‘This page wine intentionally lef bank , Cmtenatins (Par) 1 : Chapter 1 Business Combinations (Part 1) standards: Business Combinations 19 ofthe PERS for SMEs ‘on the topic ‘Combinations (Part 1) Recognition & measurement |Combinations (Part 2) Specific cases {Combinations (Part 3) Special accounting topes Objectives a business combination. ‘briefly the accounting requirements for a business for goodwill ‘combination occurs when one company acquires another two or more companies merge into one, After the ‘one company gains control over the other. ‘company that obtains control over the other is ‘as the parent or acquirer. The other company that is isthe subsidiary or acquiree. are carried out ether through:Chapter 1 > Asset acquisition ~ the acquirer purchases the assets and ‘assumes the liabilities of the acquiree in exchange for cash oF folher non-cash consideration (Wwhich may be the acquirer's fown shares). After the acquisition, the acquired entity ‘normally ceases to exist as a separate legal or accounting, ‘entity, The acquirer records the assets acquired and liabilities assumed in the business combination in its books of accounts Under the Corporation Code of the Philippines, 2 ‘business combination effected through asset acquisition may beceither: ‘a Merger— occurs when two or more companies merge into ‘2 single entity which shall be one of the combining ‘companies. For example: A Co, +B Co.= A Co. or B Co. ‘E. Consolidation ~ occurs when two or more companies ‘consolidate into a single entity which shall be the consolidated company. For example: A Co. + B Co. =C Co, Stock acquisition ~ instead of acquiring the assets and ‘assuming the Habilities of the acquiree, the acquirer obtains ‘entrol over the acquiree by acquiring a majority ownership interest (ex, more than 50%) in the voting rights of the acquiree, In a stock acquisition, the acquirer is known as the parent while the acquiree is known as the subsidiary. After the business combination, the parent and the subsidiary retain ‘heir separate legal existence. However, for financial reporting purposes, both the parent and the subsidiary are viewed as a single reporting entity. ‘After the business combination, the parent and subsidiary contirise to maintain their own separate accounting, books, recording separately their assets, liabilities and the transactions they enter into. ‘The parent records the ownership interest acquired a5, “investment in subsidiary” in its separate accounting books However, the investment is eliminated when the group [prepares consolidated financial statements. ‘combination may also be described as: “Horizontal combination - a business combination of two or more ‘with similar businesses, eg, a bank acquires another ‘bank. Vertical combination ~ a business combination of two or more “entities operating at different levels in w marketing chain, ex. ‘manufacturer acquires its supplier of raw materials. ~ a business combination of two or more entities dissimilar businesses, e-,, a real estate developer ‘bank. of a business combination is eliminated or lesened ~ competition between the constituents with similar businesses is eliminated the threat of competition from other market participants = synergy occurs when the collaboration of two or ‘entities results to greater productivity than the sum of ‘productivity of each constituent working independently. {s most commonly described as “the whole is greater the sum of its parts.” It can be simplified by the 1 plus 1=3." business opportunites and earnings potential ~ business ity and earnings potential may be increased through: fan increased variety of products or services available and. 44 decreased dependency on limited number of products and services; ‘widened dispersion of products or services and better access to new markets; access to either ofthe acquirer's or acquiree’s technological Jnow-hows, research and development, secret processes, and other information;Copter Jv, increased investment opportunities due to increased capital; or vy. appreciation in worth due to an established trade name by cither one ofthe combining constituents. 1d. Reduction of operating costs ~ operating costs of the combined entity may be reduced. 1. Under a horizontal combination, operating costs may be reduced by the elimination of unnecessary duplication of costs (eg, cost of information systems, registration and licenses, some employee benefits and costs of outsourced services) li, Under a vertical combination, operating costs may. be reduced by the elimination of costs of negotiation and coordination between the companies and mark-ups on purchases. © Combinations utilize economies of scale - economies of scale refer to the increase in productive efficiency resulting from the increase in the scale of production. An entity that achieves economies of scale decreases its average cost per unit 5 [rocluction is increased because fixed costs are allocated over ‘an increased number of units produced. Gost savings om business expansion - by acquiring another ‘company rather that creating a new one, an enfity can save on. Start-up costs, research and development costs, cost of regulation and lenses, and other similar costs. Moreover, 3 ‘business combination may be effected through exchange of ‘equity instruments rather than the transfer of cash or other resources. 