TOPIC 1 Accounting for Business Combination

Business Transaction or other event in which an acquirer obtains control of

Combination one or more businesses
✓ The control must not be
transitory.
PFRS 3 Defines what constitutes Business Combination ✓ However, a change in the extent
of the non-controlling interest does
Requires the use of acquisition method of not breach this definition.
accounting for all business combinations

Steps of the Acquisition Method ADAG

1. Identify the Acquirer
2. Identify the acquisition Date
3. Recognize and measure the identifiable Assets acquired, liabilities
and contingent liabilities assumed, and non-controlling interest (NCI).
4. Recognize and measure the Goodwill or bargain purchase.

Step 1 Notes:
✓ Acquirer - entity that obtains control of the acquiree.
✓ Acquiree - business or businesses the acquirer obtains control of.
Date when acquirer:
Legally transfers the consideration
Step 2 Notes: Acquires the assets, and
Assumes the liabilities of the acquiree
✓ Also called the “closing date”

Fair Value
Step 3 Notes:
✓ Non-controlling Interest Measurement or
NCI’s proportionate share of
the acquiree’s identifiable net
✓ Contingent Liability assets acquired
o Recognition
• present obligation that arises from
past events
• fair value can be measured reliably

This rule is different from PAS 37 which requires that CL shall be recognize when it is both probable
and measurable. In business combinations, recognition is required even if the outflow of resources is
not probable. For contingent assets, they do not meet the definition of an asset and therefore, not
recognized

Measurement Period, EARLIER between the ff.:

✓ The date the acquirer obtains information
✓ One year from the acquisition date.

Note:
After the measurement period ends, the acquirer shall revise the
accounting for a business combination only for the purpose of correcting
any error made.
 Step 4 Notes:
✓ Goodwill Generally, acquisition-date FV
o Measurement (excess of A over B)
✓ A. The aggregate of
• Consideration transferred (measured in
accordance with PFRS 3);
• Amount of any NCI in the acquire
• In case of business combination achieved in stages, the
acquisition date fair value of the acquirer’s previously held
equity interest in the acquiree.

✓ B. The net of the acquisition date amounts of the identifiable

assets acquired and the liabilities assumed in accordance with
PFRS 3.
✓ Bargain Purchase (if B exceeds A)
Illustrative example: Note: Assets and Liabilities

Recognition and measurement of the identifiable assets acquired and liabilities

Mich acquires assets and liabilities of Ton Company on January 20. To obtain these
shares, Mich pays P400,000 and issues 10,000 shares of P20 par value ordinary shares on this
date. Mich's stock had a fair value of P36 per share on that date. Mich also pays P15,000 to a
local investment firm for arranging the transaction. An additional P10,000 was paid by Mich in
share issuance costs.

The book values for both Mich and Ton as of January 20, 2020 are presented below. The fair
value of each of Mich and Ton accounts is also included. In addition, Ton holds a fully amortized
trademark that still retains a P40,000 value.

Ton Company
  Mich, Inc. Book Value Fair Value
Cash P 900,000 P 80,000 P 80,000
Receivables 480,000 180,000 160,000
Inventory 660,000 260,000 300,000
Land 300,000 120,000 130,000
Buildings (net) 1,200,000 220,000 280,000
Equipment (net) 360,000 100,000 75,000
Accounts payable 480,000 60,000 60,000
Long-term liabilities 1,140,000 340,000 300,000
Ordinary shares 1,200,000 80,000  
Retained earnings 1,080 480,000  

Assuming the combination is accounted for as an acquisition, immediately after the

acquisition, in the Statement of Financial Position of Mich.
1. What amount will be reported for goodwill?
Consideration transferred
Cash P400,000
Shares (10,000 x P36) 360,000
Total 760,000
Less: Fair Value of net identifiable assets acquired: Cash
P 80,000
Receivables 160,000
Inventory 300,000
Land 130,000
Buildings (net) 280,000
Equipment (net) 75,000
Trademark 40,000
Accounts payable ( 60,000)
Long-term liabilities ( 300,000) 705,000
Goodwill P55,000

2. What amount will be reported for receivables?

Acquirer – Mich (at book value) P480,000
Acquiree – Ton (fair value, date of acquisition) 160,000
Total receivables P640,000

3. What amount will be reported for inventory?

Acquirer – Mich (at book value) P660,000
Acquiree – Ton (fair value, date of acquisition) 300,000
Total Inventory P960,000

4. What amount will be reported for buildings (net)?

Acquirer – Mich (at book value) P1,200,000
Acquiree – Ton (fair value, date of acquisition) 280,000
Total buildings (net) P1,480,000

5. What amount will be reported for long-term liabilities?

Acquirer – Mich (at book value) P1,140,000
Acquiree – Ton (fair value, date of acquisition) 300,000
Total long-term liabilities P1,440,000

6. What amount will be reported for ordinary shares?

Acquirer – Mich (at book value) P1,200,000
Add: Issued shares (new, 10,000 x P20 par) 200,000
Acquiree – Ton (not acquired) 0
Total ordinary shares P1,400,000

Important:
What Mich acquired were the ASSETS and LIABILITIES of Ton
 7. What amount will be reported for retained earnings?

Acquirer – Mich (at book value) P1,080,000

Less: Direct acquisition costs 15,000
Acquiree – Ton (not acquired see prior page note) 0
Total retained earnings P1,065,000
Rule:
Direct and indirect costs incurred in the acquisition are charged
to profit or loss (expense) and eventually to retained earnings.

