BUSINESS

COMBINATION
ACCOUNTING 14
 Learning Objectives
To define terms related to To identify the method of
business combination and business combination
discuss reasons for business incorporating the
combination accounting transactions

Prepare financial statements

after business combination

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 Table of Contents

01
Nature of Business
Combination 02
Methods and Legal
Forms
03
Accounting Concept

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Nature of Business Combination
Business Combination

 Friendly combination - the board of directors of the potential combining

companies negotiates mutually agreeable terms of a proposed
combination

 Unfriendly (hostile) combination – results when the board of directors

of a company targeted for acquisition resists the combination

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Nature of Business Combination
Unfriendly Takeover
1. Poison Pill
2. Greenmail
3. White Knight or White Squire
4. Pac-man Defense
5. Selling the Crown Jewels or Scorched Earth
6. Shark Repellant
7. Leveraged Buyouts
8. The Mudslinging Defense
9. The Defensive Acquisition Tactic
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Reasons for Business Combination

 Cost Advantage
 Lower Risk
 Avoidance of Takeovers
 Acquisition of Intangible Assets
 Other Reasons
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Types of Business Combination
Business combinations may be classified under Three Schemes

1. One based on the structure of the combination

2. One based on the method used to accomplish

the combination

3. One based on the accounting method used

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Types of Business Combination
Structure of Business Combination
1. Horizontal Integration – involves companies with the same
industry
2. Vertical Integration – same industry but at different level
3. Conglomerate Combination – unrelated industries having
little similarities for the purpose of entering new industry
4. Circular Combination – entails some diversification but does
not have a drastic change in operation as a conglomerate

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Methods/Types of Combinations/ Legal
Forms of Effecting Business Combination

1. Acquisition of Net Assets (Assets less Liabilities)

2. Acquisition of Common Stock (Stock Acquisition)

3. Asset Acquisition

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Methods/Types of Combinations/ Legal
Forms of Effecting Business Combination

1. Acquisition of Net Assets (Assets less Liabilities)

- books of the acquired (acquiree) company are
closed out and its assets and liabilities are transferred t
the books of the acquirer (or the acquiring/surviving
company)

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Methods/Types of Combinations/ Legal
Forms of Effecting Business Combination

Acquisition of Net Assets (Assets less Liabilities) are

classified into:

 Statutory Merger
 Statutory Consolidation

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Methods/Types of Combinations/ Legal
Forms of Effecting Business Combination

2. Acquisition of Common Stock (Stock Acquisition)

- books of the acquirer (acquiring) company and acquiree
(acquired) company remain intact and consolidated financial
statements are prepared periodically.

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Methods/Types of Combinations/ Legal
Forms of Effecting Business Combination

2. Acquisition of Common Stock (Stock Acquisition)

- the acquirer company debits an account “Investment in
Subsidiary”, the stock of the acquired companu recorded as an inter-
corporate investment rather than transferring the underlying assets
and liabilities onto its own books.
- a business combination effected through stock acquisition
does not necessarily have to involve the acquisition of all of a
company’s outstanding voting (common) shares.

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Methods/Types of Combinations/ Legal
Forms of Effecting Business Combination

3. Asset Acquisition
- reflects the acquisition by one firm of assets (and possibly
liabilities) of another firm but not its shares. The acquirer typically
targets key assets for acquisition, or buys the acquiree’s assets but
does not assume its liabilities.
- it should be noted that asset acquisition is not within the
scope of business combination under PFRS 3.

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Acquisition of Net Assets (Asset less Liabilities)

Statutory Merger
- entails that acquiring (aquirer) company survives,
whereas the acquired company, ceases to exist as a
separate legal entity, although it may be continued as a
separate division of the acquiring company.

X Company + Y Company = X Company or Y Company

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Acquisition of Net Assets (Asset less Liabilities)

Statutory Consolidation
- results when a new corporation is formed to
acquire two or more other corporations; the acquired
corporations then cease to exist (dissolve) as separate
legal entities.

X Company + Y Company = Z Company

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Accounting Concept
Definition

PFRS 3 defines “business combination” as a transaction or

other event in which an acquirer obtains control of one or more
businesses. Transactions sometimes referred to as “true mergers”
or “mergers of equals”.

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Accounting Concept
Identifying a Business

PFRS 3 defines the term “business” as an integrated set

activities and assets that is capable of being conducted and
manages 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.

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Scope of Business Combination
1. Combinations involving mutual entities – defined as an entity, other that
an investor-owned entity that provides dividends, lower costs or other economic
benefits directly to its owners, members or participants.