1 Favorable tax implications - deferred tax assets may be Aansferred in a business combination. Also, business ‘combinations effected without transfers of considerations may ‘not be subjected to taxation, , rar 5 of a business combination ‘combination brings monopoly in the market which have a negative impact to the society. Ths could result to iment to healthy competition between market ipants. Jdentity of one or both of the combining, constituents may leading to loss of sense of identity for existing and loss of goodwill ‘of the combined entity may become difficult due incompatible internal cultures, systems, and policies. ‘combination may result in overcapitalization, which, turn, may result to diffusion in market price per share and iveness of the combined entity's equity instruments to investors, combined entity may be subjected to stricter regulation scrutiny by the government, most especially if the combination poses threat to consumers’ interests. "Business combinations are accounted for under PFRS 3 {Combinations ‘Combination combination is “a transaction or other event in which an ‘obtains control of one or more businesses.” Transactions ed to as ‘true mergers’ or ‘mergers of equals’ are also ‘combinations under PFRS3. (spent) ‘elements in the definition of a business combination controls an investee when the investor has the power the investee’s relevant activites (Le, operating and policies), thereby affecting the variability of the ‘investment returns from the investee.6 rapier ABC does not obtain control over XYZ because ee shares do not give the holder voting rights over the and operating policies ofthe investee. Control is normally presumed to exist when the acquirer holds more than 50% (or $1% or more) interest in the acquiree’s ‘voting rights, However, this is only a presumption because control ‘car be obtained in some other ways, such as when: ‘the acquirer has the power to appoint or remove the majority ‘of the board of directors of the acquiree; or i. the acquirer has the power to cast the majority of votes at ‘board meetings or equivalent bodies within the aequiree; or e the acquirer has power over more than half of the voting rights of the acquiree because of an agreement with other investors; or dd. the acquirer controls the acquiree's operating and financial policies because of alaw or an agreement (Go, acquires 40% ownership interest in XYZ, Ine. There is an -with the shareholders of XYZ that ABC will control the itof the majority of the board of directors of XYZ. ABC has control over XYZ because, even though the tip interest is only 40%, ABC has the power to appoint the ‘of the board of directors of XYZ. 7] Fr ‘acquires 45% ownership interest in XYZ, Inc. ABChas an nt with EFG Co,, which owns 10% of XYZ, whereby EFG ways vote in the same way as ABC. ‘An acquirer may obtain control of an acquiree in a variety of ways, for example: ‘a. by transferring cash or other assets; . by incurring abilities; ‘by issuing equity interests; 1d. by providing more than one type of consideration; or fe. without transferring consideration, including by contract alone ABC has control over XYZ; because it controls more than ‘of the voting rights over XYZ (Le, 45% plus 10% per ent with EFC). 7s Co. acquires 50% of XYZ, Inc's voting shares. The board of ors of XYZ. consists of 8 members. ABC appoints 4 of them XYZ appoints the other 4. When there are deadlocks in votes at meetings, the decision always lies with the ted by ABC. Ilustration: Determining Exumple #1 ‘ABC Co, acquires 51% ownership interest in XYZ, Inc's ordinary shares. the existence of control “Aulus: ABC is promumed to have obtained control over XYZ Incase ofthe ownership interest acquired in the voting rights of [ABC has control over XYZ becnuse it controls more than the voting rights over XYZ. in the event there is no majority8 napter tions (Pat 1) 9 Business ‘Business is “an integrated set of activities and assets that is capable ‘of being conducted and managed for the purpose of providing ‘goods or services to customers, generating investment income (such as dividends or interest) or generating other income from ‘ordinary activities.” (PFRS Appendix 8) the acquisition date; and ‘and measuring goodwill, ‘This requires ‘and measuring the following: ion transfered _ Non-controlling interest inthe acquiree Previously held equity interest inthe acquiree Identifiable assets acquired and iabilites assumed on the ‘A bsiness has the following three elements: ‘business combination. 1. Input ~ any economic resource that results to an output when fone or more processes are applied to it, eg, non-current assets, intellectual property, the ability to obtain access to necessary materials or rights and employees. the acquirer ‘business combination, one of the combining entities is a the acquirer. ‘The acquirer is the entity that obtains control of the ‘The acquiree is the business that the acquirer obtains lof in a business combination, PERS 3 provides the following guidance in identifying the 2. Process ~ any system, standard, protocol, convention oF rule that when applied to an input, creates an output, eg. strategic management processes, operational processes and. resource management processes. ‘Administrative systems, eg, accounting, billing, fis the transferor of cash or other resources or assumes payroll, and the like, are not processes used to create outputs. ? business combination effected primarily by transferring fr other assets or by incurring liabilities, the acquirer is the entity that transfers the cash or other assets oF the liabilities. 