AFAR NOTES : BUSINESS COMBINATION AND CONSOLIDATED FINANCIAL STATEMENTS.

PFRS 3 : BUSINESS COMBINATIONS

PFRS 10 : CONSOLIDATED FINANCIAL STATEMENTS

BUSINESS COMBINATIONS
What is a Business Combination?
1. It is an event or a transaction in which an entity obtains a “control” of one or more businesses.
How does the PFRS defines the word control?
o PFRS 3 : More tha 50% control (this is only prima facie evidence, but this is not conclusive, hence rebuttable)
o PFRS 10 : There is control, if the three esential elements are ALL present: ( regardless of the %) – should be
the new basis, no longer the PFRS 3.
▪ The investor shall have the power over the investee
▪ You must have exposure or rights to variable returns
▪ You must have the ability to influence the variable returns (share in the net income)
How shall you ACCOUNT for business combination?
Method : ACQUISITION METHOD which is:
1. Identify the acquirer
2. Determine the acquisition date
3. Recognize and measure the identifiable net assets
4. Measure the consideration given-up
5. Measure the non-controlling interests (if not fully acquired for purchase of stocks)
6. Measure the goodwill
1. Identify the acquirer.
2. Acquirer is the entity that controls the acquiree.
3. The one who will account for the business combination
Why important to know : Since magkaiba ang valuation ng acquirer and acquiree.
Acquiree ( fair value) ; Acquirer ( book value)
How to determine the acquirer?
Case 1. Acquisition of NET ASSETS (may dissolution)
✓ Through merger : A + B = A
o Acquirer : A
✓ Through consolidation : A + B = C
o Acquirer : A or B or C (this one’s vague, unless you really see in actual who’s the acquirer, although the
basic guide is that it is usually the corporation who has the highest total assets or the ones who issues
stocks/liab.
Case 2. Acquisition of MORE THAN 50% OF STOCKS (this gives rise to parent-subsidiary relationship)
Kung sinong nag issue ng stocks siya yung acquirer [ the parent corporation ].
XCP: Reverse Acquisition:
o Common stocks was issued in exchange for common stocks
o Once the stocks was traded, yung nakatanggap (supposedly subsi) ay naging parent na.
AFAR NOTES : BUSINESS COMBINATION AND CONSOLIDATED FINANCIAL STATEMENTS.

2. Determine the acquisition date

Why important to know?
- It is the date when the acquirer obtains control of the acquiree.
- Acquisition date is the date of measurement.

3. Recognize and measure the identifiable assets and liabilities.

Measurement : Fair value at the date of acquisition date.
Note : There are assets/liabilities which according to the standrads should not be measured at fair value

Non-current assets held for sale Lower of Cost or Fair value – COD
Deferred tax assers/liabilities Measured at face value using the future enacted ratee
Share appreciation rights (compensation liab) Fair value of liability

Note : Since it is CLEAR that they are identifiable assets, you need to derecognize any existing goodwill. This is
very important, for it affects the computation of the goodwill/gain on bargain purchase.
For intangible assets:

• As long as the intangible assets of the acquiree met either of these two, it shall take form part of the
identifiable assets:
o 1.) separability
o 2.) contractual legal criterion

Ingat sa provided fair value, minsan sa parent company or acquirer pala ang given, baka mapagkamalang sa acquiree.

4. Measure the consideration given-up/historical cost

Measurement : Fair value at the date of acquisition

POSSIBLE CONSIDERATION MEASUREMENT OR FAIR VALUE IS:

Cash Face value
Foreign Exchange rate at the date of the acquisition
Non-cash asset Exit price
Stocks Quoted price at the date of acquisition
Bonds payable Quoted price at acquisition date
Present value of cash flows at acquisition date
Contingent consideration Present value/Fair value
Shall reflect probability
Note : Consideration also includes control premium. But control premium is not considered/excluded in computing for
implied fair value of NCI, because this is merely owned by the PARENT.
What are the treatment of ACQUSITION COSTS?
1.) Acquisition-related costs [direct and indirect costs]
Treatment : expensed outright
Example : Accounting Fee, Legal fee, Broker’s Fee, Listing fee of new shares

2.) Share issuance costs

Treatment :
1.) Charged against : Share premium arising from original issuance of related shares (arising APIC from transaction); if wala
to:
AFAR NOTES : BUSINESS COMBINATION AND CONSOLIDATED FINANCIAL STATEMENTS.

