Jun Zen Ralph V.

Yap BSA – 3rd Year

In a Nutshell

Activity 1. Understanding business combinations and how to account for its transactions will help you in
your future role as accountant especially when your company enters a business combination. In this
part, you will be required to draw conclusions, perspectives, arguments and ideas from the unit lesson. I
will supply the first item and you will continue the rest.

1. In accounting for business transaction, it is important to take note of the consideration given by
the acquirer and the type of business combination that occurred. It is also important to take
note of the changes of the assets of the acquired company during the measurement period.
(Example)
2. Business combinations are accounted for using acquisition method or purchase method. This
method requires the following steps: (1) Identifying the acquirer, (2) Determining the acquisition
date, and (3) Recognizing and measuring goodwill or gain on bargain purchase by comparing the
fair value of net assets of the acquiree and the consideration given by the acquirer.
3. There are two methods used in carrying out business combination, the asset acquisition and the
stock acquisition. On one hand, the acquirer acquires the net assets of the acquiree by giving
such considerations like cash, issuance of shares and debt instruments, and other property. On
the other hand, the acquirer obtains control over the acquiree by purchasing the shares of the
existing shareholders. Besides, the acquirer needs to acquire 51% or more controlling interest of
the acquiree in order to obtain control.
4. In asset acquisition, the acquirer needs to have an assessment for all the identifiable net assets
to be bought if these are measured at acquisition date fair value. Furthermore, at the date of
acquisition, the goodwill or gain on bargain purchase is identified by comparing the
consideration given by the acquirer and the fair value of net assets of the acquiree at the date of
acquisition. If the consideration given by the acquirer exceeds the fair value of net assets of the
acquiree at the acquisition date, the result would be goodwill. If otherwise, the result is gain on
bargain purchase.
5. In stock acquisition, the acquirer obtains control over the acquiree’s company through buying
shares from the existing shareholders. The controlling interest needs to have control is 51% or
more of the voting shares. Besides, the acquirer must have to record an investment account to
its books since the transaction occurred is more likely creating financial asset to the acquirer and
an equity portion to the acquiree. The goodwill or gain on bargain purchase will likely appear in
the preparation of consolidated financial statements by comparing the consideration given by
the acquirer and the fair value of the net assets of the acquiree.
6. Under the stock acquisition, the acquirer is the entity that obtains control after the combination
and also known as the parent while the acquiree is the controlled entity that is known as
subsidiary.
7. There are instances that the acquirer pays a certain amount of consideration if the estimates
given by the acquirer can be achieved by the acquiree. A liability would arise in this
 consideration by the acquirer. Besides, it is more likely an additional payment for the benefits to
be obtained by the acquirer in the future.
8. Sometimes the estimates declared by the acquirer change because best available evidence is
identified. An adjustment is needed by the acquirer to put the liability account in correct form.
9. Under the asset acquisition, the net assets acquired by the acquirer from the acquiree after the
business combination are included in the financial statement specifically in statement of
financial position. In preparing the statement of comprehensive income of the acquirer, the
operations of the acquiree are included also.
10. Before recognizing the gain on bargain purchase occurring in the acquisition of net assets of the
acquiree, reassessment must be conducted if net assets of the acquired company are correctly
measured at its fair value that are above value from the consideration given by the acquirer.
Besides, the gain on bargain purchase is recognized in profit or loss in the year of acquisition.