3, Output ~ the result of 1 and 2 above that provides goods or services to customers, investment income or other income from ordinary activities, Identifying a business combination ‘An entity determines whether a transaction is a business ‘combination in relation to the definition provided under PFRS 3. Ifthe assets acquired (and related liabilities assumed) do ‘not constitute a business, the entity accounts forthe transaction as 44 regular asset acquisition and not a business combination, ‘Accordingly, the entity applies other applicable Standards (e.g, 'PAS2 for inventories acquired, PAS 16 for PPE acquired, etc) is the issuer of shares? ‘a business combination effected primarily by exchanging Jnerests, the acquirer is usually the entity that fesues equity interests. However, in some business combinations, “reverse acjisitions,” the isauing entity isthe acquitee pertinent facts and circumstances shall also. be in identifying the acquizer. The acquiner fs usually entity: ‘whose owners, as a group, have the largest portion of the ‘Accounting for business combination voting rights ofthe combined entity ‘Business combinations are accounted for using the acquisition ‘method. This method requires the following: 4 entifyng the acquirer10 > whose owners have the ability to appoint or remove « Identifying the acquirer majority of the members of the governing body of the XYZ, Inc, both listed entities, agreed to combine ‘combined entity. ‘The terms of the business combination is that > whose (former) management dominates the management ‘offer 5 shares for every share of XYZ, There is no cash ‘of the combined entity. "ABC's market capitalization is 900 rmllion and > that pays a premium over the pre-combination fair value F100 million. After the combination, the board of ‘of the equity interests of the other combining, entity or ‘of XYZ shall comprise only directors from ABC. Three entities the acquisition, 20% of XYZ.is soa. Who is larger? ‘The acquirér is usually the larger between the combining, entities, measured in, for example, assets, revenues or profit ABCis the acquirer based on the following indicators: {isthe issuer of shares and the initiator of the business {the larger entity of the two combining constituent. %s (former) management dominates the management of entity. ‘of XYZ is sold after the acquisition. This provides {indicator that ABC is the acquirer Who isthe initiator of the combination? ‘The acquirer is usually the one who initiated the combination Substonce aver form fan new entity is formed to effect the business combination, the acquirer is identified as follows: > if the new entity is formed to issue equity interests to effect the business combination, ome of the combining entities that existed before the business combinatios is the acquirer. > if the new entity is formed to transfer eash or other assets fot incur liabilities as consideration for the business ‘combination, the new entity is the acquirer. the acquisition date date is the date on which the acquirer obtains ‘of the acquiree. This is normally the closing date (Le, the ‘which the acquirer legally transfers the consideration, the assets and assumes the liabilities ofthe acquiree). "However, the acquirer might obtain control on a date that earlier ot later than the closing date, for example, when. /a written agreement to tha effect. Example: A Co. +B Co.= C Co. (new entity) > IFC Co. is formed to issue equity interests to A Co. and B. Co, the acquirer is either A Co. or B Co, whichever company whose former owners, as a group, gain control over CCo. fC Co. is formed to transfer cash to A Co. and B Co, the ‘acquirer is CCo, (or gain on a bargain purchase) using the following2 Chapter cra 3 Consideration transferred x of potential forms of consideration include: ‘Nea-controlling interest (NCI) in the acquiree x Previously held equity interest in the acquiree xx assets Tol instruments, e.g, shares, options and warrants Less: Fair value of net identifiable assets acquired Goodwill (Gain on a bargain purchase) ‘or a subsidiary ofthe acquirer A negative amount resulting from the formula is called “ain ona bargain purchase” alo referred to as “negative good) ‘A bargain purchase may occur, for example, in a business combination that isa forced sale in which the acquires is acting ‘under compulsion. However, a bargain purchase may also occur {nother instances such as when the application ofthe recognition anal measurement exceptions for particular items provided under PERS 3 results in again on bargain purchase. ted costs are costs thatthe acquirer incurs to effect a combination. Examples fees fees, such as advisory, legal, accounting, and consulting fees administrative costs, including the costs of ‘an intemal acquisitions department of registering and issuing debt and equity securities (On acquisition date, the acquirer recognizes a resulting: a. Goodwill asan asset. Gain ona bargain purchase as gain in profit or oss. in the initial measurement of the securities, eg, Jssue costs are included (as deduction) in the carrying, ‘of bonds payable. to issue equity securities are deducted from share If share premium is insufficient, the issue costs are from retained earnings However, before recognizing a gain on bargain purchase, the acquirer shall reassess whether it has correctly identified all of the assets acquired and all of the liabilities ‘assumed and shall recognize any additional assets or liabilities that are identified in that review. This is an application of the ‘eancept of conseroatism ling interest ig interest (NCI) is the “equity in a subsidiary not directly or indirectly, to a parent.” (PFRS Append A) Interest is also called “minority interest.” ‘example, ABC Co, acquires 80% interest in XYZ, Inc. interest is 80%, while the non-controlling interest ~ 80%). IF ABC Co, acquires 100% interest in XYZ, Fnon-contrlling interest is zero, ‘Consideration transferred ‘The consideration transferred in a business combination is measured at far value, which is the sum of the acquisition-date fair values ‘of the assets transferred by the acquirer the liabilities incurred by the acquirer to former owners of the acquiree and the equity literests issued by the acquirer.uu Chapter Pan 5 For each business combination, the acquirer measures any nos-controlling interest inthe acquiree either at a. fair value: oF the NCI's proportionate share in the