Adaptive Community for the Continuity of Education and Student Services

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MODULE 1
Accounting for Business Combinations/Advanced Accounting 2

YOUR GOALS

This module allows you to explore the fundamental theories of business

combination as well as the practical application at the onset of combination. At the
end of this learning module, you are expected to demonstrate the following
competencies:

1. Identify the features of a business combination and discuss the salient points in
the process of business combination.
2. Demonstrate the proper method of accounting for business combination and
proper valuation of identifiable assets and liabilities in a business combination.
3. Prepare consolidated financial statements at the date of acquisition.

YOUR PROJECT

When you have finished going through the experiences and reading resources
contained in this module, you will prepare an analysis based on the cases that are
provided. Please take note of the writing conditions and expectations that follow.

CHOOSE YOUR ADVENTURE! CHOOSE TO EXPLAIN WELL!

Level 1 – Solve problem 1. Your The following will be the rubrics for assessing
highest possible grade is 50 your case analysis:
points.
Level 2 – Analyze problem 2. Your Only the totals and the subtotals are given points. Subtotals
will have 2 points each while the totals will have 3 points
highest possible grade is 60
each.
points.
Level 3 – Analyze Problem 3. Your For journal entries, each entry will have 2 points each.
highest possible grade is 70
points.
If you analyze either level 2 or
level 3, the difference in the
points compared to level 1 will
already be your base score. Ex.
Should you choose level 2 then
you will
Course already
Code haveFinancial
– Advance 10 points.
Accounting and Reporting 2 1
School of Business, First Semester, SY 2020-2021
 Adaptive Community for the Continuity of Education and Student Services
National Teachers College

YOUR EXPERIENCE

Be guided by the following schedule that you can follow in order to manage your
learning experience well:

WEEK TASK OUTPUT

1 1 I/PFRS 3 Business Combination definition and scope
2 2 Acquisition method of accounting for business combination and
Valuation of Identifiable Assest and Liabilities
3 3 I/PFRS 10 Consolidated Statement of Financial Position – Date of
4 Acquisition
5
4 Problem solving (prelims)
6

The main guidance to this subject are I/PFRS 3 Business Combination and I/PFRS
10 Consolidated Financial Statements. These standard are available online but portions
of these standards will be included in this module. You may refer to other materials that
may be available to you about the approaches in accounting for business
combination. Note however that I/PFRS 3 was issued in January of 2008, hence the
materials you will refer too must not be earlier than this as there were significant changes
that occurred from the prior standard that we follow. Note that our school library has
online resources that you can access.

TASK 1: Read the introduction to business combination as discussed in I/PFRS 3. In order

to clearly understand this standard, take note of the following:

1. Not all transactions relating to investment in another corporation may be

considered under I/PFRS 3, hence take a close attention at the guidance given
by this standard when to consider it a business combination.
2. As you may read later on, only one method is allowed to be used for business
combination, please take note of the steps.

READING MATERIAL NO. 1

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[IFRS 3, Appendix A]
Business Combination - A transaction or other event in which an acquirer obtains control of one or
more businesses. Transactions sometimes referred to as 'true mergers' or 'mergers of equals' are also
business combinations as that term is used in [IFRS 3]

Business - An integrated set of activities and assets that is capable of being conducted and managed for
the purpose of providing goods or services to customers, generating investment income (such as
dividends or interest) or generating other income from ordinary activities*

Acquisition Date - The date on which the acquirer obtains control of the acquiree
Acquirer - The entity that obtains control of the acquiree
Acquiree - The business or businesses that the acquirer obtains control of in a business combination

*definition narrowed by 2018 amendments to IFRS 3 issued on 22 October 2018 effective 1 January 2020

Scope
IFRS 3 must be applied when accounting for business combinations, but does not apply to:
• The formation of a joint venture [IFRS 3.2(a)]

• The acquisition of an asset or group of assets that is not a business, although general guidance
is provided on how such transactions should be accounted for [IFRS 3.2(b)]

• Combinations of entities or businesses under common control (the IASB has a separate agenda
project on common control transactions) [IFRS 3.2(c)]

• Acquisitions by an investment entity of a subsidiary that is required to be measured at fair value

through profit or loss under IFRS 10 Consolidated Financial Statements. [IFRS 3.2A]

Determining whether a transaction is a business combination

IFRS 3 provides additional guidance on determining whether a transaction meets the definition of a
business combination, and so accounted for in accordance with its requirements. This guidance
includes:
• Business combinations can occur in various ways, such as by transferring cash, incurring
liabilities, issuing equity instruments (or any combination thereof), or by not issuing
consideration at all (i.e. by contract alone) [IFRS 3.B5]

• Business combinations can be structured in various ways to satisfy legal, taxation or other
objectives, including one entity becoming a subsidiary of another, the transfer of net assets
from one entity to another or to a new entity [IFRS 3.B6]

• The business combination must involve the acquisition of a business, which generally has three
elements: [IFRS 3.B7]
o Inputs – an economic resource (e.g. non-current assets, intellectual property) that
creates outputs when one or more processes are applied to it

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o Process – a system, standard, protocol, convention or rule that when applied to an input
or inputs, creates outputs (e.g. strategic management, operational processes, resource
management)

o Output – the result of inputs and processes applied to those inputs.

References
Guerrero, P & Peralta, J 2017. Advance Accounting Volume 2. C.M. Recto, Manila. GIC
Enterprises & Co., Inc.

Deloitte. IFRS 3. Retrieved July 15, 2020 from iasplus.com

Case 1

The June 1, 2017 statement of financial position of Straw Company at book value and
fair market values are as follows:
Book Value Fair Value
Current Assets P240,000 P280,000
Land 20,000 100,000
Building and equipment (net) 400,000 270,000
Patents 10,000 10,000
Total Assets P670,000 P680,000
Liabilities P250,000 P250,000
Common stock 100,000
Retained earnings 320,000 430,000
Total Liabilities and stockholders’ equity P670,000 P680,000

On June 1, 2017 Pepsi, Inc. purchased all of Straw Company’s stock for P600,000.

Required:
a. Prepare journal entry on the books of Pepsi, Inc. to record the stock acquisition.
b. Prepare a schedule showing the determination and allocation of the excess.
c. Prepare the working paper elimination entries.

TASK 2: Read the accounting method that is allowed to be used by I/PFRS 3. Take note
of the following:
1. Take note of what consideration were used to acquire the acquiree.

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2. Be very careful as to whose books you are supposed to make the journal entries
during the acquisition.
3. Each transaction has three possible effects to the acquirer, it may be purchased
with no goodwill, with goodwill or may be a bargain. The consideration may also
come in a form of a contingency.

