BUSINESS COMBINATION

- IFRS 3R – Fair Value Approach

- IFRS 10 – Consolidated FS

 Business Combination is a transaction where control is obtained.

 Consolidated FS -> cost method
 Separate FS -> either cost/equity
 20% to 50% - investment in associate (under equity method)
 1% to 19% - investment in trading securities

TYPES OF BUSINESS COMBINATION

1. Asset acquisition at 100%.
1.1. Statutory Merger -> A + B = A or B
1.2. Statutory Consolidation -> A + B = C

2. Stock Acquisition -> A + B = A + B (both are existing)

2.1. Fully-owned subsidiary -> no NCI
2.2. Partially-owned subsidiary -> w/ NCI

ACCOUNTING METHOD
- Purchase method (old term) or acquisition method

1. Determine the acquirer.

2. Determine the acquisition date.
2.1.The acquisition date is the measurement date.
2.2.Assets of the subsidiary can be measured w/in 1 year from the acquisition date.
3. Measure and record NCI and identifiable assets (derecognize goodwill of subsidiary)
4. Measure and record goodwill or gain on bargain purchase option.

COMPUTATION OF GOODWILL
FV of consideration given xx
(The purchase price, which can be inform of
Cash, Non-cash asset, Liab & stocks)

+ FV of Previously Held Interest xx

PHI = (Additional Purchase Price / Additional Controlling Int.) x Prev. Held Int. Percentage

+ FV of Contingent Consideration Payable xx

+ FV of Non-Controlling Interest xx

Less: Net Asset of Subsidiary at FV (xx)

Goodwill / Gain on BPO xx

MEASUREMENT OF NCI

1. FV of NCI, if silent use Fair Value.

1.1. If the FV of NCI is not given, determine the implied fair value.

** (Purchase Price – Control Premium x NCI%

Controlling Int. %)

2. Proportionate Share / “Relevant Share” / Interest in Net Asset of Subsidiary

2.1 Formula of NCI:

** FV of Subsidiary’s NA x NCI% = Proportionate Share

IMPORTANT! FLOOR TEST:

**The Fair Value of NCI should not be lower than the INAS, therefore the NCI is the HIGHER VALUE
BETWEEN FV OF NCI & INAS.

*INAS = Interest in Net Asset of Subsidiary

CONTROL PREMIUM

1. This is included in the purchase price or the investment cost.

2. This is included to Goodwill computation.
3. Excluded from the computation of NCI.

Note: Gain on BPO is NEVER allocated to subsidiary.

ACQUISITON- RELATED COST

1. Direct Cost – expensed

2. Indirect Cost – expensed
3. Cost to issue and register (CTIR)
Ex: printing cost, listing cost, or anything mentioning SEC.
4. Excess CTIR over SP from issuance.
4.1. Deduction from R/E
4.2. Deduction from SHE

*If the acquirer has 2 or more acquires, compute the amount of goodwill or gain separately.
*Excess of CTIR over SP should be computed separately for each acquiree.
SUBSEQUENT TO THE DATE OF CONSOLIDATION

*Legends:
1. CNI – P : Conso Net Income – Parent
2. NCI – NI : Non-controlling Interest – Net Income

CNI – P NCI-NI

1. Parent Net Income (could be fractional) xx

2. Less: Dividend Received (xx)
(Div. of Subsidiary x Control %)
2.1. Income from own operation / separate inc. of parent xx
3. Add: Share of Net Income (could be fractional) xx xx
4. Less: Amortization of UV Asset (xx) (xx)
(UVA / Remaining Life) x (no.of mos/12)
5. Add: Amortization of OV Asset xx xx
(OVA / Remaining Life) x (no.of mos/12)
6. Add: Gain on BPO on year of Business Combination xx
7. Less: Impairment Loss (xx) (xx)
8. Add: Realized Profit on Beginning Inventory (downstream) xx
9. Less: Unrealized Profit on Ending Inventory (downstream) (xx)
10. Add: Realized Profit on Beg. Inventory (upstream) xx xx
11. Less: Unrealized Profit on Ending Inventory (upstream) (xx) (xx)
xx xx

** Gross Profit x Ending Inv. % = Unrealized Profit on Ending Inventory

** Ending Inv. x Gross Profit % = Unrealized Profit on Ending Inventory

NOTE: Gain on BPO on the subsequent year should be adjusted on R/E, not on Net Income.
Cost to issue debt / equity securities is not expensed.