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Module No. 1 - Week 1 Businessn Combination

The document discusses accounting for business combinations according to Philippine Financial Reporting Standards (PFRS) and International Financial Reporting Standards (IFRS). It provides 3 key points: 1) Business combinations are accounted for using the acquisition method, which requires identifying the acquirer, determining the acquisition date and price paid, and recognizing and measuring the identifiable assets acquired and liabilities assumed. 2) Any excess of the price paid over the fair value of identifiable net assets acquired results in goodwill. A bargain purchase results in a gain. 3) An example problem demonstrates recording a business combination, including goodwill, acquisition costs, and journal entries.

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JayaAntolinAyuste
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245 views5 pages

Module No. 1 - Week 1 Businessn Combination

The document discusses accounting for business combinations according to Philippine Financial Reporting Standards (PFRS) and International Financial Reporting Standards (IFRS). It provides 3 key points: 1) Business combinations are accounted for using the acquisition method, which requires identifying the acquirer, determining the acquisition date and price paid, and recognizing and measuring the identifiable assets acquired and liabilities assumed. 2) Any excess of the price paid over the fair value of identifiable net assets acquired results in goodwill. A bargain purchase results in a gain. 3) An example problem demonstrates recording a business combination, including goodwill, acquisition costs, and journal entries.

Uploaded by

JayaAntolinAyuste
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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ACCOUNTING FOR BUSINESS COMBINATION

MODULE NO. 1- WEEK 1


 Lecture / Discussion
 Read Chapter 13 (prescribed textbook / physical book: Advanced Accounting
Vol. 2 by Pedro Guerrero and Jose F. Peralta
 Assignment / Quiz (Uploaded in LMS / Blackboard)
 On line discussion (google meet with the students)
 Other Reference Material (International Financial Reporting Standards (IFRS)
and (Philippine Financial Reporting Standards (PFRS)

LEARNING OBJECTIVES
The learners shall be able to define a business combination.
The learners shall be able to compute goodwill arising from a business combination.

(BUSINESS COMBINATION PART 1)


Business Combination
A business combination is defined in PFRS / IFRS 3 as a transaction or other event in
which an acquirer obtains control of one or more business (the acquire).
The objective of PFRS is to set out the accounting and disclosure requirements for a
business combination, to enhance the relevance, reliability and comparability of the
information presented in the financial statements.

Acquisition Method of Accounting for Business Combinations


IFRS 3 requires that all business combination be accounted for by applying the
acquisition method (called the purchase method).
The application of the acquisition method requires the following:
A. Identify the acquirer
B. Determine the acquisition date
C. Determine the consideration given or price paid by the acquirer
D. Recognized and measure the identifiable assets, the liabilities assumed and any
non-controlling interest in the acquire. Any resulting goodwill or gain from bargain
purchase should be recognized.
IFRS 3 requires the consideration given in a business combination to be measured at
fair value. This is determined as the sum of the acquisition-date fair values of:
 The assets transferred by the acquirer
 The liabilities incurred by the acquirer
 The equity interests issued by the acquirer.
Usual forms of consideration include cash, other asset, contingent consideration,
ordinary or preference equity instruments, options, warrants and member interest of
mutual entities.
Acquisition-related costs
The costs that the acquirer incurs to effect a business combination, such as
broker’s fee; accounting and other professional fees are not included in the price of the
company acquired and are expensed.
Stock Issuance Costs
When the acquirer issues share of stock for the net assets acquired, the stock
issuance costs such as SEC registration fees and documentary stamp tax are treated
as a deduction from share premium (additional paid in capital (APIC) from previous
share issuance. In case APIC is reduced to zero, the remaining stock issuance costs is
treated as a contra account or charged from retained earnings.

Records and Measure the Acquiree’s Assets and Liabilities that are assumed
The total of all identifiable assets less liabilities recorded is referred to as the fair
value of the net assets. The only goodwill recorded in an acquisition is “new” goodwill
arising from business combination. The fair value of the net assets recorded is not likely
to be equal to the price paid by the acquirer.
PFRS 3 defines goodwill as an asset representing the future economic benefits arising
from other assets acquired in a business combination that are not individually identified
and separately recognized.

Price paid exceeds the fair values assigned to net assets


Price paid XXX
FMV of net assets acquired XXX
Goodwill XXX
Price paid is less than fair values assigned to net assets
Price paid xxxx
FMV of net assets acquired xxxx
Gain from acquisitions xxxx

APPLYING THE ACQUISITION METHOD


Illustrative Problem - A Company issues 80, 000 shares of its P10 par value common
stock with a market value of P40 each for B Company ‘net assets. A Company pays
professional fees of P100, 000 and stock issuance cost of P30, 000.
B Company has the following Statement of Financial Position on July 1, 2020:
B Company
Statement of Financial Position
July 1, 2020
Cash 500, 000 Current liabilities 150, 0000

Inventory 500, 000 Noncurrent Liabilities 500, 000


Land 550, 000 Common stock (P1 par) 50, 000
Building 600, 000 Additional Paid in capital 700, 000
Equipment 150, 000 Retained Earnings 925, 000
Total Assets 2, 300, 000 Total liabilities and Equity 2, 300, 000

Fair values for all the accounts of B Company have been measured as of July 1, 2020
as follows:
Cash 500, 000
Inventory 580, 000
Land 1, 060, 000
Building 750, 000
Equipment 150, 000
Unrecognized receivables 225, 000
Total assets P3, 265, 000

Current liabilities P125, 000


Noncurrent liabilities 520, 000
Total liabilities 645, 000
Fair values of net identifiable assets P2, 620, 000
Analysis:
Price paid (80, 000 shares x P40 market value P3, 200, 000
Fair value of net assets acquired from B Co., (2, 620, 000)
Goodwill P 580, 000

Journal entries recorded by A Company (Acquirer) are as follows:

Cash 500, 000


Receivables 225, 000
Inventory 580, 000
Land 1, 060, 000
Building 750 ,000
Equipment 150, 000
Goodwill 580, 000
Current Liabilities 125, 000
Noncurrent Liabilities 520, 000
Common Stock(at P10 par value 800, 000
Additional Paid in capital 2, 400, 000
To record the net assets acquired by the acquirer including new goodwill
from business combination.

Acquisition Expenses 50, 000


Additional paid in capital (A Co., ) 30, 000
Cash 80, 000
To record acquisition related costs
ASSIGNMENT:
Refer to prescribed textbook / physical book (Advanced Accounting Vol. 2 by Guerrero
and Peralta)
(Uploaded in LMS / Blackboard)
*The students could consult the teacher via LMS or email.

Problem 1
HOPE Company acquired the net assets of WISDOM Company on January 3,
2017, for P565, 000. In addition, P5, 000 of professional fees were incurred in
consummating the combination. At the time of acquisition, WISDOM Company reported
the following book values and current market value as follows:
Book values Fair value
Cash and Receivables P 50, 000 P50, 000
Inventory 100, 000 150, 000
Building and Equipment (net) 200, 000 300, 000
Patent - 200, 000
Total Assets P350, 000 P700, 000
Accounts Payable P 30, 000 P 30, 000
Common stock 100, 000 -
Additional Paid-in capital 80, 000 -
Retained earnings 140, 000 -
Total Liabilities and Shareholder’s Equity P350, 000

Required:
Give the journal entries by HOPE Company to record the acquisition of the net assets of
Cat Company.

(Synchronous)
Google meet with the students (Every Friday)
On line discussions / lecture about the answers or solutions for problems assigned to
the students.

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