By taking the data of Example 4, assume that the clause (iv) is replaced with the clause “HL is to issue additional number of shares if market price of its shares falls below ₹21 by the end of financial year 2011–12 to keep the value of shares issued at the initial level.” Then show how contingent consideration is to be recognized.

Data from Example 4

The balance sheets of Hanging Limited (HL) and Flat Limited (FL) on 31st March, 2011 are as follows:

On the balance sheet date, HL acquired the business of FL for which it agrees to pay the following purchase consideration on the date of business combination.

(i) HL to issue one share of its for every three shares of FL.

(ii) The market price of HL’s shares on the date of business combination is ₹35 per share.

(iii) HL to pay ₹6 per share in cash for every one share of FL.

(iv) Further it is provided in the scheme of business combination that if combined entity reports a profit of ₹40,000 crore as half year’s profit on 30th September, 2011, then HL shall issue additional Rs 100 crore face value shares to be valued at the fair value when such contingency is resolved.

Show how purchase consideration and different assets and liabilities should be recognized in the books of HL.

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Liabilities Equity shares of face value* 10 each General reserve P & La/c Creditors Bills payable Balance Sheet as on 31st March, 2011 HL 1,50,000 63,000 39,000 36,000 12,000 3,00,000 FL 30,000 15,000 12,750 13,800 9,000 80,550 Assets Land and building Plant and machinery Stock Debtors Investment Bills receivables Bank Cash (rupees in crores) FL 25,500 15,000 6,000 20,250 HL 1,05,000 75,000 30,000 45,000 30,000 3,000 9,000 3,000 3,00,000 - 4,500 7,500 1,800 80,550