BUSINESS COMBINATION

Business Combination

•May be friendly or unfriendly.

•Resistance – often involves various moves by
the target company.
Defensive Tactics to Resist Proposed Business
Combination
• Poison Pill – amendment to the AOI or BL to make it more difficult to
obtain stockholder approval for a takeover.
• Greenmail – An acquisition of common stock presently owned by the
prospective acquiring company at an amount substantially in excess
of the prospective acquirer’s cost.
• White Knight or White Squire – a search for a candidate to be
acquirer in a friendly takeover.
• Pac-man Defense – attempting an unfriendly takeover of the would
be acquiring company.
• Selling the Crown Jewels or Scorched Earth – sale of valuable assets
to others to make the firm less attractive to the would be acquirer.
Defensive Tactics to Resist Proposed Business
Combination
• Shark Repellant – acquisition of substantial amounts of outstanding
common stock or incurring substantial long-term debt in exchange
for outstanding common stock.
• Leveraged buyouts – arrangement to buy out the stockholders using
the company’s assets to finance the deal. The bonds often take the
form of junk bonds.
• Mudslinging defense – When the acquiring company offers stock
instead of cash, the prospective acquiring company’s management
may try to convince the stockholders that the stock would be a bad
investment.
• The defensive acquisition tactic – the prospective acquirer may try to
rid itself of the excess cash by attempting to takeover of its own.
Reasons for Business Combination

•Cost advantage
•Lower risk
•Avoidance of takeovers
•Acquisition of Intangible Assets
•Other reason
Types of Business Combination Based on
Structure
•Horizontal Integration
•Vertical Integration
•Conglomerate Combination
•Circular Combination
Possible Structures

• One business becomes a subsidiary of another;

• Two entities are legally merged into on entity;
• One entity transfers its net assets to another entity;
• An entity’s owners transfer their equity interests to the
owners of another entity;
• Two or more entities transfer their net assets, or the
owners transfer their equity interests, to a newly-formed
entity; or
• A group of former owners of one entity obtains control of a
combined entity.
Methods/Legal Forms of Effecting Business
Combination
• Acquisition of assets – the books of the acquired accompany
are closed and its assets and liabilities are transferred to the
books of the acquirer.
Features:
• The acquirer acquires from another enterprise all or most
of the gross assets or net assets of the other enterprise
for cash or other property, debt instruments and equity
instruments.
• The acquirer must acquire 100% of the net assets of the
acquired
• It involves only when the acquirer company survives.
Methods/Legal Forms of Effecting Business
Combination
• Acquisition of common stock – the books of the acquirer
company remain intact and consolidated financial
statements are prepared periodically.
Features:
• The acquirer acquires from another enterprise all or most
of the gross assets or net assets of the other enterprise
for cash or other property, debt instruments and equity
instruments.
• The acquirer must acquire 100% of the net assets of the
acquired
• It involves only when the acquirer company survives.
Two Independent Issues Regarding the
Consummation of Business Combination
•What is acquired
•What is given up
Acquisition of Assets

• The terms merger and consolidation are often used

synonymously for acquisitions.
• Merger – all but one of the combining companies
go out of existence.
• Consolidation – all the combining entities dissolved
and a new corporation is formed to take over their
net assets.
Accounting Concept for Business Combination

• Definition – Business combination is a transaction or other event

in which an acquirer obtains control of one or more businesses.
• Business – integrated set of activities and assets that is capable
of being conducted and managed for the purpose of providing
return in the form of dividends, lower costs or other economic
benefits directly to investors or other owners, members or
participants.
• The following are within the scope of PFRS 3:
• Combinations involving mutual entities
• Combinations achieved by contract alone (dual listing
stapling)
Accounting Concept for Business Combination

• The following are not within the scope of PFRS 3:

• If it results to the formation of all types of joint arrangement
and the scope exception only applies to the financial
statements of the joint venture and the joint operation itself
and not the accounting for the interest in a joint arrangement
in the financial statements of a party to the joint
arrangement.
• Where the business combination involves entities or
businesses under common control.
• Where the acquisition of an asset or a group of assets does
not constitute a business
The Acquisition Method

• All assets and liabilities are identified and reported

at their fair values.
• Applied on the acquisition date.
• From the point of view of the acquirer.
Accounting Procedures for a Business
Combination
• Identify the acquirer;
• Determine the acquisition date;
• Calculate the fair value of the purchase consideration
transferred
• Recognize and measure the identifiable assets and liabilities of
the business, and
• Recognize and measure either goodwill or a gain from bargain
purchase, if either exist in the transaction.
• If the acquirer gains control by purchasing less than 100% of the
acquired entity – measure and recognize the non-controlling
interest.
Identifying the Acquirer

•The acquirer is the entity that obtains

control of the acquiree.
Determining the Acquisition Date

•Acquisition date is the date on which the

acquirer obtains control of the acquire.
•The business combination occurs at the date
the assets or net assets are under the control
of the acquirer.
Four Main Areas Where the Selection of the
Date Affects the Accounting for a Business
Combination
• The identifiable assets acquired and liabilities assumed by
the acquirer are measured at the fair value on acquisition
date.
• The consideration paid by the acquirer is determined as the
sum of the fair values of assets given, equity issued and/or
liabilities undertaken in an exchange for the net assets or
shares of another entity.
• The acquirer may acquire only some of the shares of the
acquiree.
• The acquirer may have previously held an equity interest in
the acquiree prior to obtaining control of the acquiree.
Calculating the Fair Value of the Consideration
Transferred
•Measured at fair value
•Calculated as the 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
•The equity interest issued by the acquirer
The Consideration Transferred Includes:

