IFRS 3: BUSINESS COMBINATION

Business Combination – is a transaction or other event in which an acquirer obtains control of one or
more businesses.
Business – is an integrated set of activities and assets that is capable of being conducted and managed
for the purpose of providing a return directly to investors or other owners, members or participants.
Control – is the power to govern the financial and operating policies of an entity so as to obtain benefits
from its activities
Acquisition Date - is the date on which the acquirer obtains control of the acquiree
Acquirer - is the entity that obtains control of the acquiree; must be identified for all business
combinations
Acquiree - is the business or businesses that the acquirer obtains control of in a business combination
Noncontrolling interest – (formerly called minority interest) is the equity in a subsidiary not attributable,
directly or indirectly, to a parent.

PFRS 3 does not apply to the following:

a. Formation of a joint venture
b. Acquisition of an asset or group of assets not constituting a business
c. A combination of entities or businesses under common control

Acquisition of Control
 Acquiring the net assets of the target company (NET ASSET ACQUISITION); or
 Acquiring a controlling interest (usually over 50%) in the target company’s voting common stock
(STOCK ACQUISITION)

Net Asset Acquisition

a. Merger – A + B = A/B
b. Consolidation – A + B = C

Stock Acquisition – Parent – Subsidiary relationship

*Requires consolidated financial statements
- Date of acquisition
- Subsequent to date of acquisition
- Intercompany transactions

Ways to obtain control of an acquiree:

a. By transferring cash, cash equivalents or other assets, including net assets that constitute a
business
b. By incurring liabilities
c. By issuing equity interests
d. By providing more than one type of consideration
e. By contract alone, even without consideration

Acquisition Method – used to account for each business combinations. The following are steps in
applying this method:
 1. Identify the acquirer.
2. Determine the acquisition date.
3. Recognize and measure the identifiable assets acquired, the liabilities assumed and any non-
controlling interest (NCI) in the acquiree
4. Recognize and measure goodwill or gain on bargain purchase.

Identifying the acquirer

1. In a business combination effected primarily by transferring cash or other assets, or by incurring
liabilities, the acquirer is usually the entity that transfers the cash or other assets, or incurs the
liabilities.
2. In a business combination effected primarily by exchanging equity interests, the acquirer is
usually the entity that issues its equity interests.
3. The acquirer is usually the combining 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 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.

Determining the acquisition date

- The acquisition date is normally the date on which the acquirer legally transfers the
consideration, acquires the assets and assumes the liabilities of the acquiree, also known as the
closing date.
- However, control is possible to pass to the acquirer before or after the closing date.

Recognition principle
- The acquirer shall recognize, separately from goodwill, the identifiable assets acquired, the
liabilities assumed and any noncontrolling interest in the acquiree.
- Exception to the recognition principle – an acquirer shall recognize a contingent liability
assumed in the business combination even if it is not probable that an outflow of economic
benefits will be required to settle the obligation

Measurement principle

- Assets acquired and liabilities assumed @ acquisition date fair value

- Noncontrolling interest either at:
a. Fair Value; or
b. The controlling interest’s proportionate share of the acquiree’s identifiable net assets
Computation of Goodwill (Gain on Bargain Purchase)

Consideration transferred @FV xx

Noncontrolling interest in the acquiree @FV xx
Previously-held interest in the acquiree @FV xx
Total xx
Fair Value of Net Assets acquired (xx)
Goodwill (Gain on Bargain Purchase) xx

*Contingent consideration – shall be recognized at acquisition date fair value as part of the
consideration transferred, if there is any.
Classified as either liability or equity

- Subsequent measurement:
 If classified as liability, it shall be remeasured at fair value with any gain or loss recognized in
profit or loss
 If classified as equity, no remeasurement but instead, the final settlement of the consideration
shall be recognized as part of equity

Acquisition-related costs – these are costs incurred by the acquirer to effect a business combination
such as:
- 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

*Acquisition costs shall be accounted as expenses in the period in which the costs are incurred, except
the costs of issuing debt and equity securities.
- Debt issuance costs – included in the measurement of the financial liability
- Stock issuance costs - shall be deducted from any share premium from the issue and any
excess is recognized as expense

Formula 1: Computation of Goodwill or Gain

Cash paid (@ face value) X

Stocks issued (@ FMV) X
Contingent consideration (cash or share*) X
Total consideration X
Less: FV of NA acquired (X)
Goodwill (Gain on bargain purchase) X
Formula 2: Computation of Total Assets

Total assets of acquirer at BV X

Total assets of acquiree at FV X
Cash paid (X)
Acquisition costs (X)
Goodwill X
Total Assets X

Formula 3: Computation of Total Liabilities

Total liabilities of acquirer at BV X

Total liabilities of acquiree at FV X
Contingent cash consideration X
Other liabilities assumed X
Total Liabilities X

Formula 4: Computation of Share Capital

Share capital of acquirer at par X

Shares issued at par X
Total Share Capital X

Formula 5: Computation of Share Premium

Share premium – acquirer X
Share premium from issuance X
Contingent share consideration* X
Share issue costs* (X)
Total Share Premium X

Formula 6: Computation of Total Retained Earnings

Retained earnings – acquirer X

Share issue costs* (X)
Acquisition costs (except Share issue costs) (X)
Gain on Bargain Purchase X
Retained Earnings X