Differences between Ind AS-103 & AS-14 & Carve out/in Ind AS-103 from IFRS-3

Article contains Easy Analysis of Differences Between Ind AS-103 and AS-14 and Carve-Out, Carve-In in Ind AS-103 from IFRS-3. It explains  Significant differences between Ind AS-103 and AS-14 and Carve-Out in Ind AS-103 from IFRS-3. 

1- Introduction

There is no single Accounting standard which addresses accounting treatments and disclosures where one entity obtains control of another entity. In the existing Indian GAAP, The accounting treatment of such transaction is dependent on the form and nature of acquisition such as:

a) If the Acquired Company is retained as a separate legal Entity- Accounting is to be done as per Ind AS-110 or AS-21 as applicable.

b) If the Acquired Company is legally merged with the Acquirer- Accounting is to be done as per Ind AS-103 or AS-14 as applicable.

Apart from the above, if the acquired company merged with the acquirer through a court approved scheme, the accounting will be done as per the scheme which may be differ from the accounting standards to the some extend. The Indian GAAP also permits use of pooling of Interest method whereas the entire transaction is to be accounted on carrying values and no goodwill arises.
After convergence of IFRS as Ind AS, Ind AS 103 which is in line with IFRS 3 takes care of global requirements in case of business combination.

A Business combination is a transaction where one entity being the acquirer obtains control over another business being the acquiree.

2-Significant Differences between Ind AS 103 and AS 14

a- Reverse Acquisition: Ind AS-103 deals with the concept of reverse acquisition where as there is no such concept under AS-14. A reverse acquisition occurs when the entity that issues securities (the legal acquirer) is identified as the acquiree for accounting. The entity whose equity interests are acquired (the legal acquiree) must be the acquirer for accounting purposes for the transaction to be considered a reverse acquisition.

b- Method of Accounting: Under Ind AS-103, all business combinations are accounted by using the acquisition Method which is extension of Purchase Method whereas all Identifiable Assets and liabilities are recognized and measured at acquisition date fair values with limited exceptions and Purchase Consideration is recognized at acquisition date fair value and Non-Controlling Interest (NCI) is either measured at fair value or at NCI‘s proportionate share in Identifiable Net Assets.

Under AS-14, Amalgamation in the nature of Purchase is to be accounted as per Purchase Method i.e. Identifiable Assets and Liabilities recognized at fair value or at carrying amount on the date of amalgamation and the Amalgamation in the nature of Merger is to be accounted as per the Pooling of Interest Method Assets and Liabilities and Reserve are accounted at their carrying amount.

c- Accounting of Goodwill: Under AS 14, goodwill arising on amalgamation in the nature of purchase is to be amortized over a period of maximum 5 years whereas under Ind AS-103, Good will is not to be amortized but tested for Impairment in accordance with the provisions of Ind AS-36.

d- Acquisition related cost: IND AS 103 requires acquisition related costs to be charged to the statement of Profit and loss and cost to issue debt or equity securities shall be recognized in accordance with IND AS 32 and 109 where as in AS-14 there is no such specific guidance in relation to acquisition cost.

e- Asset Acquisition: The transaction that does not meet the definition of Amalgamation or acquisition of subsidiary are accounted as assets acquisition without recognizing good will or capital reserve. The consideration is to be apportioned between the assets acquired in the ratio of fair market value. The similar treatment is given in both the standards.

f- Gain on Bargain Purchase: Under Ind AS-103, Gain on bargain purchase is recognized in Other Comprehensive Income (OCI) if there is sufficient evidence that shows the appropriateness bargain purchase gain whereas under AS-14 it is termed as Capital Reserve.

g- Contingent Consideration: As per IND AS 103, the consideration includes any asset or liability resulting from a contingent consideration arrangement which is initially recognized at acquisition date fair value and subsequently re-measured at fair value through Profit and Loss if classified as Liability, no need to re-measure if classified as Equity. Whereas there is no specific guidance in AS-14 for Contingent Consideration. It can be added in purchase consideration only when payment is provable and a reasonable estimate of amount can be made

h- In Process Research and Development: Under Ind AS-103, it is initially recognized at acquisition fair value and subsequently measured in accordance with Ind AS-38 whereas there is no specific guidance under AS-14.

i- Measurement Period: Ind AS-103, provides measurement period after acquisition date for the acquirer to adjust the provisional amounts recognized to reflect the additional information that existed as at the date of acquisition and it is limited to one year from the acquisition date. There is no such specific guidance under AS-14.

j- Business Combination achieved in Stages: Under Ind AS-103, any equity interest in the acquiree held by acquirer immediately before obtaining control over the acquiree is adjusted to acquisition date fair value and any resulting gain or loss is recognized in the profit and loss. As per AS-14, Two or more investments made over a period of time, the equity of the subsidiary at the date of investment is generally determined on step by step basis.

k- Transaction between entities under common control: Appendix C to the Ind AS-103, Provide detailed guidance which is similar to the pooling of Interest Method under AS-14. There is no such specific guidance in AS-14, the accounting is generally done as per the Court order.

3- Carve out in Ind AS-103 from IFRS-3

IFRS-3 requires bargain purchase gain to be recognized in profit and loss as income

Carve Out: Ind AS-103 requires the bargain purchase gain to be recognized in Other Comprehensive Income and accumulated in equity as capital reserve, unless there is no clear evidence for underlying reason for classification of the business combination as bargain purchase, in which case, it shall be recognized directly in equity as capital reserve.

Reason: At present, since bargain purchase gain occurs at the time of acquiring a business, these are considered as capital reserve. Recognition of such gains in profit and loss would result into recognition of unrealized gain, which may be distributed in the form of dividend.

4- Carve-In in Ind AS-103 from IFRS-3

IFRS 3 excludes from its scope business combination under common control.

Carve-In: Appendix C of the Ind AS-3, gives detailed guidance for business combination under common control.