•Cash or other Monetary Assets

•Nonmonetary Assets
•Equity instrument
•Liabilities undertaken
•Contingent consideration
•Share-based payment awards
Excluded from the measurement of
consideration paid
• Acquisition-related costs
• Costs directly attributable to the combination
• Indirect, ongoing costs, general costs
• Costs of issuing equity instruments
• Costs of issuing debt instruments
Principles of Assessing What is Part of the
Business Combination
•Transactions entered into or any amounts
paid that are designed primarily for the
economic benefit of the acquiree before the
combination. – included
•Compensation to employee or former
owners of acquiree – depends on the nature
of arrangement
Recognition and Measurement of Assets
Acquired and Liabilities Assumed
• Under the acquisition method, the acquirer is required to:
1. Recognize identifiable assets and liabilities separately from
goodwill; and
2. Measure such assets and liabilities at their fair values on the date
of acquisition.

Conditions:
• It must meet the definition of assets and liabilities at acquisition
date.
• The item acquired or assumed must be part of the business acquired
rather than the result of a separate transaction.
Valuation Techniques

• Market approach or market-based – uses prices and other

relevant information generated by market transactions
involving identical or comparable assets, liabilities, or a group
of assets and liabilities.
• Cost approach or cost-based – reflects that amount that would
be required to currently replace the service capacity of an
asset
• Income approach or income-based – based on the future
economic benefit derived from owning the asset or converts
future amounts to a single current amount, reflecting current
market expectations about these future amounts.
Valuation of Identifiable Assets and Liabilities

Identifiable Tangible Assets

Current Assets – recorded at estimated fair values.
Assets held for sale – measured in accordance with
PFRS 5 – noncurrent assets held for sale
Property, plant and equipment – recorded at
estimated fair values.
Investments in equity-accounted entities – based on
fair value whether investment in associate or a trade
investment
Valuation of Identifiable Assets and Liabilities

Identifiable Intangible Assets (met the separability

criterion or contractual-legal criterion)
Existing intangible assets – at estimated fair value
Intangible assets not currently recorded by the
acquiree – must be separately recorded
When the acquiree is a lessee with respect to assets
in use – an asset or liability is recorded at fair value
Valuation of Identifiable Assets and Liabilities

Existing Liabilities – recorded at fair value

Contingent Liabilities – recorded at fair value
Liabilities Associated with Restructuring or Exit
Activities – recorded at fair value as a separate
liability.
Valuation of Identifiable Assets and Liabilities

Other Assets/Liabilities
Employee benefit plans – not recorded at fair value but as a
difference of projected benefit obligation and plan assets.
Indemnification assets – measured on the same basis as that
of the indemnified asset or liability at acquisition date.
Income taxes – deferred taxes must be measured in
accordance with PAS 12.
Employee benefits – measured in accordance to PAS 19
Measuring and Recognizing Goodwill or a Gain
from Bargain Purchase
The acquirer shall recognize goodwill as of the acquisition date measured
as the excess of (I) over (II) below:
I. The aggregate of:
• The consideration transferred measured in accordance with this
standards, which generally requires acquisition date fair value.
• The amount of any non-controlling interest in the acquiree
measured in accordance with this standard
• Is a business combination achieved in stages, the acquisition date
fair value of the acquirer’s previously held in equity interest in the
acquiree.
II. The net of the acquisition date amounts of the identifiable assets
acquired and the liabilities assumed.
Items Included in Goodwill

• Acquire intangible asset that is not identifiable

• Items that do not qualify as assets at the acquisition
date
Bargain Purchase Gain

• Bargain purchase gain is recognized:

• An entity should first assess whether:
• It has correctly identified all the assets acquired and
liabilities assumed;
• It has correctly measured at fair value all the assets
acquired and liabilities assumed; and
• It has correctly measured the consideration transferred
• Any remaining excess should be recognized immediately
in profit or loss
Use of Provisional Values

•If the initial accounting for a business

combination is incomplete by the end of
the reporting period in which the
combination occurs, the financial
statements should be prepared using
provisional amounts for the items for
which the accounting is incomplete.
Adjustments to Provisional Values

• PFRS 3 permits adjustments to items recognized in

the original accounting for a business combination
as long as it is within the measurement period.
Post-combination Accounting

• In general, assets acquired, liabilities assumed or incurred,

and equity instruments issued in a business combination are
subsequently measured and accounted for in accordance
with other applicable PFRSs, according to their nature.
• In summary, there are normally three areas where
adjustments need to be made subsequent to the initial
accounting after acquisition:
• Goodwill
• Contingent liabilities
Measurement Period

• The period after the initial acquisition date during

which the acquirer may adjust the provisional
amounts recognized at acquisition date.
• Measurement period ends at the earlier of:
• One year from the acquisition date
• The date when the acquirer receives needed
information about facts and circumstances
Contingent consideration

• Recognized at fair value on the acquisition date

• Will be classified as either a liability or equity depending on its
nature
• Subsequent to business combination, measures to be used:
• Where the contingent consideration is classified as an asset
or liability, the acquirer measures the fair value of the
contingency at each reporting date until contingency is
resolved.
• Where the contingent consideration is classified as equity,
no measurement is required until the contingency is
resolved.