acquiree's net identifiable assets. ‘but rather treated as postcombination costs in ‘with other applicable Standards. identifiable assets acquired and liabilities assumed must ‘of what the acquirer and the acquiree (or its former 4) exchanged in the business combination transaction Previously held equity interest in the acquiree than the result of separate transactions. Previously held equity interest in the acquiree pertains to any interest held by the acquirer before the business combination. This affects the computation of goodwill only in business combinations achieved in stages. the recognition principle may result to the acquirer ‘assets and liabilities that the acquiree had not recognized in ts financial statements. For example, the acquirer may recognize an acquired asset, such asa brand name, a patent ora customer ip that the acquiree did not recognize as an asset in statements because it has developed the intangible internally and charged the related costs as expense. Net identifiable assets acquired Recrition principle On acquisition date, the acquirer recognizes the identifiable asses acquired, the liabilities assumed and any NCI in the acquire separately from goodwill Unidentifiable assets are not recognized. Examples of identifiable assets acquired and abilities assumed unidentifiable assets: assets acquired and liabilities assumed are classified at 4. Goodwill recorded by the acquitee prior to the business ‘combination b. Assembled workforce ‘6 Potential contracts that the acquiree is negotiating with [prospective new cistomers at the acquisition date jon date in accordance with other PFRSs that are fo be subsequently. ‘example, PPE acquired in a business combination are at the acquisition date in accordance with PAS 16 if the to be used as PPE subsequent to the acquisition date. Recognition conditions u principle & To quality for recognition, identifiable assets acquired and le asets acquired and liabilities assumed are measured liabilies assumed must meet the definitions of assets and I etedate fir weiner liabilities provided under the Conceptual Framework at the acquisition date For example, costs that the acquirer expects but is not obliged to incur in the future to effect its plan to exit the facquiree’s activity or to terminate or relocate the acquiree's temployees are not liabilities at the acquisition date. Hence, these are not recognized when applying. the acquisition ‘Valuation allowances are not recognized at the date because the effects of uncertainty about future are included in the fair value measurement. For the acquirer does not recognize an “allowance for accounts” on accounts receivable acquired on a business . Instead, the acquired accounts receivable are at their coqusiion dat fur values.16. hopter (Part 0 y Al acquired assets are recognized regardless of whether transferred 1,500,000 the acquirer intends to use them. For example, the acquirer Interest in the acquiree recognizes the acquire’s esearch and development (R&D) costs I eld equity interest in he acquiree as intangible asset even if it does not intend to use them or intends touse them in some other way. The acquisition-date fae value of such assets is determined in accordance with thee use by other market participants of net identifiable assets acquired lastration 1: Measuring goodwill / gain on bargain purchase Fact pattern On January 1, 20x1, ABC Co. acquired all of the assets and assumed all of the liabilities of XYZ, Inc. As of this date, the ‘camying amounts and fair values of the assets and liabilities of XYZ acquired by ABC are shown below: Asets Corying amounts Eairvalues Petty cash fund, 10,000 10,000 Receivables 200,000 120,000 onsiertion transferred refers tothe cash paid. as Meration forthe assets and liabilities of XYZ, Inc. sno non-coniroling interest inthe acquiree because ABC all of XY2's assets and liabilities held equity interest in the acquirer affects. the tion of goodwill only in business combinations achieved 3 This is discussed inthe next chapter. alue ofthe net identifiable assets of the acute is as follows: ‘Alowance for doubtful accounts (22,000) Inventory 520,000, 350,000 identifiable assets acquired excluding Building - net 11000,000 1,100,000 ‘ah~20K)* 1,580,000 Goodwill 100,000 20,000. liabilities assumed 400,000 Tal assets 100,000, 1,600,000 identifiable assets acquired 180,000. Lilies an a —e Payables ‘0800 400,000 il recorded by the acquiree is excluded from the assets acquired because goodwill i unidentifiable. Only assets acquired are recognized. es in the books ofthe acquirer are as follows: On the negotiation for the business combination, ABC Co, Jngurred transaction costs amounting to P100,000 for legal, ting end cosy ox te lo Chie ABC Gop L000 cash as concderton ore sa tts finite of XV, how much he god ae cody feindtaple ar ae Payables 400,000 Solution. Cash 1,300,000 : is ee onl na busine cndinn |Chapter Combination Part 1) ‘ 1» 492: If ABC Co. paid PI,000,000 cash as consideration forthe ‘and liabilities of XYZ, Inc, how much is the goodwill (gain purchase) on the business combination? Tat | Professional fos expense 700,000 Pe | coon 100,000 arid the cpio aad css 1 Noes: “© Noallowance is recorded for the acquired receivables because the receivables are recognized at acquisition-date fair value. “© The acquisition-related costs are expensed. The illustration above is an example of a business combination ‘effected through “asset acquisition.” XYZ, Ine, (the acquiree) shall account for the business ‘combination asa liquidation of a business. Accordingly, all ofthe ‘assets, liabilities, and equity are derecognized and the difference between the carrying amount of the items derecognized and the disposal proceeds (amount received from the business combination is treated