READING MATERIAL NO. 2

Method of accounting for business combinations

Acquisition method
The acquisition method (called the ‘purchase method’ in the 2004 version of IFRS 3) is used for all
business combinations. [IFRS 3.4]
Steps in applying the acquisition method are: [IFRS 3.5]
1. Identification of the ‘acquirer’
2. Determination of the ‘acquisition date’
3. Recognition and measurement of the identifiable assets acquired, the liabilities assumed and
any non-controlling interest (NCI, formerly called minority interest) in the acquiree
4. Recognition and measurement of goodwill or a gain from a bargain purchase

Identifying an acquirer
The guidance in IFRS 10 Consolidated Financial Statements is used to identify an acquirer in a business
combination, i.e. the entity that obtains ‘control’ of the acquiree. [IFRS 3.7]
If the guidance in IFRS 10 does not clearly indicate which of the combining entities is an acquirer, IFRS 3
provides additional guidance which is then considered:
• The acquirer is usually the entity that transfers cash or other assets where the business
combination is effected in this manner [IFRS 3.B14]

• The acquirer is usually, but not always, the entity issuing equity interests where the transaction
is effected in this manner, however the entity also considers other pertinent facts and
circumstances including: [IFRS 3.B15]

o relative voting rights in the combined entity after the business combination

o the existence of any large minority interest if no other owner or group of owners has a
significant voting interest

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o the composition of the governing body and senior management of the combined entity

o the terms on which equity interests are exchanged

• The acquirer is usually the entity with the largest relative size (assets, revenues or profit) [IFRS
3.B16]

• For business combinations involving multiple entities, consideration is given to the entity
initiating the combination, and the relative sizes of the combining entities. [IFRS 3.B17]

Acquisition date
An acquirer considers all pertinent facts and circumstances when determining the acquisition date, i.e.
the date on which it obtains control of the acquiree. The acquisition date may be a date that is earlier
or later than the closing date. [IFRS 3.8-9]

IFRS 3 does not provide detailed guidance on the determination of the acquisition date and the
date identified should reflect all relevant facts and circumstances. Considerations might include,
among others, the date a public offer becomes unconditional (with a controlling interest
acquired), when the acquirer can effect change in the board of directors of the acquiree, the date
of acceptance of an unconditional offer, when the acquirer starts directing the acquiree’s
operating and financing policies, or the date competition or other authorities provide necessarily
clearances.

Acquired assets and liabilities

IFRS 3 establishes the following principles in relation to the recognition and measurement of items
arising in a business combination:

• Recognition principle. Identifiable assets acquired, liabilities assumed, and non-controlling

interests in the acquiree, are recognized separately from goodwill [IFRS 3.10]

• Measurement principle. All assets acquired and liabilities assumed in a business combination
are measured at acquisition-date* fair value. [IFRS 3.18]

*Acquisition date as defined above should be the date when actual control of the acquiree was
given to the acquired.

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Exceptions to the recognition and measurement principles

The following exceptions to the above principles apply:

• Liabilities and contingent liabilities within the scope of IAS 37 or IFRIC 21 – for
transactions and other events within the scope of IAS 37 or IFRIC 21, an acquirer applies
IAS 37 or IFRIC 21 (instead of the Conceptual Framework) to identify the liabilities it has
assumed in a business combination [IFRS 3.21A-21B]

• Contingent liabilities and contingent assets – the requirements of IAS 37 Provisions,

Contingent Liabilities and Contingent Assets do not apply to the recognition of contingent
liabilities arising in a business combination; an acquirer does not recognize contingent
assets acquired in a business combination [IFRS 3.22-23A]

• Income taxes – the recognition and measurement of income taxes is in accordance

with IAS 12 Income Taxes [IFRS 3.24-25]

• Employee benefits – assets and liabilities arising from an acquiree’s employee benefits
arrangements are recognized and measured in accordance with IAS 19 Employee
Benefits (2011) [IFRS 2.26]

• Indemnification assets – an acquirer recognizes indemnification assets at the same time

and on the same basis as the indemnified item [IFRS 3.27-28]

• Reacquired rights – the measurement of reacquired rights is by reference to the

remaining contractual term without renewals [IFRS 3.29]

• Share-based payment transactions – these are measured by reference to the method

in IFRS 2 Share-based Payment

• Assets held for sale – IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations is applied in measuring acquired non-current assets and disposal groups
classified as held for sale at the acquisition date.

In applying the principles, an acquirer classifies and designates assets acquired and liabilities assumed
on the basis of the contractual terms, economic conditions, operating and accounting policies and
other pertinent conditions existing at the acquisition date. For example, this might include the
identification of derivative financial instruments as hedging instruments, or the separation of

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embedded derivatives from host contracts.[IFRS 3.15] However, exceptions are made for lease
classification (between operating and finance leases) and the classification of contracts as insurance
contracts, which are classified on the basis of conditions in place at the inception of the contract. [IFRS
3.17]

Acquired intangible assets must be recognized and measured at fair value in accordance with the
principles if it is separable or arises from other contractual rights, irrespective of whether the acquiree
had recognized the asset prior to the business combination occurring. This is because there is always
sufficient information to reliably measure the fair value of these assets.

[IAS 38.33-37] There is no ‘reliable measurement’ exception for such assets, as was present under IFRS
3 (2004).

Business combination achieved in stages (step acquisitions)

Prior to control being obtained, an acquirer accounts for its investment in the equity interests of an
acquiree in accordance with the nature of the investment by applying the relevant standard,
e.g. IAS 28 Investments in Associates and Joint Ventures (2011), IFRS 11 Joint
Arrangements, IAS 39 Financial Instruments: Recognition and Measurement or IFRS 9 Financial
Instruments. As part of accounting for the business combination, the acquirer remeasures any
previously held interest at fair value and takes this amount into account in the determination of
goodwill as noted above [IFRS 3.32] Any resultant gain or loss is recognized in profit or loss or other
comprehensive income as appropriate. [IFRS 3.42]

The accounting treatment of an entity’s pre-combination interest in an acquiree is consistent with the
view that the obtaining of control is a significant economic event that triggers a remeasurement.
Consistent with this view, all of the assets and liabilities of the acquiree are fully remeasured in
accordance with the requirements of IFRS 3 (generally at fair value). Accordingly, the determination of
goodwill occurs only at the acquisition date. This is different to the accounting for step acquisitions
under IFRS 3(2004).

Measurement period

If the initial accounting for a business combination can be determined only provisionally by the end of
the first reporting period, the business combination is accounted for using provisional amounts.
Adjustments to provisional amounts, and the recognition of newly identified asset and liabilities, must
be made within the ‘measurement period’ where they reflect new information obtained about facts
and circumstances that were in existence at the acquisition date. [IFRS 3.45] The measurement period
cannot exceed one year from the acquisition date and no adjustments are permitted after one year
except to correct an error in accordance with IAS 8. [IFRS 3.50]

Related transactions and subsequent accounting

General principles

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In general:
• transactions that are not part of what the acquirer and acquiree (or its former owners)
exchanged in the business combination are identified and accounted for separately from
business combination

• the recognition and measurement of assets and liabilities arising in a business combination
after the initial accounting for the business combination is dealt with under other relevant
standards, e.g. acquired inventory is subsequently accounted under IAS 2 Inventories. [IFRS
3.54]

When determining whether a particular item is part of the exchange for the acquiree or whether it is
separate from the business combination, an acquirer considers the reason for the transaction, who
initiated the transaction and the timing of the transaction. [IFRS 3.B50]

Contingent consideration
Contingent consideration must be measured at fair value at the time of the business combination and
is taken into account in the determination of goodwill. If the amount of contingent consideration
changes as a result of a post-acquisition event (such as meeting an earnings target), accounting for the
change in consideration depends on whether the additional consideration is classified as an equity
instrument or an asset or liability: [IFRS 3.58]
• If the contingent consideration is classified as an equity instrument, the original amount is not
remeasured

• If the additional consideration is classified as an asset or liability that is a financial instrument,

the contingent consideration is measured at fair value and gains and losses are recognized in
either profit or loss or other comprehensive income in accordance with IFRS 9 Financial
Instruments or IAS 39 Financial Instruments: Recognition and Measurement

• If the additional consideration is not within the scope of IFRS 9 (or IAS 39), it is accounted for in
accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets or other IFRSs as
appropriate.

