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PFRS 3: Business
Combination
Date: 06/14/2022

Essential Elements
● Business
○ Input
○ Process
○ Output

● Control
○ Majority of the Board of Directors
○ Majority of Votes/ More than half of the votes
○ Policies

● Constitute a Business: Asset Acquisition in Business Combination vs. Regular

Asset Acquisition
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Steps:
1. Identifying the acquirer.
● General
● Control
● Specific
● Asset Acquisition (Accounting Merger) : The one who transfers
cash and other assets.
○ 100%
○ After the acquisition, the acquiree is dissolved and only the
acquirer continues to exist

● Stock Acquisition (Accounting Consolidation): The one who issues

equity interest is the acquirer
○ All or majority
○ After acquisition, the acquirer/parent and the
acquiree/subsidiary continue their separate existence.
HOwever, they are consolidated or seen as one for reporting
purposes.

● Reverse Acquisition: the one who issues the interest is not the
acquirer but the acquiree.
● Others:
● In a business combination involving two or more entities: Who
initiated?
● In a business combination wherein a new entity is formed:

Purpose Acquirer

To issue equity interest The one who obtains the

control/dominance

To transfer cash or other The one who transfers may be

assets or assumes/ incurs
liabilities

2. Identifying the acquisition date.

What if the fair values at the acquisition date are tentative or provisional?
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3. Recognition & Measuring of identifiable assets, the liabilities acquired, and the
non-controlling interest in the acquiree
a. Asset & Liabilities
i. Recognition: Meet the definition of assets and liabilities
ii. Measurement:
1. Fair Value
2. Separate Valuation

b. NCI
i. Recognition: the equity interest not attributable to a parent, directly
or not
ii. Measurement:
1. GIven Fair Value
Consideration
2. Assumed FV ( x NCI)
Ownership %
3. (FVNA x NCI%) =NCI appropriate share in net identifiable
assets acquired. 1

4. Recognition & Measuring Goodwill.

● Recognition:
○ Positive Goodwill as an: Asset
○ Negative: Gain on Bargain Purchase as a gain in P/L

Consideration Transferred FV

Non-controlling interest in the

acquiree

Previously held equity interest Interest hely be the acquirer

in the acquiree before the business
combination
¿)

TOTAL

Fair Value of Net Identified

Assets acquired

Goodwill (Gain on Bargain on

Purchase)

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5. Recognition & Measuring Acquisition

Acquisition-related costs 1. Expenses:

1. Finder's Fee
2. Professional Fee
3. General administrative
costs including the cost
of maintaining the
internal acquisition
department.
● PAS 32 & PFRS9
2. Debt Securities
(@amortized
cost): Deducted
from Carrying
Amount
3. Equity Securities:
Deducted from a
share premium. If
insufficient, from
retained earnings

PFRS 3: Business
Combination; Fair Value of
Net Asset
Date: 06/18/2022
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Additional Concepts
● Restructuring Provisions-incurred

○ Recognition:

i. Liability @acquisition date, incurred and not estimation

a. Detailed Formal Plans

b. Public Announcement of Details

c. Implementation on or before the acquisition date

ii. Post-combination expenses

- restructuring provisions that do not meet the definition of a

liability at the acquisition date

● Operating Lease- estimation or incurred

i. Acquiree is the lesee

1. Recognition/ Non-recognition

a. Recognize: Terms in the operating lease

i. Favorable: Intangible Assets

ii. Unfavorable: Liability

b. Non-recognize: Asset & Liability in the operating lease

ii. Acquiree is the lessor

- Shall not recognize

● Intangible Asset- incurred

○ Recognition: Identifiable

i. Identifiable: includes R&D projects, customer’s list

1. Separable (capable of being separated from the acquiree

and sold, transferred, etc.), even if

a. Infrequent exchange transactions

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b. Acquirer does not intend to sell or exchange

2. Arises from contractual rights

Exceptions to the recognition

● Contingent Liability: estimation

○ Recognition:

i. Present Obligation

ii. Fair value can be measured reliably

Exceptions to the recognition and measurement

● Income taxes:

○ However, still, PAS 12 prohibits the recognition of DTL arising from initial
recognition of goodwill.

● Employees Benefits

Employee benefits are accounted for using PAS 19 Employee benefits.

For example, defined benefit obligations are measured through actuarial
valuations.

● Indemnification assets

•arises when the former owners of the acquiree agree to reimburse

the acquirer for any payments the acquirer eventually makes upon
settlement of liability.

• The acquirer shall recognize an indemnification asset at the same time

and on the same basis as the indemnified item.

• Accordingly, if the indemnified item is measured at fair value, the

indemnification asset is also measured at fair value. If the indemnified
item is measured at other than fair value, the indemnification asset is
measured using assumptions consistent with those used to measure the
indemnified item.
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Example: Entity A acquires Entity B. At the acquisition date, the taxing authority is
disputing Entity B’s tax returns in prior years. The former owners of Entity B agree to
reimburse Entity A in case Entity A will be held liable to pay Entity B’s tax deficiencies in
the prior years. At the acquisition date, Entity A recognizes a tax liability to the
taxing authority and an indemnification asset for the reimbursement due from the
former owners of Entity

Exceptions to the measurement

● A. Reacquired rights

Reacquired rights are measured based on the remaining term of the

related contract. (Discussed in the next chapter)

● B. Share-based payment transactions

Liabilities and equity instruments related to the acquiree’s share-based

payment transactions are accounted for using the PFRS 2 Share-based payment.

● C. Assets held for sale

A non-current asset (or disposal group) that is classified as held for sale at
the acquisition date at fair value less costs to sell in accordance with PFRS 5
Non-current Assets Held for sale and Discontinued Operations, rather than at fair
value under PFRS 3.
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