs. 450 lakh.
b. The value of replacement award is allocated between consideration transferred and post
combination expense. The portion attributable to purchase consideration is determined based
on the fair value of the replacement award for the service rendered till the date of the
acquisition. Accordingly, Rs. 3 lakh (6 x 2/4) is considered as a part of purchase consideration
and is credited to David Ltd equity as this will be settled in its own equity. The balance of Rs.
3 lakh will be recorded as employee expense in the books of Parker Ltd over the remaining
life, which is 1 year in this scenario.
c. There is a difference between contingent consideration and deferred consideration. In the
given case, Rs. 30 lakh is the minimum payment to be paid after 3 years and accordingly will
be considered as deferred consideration. The other element is if company meet certain target
then they will get 25% of that or Rs. 30 lakh whichever is higher. In the given case, since the
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criteria is the minimum what is expected to be paid, the fair value of the contingent
consideration has been considered as zero. The impact of time value on deferred
consideration has been given @ 8%.
d. The additional consideration of Rs. 25 lakh to be paid to the founder 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 expenses in the income statement of
Parker Ltd.
Working Notes:
1. Computation of Purchase Consideration
Rs. in lakh
Particulars Amount
Share capital of Parker Ltd. 400
Number of shares 4,00,000
Shares to be issued 2:1 2,00,000
Fair value per share 50
Purchase consideration (2,00,000x70%xRs. 50 per share) (A) 70.00
Deferred consideration after discounting Rs. 30 lakh for 3 years
@ 8% (B) 23.81
Replacement award - Market based measure of the acquiree award
ie Fair value of original award (6) x ratio of the portion of the
vesting period completed (2) / greater of the total vesting period (3)
or the original vesting period (4) of the acquiree award ie (6 x 2 / 4)
(C) 3.00
Purchase consideration (A+B+C) 96.81
2. Allocation of Purchase consideration
Particulars Book value Fair value FV
(A) (B) adjustment
(A-B)
Property, plant and equipment 600 450 (150)
Investment 200 200 -
Inventories 100 100 -
Financial assets: -
Trade receivables 200 200 -
Cash and cash equivalents 200 200 -
Others 300 300
Less: Financial Liabilities
Long term borrowings (300) (300) -
Long term provisions (80) (80) -
Deferred tax (55) (55) -
Financial Liabilities
Short term borrowings (170) (170) -
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Trade payables (320) (320) -
Contingent liability - (10) (10)
Net assets (X) 675 515 (160)
Deferred tax asset on fair value adjustment (160 x
40%) (Y) 64 160
Net assets (X+Y) 579
Non-controlling interest (NCI)
(579 x 30%) rounded off 173.70
Capital reserve (Net assets – NCI – PC) 308.49
Purchase consideration (PC) 96.81
3. Computation of Consolidated amounts of consolidated financial statements
David Ltd. Parker Ltd. PPA Total
(preacquisition) Allocation
Assets
Non-current assets:
Property, plant and equipment 400 600 (150) 850
Investment 300 200 500
Current assets:
Inventories 300 100 400
Financial assets:
Trade receivables 400 200 600
Cash and cash equivalents 150 200 350
Others 300 300 ____- 600
Total 1,850 1,600 (150) 3300
Equity and Liabilities
Equity
Share capital- Equity shares of Rs. 500
100 each
Shares allotted to Parker Ltd. 14 514
(2,00,000 x 70% x Rs. 10 per share)
Other Equity
Other Equity 700 700
Replacement award 3 3
Security premium
(2,00,000 shares x 70% x Rs. 40) 56 56
Capital reserve 308.49 308.49
Non-controlling interest 0 173.70 173.70
Non-current liabilities:
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Financial Liabilities
Long term borrowings 200 300 500
Long term provisions 100 80 23.81 203.81
Deferred tax 20 55 (64) 11
Current liabilities:
Financial Liabilities
Short term borrowings 130 170 300
Trade payable 200 320 0 520
Liability for lawsuit damages 10 10
Total 1,850 925 525 3,300
2.(a) On 1st April 20X1, J Ltd. acquired a new subsidiary, B Ltd., purchasing all 150 million shares of B Ltd.
The terms of the sale agreement included the exchange of four shares in J Ltd. for every three shares
acquired in B Ltd; On 1st !pril 20X1, the market value of a share in J Ltd; was ₹ 10 and the market
value of a share in B Ltd; ₹ 12;00;
The terms of the share purchase included the issue of one additional share in J Ltd. for every five
acquired in B Ltd. if the profits of B Ltd. for the two years ending 31 st March 20X2 exceeded the
target figure. Current estimates are that it is 80% probable that the management of B Ltd. will
achieve this target.