Note: Annual Improvements to IFRSs 2010–2012 Cycle changes these requirements for business
combinations for which the acquisition date is on or after 1 July 2014. Under the amended
requirements, contingent consideration that is classified as an asset or liability is measured at fair value
at each reporting date and changes in fair value are recognized in profit or loss, both for contingent
consideration that is within the scope of IFRS 9/IAS 39 or otherwise.
Where a change in the fair value of contingent consideration is the result of additional information
about facts and circumstances that existed at the acquisition date, these changes are accounted for as
measurement period adjustments if they arise during the measurement period (see above). [IFRS 3.58]

Some guidance on the measurement of fair values as provided in the specific I/PFRS:

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Cash and Cash Equivalents, Short-term Monetary Assets and Deferred Consideration
Cash and cash equivalents, and short-term monetary assets given and short-term liabilities incurred
are measured at fair value, in most cases this is equal to their face values or nominal values. For
example a Time Deposit in the acquiree’s books valued at P100,000 is still to be valued at P100,000
when consolidating.

Deferred consideration is measured and recorded at present value and not the nominal/face value.
The rate to be used is the acquirer’s current borrowing cost.

Illustration
Cross Company acquires Nadine Company on January 1, 2020, Included in the purchase consideration
is an amount of P10 million payable on January 1, 2022. P Company’s borrowing cost on acquisition
date is 8% per annum.

In order to compute the fair value, we must get the present value of the payable computed as follows:

P10,000,000 / (1+.08)2 = P8,573,388

To record, make the following entry:

Cost of combination 8,573,388

Deferred liability 8,573,388

In the next 2 years the value of the liability is to be increased to P5 million by recognizing finance cost
in the profit and loss. Journal entries are as follows:

At the end of 1st year:

Finance cost (8% x 8,573,388) 685,871
Deferred Liability 685,871

At the end of 2nd year:

Finance cost [8% x( 8,573,388+685,871)] 740,740
Deferred Liability 740,740

Upon payment
Deferred liability 10,000,000
Cash 10,000,000

Equity Instruments Transferred

Equity instruments issued are measured at their fair value. For quoted equity instruments issued, the
published price at the date of exchange is the best evidence of an instrument’s fair value.
Where published price is not reliable or does not exist for the shares issued by the acquirer, the fair
value may be estimated by reference to their proportional interest in the fair value of the acquirer or

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by reference to the proportional interest in the fair value of the acquiree obtained, whichever is more
clearly evident.

Non-Financial Asset Transferred

Non-financial assets given shall be measured using their market prices, estimated realizable values,
independent valuations or other available information relevant to the valuation. If the fair value differs
from the carrying amounts as at the acquisition date, the acquirer remeasures the carrying amount to
fair value and recognizes the resulting gain or loan in profit or loss (IFRS 3.38).

The cost of a business combination includes liabilities incurred or assumed by the acquirer in exchange
for control of the acquire. Future losses or other costs expected to be incurred as a result of a
combination are not liabilities incurred or assumed by the acquirer in exchange for control of the
acquire, and are not, therefore, included as part of the cost of combination.

When the property is transferred to the acquiree rather than to its former shareholders, the acquirer
shall measure the non-monetary assets transferred at their carrying amounts rather than at their fair
value, so that it does not recognize a gain or loss, both before and after the business combination
(I/PFRS 3.38).

Illustration
P Ltd acquires 100% interest in the equity shares of S Ltd from two controlling shareholders on January
1, 2020. The terms of the business combination include:

(i) P Ltd shall pay an amount of P10 million to the two controlling shareholders of S Ltd;
(ii) P Ltd shall inject a property in to S Ltd. The carrying amount of the property in the accounts
of P Ltd at acquisition date is P20 million. The fair market value of the property at
acquisition date is P30 million;
(iii) P Ltd shall assume the bank loans of P5 million taken by the two controlling shareholders
when they invested in S Ltd; and
(iv) P Ltd shall bear the future losses and future restructuring costs of S Ltd, estimated at P6
million.
The cost of combination is computed as follows:
Cash consideration P 10 million
Liabilities assumed 5 million
Property transferred 20 million
Cost of Combination P 35 million

Assets with Uncertain Cash Flows (valuation allowance)

An acquirer is not permitted to recognize a separate valuation allowance as of the acquisition date for
assets acquired in a business combination that are measured at their acquisition-date fair values
because the effects of uncertainty about future cash flows are included in the fair value measured.
The principle of “no valuation allowance” also applies to property, plant and equipment such that ,
following a business combination, such as assets are stated at a single fair value amount, and not at
gross “deemed cost” and accumulated depreciation.

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Unrecognized Assets and Liabilities

The acquirer may recognize some assets and liabilities that the acquiree had not previously recognized
in its financial statements.

Acquisition costs

Costs of issuing debt or equity instruments are accounted for under IAS 32 Financial Instruments:
Presentation and IAS 39 Financial Instruments: Recognition and Measurement/IFRS 9 Financial
Instruments. All other costs associated with an acquisition must be expensed, including
reimbursements to the acquiree for bearing some of the acquisition costs. Examples of costs to be
expensed include finder’s fees; advisory, legal, accounting, valuation and other professional or
consulting fees; and general administrative costs, including the costs of maintaining an internal
acquisitions department. [IFRS 3.53]

Under Philippine Interpretations, when the acquirer issues shares of stock for the net assets acquired,
the stock issuance cost such as SEC registration fees, documentary stamp tax and newspaper
publication fees are treated as a deduction from additional paid in capital (APIC) from previous share
issuance. In case APIC is reduced to zero, the remaining stock issuance costs is treated as contra
account from retained earnings presented as a separate line.

Pre-existing relationships and reacquired rights

If the acquirer and acquiree were parties to a pre-existing relationship (for instance, the acquirer had
granted the acquiree a right to use its intellectual property), this must must be accounted for
separately from the business combination. In most cases, this will lead to the recognition of a gain or
loss for the amount of the consideration transferred to the vendor which effectively represents a
‘settlement’ of the pre-existing relationship. The amount of the gain or loss is measured as follows:
• for pre-existing non-contractual relationships (for example, a lawsuit): by reference to fair value

• for pre-existing contractual relationships: at the lesser of (a) the favourable/unfavourable

contract position and (b) any stated settlement provisions in the contract available to the
counterparty to whom the contract is unfavourable. [IFRS 3.B51-53]

However, where the transaction effectively represents a reacquired right, an intangible asset is
recognized and measured on the basis of the remaining contractual term of the related contract
excluding any renewals. The asset is then subsequently amortised over the remaining contractual term,
again excluding any renewals. [IFRS 3.55]

Contingent liabilities
Until a contingent liability is settled, cancelled or expired, a contingent liability that was recognized in
the initial accounting for a business combination is measured at the higher of the amount the liability

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would be recognized under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, and the
amount less accumulated 13uthorized13n under IAS 18 Revenue. [IFRS 3.56]

Contingent payments to employees and shareholders

As part of a business combination, an acquirer may enter into arrangements with selling shareholders
or employees. In determining whether such arrangements are part of the business combination or
accounted for separately, the acquirer considers a number of factors, including whether the
arrangement requires continuing employment (and if so, its term), the level or remuneration
compared to other employees, whether payments to shareholder employees are incremental to non-
employee shareholders, the relative number of shares owns, linkages to valuation of the acquiree, how
the consideration is calculated, and other agreements and issues. [IFRS 3.B55]

Where share-based payment arrangements of the acquiree exist and are replaced, the value of such
awards must be apportioned between pre-combination and post-combination service and accounted
for accordingly. [IFRS 3.B56-B62B]

ILLUSTRATION ON THE ACQUISITION METHOD

ACQUISITION OF NET ASSETS

Here is the Statement of Financial Position of J&J Company which Acquirer, Inc. is acquiring.