2.) Recognize stock issuance cost – served as a contra account against: (in priority)
o Share premium from other issuances of the acquirer
o Retained earnings of the acquirer

ISSUANCE OF DEBT SECURITIES – related transaction costs [ apply knowledge of PFRS 9]

• FVPL – expensed outright
• FAAC – part of the liab
• FVOCI – part of the debt securities

5. Recognize and Measure Non-controlling interest

✓ This only arises during acquisition of stock and the purchase of stocks is for less than 100%.
✓ This is an equity account.
✓ Shall be presented as part of the equity in the consolidated FS, separately.
What is the measurement of NCI?
GR : It depends on the policy of the company. It could be
PROPORTIONATE SHARE/PARTIAL GOODWILL
✓ Proportionate share is : FVNAA X NCI %
IF AT FAIR VALUE/FULL GOODWILL
✓ Expressed : GIVEN
✓ Implied : Consideration given up (without control premium)/ % acquired x NCI %
✓ Always do FLOOR TEST first : Proportionate share of NCI is the minimum amount of NCI
FLOOR TEST: What is allowed only is:
Case 1. If the fair value > proportionate share ✓ Total Goodwill
✓ Partial Goodwill
We will measure NCI at fair value. ✓ Partial GOBP

Case 2. If the fair value < proportionate share NOTE:

Only proportionate share This is so important, that it will affect the division of
Why? Gain on bargain purchase is always partial. impairment losses.

Ganito kasi, once na mas mataas ang proportionate share sa

FVNAA, tapos pinili mo to measure the NCI at fair value, it will result to gain di ba? Since FV of NCI – Proportionate
share = Gain, eh ang NCI, ‘di naman ‘yan kasali sa transaction, so illogical kung magrerecognize siya ng gain, kaya
naman once mas mataas ang PS, always measure it at PS.
6. Measure and recognize goodwill/gain on bargain purchase
PURCHASE PRICE + NCI – FVNAA = GOODWILL/GOBP
We could therefore conclude that the measurement of the PP, NCI and FVNAA is very important, because if any of the three
is wrong, then the goodwill or gain is also incorrect, hence will further affect reported conso assets or equity.
Beware! Goodwill arising from business combination will only appear in the consolidated financial statements, and not in the separate books of
either the acquirer or acquiree.
 AFAR NOTES : BUSINESS COMBINATION AND CONSOLIDATED FINANCIAL STATEMENTS.

Special Notes in Business Combination at date of Acquisition

Case : BBusiness Combination achieved in stages [STEP ACQUISITION]

This shall be accounted for prospectively.
1. Remeasure the existing interest at fair value.
▪ The difference between the carrying amount and the fair value is a gain/loss of remeasurement and will be recognized
in (depends on the original classification of the financial asset):
o If previously measured at FVPL : profit/loss
o If previously measured at FVOCI : OCI ng CONSO; deretso RE
o If previously measured at equity method (Inv. In assoc) : profit/loss

What is the fair value of the existing interest?

➢ Expressed or kung hindi:
➢ Implied :
▪ Purchase price of addt’l interest/ additional interest percentage = Full fair value
▪ Full fair value x % of existing interest = Fair value of existing interest
• Note : Purchase price of addt’l interest should include any contingent consideration in determining the
implied fair value of the existing interest.

2. Additional purchase price and NCI and FVNAA is measured at fair value as well.
Note : As to the NCI, don’t forget na gawin pa rin ang floor test, it’s proportionate share is the minimum value.
3. To get the goodwill :
Purchase Price (addt’l interest) + FV of existing Interest + NCI – FVNAA = Goodwill or GOBP

MEASUREMENT PERIOD

Minsan, the buscom is incomplete by the end of the accounting period, kaya naman binibigyan muna nang provisional
amounts ang:
• Consideration transferred
• NCI
• Previously held equity interest
• Identifiable assets acquired, and liab assumed

At dahil nga sa provisional amounts lang ang inassign sakanila i.e., hindi pa “final amount’ we need to reflect any
adjustments to report the above items on their proper amounts.