as a gain or Loss on disposal of busines XYZ, shall recognize a gain on disposal of business of 1P100,000 (P1.5M proceeds minus P14M carrying amount of net assets). The entries in XYZ's books are as follows: Tet] Gach 150000 81 | Atlowance for doubtful accounts: 30,000 Payables 00000 ety cash nd 10000 Recvabes 20,00 Inventory 520,00 Balding 10,000 Goodi 100000 Gain on disposlof business 100,000 tomar heh of bon FT| Shar aptal ater as 656-0, | 1400000 21 | Gain on disposal of business “0,000 0 Cash 1,500,000 ibrar on ory transfered 1,000,000 trolling interest inthe acquiree - eld equity interest in the acquiree ‘1000000 of net identifiable assets acquired 180,000) ‘a bargain purchase 30000), ABC Co. reassesses first whether it has correctly identified the assets (liabilities) acquired (assumed). If after the ‘a negative amount still exists, ABC Co, recognizes tas gain in its 2031 profit or loss. Petty cash fund 0.000 Receivables 120,000 Inventory 350,000 Building 1,100,000, Payables 400,000 Cash 1,000,000, Gain on bargain purchase 180,000 Sessional fees expense 100,000 Cash 100,000 2; Non-controlling interests 1, 20x1, ABC acquired 80% of the voting shares of (On this date, XYZ's identifiable assets and liabilities values of P1,200,000 and 40,000, respectively20 oapter wary) i a (Case 1: Non-contolling interest measured at far value "ABC Co, elects the option to measure nor-controling interest at {uir value. The independent consultant engaged’ by ABC Co ‘determined that the fair value of the 20% non-controlling interest in XYZ, Inc. is P155,000, ABC Co, paid 1,000,000 for the 80% interest in XYZ, Inc. How much isthe goodwil ‘Non-controlling interest measured at fair oalue ‘elects to measure non-controlling interest at fir value A ‘of 250,000 is assigned to the non-controlling interest in Inc. ((PIM + 80%) x 20% = P250,000). The consideration {is PI,000,000. How much is the goodwill? Solution: * transferred 100000 — :1000,000 ling interest inthe aequiree (fir value) 250,000, [Non-controling interest inthe acquire (fr value) 155,000 held equity interest inthe acquiree Previously held equity interest in the acquiree Total 7155;000 of net identifiable assets acquired Fair value of not identifiable assets acquired 600000) Goodwitt 355,000 'NCI's proportionate share in net assets ‘Theentries are a follows: elects the option to measure the non-controlling interest > “Torecord the acquisition in ABC's separate books of accounts: ling interes’s proportionate share of XYZ, Ines Ti] investment in subsidiary 700,000 assets. ABC Co. paid 1,000,000 for the interest aot} Cash 1,000,000 wil? > To include XYZ in ABC's consolidated financial statements: Tie 1] Identifiable assets acquired 71200,000, 2091) Goodwill 135,000 transferred 1,000,000 Liabilities assumed 400,00 interest in the acquiree Sate Investment in subsidiary 1,000,000 Fal equity interest in the acquiree 4 [Non-controlling interest in XYZ, Inc. 155,000, 160,000 fof net identifiable assets acquired (12M) _ (800,000) Notes: 360000 © The non-controlling interest is presented in the consolidated Statement of financial position within equity but separately from the equity ofthe owners of ABC Co. (parent). © ‘Theillustration above is an example of business combination effected through “stock acquisition.” 's proportionate share in XYZ's net assets is computed ‘of net identifiable assets acquired (2M) $00,000 by: Nor-controlling interest 20%, te share in net identifiable assets 160,00.Illustration 3: Transaction costs Fact pattern Tees expense (10K 100K) and administrative costs (Cash in bank (erent acqstion ated ns 20,000 130,000 (On January 1, 20x1, ABC acquired all the assets and assumed al the liabilities of XYZ, Inc. On this date, XYZ’s assets and liabilities hhave fair values ofP1,600,000 and 900,000, respectively. ‘ABC incurred the following acquisition-related costs: legal fees £710,000, due diligence costs, #100,000, and general administrativ costs of maintaining an internal aoquisitions department, P20,000. Case Hi: As consideration for the business combination, ABC Co, transferred 8,000 ofits own equity instruments with par value pet share of P100 and fair value per share of P125 to XYZ's fo acquisition-related costs are expensed, except for the costs which are deducted from share premium. smuichis the goodwill? “As consideration for the business combination, ABC Co. Ws with face amount and fair value of 1,000,000. ‘costs incurred in issuing the bonds amounted to 1s. Coss 0 the shares amounted to PA0,00. Ho unas Cost of eitering ht transferred (fir valu of ands) 1.0000 interest inthe acquire ety interest inthe acquiree ; “000000 Consideration transferred (8000 sh. ¥125) 4 [Petidentifiable asvets acquired cies __(700,001)_ ‘Non-controlling interest in the aoquiree 300,000 Previously held equity interest in he acquiee Tat Fair value of net identifiable assets acquired (16M - 9) assets acquired 7,600,000 Goodtitt ‘sono sooo ‘The entries are as follows: Be tu inner of bets a 1,000,000 Ta | Wdentiiale assets acquired Tomo falas Sab 2a | Goodwit ‘0000 a Liabilities assumed soo Share capital 0 Fos) ibrar he end ects ‘Share premium jonal fees expense (10K + 100K) 110,000 ie and he ae of ar os rl and administatve cots 2000 cident sino ae ‘Share premiums 0,000 Cash i bank 404 re the otf ity msc4 4 Notes: flected that the restructuring wil be “© The bond issue costs are deducted when determining the i ata of the plan ox has carrying amount of the bonds. The carrying amount of the before the acquisition date bonds payable s 950,000 (IM ~ 50). Pe i Gectional ont ‘When computing for goodvil the consideration transferred is docs not represent present measured atthe fair value of the securities isued without deduction forthe transaction costs In both cases