J&J COMPANY
Statement of Financial Position
June 30, 2017

Cash P 200,000 Current liabilities P 125,000

Marketable Securities 300,000 Bonds Payable 500,000
Inventory 500,000
Land 150,000 Common Stock (P1 par) 50,000
Building (net) 750,000 Additional paid in capital 700,000
Equipment (net) 400,000 Retained Earnings 925,000
Total Assets P2,300,000 Total liabilities and equity P 2,300,000

Fair values of the accounts as of June 30, 2017 are as follows:

Cash P 200,000
Marketable securities 330,000
Inventory 550,000
Land 360,000
Building 900,000
Equipment 700,000
Unrecognized receivables 225,000 P 3,265,000

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Current liabilities P 125,000

Bonds payable 500,000
Premium on bonds payable 20,000 645,000
Fair value of net identifiable assets P 2,620,000

Case 1: Price paid exceeds the fair value of the net identifiable assets acquired.
Acquirer, Inc., issues 80,000 shares of its P10 par value common stock with a market value of P40 each
for J&J Company’s net assets. Acquirer, Inc. pays professional fees of P50,000 to accomplish the
acquisition and stock issuance costs of P30,000.

Analysis:
Price paid (consideration given), 80,000 shares x P40 P 3,200,000
Fair value of net identifiable assets acquired for J & J ( 2,620,000 )
Goodwill P 580,000

Professional fees (expense) P 50,000

Stock issue costs (reduction from additional paid-in capital 30,000

Entries recorded by the Acquirer, Inc. are as follows:

(1) To record the net assets acquired including the goodwill:

Cash 200,000
Marketable securities 330,000
Inventory 550,000
Land 360,000
Building 900,000
Equipment 700,000
Receivables – trade 225,000
Goodwill 580,000
Current liabilities 125,000
Bonds payable 500,000
Premium on bonds payable 20,000
Common stock (P10 par, 80,000 shares issued) 800,000
Additional paid in capital (P30 x 800,000 shares). 2,400,000

(2) To record acquisition-related costs:

Acquisition expense 50,000

Additional paid in capital 30,000
Cash 80,000

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Case 2: Price paid is less than fair value of net identifiable assets acquired:

Acquirer, Inc. issues 20,000 shares of its P115 par value common stock with a market value of P120
each for J & J Company’s net assets. Acquirer, Inc. pays professional fees of P50,000 to accomplish the
acquisition and stock issuance costs of P130,000.

Analysis:
Price paid (consideration given), 20,000 shares x P120 P 2,400,000
Fair value of net identifiable assets acquired for J & J ( 2,620,000 )
Gain on acquisition (Bargain purchase) P ( 220,000 )

Professional fees (expense) P 50,000

Stock issue costs (reduction from additional paid-in capital 130,000

Entries recorded by the Acquirer, Inc. are as follows:

(1) To record the net assets acquired including the goodwill:

Cash 200,000
Marketable securities 330,000
Inventory 550,000
Land 360,000
Building 900,000
Equipment 700,000
Receivables – trade 225,000
Current liabilities 125,000
Bonds payable 500,000
Premium on bonds payable 20,000
Common stock (P115 par, 20,000 shares issued). 2,300,000
Additional paid in capital (P5 x 20,000 shares). 100,000
Gain on acquisition 220,000

(2) To record acquisition-related costs:

Acquisition expense 50,000

Additional paid in capital 100,000
Stock issuance costs 30,000
Cash 180,000

Recording Contingent Consideration in Acquisition of Net Assets

Using the data in J & J Company Case 1, assume that in addition to the stock issued, the acquirer
agreed to pay additional P200,000 on January 31, 2018, if the average income for the 2-year period of

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2016 and 2017 exceeds P160,000 per year. The expected value is estimated at P100,000 based on the
50% probability of achieving the target average income.

Analysis:
Total price paid:
Stock issued at market value P3,200,000
Estimated value of contingent consideration 100,000 P 3,300,000
Fair value of net identifiable assets acquired for J ( 2,620,000 )
&J
Goodwill P 680,000

Professional fees (expense) P 50,000

Stock issue costs (reduction from additional paid- 30,000
in capital

Entries recorded by the Acquirer, Inc. are as follows:

(1) To record the net assets acquired including the goodwill:

Cash 200,000
Marketable securities 330,000
Inventory 550,000
Land 360,000
Building 900,000
Equipment 700,000
Receivables – trade 225,000
Goodwill 680,000
Current liabilities 125,000
Bonds payable 500,000
Premium on bonds payable 20,000
Contingent consideration payable 100,000
Common stock (P10 par, 80,000 shares issued) 800,000
Additional paid in capital (P30 x 800,000 shares). 2,400,000

(2) To record acquisition-related costs:

Acquisition expense 50,000

Additional paid in capital 30,000
Cash 80,000

Recording Changes in Contingent Consideration

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Changes resulting from additional information obtained by the acquirer that existed at the acquisition
date, and that occur within the measurement period are recognized as adjustments against the original
accounting for the acquisition. Changes resulting from events after the acquisition date are not
measurement period adjustments. If the additional consideration is an equity instrument, the original
amount is not remeasured (hence no entry). If the additional consideration is cash or other assets paid
or owed, the changed amount is recognized in profit or loss.

To illustrate if during the measurement period, the estimate was revised to P160,000, the increase
would be adjusted as follows:

Goodwill 60,000
Contingent consideration payable 60,000

If the estimate is again revised after the measurement period and was revised to P200,000, the
additional 40,000 is recorded as follows:

Loss on contingent consideration payable 40,000

Contingent consideration payable 40,000

This illustration applies when the contingent consideration is payable in cash or other assets. If the
agreement is to issue additional shares of stock, no liability is recorded at the acquisition date. The only
entry made is at the date when additional shares are issued. The entry would require a debit to
Additional paid in capital and credit to common stock at par value.

Recording Changes in Value During Measurement Period

During the measurement period, values assigned to accounts recorded as part of the acquisition may
be adjusted to better reflect the value of the accounts as of the acquisition date. Changes in value
caused by events that occur after the acquisition date are not a part of this adjustments. They would
be adjusted to income in the period they occur.
The values recorded on the acquisition date are considered “provisional”. They must be used in
financial statements with dates prior to the end of the measurement period. The measurement period
ends when the improved information is available or it is obvious that no better information is available.
In no case can the measurement period exceed one year from the acquisition date.

Using the same scenario in case 1, however the value of the building is provisional.

Provisional Value P 900,000

Depreciation method:
20-year straight-line with P660,000 residual value.
P240,000/20 years = P 12,000 per year, P 1,000 per month
Recorded in 2017 (6 months) 6,000

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Projected in 2018 12,000

Better estimates of values for the building become available in early 2018. The new values and revised
depreciation are as follows:
Revised Value P 950,000
Depreciation method:
20-year straight-line with P590,000 residual value.
P360,000/20 years = P 18,000 per year, P 1,500 per month
Recorded in 2017 (6 months) 9,000
Projected in 2018 18,000

Entry to record the adjustment in 2018:

Building (950,000-900,000) 50,000

Goodwill 50,000

An adjustment to the depreciation expense will also be made retroactively.