Ngayon, paano natin malalaman kung kailangan ng adjustment ang information obtained? (these two criteria must
be met)
1. New information obtained about facts and circumstances that existed as of the acquisition date, that if know would
have affected the measurement of the amounts recognized as of that date (information na nahuli lang nang dating).
o It means meron na talaga itong information na to during the acquisition date, hindi mo lang talaga nalaman
non.
2. The information must be obtained within 1 year from the date of acquisition.
The adjustments that will be made will affect the amount of goodwill.
Note:
New Information that exist after the acquisition date, like the ones listed below are not considered as measurement
adjustments, and therefore doesn’t affects goodwill:
1. Changes in the probability of meeting earnings target.
AFAR NOTES : BUSINESS COMBINATION AND CONSOLIDATED FINANCIAL STATEMENTS.

2. Reaching a specified share price

3. Reaching a milestone on a research and development project
4. If the new information obtained provides evidence to facts and circumstance that existed as of the acquisition date
a. Ngayon, there’s a rule as to the adjustment, to summarize:

Hanggang kailan ang measurement period?

the measurement period ends as soon as the acquirer receives all necessary information about the facts and
circumstances that existed as of the acquisition date for the provisional amounts (or otherwise learns that more information
is not obtainable). However, the measurement period cannot exceed one year from the acquisition date.

Summary of entries for contingent consideration:

Contingent Classification Initial Entry Subsequent Entry Settlement
consideration (measurement period)
Issuance of Liability Identifiable assets Increase in CC Condition met:
Goodwill Liab for contingent consi
addit’l cash Identifiable liabilities
Goodwill
Liab for contingent consi Cash
Cash
Contingent consi payable
Decrease in CC Condition not met:
Liab for contingent consi Contingent payable
Goodwill Gain on extinguishment of liab

Not measurement adjustment:*

Unrealized loss – P&L
Liab for contingent consi

Liab for contingent consi

Unrealized gain – P&L
Issuance of Equity – Identifiable assets No entry Condition met:
Goodwill Share premium – contingent con
equity share Identifiable liabilities Ordinary share capital
premium Cash or other contingent consid. Share premium
Share prem – contingent consi
Condition not met:
Share prem – contingent consi
Share premium

Note : huwag mong kakalimutan as to the contingent consideration payable with cash, na i-adjust pa rin yung liab, basta nagbago yung
measurement (meaning kahit beyond the 1 yr period) pero before the settlement date naman, kahit na hindi siya considered as m easurement
adjustment sa goodwill. Significant ‘to kung tatanungin ka na about the settlement gain or loss, siyempre ang magiging basis natin ay yung carrying
amount ng contingent consideration payable.

Moreover, don’t forget that the loss from contingent consideration is part of the expenses.

BUSINESS COMBINATION WITHOUT TRANSFER OF CONSIDERATION

Paano nagkakaroon ng acquisition of control, without transferring consideration?

Well, this arises when you hold an existing interest in a particular company, then that entity, reacquire it’s own
shares, as a result, bumaba yung outstanding shares. And dahil bumaba yung outstanding, tumaas ngayon yung
interest mo sa kumpaniya to the point na nagkaroon ka na ng control (presumption is when it’s already more than
50%). Hence, wala kang nitransfer na consideration, pero nagkaroon ka ng control, resulting to a business
combination.

Paano natin ngayon, imemeasure ang consideration, eh wala namang nitransfer?

• Conventionally, we measure consideration at fair value, right? Now dahil wala tayong nitransfer, the basis
of the consideration will be the ratio of the new interest to the fair value of the net identifiable assets of the
entity.
• And since, nagbago ang amount ng dati mong investment at may control ka na sa investee, you need to
AFAR NOTES : BUSINESS COMBINATION AND CONSOLIDATED FINANCIAL STATEMENTS.

revalue it and reclassifying the investment to investment in subsidiary, which will then result to either gain
or loss on remeasurement.