above, the acquisiion-related cost, including costs of issuing equity and debt securities, do_not affect the ‘computation of goodwill Restructuring provisions Restructuring is a program that is planned and controlled by Bi thease and bien ‘management, and materially changes either: ry ices and ‘the scope of a business undertaken by an entity; of 'b. the manner in which that business is conducted. Restructuring provisions may include the costs of an entity's plan a To.exit an activity ofthe acquiree, 'b. Toinvoluntarly terminate employees ofthe acquiree, or {& Torelocate no-continuing employees of the acquiree ‘The costs above are sometimes referred to as “liquidation costs Restructuring provisions do not include such costs as (2) si tetraining or relocating continuing staff, (b) marketing: oF () equity interest in the aequiroe z investment in new systems and distribution networks. To0000) Restructuring provisions are generally not recognized a net Kentifiabe assets acquired (1sM- 98) _ (70,00 part of business combination unless the acquiree has, at the \ 300,00 ‘acquisition date, an existing lability for restracturing that has ‘been recognized in accordance with PAS 37 Provisions, Contingent Festructuring provisions are simply ignored in the Liabilities and Contingent Assets. of goodwill. These are considered only when they ‘A resteuturing provision meets the definition of a lability tion under PAS 37 as at the acquisition date (see fat the acquisition date ifthe acquirer incur a present obligation ‘0 3). Restructuring provisions that do not meet the faite the restructuring costs assumed, such as when the acquiree ariteria as at the acquisition date aze recognized as developed a detailed formal plan for the restructuring and raised ‘expenses (le, expenses after the businessCombinations ar) z 1: Acquiree isthe lessee terms are favorable is renting out a building to XYZ, Inc. under an operating, The terms of the lease compared with market terms are ‘The fair value ofthe differential is ?20,000. ‘Specific recognition principles ERS 3 provides the following specific recognition principles: 1. Operating leases, ‘Acquiree is the lessee General rule “The acquirer does not recognize any assets or liabilities related ‘0 an operating lease in wt te the les. ins bere et er eration transfereed 1.000000 olin interest in the acqutee : Exception: eld equity interest nthe acquiree ‘The acquirer determines whether the terms of each operating lease Binal eer ae Sea in which the acquire isthe lsse are favorable or unfavorable. Te eet reer 7 = 2a0,000- If the terms of an operating lease relative to market terms sale, 4 Favorable ~the acquirer recogpizes an intangible asst a eee Hang valu of ide acquired, ncading 2. Unfavorable -the acquser recognizes a liability. alae ceniresn creer SE frie» r20K) For example, an identifiable aset (favorable) may aris IR sides soci 00 200 when market participants ae wiling to pay rent at above-mad of ne Menifee acquired 7200 ‘ates because the leased property is located at a prime spot. ‘Acquire isthe lessor If the acquiree is the lessor, the acquirer does not recognize a separate intangible asset or liability regardless of whether ¢ terms of the operating lease are favorable or unfavorable whet ‘compared with market terms, is renting out a patent to XYZ, Inc. under an operating lease. terms of the lease compared with market terms are erable. The fair value of the differential is #20,000. nt: Compute forthe goodwill. ‘Mustration: Specific recognition principles - Operating leases Fact pattem (On January 1, 20x1, ABC Co. acquired all the assets and liabilities ee eer ce pn ‘of XYZ, Inc. for 71,000,000. On this date, XYZ’s assets ani alae eee E “Miabilities have fair values of P1,600,000 and P900,000, respectively — ar 5 value of net identifiable assets acquired ® 680,000) : 320,000(Fait value of identifiable assets acquired 1,600,000 gible asset is separable if it can be separated from the Fie value of liabilities assumed, éclcing Wabiity on the Bee acid. chasse chnsa sense ck wich operating lease wth unfavorable terms 900K + F20K) s individually or together with a related contract, identiisble Fair value of net identifiable assets acquired £80,000 iat oe liability. ‘An intangible asset is also separable if there is evidence of transactions for that type of asset or similar asset, even if transactions are infrequent and the acquirer is not involvee Case 83: Acquire is the lessor ‘ABCs renting a building from XYZ, Inc. under an operating lease: ‘The terms ofthe operating lease compared with market terms ar favorable. The fair value of the differential is P20,000, ‘An intangible asset is separable even if the acquirer does to sell, loense or otherwise exchange it. For example. that customer and subscriber lists are frequently licensed such lists separable. However, such lists would not be ple if the terms of confidentiality or other agreements the entity from selling, leasing or otherwise exchanging ‘Consideration transferred 1,000,009 tion about its customers [Non-controlling interest in the acquiree : Previously held equity interest inthe acquiree - Total Fair value of net identifiable assets acquired (10-99% Goodteill Requirement: Compute for the goodwill. Solution: egal criterion gible asset that is not separable is nonetheless identifiable es from contractual o other legal rights ple: A acquires Entity B, an owner of a nuclear power plant ‘A obtains Entity B’s license to operate the nuclear power However, the terms of the license prohibit Entity A from ‘or transferring the license to another pasty No intangible asset or liability is recognized, regardless of ter ‘of the operating lease, because the acquiree is the lessor. 