CHAPTER U

BLUE NOTES
50 S
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A business combination is a transaction or other event in Definition of the following in connection with a
which an acquirer obtains control of one or one business combination
businesses.
(PFRS 3) 1. Control is the power to govern the financial and
 True mergers operating policies of an entity so as to obtain benefits
 Mergers of equals from its activities.
2. Noncontrolling interest or formerly minority interest is
Ways in which an acquirer might obtain control of an the equity in a subsidiary not attributable directly or
acquire indirectly to a parent.
3. Acquirer is the entity that obtains control of the
a. By transferring cash, cash equivalents or other assets, acquiree.
including net assets that constitute a business. 4. Acquiree is the business or businesses that the
b. By incurring liabilities. acquirer obtains control of in a business combination.
c. By issuing equity interests. 5. Owners include holders of equity interest of investor-
d. By providing more than one type of consideration. owned entities and owners, members or participants
e. By contract alone even without consideration. in mutual entities.

Method of accounting for a business combination

 An entity shall account for each business combination by applying the acquisition method.
The application of the acquisition method requires the following:
a. Identifying the acquirer.
b. Determining the acquisition date.
c. Recognizing and measuring the identifiable assets acquired, the liabilities assumed and any noncontrolling
interest in the acquiree.
d. Recognizing and measuring goodwill or gain from bargain purchase.

 For each business combination, one of the combining entities shall be identified as the acquirer.

Factors in identifying the acquirer in a business combination

1. The acquirer is usually the entity that transfers the cash or other assets, or incurs the liabilities.
2. The acquirer is usually the entity that issues its equity interests.
3. The acquirer is usually the combination entity whose relative size measured in terms of assets, revenue or
profit is significantly greater than that of the other combining entity or entities.
4. In a business combination involving more than two entities, determining the acquirer shall include a

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consideration of which of the combining entities initiated the combination as well as the relative size of the
entities.
5. If a new entity is formed to issue equity interests to effect a business combination, one of the combining
entities that existed before the combination shall be identified as the acquirer.

The following may be of the help in identifying the acquirer

a. The combining entity whose owner as a group receives the largest proportion of the voting rights in the combined
entity is likely the acquirer.
b. Where there is a large minority interest in the combined entity and no other owner has a significant voting
interest, the holder of the large minority interest is likely the acquirer.
c. Where one entity has the ability to select the management team or the majority of the members of the governing
body of the combined entity, such entity is likely the acquirer.

“Acquisition date” in a business combination

 It is the acquirer’s responsibility to identify acquisition date.
 The acquisition date (closing date) is the date on which an acquirer obtains control over the acquiree.
Note: It is possible for control to pass to the acquirer before or after the closing date.

“Recognition principle” in a business combination

As of acquisition date the acquirer shall recognize, separately from goodwill, the identifiable assets acquired, the
liabilities assumed and any noncontrolling interest in the acquiree.

To qualify for recognition, the identifiable assets and liabilities must meet the definition of assets and liabilities in
the Conceptual Framework for Financial Reporting.
Note: The acquirer shall recognize a contingent liability assumed in a business combination at the acquisition date even if it is not probable
that an outflow of economic benefits will be required to settle the obligation.

Measurement principle in a business combination

1. The acquirer shall measure the identifiable assets acquired and the liabilities assumed at their acquisition-date fair
value.
2. For each business combination, the acquirer shall measure any noncontrolling interest in the acquire either at:
i) Fair value
ii) The noncontrolling interest’s proportionate share of the acquiree’s identifiable net assets.

“Consideration transferred” in business combination

The sum of the acquisition-date fair values of the following:
a. The assets transferred by the acquirer
b. The liabilities incurred by the acquirer to the former owners of the acquire
c. The equity interest issued by the acquirer

Treatment of “contingent consideration” in a business

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188 USL Blue Notes Chapter 50 – Business Combination

The acquirer shall recognize the acquisition-date fair value of any contingent consideration as part of the
consideration transferred in exchange for the acquiree.
The acquirer shall classify the obligation to pay the contingent consideration as liability or equity on the basis of
the definitions of an equity instrument and a financial liability under PAS 32.

Subsequent accounting for contingent consideration

If the consideration is classified as equity, this amount shall not be remeasured and instead, the final settlement of
the consideration shall be recognized as part of the equity.

If the contingent consideration is classified as financial liability, it shall be remeasured at fair value with any gain
or loss being in profit or loss.

Business combination “achieved in stages” or Step Acquisition.

In such a case, the acquirer shall remeasure its “previously held equity interest” in the acquiree at its acquisition
date fair value.
Any resulting gain or loss the remeasurement to fair value is recognized in profit or loss.

Measurement of goodwill in a business combination

Goodwill (Gain on Bargain Purchase) = (Consideration Transferred + Amount of Noncontrolling Interest in the Acquiree
+ Acquisition-date FV of the Acquirer’s Previously Held Interest in the Acquiree) – (Identifiable Assets Acquired –
Liabilities Assumed)
Note: Before recognizing a gain on bargain purchase, the acquirer shall reassess whether it has correctly identified all of the assets acquired and
all of the liabilities assumed, and shall recognize any additional assets or liabilities identified in the review.

“Acquisition-related costs” in a business combination

 Finder’s fee
 Advisory, legal, accounting, valuation and other professional or consulting fees
 General administrative costs, including costs of maintaining an internal acquisition department
 Costs of registering and issuing debt and equity securities

Treatment of acquisition-related costs

The acquirer shall account for acquisition-related costs as expense in the period in which the costs are incurred,
except the costs of issuing debt and equity securities.

The cost of issuing debt securities shall be included in the measurement of the financial liability.
The cost of issuing equity securities shall be deducted from any share premium from the issue and any excess s
recognized as expense.

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