Retained earnings 3,000
Accumulated Depreciation 3,000

ENTRY IN THE BOOKS OF THE ACQUIREE

Using the data in Case 1, the entry in the books of J & J Company are as follows:

(1) To record the sale of net assets:

Investment in Acquirer, Inc. 3,200,000

Current liabilities 125,000
Bonds payable 500,000
Cash 200,000
Marketable securities 300,000
Inventory 500,000
Land 150,000
Building (net) 750,000
Equipment (net) 400,000
Gain on sale of business 1,525,000

(2) To record the distribution of Acquirer, Inc. shares received by its shareholders and the
liquidation of J & J Company

Common Stock 50,000

Additional paid in capital 700,000
Retained earnings 925,000
Gain on sale of business 1,525,000
Investment in Acquirer, Inc. 3,200,000

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Financial Statements Following the Acquisition of Net Assets

Statement of Financial Position. Under the acquisition method, all assets and liabilities of the acquiree
will be included in the Statement of Financial Position of the acquired.

Statement of Comprehensive Income. It will only include the results of operation of the acquiree after
the date of acquisition.

ACQUISITION OF STOCK

In a stock acquisition, the acquiring company deals only with existing shareholders of the acquired
company and not the company itself.

Illustration
Assume that A company acquired all the 100,000 outstanding shares of B company with P100 par value
for P15,000,000 cash. In addition A company paid P150,000 for professional fees to accomplish the
transaction.

Journal entries to make:

(1) To record the acquisition of stock
Investment in B Company 15,000,000
Cash 15,000,000

(2) To record the acquisition-related costs:

Acquisition expense 150,000
Cash 150,000

Goodwill

Goodwill is measured as the difference between:

• the aggregate of (i) the value of the consideration transferred (generally at fair value), (ii) the
amount of any non-controlling interest (NCI, see below), and (iii) in a business combination
achieved in stages (see below), the acquisition-date fair value of the acquirer’s previously-held
equity interest in the acquiree, and

• the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities
assumed (measured in accordance with IFRS 3). [IFRS 3.32]

This can be written in simplified equation form as follows:

Goodwill = Consideration transferred + Amount of non-controlling interests +Fair value of previous

equity interests – Net assets recognized

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If the difference above is negative, the resulting gain is a bargain purchase in profit or loss, which may
arise in circumstances such as a forced seller acting under compulsion. [IFRS 3.34-35] However, before
any bargain purchase gain is recognized in profit or loss, the acquirer is required to undertake a review
to ensure the identification of assets and liabilities is complete, and that measurements appropriately
reflect consideration of all available information. [IFRS 3.36]

Choice in the measurement of non-controlling interests (NCI)

IFRS 3 allows an accounting policy choice, available on a transaction by transaction basis, to measure
non-controlling interests (NCI) either at: [IFRS 3.19]
• fair value (sometimes called the full goodwill method), or

• the NCI’s proportionate share of net assets of the acquiree.

The choice in accounting policy applies only to present ownership interests in the acquiree that entitle
holders to a proportionate share of the entity’s net assets in the event of a liquidation (e.g. outside
holdings of an acquiree’s ordinary shares). Other components of non-controlling interests at must be
measured at acquisition date fair values or in accordance with other applicable IFRSs (e.g. share-based
payment transactions accounted for under IFRS 2 Share-based Payment). [IFRS 3.19]

Example
P pays 800 to acquire an 80% interest in the ordinary shares of S. The aggregated fair value of
100% of S’s identifiable assets and liabilities (determined in accordance with the requirements of
IFRS 3) is 600, and the fair value of the non-controlling interest (the remaining 20% holding of
ordinary shares) is 185.
The measurement of the non-controlling interest, and its resultant impacts on the determination
of goodwill, under each option is illustrated below:

NCI based on NCI based on

fair value net assets

Consideration transferred 800 800

Non-controlling interest 185 (1) 120 (2)

985 920

Net assets (600) (600)

Goodwill 385 320

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(1) The fair value of the 20% non-controlling interest in S will not necessarily be proportionate to
the price paid by P for its 80% interest, primarily due to any control premium or discount [IFRS
3.B45]
(2) Calculated as 20% of the fair value of the net assets of 600.

Impairment Test for Goodwill

After the initial recognition, the acquirer shall measure goodwill acquired in a business combination at
cost less any accumulated impairment losses in accordance with PAS 36, Impairment of Assets.

Disclosure
Disclosure of information about current business combinations
An acquirer is required to disclose information that enables users of its financial statements to
evaluate the nature and financial effect of a business combination that occurs either during the current
reporting period or after the end of the period but before the financial statements are 21uthorized for
issue. [IFRS 3.59]
Among the disclosures required to meet the foregoing objective are the following: [IFRS 3.B64-B66]
• name and a description of the acquiree

• acquisition date

• percentage of voting equity interests acquired

• primary reasons for the business combination and a description of how the acquirer obtained
control of the acquiree

• description of the factors that make up the goodwill recognized

• qualitative description of the factors that make up the goodwill recognized, such as expected
synergies from combining operations, intangible assets that do not qualify for separate
recognition

• acquisition-date fair value of the total consideration transferred and the acquisition-date fair
value of each major class of consideration

• details of contingent consideration arrangements and indemnification assets

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• details of acquired receivables

• the amounts recognized as of the acquisition date for each major class of assets acquired and
liabilities assumed

• details of contingent liabilities recognized

• total amount of goodwill that is expected to be deductible for tax purposes

• details about any transactions that are recognized separately from the acquisition of assets and
assumption of liabilities in the business combination

• information about a bargain purchase

• information about the measurement of non-controlling interests

• details about a business combination achieved in stages

• information about the acquiree’s revenue and profit or loss

• information about a business combination whose acquisition date is after the end of the
reporting period but before the financial statements are 22uthorized for issue

Disclosure of information about adjustments of past business combinations

An acquirer is required to disclose information that enables users of its financial statements to
evaluate the financial effects of adjustments recognized in the current reporting period that relate to
business combinations that occurred in the period or previous reporting periods. [IFRS 3.61]

Among the disclosures required to meet the foregoing objective are the following: [IFRS 3.B67]
• details when the initial accounting for a business combination is incomplete for particular
assets, liabilities, non-controlling interests or items of consideration (and the amounts

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recognized in the financial statements for the business combination thus have been determined
only provisionally)

• follow-up information on contingent consideration

• follow-up information about contingent liabilities recognized in a business combination

• a reconciliation of the carrying amount of goodwill at the beginning and end of the reporting
period, with various details shown separately

• the amount and an explanation of any gain or loss recognized in the current reporting period
that both:

o relates to the identifiable assets acquired or liabilities assumed in a business

combination that was effected in the current or previous reporting period,
o and is of such a size, nature or incidence that disclosure is relevant to understanding the
combined entity’s financial statements.

References
Guerrero, P & Peralta, J 2017. Advance Accounting Volume 2. C.M. Recto, Manila. GIC
Enterprises & Co., Inc.

Deloitte. IFRS 3. Retrieved July 15, 2020 from iasplus.com

Case 2

On January 2, 2017, Pol, inc. purchased all the outstanding shares of Sun Company for
P1,900,000. It has been decided that Sun Company will use push-down accouting
principles to account for this transaction. The current statement of financial position is
stated at historical cost.

The following statement of financial position is prepared for Sun Company on January
2, 2017:

Assets Liabilities and Equity

Current Assets: Current Liabilities P180,000
Cash P160,000 Long-term liabilities
Accounts receivable 520,000 Bonds payable 600,000
Prepaid expenses 40,000 Deferred taxes 100,000
Property, plant and Stockholders’ equity
equipment

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Land 400,000 Common stock, P10 par 600,000

Building (net) 1,200,000 Retained earnings 840,000
Total Assets P2,320,000 Total liabilities and equity P2,320,000

Pol Inc. received the following appraisals for Sun Company’s assets and liabilities:

Cash P160,000
Accounts receivable 520,000
Prepaid expenses 40,000
Land 500,000
Building (net) 1,400,000
Current liabilities 180,000
Bonds payable 560,000
Deferred tax liability 80,000

Required:
1. Record the investment.
2. Prepare the determination and allocation of excess schedule.
3. Record the adjustment of the books of Sun Company.
4. Prepare entries that would be made on the consolidated working paper to
eliminate the investment account.