1 Nee tht he bai for determining which party shel rte losin perting ese the acquirer Ih cq he ea an ast Hay ee alien ste mar ‘The license is an identifiable intangible asset because, ough itis not separable, it meets the contractunl-legal criterion yn 1: Intangible assets ‘Co. acquired all the assets and liabilities of XYZ, Ine. for 0,000. Relevant information follows: fare recognized separately from goodwill. An intangible asset Idlentifiable if itis either (a) separable or (b) arises from contractual ther legal rights.» rapier 1 estat 1 at Carying amounts Fair values on 2 Intangible assets Other assets 100,000 1,480,000 ‘acquired all the assets and liabilities of XYZ, Ine. for ‘Computer software 100,000 : XYZ's assets and liabilities have fair values of Patent z 0,000 0,000 and P300,000, respectively. Not included in the fair Goodwill 100,00 20,000 of assets are the following unrecorded intangible assets Assets 3,300,000, 77350,000 Fair value Liabilities 400,000 450000 ao 30,000 Additional information: rm 20,000 «The computer software is considered obsolete. production) backlog 10,000 4 The patent has a remaining useful life of 10 years and Bsn name ea ‘remaining legal life of 12 years. oo ‘© XYZ has research and development (R&D) projects with f I frocesece 35,000 value of 950,000. However, XYZ, Inc. recognized the Réd) recs ib costs as expenses when they were incurred. Taeao00 Requietent: Compute forthe goodwill. Pict contract #1 refers to an agreement between XYZ; Ine. ‘a customer, wherein XYZ, In. isto supply goods to the J ‘over a perio of 5 years. The remaining term of the ‘Consideration transferred bans is 3 years. The agreement is expected to be renewed at ‘Non-controllng interest in the acquiree - BE cc bie snot operas te Rigs: pe eases ep ec ; Fir value of net identifiable assets acquired “ Goodwill Solution: Sales orders. As of acquisition date, XYZ; has a backlog of omer purchase orders from 60% of its customers, all of fare recurring customers. The other 40% are also ‘customers but XYZ has no open purchase orders these customers. Internet domain name is registered. Fair value of identifiable assets acquired, excluding Computer sofa ar eco sod but tnelading pent and RED (SEM. Y20K goodwill + PSOK R&D) Fair value of abilities assumed Fair oa of ne identifiable assets acquired asset even f the acquiree has already expensed the related costs : Compute forthe goodwilli 6 cropter Combinations (Part) 2 jonal concepts on Consideration transferred ‘consideration transferred in a business combination includes those that ae transfered othe former exer of he acre: those that remain within the combined entity. (soe and lables inner. the frmer comers of te are remeasured to acquisition-date fiir values. Any ment gain of loss is recognized in profit or loss iH) > The deferred taxes are computed asfollows: Fair Previows | values Carying | (CAfor—aniunts Taser '| ory 70000 10,000 i ‘TID (01D) TP Assets and liabilities that remain within the combined entty Receivables-net 120000 170,000, (60,000) | for example, because the assets or liabilities were transferred to 1 aventony 50000 20.000 (270900) nee rather than to its former owners) are not remeasured ‘| Building - net 1,109,000 1,000,000 100,000 er ignored when applying the acquisition method. Patent 30,000 - 30,000 { Payables 49000 400,000 1: Consideration transferred ‘Contingent liability 20,000 x Paco 11, 20x1, ABC Co, acquired all the assets and liabilities Inc, The assets and liabilities have fai values of PI, 60,020 ‘Taxable temporary difference (TTD) amk+30 130,000 200,000, respectively. As consideration ‘Maliply by: Tax rate ae agrees to pay P1,000000 cash, of which half is payable on Deferred tax Fability 32.00 January 1, 2x1 and the other half on December 31, 20%5, Tae sing market rte of interest on January 1, 20x) is 0% in addition, ABC agrees to transfer a piece of land with crying amount of P50000 and fair value of 300,000 to the ‘owners of XYZ. ‘the combination, ABC will continue the activities of Consideration transferred 1,500.00) _ ABC agrees to provide a patented technology with ‘Non-controlling interes inthe acquire ji ‘amount of P60,000 and fair value of ¥80,000 for use in Previously held equity interest in the acquiree eee Total Fair value of net identifiable assets acquired Compute fr the goodwill. Goodell Deductible temporary difference (DTD) (ax+ 10x20) 240,000 “Multiply by: Tax rate 730% Deferred tax asset 72,000, _\oPrir value of identifiable assets acquited exlutng ie Are ne (0-20 ond Keno ing tc bogie ed einem ity eh ey inert inte scqulee Tsar of et dertifable sot acquired an s90 70.0) “10461‘not a payment for the business combination, but rather for Cash payment (ints 50%) 500,000 PV of ture cash payment (IM xao%xPV oR 610% m5) 310461 Land transferred to former owners of XYZ (tf val) Fair value of consideration transferred Identifiable assets acquired 1600,000 Goodwill 200,000 Notes: Liabilities assumed (in doidend)| ‘900.00 © The land is remeasured to acquisition-date fair value before it mt aan is transferred, The 200,000 adjustment is recognized as] oe paras, nen, ed cr The patented technology is not included in the consideration —— cuarianameeent dearer transferred because it remains within the combined entity. ‘The patented technology continues to be measured at carrying amount. ons to the measurement principle gure rights rights are measured based on the remaining term of ‘Mlustration 2: Consideration transferred ~ Dividends on. contract. Reacquired rights are discussed in the next On January 1, 20x1, ABC Co. acquired all the assets and liabilities ‘of XYZ, Inc, for 1,000,000. The assets and Habilties have fairl values ofP1,600,000 and 900,000, respectively. sed payment transactions Jes and equity instruments related to the acquiree’s share ed payment transactions are