REVERSE ACQUISITION

Happens when the:

➢ Legal acquirer becomes the accounting acquiree;
➢ Legal acquiree becomes the accounting acquirer

APPLIED PRINCIPLE : substance over form

Nangyayari ‘to kung nag issue ng shares ang isang entity para ma-acquire ang isang company, pero dahil sa inissue niyang
shares, majority of the stocks ni acquirer ay hawak na ni acquiree, hence in the legal form, yung nag issue ng shares, siya talaga
si acquirer, siya nag issue ng consideration eh. Pero if we’ll evaluate the substance, wherein ang titingnan nating criterion ay
kung sino ang naka obtain ng ‘control’, we’ll treat the legal acquiree as the acquirer dahil siya na ang may hawak ng majority of
the stocks ng legal acquirer.

To illustrate, for us to visualize:

A has 3,000 outstanding shares.

B has 5,000 outstanding shares.

B issues 5 shares in exchange for each ordinary share of A.

Hence, the new outstanding shares of B are:

5000
15,000 (10,000 x 5)
Total : 20,000

From the outstanding shares of B, A already holds 75% (15,000/20,000) of it, naging 15,000 na dahil binigyan siya ni B ng 5 x
3000 shares in exchange of 3000 shares. Hence siya na yung nagkaroon ng control over B. Kahit si B naman talaga ang nag-
acquire. The situation was reversed.

How to compute for the goodwill in a reverse acquisition?

- To get the goodwill, isipin natin na si A na ang acquirer. Ngayon, pano yung consideration, eh wala naman siyang
inissue? Well, gagawa tayo ng “as if consideration”. Paano?

Ang goal natin sa pag compute ng as if consideration, as if mag-i-issue si accounting acquirer - A ng additional share, para itong
si legal acquirer ay magkaroon nang the same interest ni A sa kaniya. Di ba si A, meron na siyang 75% interest kay B. So dapat
si B, magkaroon din ng 75% interest kay A. So paano? Di ba currently, merong 3000 shares si A na hawak ni B, ngayon dapat
yang 3000 shares na yan ay dapat maging equivalent sa 75%. Hence, need mag-issue ni A ng 1000 shares (3000/75% x 25%),
para ang magiging outstanding na ay 4000 shares. Thus, kung may 3000 shares na hawak si B kay A, meron na siyang 75%
interest (3000/4000). So yung 1000 shares na yun, multiplied with the fair value will be the “as if consideration”.

Consideration paid : 1000 shares x fair value of A’s share

Less: FVNAA = B
Goodwill
AFAR NOTES : BUSINESS COMBINATION AND CONSOLIDATED FINANCIAL STATEMENTS.

CONSO FINANCIAL STATEMENTS AT ACQUISITION DATE

Note : These are the amounts of consolidated items immediately after the business combination.

ASSETS (Memory aid : ASSET is 5 letters hence 5 items ang hinahanap)

Acquirer assets – at book value xxx
Acquiree assets – at fair value xxx
Add : Goodwill xxx
Less : Cash issued for buscom (consideration) xxx
Less: Acquisition related costs xxx

LIABILITIES ( LIAB : 4 letters, hence apat ang hinahanap)

Parent assets – at book value xxx
Subsi assets – at fair value xxx
Add : Contingent consideration xxx
Add : Debt securities issued – net of bond issue costs at AC or OCI xxx

STOCKHOLDER’S EQUITY
ORDINARY SHARE CAPITAL (C/S : 2 letters, hence dalawa lang ang hinahanap)
Acquirer’s existing share capital xxx
Issued share capital for buscom xxx

SHARE PREMIUM (APIC : 4 letters, hence apat ang hinahanap)

Acquirer’s existing share premium xxx
Resulting share premium from issuance of share for buscom xxx
Share premium – contingent consideration xxx
Less: Share issuance costs xxx

RETAINED EARNINGS (tandaan mo nalang na lima to haha)

Parent existing retained earnings xxx
Add : Gain on bargain purchase xxx
Add/Less : Gain on remeasurement /revaluation (when due to step acquisition) xxx
Less : Expenses incurred (other than stock issuance costs) xxx
Less : Stock issuance costs (if the share premium is insufficient) xxx

NON-CONTROLLING INTEREST
• The computation was already presented in the step 5 : recognize and measure NCI discussion.