Page 7 - 16. COMPILER QB - INDAS 103

SOLUTION

Ind AS 103, inter alia, provides that the consideration transferred in a business combination should be
measured at fair value, which should be calculated as the sum of (a) the acquisition-date fair values of the
assets transferred by the acquirer, (b) the liabilities incurred by the acquirer to former owners of the acquiree
and (c) the equity interests issued by the acquirer.

Further, Ind AS 103 provides that the consideration the acquirer transfers in exchange for the acquiree includes
any asset or liability resulting from a contingent consideration arrangement. The acquirer shall recognize the
acquisition-date fair value of contingent consideration as part of the consideration transferred in exchange for
the acquiree.
With respect to contingent consideration, obligations of an acquirer under contingent consideration

arrangements are classified as equity or a liability in accordance with Ind AS 32 or other applicable Ind AS,
i.e., for the rare case of non-financial contingent consideration. The Ind AS provides that the acquirer shall
classify an obligation to pay contingent consideration that meets the definition of a financial instrument as a
financial liability or as equity on the basis of the definitions of an equity instrument and a financial liability
in Ind AS 32, Financial Instruments: Presentation. The acquirer shall classify as an asset a right to the return
of previously transferred consideration if specified conditions are met. Ind AS 103 provides guidance on the

subsequent accounting for contingent consideration.
(i) In the given case the amount of purchase consideration to be recognized on initial recognition shall be as
follows:
In case of equity classification-

Fair value of shares issued (10,00,000 x Rs. 20) Rs. 2,00,00,000
Fair value of contingent consideration Rs. 25,00,000
Total purchase consideration Rs. 2,25,00,000
Subsequent measurement of contingent consideration payable for business combination

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:
(a) 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).
(b) If the instrument will or may be settled in the issuer's own equity instruments, then it is:
(i) a non-derivative that comprises an obligation for the issuer to deliver a fixed number of its own

equity instruments; or
(ii) 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 a fixed number of shares on fulfilment of
the contingency, the contingent consideration will be classified as equity as per the requirements of Ind AS
32.

As per Ind AS 103, contingent consideration classified as equity should not be re-measured and its subsequent
settlement should be accounted for within equity.

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