Page 8 - 16. COMPILER QB - INDAS 103

Here, the obligation to pay contingent consideration amounting to Rs. 25,00,000 is recognized as a part of
equity and therefore not re-measured subsequently or on issuance of shares.

(ii) The amount of purchase consideration to be recognized on initial recognition is shall be as follows:
Fair value 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
The contingent consideration will be classified as liability as per Ind AS 32.
As per Ind AS 103, contingent consideration not classified as equity should be measured at fair value at each

reporting date and changes in fair value should be recognized in profit or loss.
As at 31 March 2017, (being the date of settlement of contingent consideration), the liability would be
measured at its fair value and the resulting loss of Rs. 15,00,000 (Rs. 40,00,000 – Rs. 25,00,000) should be
recognized in the profit or loss for the period. A Ltd. would recognize issuance of 160,000 (Rs. 40,00,000/25)

shares at a premium of Rs. 15 per share.

Q5. (May 19 & Similar in Exam July 21) (IndAS 38 & IndAS 103)

As part of its business expansion strategy, KK Ltd. is in process of setting up a pharma intermediates
business which is at a very initial stage. For this purpose, KK Ltd. has acquired on 1st April, 2018, 100%
shares of ABR Ltd. that manufactures pharma intermediates. The purchase consideration for the same was by
way of a share exchange valued at Rs. 35 crores. The fair value of ABR Ltd.' s net assets was Rs. 15 crores,
but does not include:

(i) A patent owned by ABR Ltd. for an established successful intermediate drug that has a remaining life of
8 years. A consultant has estimated the value of this patent to be Rs 10 crores. However, the outcome of
clinical trials for the same are awaited. If the trials are successful, the value of the drug would fetch the
estimated Rs. 15 crores.
(ii) ABR Ltd. has developed and patented a new drug which has been approved for clinical use. The cost of
developing the drug was Rs. 12 crores. Based on early assessment of its sales success, the valuer has

estimated its market value at Rs. 20 crores.
(iii) ABR Ltd.'s manufacturing facilities have received a favourable inspection by a government department. As
a result of this, the Company has been granted an exclusive five-year licence to manufacture and
distribute a new vaccine. Although the licence has no direct cost to the Company, its directors believe

that obtaining the licence is a valuable asset which assures guaranteed sales and the value for the same
is estimated at Rs 10 crores.
KK Ltd. has requested you to suggest the accounting treatment of the above transaction under
applicable Ind AS.

SOLUTION

As per Ind AS 103 ―Business Combination‖, the acquirer's application of the recognition principle and conditions
may result in recognising some assets and liabilities that the acquiree had not previously recognised as assets
and liabilities in its financial statements. This may be the case when the asset is developed by the entity
internally and charged the related costs to expense. Based on the above, the company can recognise following
16. 7