Step acquisition, contingent consideration and the NCI election

Step 1 - net assets acquired

Item	₹ crore
Fair value of identifiable net assets	1,400.00
Less: deferred tax on the fair value uplift (420 × 25%)	(105.00)
Net assets for the goodwill computation	1,295.00

The ₹420 crore uplift has no corresponding tax base, so it creates a taxable temporary difference and a deferred tax liability on acquisition. The DTL reduces the net assets acquired and therefore increases goodwill. Only the net figure enters the computation.

Step 2 - goodwill

Component	₹ crore
Cash consideration	810.00
Fair value of contingent consideration	38.00
Fair value of the previously held 30% interest	540.00
NCI (25% × 1,295)	323.75
Less: net assets acquired	(1,295.00)
Goodwill	416.75

Step 3 - gain on the previously held interest

Remeasure the 30% stake to fair value at the acquisition date: 540 − 420 = ₹120 crore gain in profit or loss. It is not taken to OCI and it is not netted against goodwill; it is a separate line and is part of the year's earnings.

Judgement points

• The ₹420 crore is stated at the acquisition date. Had it been an opening balance, Alpha would first equity-account its share of Beta's profit for the six months to 30 September (30% × ₹75 crore = ₹22.5 crore), and the gain would fall to ₹97.5 crore. Getting this sequence wrong is the most common error in step acquisitions.
• The gain is non-recurring; EPS accretion analysis should strip it out.
• Goodwill is not amortised. It is tested annually for impairment at CGU level, so ₹416.75 crore is the number that drives future EPS volatility.
• Transaction costs (due diligence, advisory, legal) are expensed, not capitalised into goodwill.

Classification. The obligation will be settled in cash, not by issuing a fixed number of Alpha shares, so it is a financial liability (Ind AS 32), not equity. Equity classification would be available only for a fixed-for-fixed share settlement, which is not the case here. The classification is not a free choice - it follows the settlement mechanism.

At acquisition. Measure at fair value, ₹38 crore, and include it in the consideration transferred (already reflected in the ₹416.75 crore of goodwill). Do not use the maximum ₹60 crore; the expected value is the fair value, and the difference between the two is the uncertainty the treasury team has priced.

Subsequently. The liability is measured at fair value through profit or loss under Ind AS 109. Changes - the unwinding of discount, revisions to the probability of hitting ₹300 crore EBITDA, and the final settlement - go to the consolidated statement of profit and loss. They do not adjust goodwill: goodwill is adjusted only for measurement-period adjustments relating to facts and circumstances existing at the acquisition date, and a change in the expected earn-out outcome after acquisition is generally not such an adjustment.

FY2025 effect. Beta expects to exceed the threshold, so the liability moves from ₹38 crore to ₹60 crore: a ₹22 crore charge in FY2025 (plus any discount unwinding, which is small over one year). Consolidated profit after tax is reduced by ₹22 crore, of which Alpha's shareholders bear 75% (₹16.5 crore) and the NCI 25% (₹5.5 crore) - the earn-out is a liability of the group, and its cost is shared with the NCI.

Tax and presentation. The payment should be deductible when incurred, so the liability may give rise to a deductible temporary difference; a deferred tax asset is recognised only if the deduction is probable and admissible - this needs written tax confirmation rather than an assumption. The charge should be presented as part of the consideration remeasurement, not buried in operating expenses, so that the underlying margin is visible. Finally, because the earn-out is still contingent, it remains a potential related-party and going-concern disclosure item until settled.

The computation

	Proportionate NCI	Full goodwill
Cash consideration	810.00	810.00
Contingent consideration	38.00	38.00
Previously held interest at fair value	540.00	540.00
NCI	323.75	380.00
Less: net assets	(1,295.00)	(1,295.00)
Goodwill	416.75	473.00

Full goodwill adds ₹56.25 crore to goodwill and to NCI. Total consolidated equity at acquisition is ₹56.25 crore higher, and total assets are ₹56.25 crore higher - the group's net assets are unchanged in substance, but the balance sheet is grossed up.

Consequences

• Return ratios. Higher goodwill lowers ROE, ROIC and asset turnover immediately. On a ₹56.25 crore gross-up alone the effect is small, but on a large deal it is not.
• Impairment. This is the real difference. Under full goodwill, an impairment is allocated between the group and the NCI, so the group's share of the hit is 75%. Under proportionate goodwill, the recorded goodwill is only the parent's share, and the group bears 100% of any impairment of that goodwill. Proportionate NCI therefore produces more EPS volatility if the CGU underperforms.
• Disclosure. The NCI fair value of ₹380 crore implies a control premium in the whole-company valuation and must be disclosed and supported.

Recommendation. Elect proportionate NCI. It gives a smaller asset base and higher ROE, keeps goodwill - and therefore the future impairment charge - smaller in absolute terms, and is consistent with the board's EPS focus in the near term. The election is made transaction by transaction, so it does not lock Alpha in. The counter-argument should be minuted: if the NCI was genuinely worth ₹380 crore, proportionate measurement understates the true cost of the 25% not acquired, and full goodwill gives a more faithful picture. The choice must be applied consistently to all components of the same transaction.