accounted for using PFRS 2 Share Payment. (Sarebased peyment ansactions ae dss ny deal bn soning Pert 2.) XYZ's liabilities include 100,000 cash dividends declared on) ‘December 28, 20x0, to shareholders of record on January 15, 20x and payable on January 31, 20x1 Requirement: Compute for the goodwill ets held forsale asset (or disposal group) that is clasified as “held Solution: atthe acquisition date is measured at fair value less costs ‘Consideration transferred (1M - 100K dividends on) 900,000] Hin accordance with PFRS 5 Non-current Assets Held for Sale [Non-controlling interest inthe acquire inued Operations, rather than at fair value under PFRS 3. Previously held equity interest in the acquiree Total FY of net identifiable assets acquired (1.6M-9M) Goodwill IC Co. acquired all the assets and liabilities of XYZ, Inc. for 00,000. The assets and liabilities have fair values of PI,600,000 For purposes of computing the goodwill, the 100,00 ‘payment is excluded from the consideration transferred becaus” Couper Combinaions (Part 1) a Tecognition and measurement principles ‘net identifiable assets acquired in a business combination are fzed when they meet the recognition criteria under the Framework and are measured at acquisition-date fir {in accordance with PFRS 3, tothe | Exceptions both | Exceptions tothe | ‘Additional information: # XYZ's assets include a factory plant that ABC intends to sell immediately. The criteria for “held for sale” classification under PFRS 5 are met. Costs to sell the factory plant are 20,000. ‘+ Not included in X¥2's assets is a research and development [project that ABC does not intend to use. The R&D’s fair value Pcseesarriion mis earner pet Beco mseerrenent ences ¢ Also not included in the assets is a customer list with an ee estimated valu of PIQO00. However, confidentality prohibits ened ey | nae Entity A from selling leasing or otherwise exchanging aes Sree aes information about the customers in the list. 2. Employee benefits “remaining term of =(rasisiepnie | rant Requirement: Compute forthe goodwill. 3. Indemnification a Solution: assets recognized | 2, Share-based and measured onthe | payment = (PFS Consideration transferred 1,000,000 tenet te 2ieapplied) [Non-controlling interest inthe acquiree Previously held equity interest inthe acquiree Total Fair value of net identifiable assets acquired (eM= 2 cons ell SK RAD = alts) Goodwill 3. “Held forsale” assets — mens xi ea less ‘ots tell, Notes: © The “held for sale” factory plant is measured at fair valueless sts fo sell. Because the fair value is already included in the total, the costs to sell are simply deducted. iness combination is one in which an acquirer obtains ‘of one or more business. ‘is presumed to exist when an investor holds more ther interest in the acquiree’s voting rights. © An identifiable asset acquired (eg. the R&D) is recognized combinations are accounted for using the acquisition regardless of whether the acquirer intends to use it {This method requires the following Yr The customer list is not recognized because it is not Mentitying the acquirer; {dentable Se previous discussion. Determining the acquisition date; Recognizing and measuring goodwill (or negative good ill -this requires accounting forthe following: Consideration transferred Non-contShaprer Combinations Part) 2 provisions of the PFRS for SMES Tel equity interest and iv. Identifiable assets acquired and liabilities assumed. “The acyurer (parent isthe entty that obtains control after the business combination, The controlled entity is the acquire (cubsidiay) ‘The aquisition date is the date on which the acquirer obtains contol ofthe acquire eg, the closing date. ‘Goodtwil is computed using the following formula: ‘Consideration transfered Nom-controlling interest inthe scquiree Previously held equity interest in the acquiree Tal ess: Far value of net identifiable assets acquired (00 Goodsill/(Gatn ova bargain purchase) 1n 19 Business Combinations and Goodwill 19 of the PFRS for SMEs applies to all business nations, including the accounting for goodwill. It does mot tothe following: Combinations of businesses under common control (le, ‘entities having the same parent) ‘The formation ofa joint venture. Acquisition of a group of assets that do not constitute a business. afew $5 combination ‘combination is “the bringing together of separate entities Into one reporting entity.” (rms fr sey AS a rest, (the acquirer) obtains control over the other business ire. ‘Acbusiness combination may involve the purchase, by the tof some or all of the acquiree's (a) assets and liabilities ») equity, in exchange for cash, non-cash assets, or the ‘sequity instruments, “The consideration transferred is measured at fair value. NCI is measured either at fair value or the NCI proportionate share in the acquiree’s net identifiable assets ‘A “gain on a bargain purchase” is recognized in profit or loss i the year of acquisition only after reassessment of the a: acquired and liabilities assumed in the business combination. (Only identifiable assets acquired are recognized. Unidentfia assets are not recognized. “Acquisiion-related costs are expensed, except costs of issu ‘equity and debt instruments. Acquisition-related costs do no affect the measurement of goodwill Restructuring provisions are generally not recognized as ‘of business combination, but rather as post-combinatc ‘of the combined entity when the costs are incurre. combinations are accounted for using the purchase | This method involves the following: the acquirer ing the cost ofthe business combination. ing the cost of the business combination to the assets and liabilities assumed. “The purchase method is applied as atthe acquisition date, the date on which the acquirer obiains control over the