Legal and professional fees associated with the acquisition of B Ltd; shares were ₹ 12,00,000,
including ₹ 2,00,000 relating to the cost of issuing shares; The senior management of J Ltd; estimate
that the cost of their time that can be fairly allocated to the acquisition is ₹ 2,00,000; This figure of
₹ 2,00,000 is not included in the legal and professional fees of ₹ 12,00,000 mentioned above;
The individual Balance Sheet of B Ltd. at 1st April 20X1 comprised net assets that had a fair value at
that date of ₹ 1,200 million; !dditionally, J Ltd; considered B Ltd; possessed certain intangible assets
that were not recognized in its individual Balance Sheet:
• Customer relationships – reliable estimate of value ₹ 100 million; This value has been derived
from the sale of customer databases in the past.
• An in-process research and development project that had not been recognised by B Ltd. since
the necessary conditions laid down in Ind AS for capitalisation were only just satisfied at 31st
March 20X2. However, the fair value of the whole project (including the research phase) is
estimated at ₹ 50 million;
• Employee expertise – estimated value of Director employees of B Ltd; is ₹ 80 million;
• The market value of a share in J Ltd; on 31st March 20X2 was ₹ 11;
Compute the goodwill on consolidation of B Ltd. that will appear in the consolidated balance sheet
of J Ltd. at 31st March 20X2 with necessary explanation of adjustments therein. (15 Marks)
Answer 2 (a)
Calculation of purchase consideration:
Particulars ₹ in million
Market value of shares issued (150 million x 4/3 x ₹ 10) 2,000
Initial estimate of market value of shares to be issued (150 million x 1/5 x ₹ 10) 300
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Total consideration 2,300
Contingent consideration is recognized in full if payment is probable.
As per para 53 of Ind AS 103, acquisition‑related costs are costs the acquirer incurs to effect a
business combination. Those costs include finder’s fees- advisory, legal, accounting, valuation and
other professional or consulting fees; general administrative costs, including the costs of maintaining
an internal acquisitions department; and costs of registering and issuing debt and equity securities.
The acquirer shall account for acquisition-related costs as expenses in the periods in which the costs
are incurred and the services are received, with one exception. The costs to issue debt or equity
securities shall be recognised in accordance with Ind AS 32 and Ind AS 109.
Statement of fair value of identifiable net assets at the date of acquisition
Particulars ₹ in million
!s per B Ltd.’s Balance Sheet 1,200
Fair value of customer relationships 100
Fair value of research and development project 50
Total net assets acquired 1,350
!s per Ind !S 38 ‘Intangible assets’, intangible assets can be recognized separately from goodwill
provided they are identifiable, are under the control of the acquiring entity, and their fair value can
be measured reliably.
Customer relationships that are similar in nature to those previously traded, pass these tests but
employee expertise fail the ‘control’ test. Both the research and development phases of in process
project can be capitalised provided their fair value can be measured reliably.
Statement of computation of goodwill
Particulars ₹ in million
Fair value of consideration given 2,300
Fair value of net assets acquired (1,350)
Goodwill on acquisition 950
Paragraph 58 of Ind AS 103 provides guidance on the subsequent accounting for contingent
consideration. In general, an equity instrument is any contract that evidences a residual interest in
the assets of an entity after deducting all of its liabilities. Ind AS 32 describes an equity instrument
as one that meets both of the following conditions:
➢ There is no contractual obligation to deliver cash or another financial asset to another party, or
to exchange financial assets or financial liabilities with another party under potentially
unfavourable conditions (for the issuer of the instrument).
➢ If the instrument will or may be settled in the issuer's own equity instruments, then it is:
• a non-derivative that comprises an obligation for the issuer to deliver a fixed number of its
own equity instruments; or
• a derivative that will be settled only by the issuer exchanging a fixed amount of cash or
other financial assets for a fixed number of its own equity instruments.
In the given case, given that the acquirer has an obligation to issue fixed number of shares on
fulfillment of the contingency, the contingent consideration will be classified as equity as per the
requirements of Ind AS 32.
As per paragraph 58 of Ind AS 103, contingent consideration classified as equity should not be re-
measured and its subsequent settlement should be accounted for within equity.