ACCOUNTING FOR

BUSINESS
COMBINATIONS
PFRS 3 Business Combinations

◦ PFRS 3 establishes the accounting and reporting requirements (known as ‘the acquisition
method’) for the acquirer in a business combination.
Acquisition method
◦ STEP 1:
 Identifying a business combination

Many transactions or other events involving the purchase of another entity or groups of assets require
further analysis to determine whether: (a) what was acquired constitutes a business; (b) control, as defined
by PFRS 10, has been obtained and (c) the combination is within the scope of PFRS 3.
Acquisition method
◦ STEP 2:
 Identifying the acquirer  

PFRS 3 requires an in-substance approach to identify the party that obtained control (i.e. the acquirer).
This approach looks beyond the legal form of the transaction and considers the rights of the combining
entities and their former owners.
Acquisition method
◦ STEP 3:
 Determining the acquisition date

The acquisition date is the date the acquirer obtains control of the acquiree, usually the specified
closing or completion date of the business combination.
Acquisition method
◦ STEP 4:
 Recognizing and measuring identifiable assets acquired and liabilities assumed

The most complex and time-consuming step which requires the acquirer to:
1. recognize identifiable assets acquired and liabilities assumed at the acquisition date, including some
intangible assets that may not have been previously recognized in the acquiree’s financial statements;
2. measure identifiable assets acquired and liabilities assumed at fair value, with a few exceptions;
3. determine the applicability of some specific recognition and measurement provisions; and,
4. classify or designate the assets acquired and liabilities assumed.
Acquisition method
◦ STEP 5:
 Recognizing and measuring any non-controlling interest (NCI)

The acquirer has a choice to measure present ownership-type NCI at either fair value or the
proportionate interest in the acquiree’s recognized identifiable net assets.  The measurement of NCI
affects the amount of goodwill that can be recognized and it can also impact post-combination reported
results.
Acquisition method
◦ STEP 6:
 Determining the consideration transferred

Consideration transferred can include cash and other assets transferred, liabilities incurred, and equity
interests issued by the acquirer.  Some considerations may be deferred or be contingent on future events. In
addition, consideration transferred in exchange for the acquired business may be different from the
contractual purchase price if the overall transaction includes elements that are not part of the business
combination exchange.
Acquisition method
◦ STEP 7:
 Recognizing and measuring goodwill or a gain from a bargain purchase

Goodwill or gain from a bargain purchase is measured as a residual amount.

Identifying the acquirer
It is the entity that transfers the cash
The entity that issues its equity interests
Has the largest portion of the voting rights
Has the ability to appoint or remove a majority of the members of the governing body of the combined
entity
Dominates the management of the combined entity
Pays a premium over the pre-combination fair value of the equity interests of the other combining entity.
Recognizing and measuring goodwill
Formula
Consideration transferred Pxx
Non-controlling interest (NCI) in the acquire xx
Previously held equity interest in the acquire xx
Total Pxx
Less: Fair value of net identifiable assets acquired (xx)
Goodwill/ Gain on a bargain purchase Pxx
Acquisition-related costs
Acquisition related costs are expensed when incurred except for costs to issue debt securities and equity
securities.
Bond issue costs are deducted from the carrying amount of the bonds payable.
Costs to issue equity securities are deducted from share premium, if insufficient from retained earnings.
Sample problem