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ABC Ltd. had granted PQR Ltd. a 10-year European franchise 4 years ago at an upfront fee of ₹2,50,000. Termination clause requires the cancelling party to pay unexpired initial fee + 20%. On acquisition, current 6-year franchise market price is ₹4,50,000 and termination settlement amount is ₹1,80,000. ABC acquires PQR for ₹1 crore. Identify the correct accounting for the reacquired right and the settlement.
ARecognise reacquired right at ₹2,50,000 (original fee); no settlement effect; BC consideration ₹1 crore
BRecognise reacquired right at ₹4,50,000; settlement loss ₹3,00,000; consideration in BC ₹1 crore
CRecognise reacquired right at ₹4,50,000; settlement loss is LOWER of (₹3,00,000 unfavourable amount vs ₹1,80,000 stated settlement) = ₹1,80,000; BC consideration ₹98.2 lakh; ₹1.8 lakh settlement loss recognised separately
DSubsume the right into goodwill; no settlement entry
Answer & Solution
Correct answer: C. Recognise reacquired right at ₹4,50,000; settlement loss is LOWER of (₹3,00,000 unfavourable amount vs ₹1,80,000 stated settlement) = ₹1,80,000; BC consideration ₹98.2 lakh; ₹1.8 lakh settlement loss recognised separately
Per Ind AS 103 B52, when a BC settles a pre-existing CONTRACTUAL relationship, the settlement gain/loss is the LOWER of (i) the off-market amount and (ii) the stated termination/settlement provision. Here (ii) ₹1.8 lakh < (i) ₹3 lakh, so settlement loss = ₹1.8 lakh. The reacquired right is recognised at current market FV ₹4.5 lakh. The remaining BC consideration is ₹100,00,000 − ₹1,80,000 = ₹98,20,000.
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