What is a business combination under Ind AS 103?
A business combination under Ind AS 103 is a transaction or other event in which an acquirer obtains control of one or more businesses. The acquirer accounts for it by the acquisition method. Buying a group of assets that is not a business is not a business combination.
No. Inputs and processes are required. A set that is capable of producing outputs can be a business even if it has not yet produced them.
What is a business?
A business is an integrated set of activities and assets that is capable of being conducted and managed to provide goods or services, to generate investment income, or to generate other income from ordinary activities. Inputs and the processes applied to them are required. Outputs are not required, so a set that is still at a development stage can be a business.
The existence of goodwill is not the test. Goodwill is measured only after the set has been identified as a business and the acquisition method is applied.
What is outside the acquisition method?
Three cases stay outside the acquisition method in the body of the standard. The formation of a joint arrangement. The acquisition of an asset, or a group of assets, that does not meet the definition of a business. A combination of entities or businesses under common control, which Appendix C accounts for by pooling of interests.
What are the four steps?
The acquisition method has four steps, in this order.
- Identify the acquirer. The acquirer is the entity that obtains control.
- Determine the acquisition date, which is the date control is obtained.
- Recognise and measure the identifiable assets acquired, the liabilities assumed, and any non-controlling interest.
- Recognise goodwill, or a gain on a bargain purchase.
Identifiable assets and liabilities are measured at their acquisition-date fair values, with the exceptions the standard lists. Control is the same idea as in Ind AS 110. Holding more than half the votes is not the only way to obtain it.
How is goodwill measured?
Goodwill is the excess of the consideration transferred, plus the amount of any non-controlling interest, plus the fair value of any previous equity interest, over the net of the identifiable assets acquired and the liabilities assumed. If that net amount exceeds the aggregate, the acquirer recognises a gain on a bargain purchase, after reassessing the measurements.
Costs the acquirer incurs to effect the combination are recognised as an expense when incurred. Costs to issue debt or equity are not added to goodwill. They are accounted for under the standard that deals with those instruments.
Frequently asked questions
Four questions cover outputs, goodwill, common control, and acquisition costs.
Must a business already have outputs?
No. Inputs and processes are required. A set that is capable of producing outputs can be a business even if it has not yet produced them.
Does goodwill by itself prove a business?
No. Goodwill is the residual measured after a business combination. It is not the test of whether the acquired set is a business.
Is a common-control combination accounted the same way?
No. Appendix C of Ind AS 103 uses the pooling-of-interests method. The acquisition method in the body of the standard does not apply.
Are acquisition costs added to goodwill?
No. Costs of the combination are expensed, except costs of issuing debt or equity, which follow the standard for those instruments.
Sources
Ind AS 103 applies when an acquirer obtains control of a business. Control is the test in Ind AS 110.