BUSINESS

COMBINATION
Business as an element and Accounting for Business
Combination
 ESSENTIAL ELEMENTS
OF BUSINESS COMBINATION
§ Control

§ Business
Business
- an integrated set of activities and assets that is capable of
being conducted and managed for the purpose of providing
goods and services to customers generating investment income
from ordinary activities. (PFRS 3)
 ELEMENTS OF BUSINESS
§ Input - any economic resource that results to an output when one or
more processes are applied into it.

§ Process- any system, standard, protocol, convention or rule that when

applied to an input, creates an output.

§ Output- the result of the combination of input and processes that

provide goods or services to customers.
 IDENTIFYING A BUSINESS
COMBINATION
§ When 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. ( In such case, other applicable standards
apply)
 IDENTIFYING A BUSINESS
COMBINATION
Accounting for Business Combination
(Acquisition Method)
§ Identifying the Acquirer
§ Determining the acquisition date
§ Recognizing and measuring goodwill
IDENTIFYING THE ACQUIRER (PFRS 3)
§ The entity that transfers cash or other assets/ incurs liabilities
§ The entity that issues the equity interests (except for reverse
acquisitions)
§ The larger between the combining entities.
§ The one who initiated the combination.
§ The entity that existed before the combination (equity
issuance)
§ The new entity (involved cash transfer and liability
assumption.)
 DETERMINING THE ACQUISITION DATE
§ Acquisition Date
- the date on which the acquirer obtains control of the acquiree.
- normally the closing date (date on which the acquirer legally
transfers the consideration, acquires assets and assumes
liabilities.)
- by exception, acquisition date can be earlier or later than the
closing date as long as control was expressly stipulated in an
agreement.
RECOGNIZING AND MEASURING GOODWILL
RECOGNIZING AND MEASURING GOODWILL

Results to recognition of the following by the acquirer:

• Goodwill as an Asset
• Gain on bargain purchase ad gain in profit or loss.
CONSIDERATION TRANSFERRED
- measured at fair value
§ Fair Value - 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 interests issued by
the acquirer.
 ACQUISITION- RELATED COSTS
- costs that the acquirer incurs to effect a business combination.
a. Finder’s Fees
b. Professional Fees
c. General and Administrative Costs
d. Costs of registering and issuing debt and equity securities.
 ACQUISITION-RELATED COSTS
- generally expensed when incurred
Exceptions:
§ Cost to issue debt securities measured at amortized cost are
considered in the initial measurement of securities.
 ACQUISITION-RELATED COSTS
- generally expensed when incurred
Exceptions:
§ Cost to issue equity securities are deducted from share
premium.
 ACQUISITION-RELATED COSTS
- generally expensed when incurred
Exceptions:
§ Cost to issue equity securities are deducted from share
premium.
NON-CONTROLLING INTEREST (NCI)
- equity in a subsidiary, not attributable,
directly or indirectly to a parent
- minority interest
- measured at Fair Value or NCI’s
proportionate share in the acquiree’s Net
Identifiable Assets.
 PREVIOUSLY HELD EQUITY
INTEREST IN THE ACQUIREE
- any interest held by the
acquirer before the business
combination.
- affects the computation of
goodwill only in business
combination achieved in stages.
NET IDENTIFIABLE ASSETS ACQUIRED
§ The acquirer recognizes the
identifiable assets acquired,
the liabilities assumed and any
NCI in the acquiree separate
from goodwill on the
acquisition date.
§ Assets acquired and Liabilities
assumed are measured at their
acquisition-date fair values.
 UNIDENTIFIABLE ASSETS
§ Goodwill recorded by the acquiree prior to the business
combination
§ Assembled workforce
§ Potential contracts that the acquiree is negotiating with
prospective new customers at the acquisition date
 NET IDENTIFIABLE ASSETS (Recognition)
§ Must meet the definition of assets and liabilities as provided
under the Conceptual Framework at the acquisition date.
§ Must be a part of what the acquirer and the acquiree (or its
former owners) exchanged in the business combination
transaction.
§ May include assets and liabilities that were not previously
recognized in the financial statements of the acquiree.
 MEASURING GOODWILL/
GAIN ON BARGAIN PURCHASE
On January 1, 2021, JPIA Co. acquired all the assets and
assumed all the liabilities of JPMAP Inc. Listed in the next slide
are the carrying amounts and fair values of the assets and
liabilities of JPMAP Inc. acquired by JPIA Co.
 MEASURING GOODWILL/
GAIN ON BARGAIN PURCHASE
.

In the negotiation, JPIA Co. incurred transaction costs amounting to 120,000 for legal,
accounting, and consultancy fees.
 MEASURING GOODWILL/
GAIN ON BARGAIN PURCHASE
. If JPIA Co. paid 1,500,000 cash as consideration for the assets and
liabilities of JPMAP Inc., how much is the goodwill (gain on bargain
purchase) on the business combination?
 MEASURING GOODWILL/
GAIN ON BARGAIN PURCHASE
. If JPIA Co. paid 1,000,000 cash as consideration for the assets and
liabilities of JPMAP Inc., how much is the goodwill (gain on bargain
purchase) on the business combination?
 NON-CONTROLLING INTEREST
On January 1, 2021 Satoshi Co. acquired 75% voting shares of
Nakamoto Inc. On this date, Nakamoto’s identifiable assets and
liabilities have fair values of 1,500,000 and 300,000 respectively.

Satoshi Co. elects the option to measure non-controlling interest

at fair value. The independent consultant engaged by Satoshi Co.
determined the fair value of the 25% non-controlling interest in
Nakamoto Inc. is 150,000. Satoshi Co. paid 1,200,000 for the
75% interest in Nakamoto Inc. How much is the goodwill?
 NON-CONTROLLING INTEREST
On January 1, 2021 Satoshi Co. acquired 75% voting shares of
Nakamoto Inc. On this Nakamoto’s identifiable assets and
liabilities have fair values of 1,500,000 and 300,000 respectively.

Satoshi Co. elects the option to measure non-controlling interest

at the non-controlling interest’s proportionate share of
Nakamoto Inc.’s net identifiable assets. Satoshi Co. paid
1,200,000 for the interest acquired in Nakamoto Inc. How much
is goodwill?
 TRANSACTION COSTS
On January 1, 2021 Satoshi Co. acquired all the assets and
assumed all the liabilities of Nakamoto Inc. On this Nakamoto’s
identifiable assets and liabilities have fair values of 1,500,000 and
300,000 respectively.

As consideration for the business combination, Satoshi Co.

transferred 10,000 of its own equity shares with par value per
share of 100 and fair value per share of 125 to Nakamoto Inc.’s
former owners. Costs of registering the shares amounted to
50,000. How much is the goodwill?
 REFERENCE
• MILLAN, ZEUS VERNON. 2022. Accounting for Business
Combinations. Bandolin Enterprise. Baguio City
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