2. Combination achieved by contract alone (dual listing stapling) – in a

combination achieved by contract alone, two entities enter into a contractual
arrangement which covers, for example operation under a single management and
equalization of voting power and earnings attributable to both entities equity
investors.

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The Acquisition Method
Applied on the acquisition date which is the date the acquirer obtains
control of the acquiree. The acquisition method approaches a
business combination from the perspective of the acquirer (not the
acquiree), the entity that obtains control of the other entities in the
business combination.

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The Acquisition Method
Applied on the acquisition date which is the date the acquirer obtains
control of the acquiree. The acquisition method approaches a
business combination from the perspective of the acquirer (not the
acquiree), the entity that obtains control of the other entities in the
business combination.

Under the Acquisition Method, all assets and liabilities are identified
and reported at their fair values.

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Accounting Procedure
The required method of accounting for business combinations under
Paragraph 4 of PFRS 3 is the Acquisition method. Under the said
method, the general approach to accounting business combination is
a five step process:

1. Identify the Acquirer

2. Determine the acquisition date
3. Calculate the fair value of the purchase consideration transferred
4. Recognize and measure the identifiable assets and liabilities
5. Recognize and measure either goodwill or a gain from a bargain
purchase, if either exists in the transaction
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Accounting Procedure
Identifying the Acquirer

PFRS 3 paragraph 7 states that “the acquirer is the entity that

obtains control of the acquiree”. Paragraph 6 requires that in
each business combination, one of the combining entities should
be identified as the acquirer.

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Accounting Procedure
Determining the Acquisition Date

PFRS 3 defines acquisition date as the date on which the acquirer

obtains control of the acquiree.

A business combination involves the joining together of assets

under the control of a specific entity. Therefore, the business
combination occurs at the date of the assets or net assets are
under the control of the acquirer. This date is the acquisition
date.
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Accounting Procedure
Calculating the FV of the consideration transferred: Accounting
records of the Acquirer

According to PFRS 3 paragraph 37, the consideration transferred:

- is measured at fair value at acquisition date
- is calculated as the sum of the acquisition date fair values of:
1. the assets transferred by the acquirer
2. the liabilities incurred by the acquirer to former owners of
the acquiree
3. the equity interest issued by the acquirer
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Accounting Procedure
Acquisition-Related cost are excluded from the
measurement of the consideration paid, because such
costs are not part o the fair value of the acquiree and are
not assets. They are follows:

1. Cost directly attributable to the combination which includes

cost such as legal fees, finder’s and brokerage fee, advisory,
accounting, valuation and other professional consulting fees.

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Accounting Procedure
2. Indirect, ongoing cost, general cost including the cost to
maintain an internal acquisition department, as well as general
and administrative cost such as managerial (including the cost of
maintaining an internal acquisitions department, management
salaries, depreciation, rent and cost incurred to duplication facilities),
overhead that are allocated to the merger but would have existed in
its absence and other costs of which cannot be directly attributed to
the particular acquisition.

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Accounting Procedure
Key reasons given for this approach are:

 Acquisition-related costs are not part of the fair value exchange

between the buyer and seller.
 They are separate transactions for which the buyer pays the fair
value for the services received
 These amounts do not generally represent assets of the acquirer
at acquisition date because the benefits obtained are consumed
as the services are received.

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Accounting Procedure
Cost of Issuing Equity Instruments/Share Issuance Costs

The cost of issuing entity instruments is also excluded from the

consideration and accounted for separately.

In issuing equity instruments such as shares as part of the

consideration paid, transaction costs such as documentary
stamp duties on new shares, professional adviser’s fees,
underwriting costs and brokerage fees may be incurred.

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Accounting Procedure
Cost of Issuing Debt Instruments

Similarly with equity instruments, the costs of arranging and

issuing debt instruments or financial liabilities in accordance
with PFRS 9, are an integral part of the liability issue
transaction. They are deemed as yield adjustments to he cost of
borrowing. These cost are included in the initial measurement of
the liability as bond issue costs and amortized the life of the
debt.

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Summary of Acquisition-related cost
Acquisition-Related Cost
Directly attributable costs
Indirect acquisition cost
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Examples Treatment
Legal fee, finders and brokerage fee, Expenses
advisory, accounting, valuation and
other professional or consulting fees to
effect the combination
General and administrative costs such
as managerial (including the cost of
maintaining an internal acquisitions
department, management salaries,
depreciation, rent and cost incurred to
duplication facilities), overhead that are
allocated to the merger but would have
existed in its absence and other costs
of which cannot be directly attributed to
the particular acquisition.
 Thank you!
Do you have any questions?
plukjaymarieresco@gmail.com
+63 9266173877
Jay Marie Kadalim Resco
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