TASK 3: Read the through the process of Consolidating the Statement of Financial
Position at the purchase date. Take note of the following:
1. Take note of the different scenarios of purchase as discussed in I/PFRS3.
2. Take note of the prohibitions in the consideration for the value of the Non-
controlling Interest.
3. The method mainly discussed is relating to non-adjustment of subsidiary books
however, a small portion was also dedicated to an alternative procedure in
recording of changes in the fair value, which is called push down accounting.

READING MATERIAL NO. 3

Summary of IFRS 10 and Illustrations

Objective
The objective of IFRS 10 is to establish principles for the presentation and preparation of consolidated
financial statements when an entity controls one or more other entities. [IFRS 10:1]
The Standard: [IFRS 10:1]
• requires a parent entity (an entity that controls one or more other entities) to present
consolidated financial statements

• defines the principle of control, and establishes control as the basis for consolidation

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• set out how to apply the principle of control to identify whether an investor controls an
investee and therefore must consolidate the investee

• sets out the accounting requirements for the preparation of consolidated financial statements

• defines an investment entity and sets out an exception to consolidating particular subsidiaries
of an investment entity*.
* Added by Investment Entities amendments, effective 1 January 2014.

Key definitions
[IFRS 10:Appendix A]

Consolidated Financial Statements - The financial statements of a group in which the assets, liabilities,
equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a
single economic entity

Control of an Investee - An investor controls an investee when the investor is exposed, or has rights, to
variable returns from its involvement with the investee and has the ability to affect those returns
through its power over the investee

Investment Entity* - An entity that:

1. obtains funds from one or more investors for the purpose of providing those investor(s) with
investment management services

2. commits to its investor(s) that its business purpose is to invest funds solely for returns from
capital appreciation, investment income, or both, and

3. measures and evaluates the performance of substantially all of its investments on a fair value
basis.

Parent - An entity that controls one or more entities

Power - Existing rights that give the current ability to direct the relevant activities
Protective Rights - Rights designed to protect the interest of the party holding those rights without
giving that party power over the entity to which those rights relate

Relevant Activities - Activities of the investee that significantly affect the investee's returns
* Added by Investment Entities amendments, effective 1 January 2014.

Control
An investor determines whether it is a parent by assessing whether it controls one or more investees.
An investor considers all relevant facts and circumstances when assessing whether it controls an
investee. An investor controls an investee when it is exposed, or has rights, to variable returns from its
involvement with the investee and has the ability to affect those returns through its power over the
investee. [IFRS 10:5-6; IFRS 10:8]

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An investor controls an investee if and only if the investor has all of the following elements: [IFRS 10:7]
• power over the investee, i.e. the investor has existing rights that give it the ability to direct the
relevant activities (the activities that significantly affect the investee's returns)

• exposure, or rights, to variable returns from its involvement with the investee

• the ability to use its power over the investee to affect the amount of the investor's returns.

Power arises from rights. Such rights can be straightforward (e.g. through voting rights) or be complex
(e.g. embedded in contractual arrangements). An investor that holds only protective rights cannot
have power over an investee and so cannot control an investee [IFRS 10:11, IFRS 10:14].

An investor must be exposed, or have rights, to variable returns from its involvement with an investee
to control the investee. Such returns must have the potential to vary as a result of the investee's
performance and can be positive, negative, or both. [IFRS 10:15]

A parent must not only have power over an investee and exposure or rights to variable returns from its
involvement with the investee, a parent must also have the ability to use its power over the investee to
affect its returns from its involvement with the investee. [IFRS 10:17].

When assessing whether an investor controls an investee an investor with decision-making rights
determines whether it acts as principal or as an agent of other parties. A number of factors are
considered in making this assessment. For instance, the remuneration of the decision-maker is
considered in determining whether it is an agent. [IFRS 10:B58, IFRS 10:B60]

Accounting requirements

Preparation of consolidated financial statements

A parent prepares consolidated financial statements using uniform accounting policies for like
transactions and other events in similar circumstances. [IFRS 10:19]
However, a parent need not present consolidated financial statements if it meets all of the following
conditions: [IFRS 10:4(a)]
• it is a wholly-owned subsidiary or is a partially-owned subsidiary of another entity and its other
owners, including those not otherwise entitled to vote, have been informed about, and do not
object to, the parent not presenting consolidated financial statements

• its debt or equity instruments are not traded in a public market (a domestic or foreign stock
exchange or an over-the-counter market, including local and regional markets)

• it did not file, nor is it in the process of filing, its financial statements with a securities
commission or other regulatory organisation for the purpose of issuing any class of instruments
in a public market, and

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• its ultimate or any intermediate parent of the parent produces financial statements available
for public use that comply with IFRSs, in which subsidiaries are consolidated or are measured at
fair value through profit or loss in accordance with IFRS 10.*
* Fair value measurement clause added by Investment Entities: Applying the Consolidation Exception

(Amendments to IFRS 10, IFRS 12 and IAS 28) amendments, effective 1 January 2016.
Investment entities are prohibited from consolidating particular subsidiaries.
Furthermore, post-employment benefit plans or other long-term employee benefit plans to
which IAS 19 Employee Benefits applies are not required to apply the requirements of IFRS 10. [IFRS
10:4B]

Consolidation procedures
Consolidated financial statements: [IFRS 10:B86]
• combine like items of assets, liabilities, equity, income, expenses and cash flows of the parent
with those of its subsidiaries

• offset (eliminate) the carrying amount of the parent's investment in each subsidiary and the
parent's portion of equity of each subsidiary (IFRS 3 Business Combinations explains how to
account for any related goodwill)

• eliminate in full intragroup assets and liabilities, equity, income, expenses and cash flows
relating to transactions between entities of the group (profits or losses resulting from
intragroup transactions that are recognized in assets, such as inventory and fixed assets, are
eliminated in full).

A reporting entity includes the income and expenses of a subsidiary in the consolidated financial
statements from the date it gains control until the date when the reporting entity ceases to control the
subsidiary. Income and expenses of the subsidiary are based on the amounts of the assets and
liabilities recognized in the consolidated financial statements at the acquisition date. [IFRS 10:B88]
The parent and subsidiaries are required to have the same reporting dates, or consolidation based on
additional financial information prepared by subsidiary, unless impracticable. Where impracticable, the
most recent financial statements of the subsidiary are used, adjusted for the effects of significant
transactions or events between the reporting dates of the subsidiary and consolidated financial
statements. The difference between the date of the subsidiary's financial statements and that of the
consolidated financial statements shall be no more than three months [IFRS 10:B92, IFRS 10:B93]

Non-controlling interests (NCIs)

A parent presents non-controlling interests in its consolidated statement of financial position within
equity, separately from the equity of the owners of the parent. [IFRS 10:22]
A reporting entity attributes the profit or loss and each component of other comprehensive income to
the owners of the parent and to the non-controlling interests. The proportion allocated to the parent
and non-controlling interests are determined on the basis of present ownership interests. [IFRS 10:B94,
IFRS 10:B89]

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The reporting entity also attributes total comprehensive income to the owners of the parent and to the
non-controlling interests even if this results in the non-controlling interests having a deficit balance.
[IFRS 10:B94]

Illustration

ACQUISITION OF A WHOLLY OWNED SUBSIDIARY

Case 1: Acquisition at Book Value

P Company acquires all of S Company’s outstanding common stock for P100,000 cash. Analysis of the
book value of the subsidiaries reveal that the price paid is equal to it.

