CHAPTER 1: BUSINESS COMBINATION
exist as separate legal entity
 Occurs when one company obtains
control of another entity
 “True mergers” or “merger of equals”
 Revised version: June 2008
 Application: on or after July 1, 2009
 Early application: on or after June 30,
2007
Objectives:
 Improve relevance, reliability and
comparability of the info that a reporting
entity provides in its FS
 Principles and requirements for how the
acquirer:
o R and M identifiable assets,
liabilities and NCI
o R and M goodwill or Bargain
Purchase
o Info to disclose
Scope:
Does not apply to:
 Joint ventures
 Acquisition that does not constitute a
business
 Combination under common control
Forms of Business Combination
1. Net Asset Acquisition
a. Statutory Merger
b. Statutory Consolidation
2. Stock Acquisition (Acquisition of Control)
Net Asset Acquisition
 Purchases assets and liabilities of the
acquire in exchange for consideration
 Acquired Entity ceases to exist
 Acquirer records A and L acquired on its
own book
 Two classification
o Statutory Merger- X + Y= X or Y
o Statutory Consolidation- X + Y=
Z 
Stock Acquisition
 Acquirer issue consideration in exchange
of ownership of stocks
 Acquirer: parent; acquiree: subsidiary
 Both parent and subsidiary continue to
 Have own separate books
Nature of combining business
1. Horizontal Integration- same business lines
and markets
2. Vertical Integration- different levels in
marketing or production chain. Different
operations but is successive
3. Conglomerate- Unrelated business with
dissimilar nature and diverse product or service
The Acquisition method
1. Identifying the acquirer
2, determining the acquisition date
3. R and M the identifiable assets acquired,
liabilities assumes and NCI in the acquire
4. R and M goodwill or gain from a bargain
purchase.
Identifying the acquirer
a. Combination of transferring cash or other
asset or incurring liability- the entity that
transfers the cash, other assets or incur liability
b. Exchanging equity interests- entity that
issues its equity interest. XPN: Reverse
acquisition
 Relative voting rights- receives the
largest portion of voting rights (consider
unusual or special voting arrangements,
options, warrants and convertible
securities)
 Existence of large minority voting
interest (in case no other owner that
has significant voting int)- holds the
largest minority voting interest in the
combined entity
 Composition of governing body- ability
to elect, appoint or remove a majority of
the members
 Composition of senior management-
former management dominates the
management of the combined ent
Terms of the exchange of equity
interest- pay a premium
c. Relative size is greater
d. Who intiated and the relative size
e. New entity formed is NOT necessarily the
acquirer.
 New entity is formed to issue equity
interest- one of the entity that existed
before
 New entity that transfers cash or
other asset or incur liability- new
is the acquirer
Acquisition date
 Date on which it obtains control
 Closing date- transfer of consideration
Note:
 If they only exchanged equity interests,
acquiree’s equity interest may be more
reliable
 No Consideration is transferred- use
the FV of acquirer’s interest in the
acquiree to determine the goodwill
 Goodwill under net asset acquisition-
TESTED FOR IMPAIRMENT BUT NOT
AMORTIZED
 Gain under net asset acquisition- recog
as income in the books of the acquirer
 FV on NCI is based on consideration
under FV method
 NCI is based on net asset under
proportionate method
 Investment in subsidiary is the only one
recorded in the books of acquirer.