8. What amount will be reported for share premium (SP)?

Acquirer – Mich (at book value) P 0

Add: SP from newly issued shares 160,000
[10,000 shares x (P36 -P20 par)]
Less: Share issuance costs ( 10,000)
Acquiree – Ton (not acquired) 0
Total share issuance costs P150,000

Rule:
Share issuance costs are charged to equity. In this case, deducted from the related share premium.
However, costs of listing, if any, shall be expensed outright.

9. What amount will be reported for cash after the purchase transaction?

Acquirer – Mich P 900,000

Less: Cash paid to acquire net assets of Ton ( 400,000)
Direct costs of acquisition ( 15,000)
Share issuance costs ( 10,000)
Acquiree – Ton 80,000
Total cash P555,000

Recognition and measurement of the goodwill and bargain purchase

On January 1, 2020, Carl Co. acquired the identifiable net assets of Danny, Inc. On this date, the
identifiable assets acquired and liabilities assumed have fair values of P7,680,000 and P4,320,000
respectively.

Carl Co. incurred the following acquisition-related costs:

➣ legal fees, P48,000

➣ due diligence costs, P480,000
➣ general and administrative costs of maintaining an internal acquisition, P96,000.

As consideration, Carl Co. transferred 9,600 of its own shares with par value and fair value per share of
P400 and P500, respectively, to Danny’s former owners. Costs of registering the shares (previously
issued and newly issued) amounted to P192,000 (P24,000 pertains to listing fees of previously issued
shares).
 1. How much is the goodwill (gain on bargain purchase) on the business combination?

Consideration transferred
Ordinary shares: 9,600 shares x P500 P4,800,000
Less: FV at identifiable assets acquired and liabilities assumed
(P7,680,000 – P4,320,000) 3,360,000
Positive excess – goodwill P1,440,000

2. How much is the total amount charged to profit or loss in relation to the
transaction above?

Direct acquisition costs P 48,000

Due diligence costs 480,000
Gen and admin costs 96,000
Listing fees 24,000
Total chargeable to profit and loss P648,000

3. Ignoring the consideration and issue costs above, but instead, Carl Co. issued bonds with
face value and fair value of P4,800,000. How much is the goodwill (gain on bargain
purchase) on the business combination.

Consideration transferred
PV/FV of Bonds P4,800,000
Less: FV at identifiable assets acquired and liabilities assumed
(P7,680,000 – P4,320,000) 3,360,000
Positive excess – goodwill P1,440,000

Complementary - see Chapter 11 Module for notes on the following:

1. “Characteristics of Business Combination”

2. Detailed explanation of “Steps of the Acquisition Me
TOPIC 2 | Accounting for Business Combination – Subsequent Measurement
PFRS 3 Specifically provides for the subsequent measurement and accounting of the
following assets and liabilities:

✓ Reacquired rights;
✓ Contingent liabilities recognized as of the acquisition date;
✓ Indemnification assets; and,
✓ Contingent consideration.

Measurement rules

Reacquired Rights

Initial measurement
The acquirer shall measure the value of a reacquired right recognized as an intangible
asset on the basis of the remaining contractual term of the related contract.

Subsequent measurement
o subsequently amortized - over the remaining contractual period of the
contract in which the right was granted.
o subsequent sale - the carrying amount of the intangible asset should
be included in determining the gain or loss on sale

Contingent Liabilities

o Subsequent Measurement, HIGHER between the ff.:

 Amount that would have been recognized under PAS 37
 Initial amount recognized less cumulative amount of income
recognized under PFRS 15
Note: This requirement does NOT apply to contracts accounted for in accordance with PFRS 9.

Indemnification assets
o Measured on the same basis as the indemnified liability or asset
o Shall be derecognized when:
 The acquirer collects the asset;
 The acquirer sells the asset; or,
 Loses the right to the asset.

Contingent Consideration (on FV changes)

Initial measurement
At the acquisition date FV of the contingent consideration.

Subsequent measurement:
Rule - Changes are considered as measurement period adjustments.
If the contingent consideration has been classified as equity, it shall not be
remeasured.
 no systematic
Goodwill Carried at cost and subject to annual impairment testing amortization of
goodwill
Complementary - see Chapter 12 Module for notes on the following:

1. “Subsequent treatment of Non-Controlling Interest”

2. “Reverse Acquisition”
3. “Business Combination Achieved in Stages”

TOPIC 3 | Preparation and Consolidation of Financial Statements

General An entity that is a parent shall present
Rule consolidated financial statements.

Exception: All of the following conditions are met:

✓ It is a wholly-owned subsidiary (or a partially-owned subsidiary of
another entity and all its other owners, including those not otherwise
entitled to vote) which has been informed about and does not object
to the parent not presenting consolidated financial statements.
✓ Its debt or equity instruments are not traded in a public market.
✓ It did not file, nor is it in the process of filing, its financial statements
with a securities commission or other regulatory organization for the
purpose of issuing any class of instruments in a public market.
✓ Its ultimate or any intermediate parent produces consolidated
financial statements that are available for public use and comply with
PFRSs.

Consolidation Procedures CO ElSe

Combine 1. Combine like items of assets, liabilities, equity, income, expenses and cash
flows of the parent with those of its subsidiaries.
2. Offset/eliminate the carrying amount of the parent’s investment in each
subsidiary and the parent’s portion of equity of each subsidiary.
Eliminate
3. Elimination in full of intragroup balances, transactions and
unrealized profits and losses.
Separate 4. Separate presentation of NCI in profit or loss and net assets of group (NCI
classified as equity).

Complementary - see Chapter 12 Module for notes on the following:

1. “Key definition from PAS 27 and PFRS 10”

2. “Changes in ownership stages”
3. “Investment Entity”