Consideration given (price paid) P 100,000

Less book value of interest acquired (100%)
Common Stock, S Company P 50,000
APIC – S Company 30,000
Retained Earnings – S Company 20,000 100,000
Excess P -0-

P Company and S Company

Statement of Financial Position
December 1, 2017
P Company S Company
Assets
Cash P130,000 P -0-
Accounts receivable 40,000 32,000
Inventory 50,000 20,000
Equipment – net 180,000 158,000
Investment in S Company Stock 100,000
Total Assets P500,000 P210,000

Liabilities and Stockholders’ Equity

Accounts payable P280,000 P110,000
Common stock 100,000 50,000
Additional paid-in capital 80,000 30,000
Retained earnings 40,000 20,000
Total Liabilities and Stockholders’ Equity P500,000 P210,000

Working Papers Elimination Entry (This only exist in working papers and not in the actual books of
either companies)

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In order to consolidate first eliminate the investment balance in P Company’s books against the equity
accounts of S Company.

E(1) Common stock – S Company 50,000

Additional paid-in capital – S Company 30,000
Retained earnings – S Company 20,000
Investment in S Company 100,000
This entry is made since P and S Companies are just going to considered as one company. This will zero
out the Investment Account and the Equity accounts of the subsidiary in consolidated financial
statements.

P Company and Subsidiary

Consolidation Working Paper
December 1, 2017

P Company S Company Eliminations Consolidated

Debit Credit
Assets
Cash P130,000 P -0- P130,000
Accounts Receivable 40,000 32,000 72,000
Inventory 50,000 20,000 70,000
Equipment - net 180,000 158,000 338,000
Investment in S
Company 100,000 1/ 100,000 -
Total Assets P500,000 P210,000 P610,000

Liabilities and Equity

Accounts payable P280,000 P110,000 P390,000
Common stock:
P Company 100,000 100,000
S Company 50,000 1/ 50,000
Additional paid-in capital
P Company 80,000 80,000
S Company 30,000 1/ 30,000
Retained earnings
P Company 40,000 40,000
S Company 20,000 1/ 20,000
Total Liabilities and
Equity P500,000 P210,000 P100,000 P100,000 P610,000

Consolidated Statement of Financial Position

P Company and Subsidiary

Consolidated Statement of Financial Position
December 1, 2017

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Assets
Current Assets
Cash P130,000
Accounts Receivable 72,000
Inventory 70,000
Total Current Assets P272,000
Non-current Assets
Equipment 338,000
Total Assets P610,000

Accounts payable P390,000

Common stock: 100,000
Additional paid-in capital 80,000
Retained earnings 40,000
Total Liabilities and Equity P610,000

Case 2: Acquisition at More than Book Value

As discussed in the previous reading material when the price paid exceeds the book value of the
interest acquired, the excess will be treated as goodwill.

Considering the data in the previous case, however this time the stocks were acquired at P110,000.
Consideration given (price paid) P 110,000
Less book value of interest acquired (100%)
Common Stock, S Company P 50,000
APIC – S Company 30,000
Retained Earnings – S Company 20,000 100,000
Excess P 10,000

Entry to eliminate the investment account will be as follows.

E(1) Common stock – S Company 50,000

Additional paid-in capital – S Company 30,000
Retained earnings – S Company 20,000
Goodwill 10,000
Investment in S Company 110,000

The consolidated working paper will be illustrated as follows

P Company and Subsidiary

Consolidation Working Paper
December 1, 2017

P Company S Company Eliminations Consolidated

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Debit Credit
Assets
Cash P120,000 P -0- P120,000
Accounts Receivable 40,000 32,000 72,000
Inventory 50,000 20,000 70,000
Equipment - net 180,000 158,000 338,000
Goodwill 1/ 10,000 10,000
Investment in S
Company 110,000 1/ 110,000 -
Total Assets P500,000 P210,000 P610,000

Liabilities and Equity

Accounts payable P280,000 P110,000 P390,000
Common stock:
P Company 100,000 100,000
S Company 50,000 1/ 50,000
Additional paid-in capital
P Company 80,000 80,000
S Company 30,000 1/ 30,000
Retained earnings
P Company 40,000 40,000
S Company 20,000 1/ 20,000
Total Liabilities and
Equity P500,000 P210,000 P100,000 P100,000 P610,000

The Consolidated Statement of Financial Position will be shown this way.

P Company and Subsidiary

Consolidated Statement of Financial Position
December 1, 2017

Assets
Current Assets
Cash P120,000
Accounts Receivable 72,000
Inventory 70,000
Total Current Assets P262,000
Non-current Assets
Equipment 338,000
Goodwill 10,000
Total Non-current Assets 348,000
Total Assets P610,000

Accounts payable P390,000

Common stock: 100,000
Additional paid-in capital 80,000
Retained earnings 40,000
Total Liabilities and Equity P610,000

Case 3: Acquisition at Less than Book Value – Bargain Purchase

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When the price paid is less than the fair value of the subsidiary’s net identifiable assets, a bargain
purchase exists. The excess is treated as gain on acquisition or gain on bargain purchase.

Illustration
Using the same example as in the previous cases, let us assume that P Company paid only P80,000 for
the 100% interest in the stockholders’ equity of S Company.
Consideration given (price paid) P 80,000
Less book value of interest acquired (100%)
Common Stock, S Company P 50,000
APIC – S Company 30,000
Retained Earnings – S Company 20,000 100,000
Excess P ( 20,000)

Entry to eliminate the investment account will be as follows.

E(1) Common stock – S Company 50,000

Additional paid-in capital – S Company 30,000
Retained earnings – S Company 20,000
Investment in S Company 80,000
Retained Earnings – P Company (gain) 20,000

The consolidated working paper will be illustrated as follows

P Company and Subsidiary

Consolidation Working Paper
December 1, 2017

P Company S Company Eliminations Consolidated

Debit Credit
Assets
Cash P150,000 P -0- P150,000
Accounts Receivable 40,000 32,000 72,000
Inventory 50,000 20,000 70,000
Equipment - net 180,000 158,000 338,000
Investment in S
Company 80,000 1/ 80,000 -
Total Assets P500,000 P210,000 P630,000

Liabilities and Equity

Accounts payable P280,000 P110,000 P390,000
Common stock:
P Company 100,000 100,000
S Company 50,000 1/ 50,000
Additional paid-in capital
P Company 80,000 80,000
S Company 30,000 1/ 30,000

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School of Business, First Semester, SY 2020-2021
 Adaptive Community for the Continuity of Education and Student Services
National Teachers College

Retained earnings
P Company 40,000 1/ 20,000 60,000
S Company 20,000 1/ 20,000
Total Liabilities and
Equity P500,000 P210,000 P100,000 P100,000 P630,000

ACQUISITION OF PARTIALLY OWNED SUBSIDIARY (Less than 100% interest)

Illustration

P Company
Statement of Financial Position
December 1, 2017

ASSETS LIABILITIES AND EQUITY

Current Assets Liabilities
Cash P218,000 Accounts payable P160,000
Accounts receivable 144,000 Bonds payable 400,000
Inventory 160,000
Total 522,000 Total Liabilities 560,000
Non-current Assets Stockholders’ Equity
Land 200,000 Common stock, P10 par 400,000
Building (net) 840,000 APIC 500,000
Equipment (net) 400,000 Retained earnings 502,000
Total 1,440,000 Total equity 1,402,000
Total Assets P1,962,000 Total liabilities and equity P1,962,000