Goodwill is never recognized
 Cost if business includes: cash, NCA,
liab, equity instruments, contingent
consideration
 Note: If there are no APIC, charge to RE
 Changes in contingent consideration
recorded in the income statement as
expense (inc in liab) and gain (reduction in
the payment)
 Any movement beyond the measurement
period is ignored
CHAPTER 2: CONSOLIDATION DATE OF
ACQUISITION
 Conso FS are more meaningful than
separate statements
 Applicable on or after Jan 1, 2013
Objectives
 Establish principles for the presentation
and preparation of Conso FS
 Parents to present FS
 Defines control and establishes control as
basis for conso
 How to apply control
 Acco requirements for preparation of
Conso FS
 Defines investment entity and sets out an
exception
Scope
All entities, except:
1. A parent need not to present conso FS if it
meets all of the following:
 It is wholly or partially owned subsidiary of
another entity (all other owners agrees
that its ok not to present conso FS)
 Debt or equity instruments are not traded
in public market
 Did not file or not in the process of filing
FS with SEC
 Ultimate parent produces conso FD
2. Post-employment benefit plan or other long-
term employee benefit plan
3. If it is required to measure subsidiary @FVPL
Definition of Control
Has control if:
 Power over the investee
 Exposure or rights to variable returns
 Ability to use its power over the investee
to affect the amount of return
 Note: If two or more collectively controls
(one cannot direct w/o the other) no
investor individually controls the investee
Power
 Has rights that gives ability to direct
relevant activities
 Relevant activities- those that
significantly affect the investee’s returns
 In determining which investor has
power, consider the following:
a. Purpose and design of investee
 b. factors that determine the profit margin,
revenue and value of the investee
c. effect on the investee’s returns
d. investor’s exposure to variability of
returns
 Power rises from rights
 Protective rights does not have power
over an investee, does not control
investee
 Rights that gives power:
A. Voting rights
B. Appoint, resign or remove members of
an investee’s key management
C. Appoint and remove another entity that
directs relevant activities
D. Direct to enter into a transaction
E. Other rights
Substantive rights
 To be substantive, there must be a
practical ability to exercise that right
 Things to consider:
a. whether there are barriers
b. when the rights requires agreement of
more than one party in order to be
exercise
c. if the parties that hold the rights would
benefit from the exercise of those rights
 Usually, it has to be exercisable, but
there can be rights which are not
currently exercisable
Protective rights
 Fundamental changes to the activities of
an investee or apply in exceptional
circumstances
 Protect interest without giving power
 Examples:
a. Lender’s right to restrict a borrower
from undertaking act that change the
credit risk
b. right of a party holding NCI to approve
capital expenditure greater than usual
c. right of a lender to seize the assets of a
borrower if it fails to meet specified loan
repayment
Voting rights
 Has right to direct relevant activities
 Power with a majority of VR
 Power without a majority of VR
 Majority of VR but no power
 Contractual arrangement with other vote
holders
 Rights from other contractual
arrangements
 Investor’s voting rights
 Potential voting rights
Points to remember
 Investment in subsidiary and BC
expenses and SIC are recorded only at
the acquirer’s book
 Working paper elimination entries are not
recorded in the books of the parent not
subsidiary
 Consolidating procedures will not affect
separate FS
 Resulting goodwill is recognized in the
elimination entries
 Only the parent’s equity is presented in
Conso FS
 NCI is shown as part of SHE in Conso FS
CHAOTER 3: CONSOLIDATION –
SUBSEQUENT TO DATE OF ACQUISITION
 Two methods of accounting Investement
in subsidiary: Cost or financial asset
 Results are the same regardless of the
method used
 Separate records of the acquire is
unaffected since no journal entry is made
there
 Process
o Add similar items
o Eliminate inv in sub
o Eliminate equity of subsidiary
o Set up goodwill or gain
 Take into consideration the following
items:
o Dividends declared or paid
o Difference between FV and BV
o Impairment
Accounting for dividends
 Dividends paid or payable by subsidiary to
the parent is recognized as revenue by
the parent
 For conso FS dividends recognized by
the parent from subsidiary must be
eliminated
Reminders:
 Check If may APIC, kapaga meron
doon icharge share issuance cost.
Kapag wala, sa RE
 Check the measurement period (1 yr
lang nagaadjust)
 Check mo ilang % nung shares na
inacquire
 Higher between FV and proportionate
if hindi nakaindicate
