PFRS 3 BUSINESS COMBINATIONS

I. NATURE
PFRS 3 applies to business combinations.
Objective:
To enhance the relevance, reliability and comparability of the acquirer’s financial
reporting by establishing the recognition and measurement principle and disclosure
requirements for a business combination.
PFRS 3 does not apply to the ff.:
a. The formation of a joint venture.
b. The acquisition of an asset or a group of assets related liabilities that does not
constitute as business. In such a case, the acquirer allocates the lump sum
purchase price to the acquired items based on their relative fair values on the
purchase date. This transaction does not give rise to goodwill.
c. A combination of entities under common control.
Essential elements in the definition of a business combination:
1. Control
 Presumed to exist when the acquirer holds more than 50% (or 51% or
more) interest in the acquiree’s voting rights.
 Other ways in obtaining control:
1. Transferring cash or other assets
2. Incurring liabilities
3. Issuing equity interests
4. Providing more than one type of consideration
5. Without transferring consideration, including by contract alone
2. Business
 Integrated set of activities and assets that is capable of being conducted
and managed for the purpose of providing goods or services to consumers,
generating investment income or generating other income from ordinary
activities.
 3 elements:
1. Input – any economic resource that results to an output when one
or more processes are applied.
2. Process – any system, standard, protocol, convention or rule that
when applied to an input, creates an output, strategic management
processes, operational processes and resource management
processes.
3. Output – result of 1 and 2 above that provides goods or services to
customers, investment income or other income from ordinary
activities.
 II. RECOGNITION
An entity determines whether a transaction is a business combination in relation to the
definition provided under PFRS 3.
If the assets acquired (and related liabilities assumed) do not constitute a business, the
entity accounts for the transaction as a regular asset acquisition and not a business
combination.
Accordingly, the entity applies other applicable standards (e.g., PAS 2 for inventories
acquired, PAS 16 for PPE acquired, etc.)

III. MEASUREMENT
Business combinations are accounted for using acquisition method:
A. Identifying the acquirer
 Acquirer – entity that obtains control of the acquiree.
 Acquiree – business that the acquirer obtains control in a business
combination.
B. Determining the acquisition date
 Normally at the closing date (the date on which the acquirer legally
transfers the consideration, acquires the assets and assumes the liabilities
of the acquiree)

C. Recognizing and measuring goodwill

 Gain on a bargain purchase.
 Formula:
Consideration transferred xx
Non-controlling interest (NCI) in the acquiree xx
Previously held equity interest in the acquiree xx
Total xx
Less: Fair value of net identifiable assets acquired (xx)
Goodwill/(gain on a bargain purchase) xx
 Consideration transferred – measured at fair value
 Acquisition-related costs –
i. Costs to issue debt securities measured at amortized cost
ii. Cost to issue equity securities are deducted from share premium. If
the share premium is insufficient, the issue costs are deducted from
retained earnings.
 Non-controlling interest – measured at (a) fair value or (b) NCI’s
proportionate share of the acquiree’s identifiable assets.
 Previously held equity interest in the acquiree – affects the computation of
goodwill only in business combinations achieved in stages.
 Net identifiable assets acquired – identifiable assets acquired and
liabilities assumed are measured at their acquisition-date fair values.

IV. TRANSACTION
a. Consideration transferred
1. Cash
2. Non-cash assets
 3. Equity instruments (Ex. Shares, options and warrants)
4. A business or a subsidiary of the acquirer
5. Contingent consideration

b. Acquisition-related costs
1. Finder’s fees
2. Professional fees, such as advisory, legal, accounting, valuation and
consulting fees
3. General administrative costs
4. Costs of registering and issuing debt and equity securities

c. Non-controlling interest
1. ABC Co. acquires 80% interest in XYZ, Inc. the controlling interest is 80%,
while the non-controlling interest is 20% (100% - 80%)

d. Previously held equity interest in the acquiree

1. Interest held by the acquirer before the business combination.