S Company
Statement of Financial Position
December 1, 2017
Assets Book Value Fair Value
Accounts receivable P40,000 P40,000
Inventory 100,000 110,000
Land 80,000 130,000
Buildings (net) 300,000 500,000
Equipment (net) 80,000 120,000
Total Assets P600,000 P900,000

Liabilities and Equity

Accounts payable P80,000 P80,000
Bonds payable 200,000 200,000
Total liabilities P280,000 P280,000
Stockholders’ equity
Common stock, P1 par 20,000
Additional paid in capital 180,000
Retained earnings 120,000
Total Equity 320,000

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School of Business, First Semester, SY 2020-2021
 Adaptive Community for the Continuity of Education and Student Services
National Teachers College

Net assets P320,000 P620,000

Case 4: Acquisition at More than Fair Value with Adjustment of Subsidiary accounts

Assume that P Company issued 16,000 shares of its P10 par value common stock for 80% (16,000
shares) of the outstanding shares of S Company. The fair value of P Company’s stock is P50 and fair
value of the 20% NCI is assessed to be P170,000. P Company also pays P50,000 in professional fees to
accomplish the acquisition. P Company would make the following entries:

(1) To record the acquisition of S Company stock:

Investment in S Company P800,000
Common stock 160,000
Additional Paid in capital 640,000

(2) To record acquisition-related costs:

Retained earnings – P Co. (Acquisition costs)50,000
Cash 50,000

Consolidation procedures:

1. Compute goodwill
Price paid P800,000
Non-controlling Interest 170,000
Total 970,000
Less fair value of net assets acquired 620,000
Goodwill P350,000

2. Prepare a Determination and Allocation (D&A) of excess Schedule.

Fair Value Parent (80%) NCI (20%)

Fair value of subsidiary P970,000 P800,000 P170,000
Less book value of interest acquired
Common stock P20,000
Additional paid-in capital 180,000
Retained earnings 120,000
Total Equity P320,000 P320,000 P320,000
Interest acquired 80% 20%
Book Value P256,000 P64,000
Excess P650,000 P544,000 P106,000
Adjustment of identifiable accounts
Inventory P(10,000)
Land (50,000)
Buildings (200,000)
Equipment (40,000)
Total P(300,000)
Goodwill P 350,000

Course Code – Advance Financial Accounting and Reporting 2 34

School of Business, First Semester, SY 2020-2021
 Adaptive Community for the Continuity of Education and Student Services
National Teachers College

Working Paper Eliminations Entries

• Eliminate subsidiary stockholders’ equity

E(1) Common Stock – S company 20,000
Additional paid in capital – S Company 180,000
Retained earnings – S Company 120,000
Investment in S Company 256,000
Non-controlling interest 64,000

• Allocate excess by adjusting the net assets to their fair values.

E(2) Inventory 10,000
Land 50,000
Buildings 200,000
Equipment 40,000
Goodwill 350,000
Investment in S Company 544,000
Non-controlling interest (NCI) 106,000

P Company and subsidiary

Consolidation Working Paper
December 1, 2017

P Company S Company Eliminations Consolidated

Debit Credit
Assets
Cash P168,000 P -0- P168,000
Accounts Receivable 144,000 40,000 184,000
Inventory 160,000 100,000 2/ 10,000 270,000
Land 200,000 80,000 2/ 50,000 330,000
Building 840,000 300,000 2/ 200,000 1,340,000
Equipment 400,000 80,000 2/ 40,000 520,000
Investment in S
Company 800,000 1/ 256,000 -
2/ 544,000
Goodwill 2/ 350,000 350,000
Total Assets P2,712,000 P600,000 3,162,000

Liabilities and Equity

Accounts payable P160,000 P 80,000 P240,000
Bonds payable 400,000 200,000 600,000
Common stock:
P Company 560,000 560,000
S Company 20,000 1/ 20,000
Additional paid-in capital
P Company 1,140,000 1,140,000
S Company 180,000 1/ 180,000
Retained earnings

Course Code – Advance Financial Accounting and Reporting 2 35

School of Business, First Semester, SY 2020-2021
 Adaptive Community for the Continuity of Education and Student Services
National Teachers College

P Company 452,000 452,000

S Company 120,000 1/ 120,000
NCI to consolidated 1/ 64,000 170,000
2/ 106,000
Total Liabilities and
Equity P2,712,000 P600,000 P970,000 P970,000 P3,162,000

P Company and Subsidiary

Consolidated Statement of Financial Position
December 1, 2017

Assets
Current Assets
Cash P168,000
Accounts Receivable 184,000
Inventory 270,000
Total Current Assets P622,000
Non-current Assets
Land 330,000
Building 1,340,000
Equipment 520,000
Goodwill 350,000
Total Non-current Assets 2,540,000
Total Assets P3,162,000

Liabilities and Equity

Accounts payable P240,000
Bonds Payable 600,000
Total Liabilities P840,000
Stockholders’ Equity
Common stock 560,000
Additional paid-in capital 1,140,000
Retained earnings 452,000
Total controlling equity P2,152,000
Non-controlling interest 170,000
Total Equity 2,322,000
Total liabilities and equity P3,162,000

Case 5: Acquisition at Less than the Fair Value with Adjustment of Subsidiary Accounts
Illustration
Using the same data as Case 4, assume that P Company issued 8,000 shares of its P10 par value
common stock for 80% of the outstanding shares of S Company. The fair value of the P share is P50. P
Company also pays P50,000 in professional fees to complete the combination. Here are the entries
that P Company would make.

(1) To record the acquisition of S Company stock:

Investment is S Company (8,000x P50) 400,000

Course Code – Advance Financial Accounting and Reporting 2 36

School of Business, First Semester, SY 2020-2021
 Adaptive Community for the Continuity of Education and Student Services
National Teachers College

Common stock (8,000 x P10) 80,000

Additional paid-in capital 320,000

(2) To record the acquisition-related costs

Retained earnings – P Co (Acquisition Expense) 50,000
Cash 50,000

Using the percentage of interest purchased we can recompute the “implied value of S Company.
Hence, P400,000/80% = P500,000. The NCI would be P100,000 (500,000 x 20%). The NCI value however
can never be less than its share of the subsidiaries net identifiable assets of P124,000. Therefore, the
NCI share share of the company value should be increased to P124,000

Here’s the consolidation process:

1. Compute the gain on acquisition
Price Paid P 400,000
Non-controlling interest 124,000
Total 524,000
Less fair value of net assets acquired (excluding goodwill) 620,000
Gain on acquisition P(96,000)

The gain is to be recognized only by the controlling interest (I/PFRS3) as shown below

Total Implied Fair Parent (80%) NCI (20%)

Value
Fair value of subsidiary P 524,000 P 400,000 P124,000
Less Fair Value of net assets 620,000 496,000 124,000
Book Value P ( 96,000) P ( 96,000) P -0-

2. Prepare the Determination and Allocation of Excess Schedule:

Fair Value Parent (80%) NCI (20%)
Fair value of subsidiary P524,000 P400,000 P124,000
Less book value of interest acquired
Common stock P20,000
Additional paid-in capital 180,000
Retained earnings 120,000
Total Equity P320,000 P320,000 P320,000
Interest acquired 80% 20%
Book Value P256,000 P64,000
Excess P204,000 P144,000 P60,000
Adjustment of identifiable accounts
Inventory P(10,000)
Land (50,000)
Buildings (200,000)
Equipment (40,000)
Total P(300,000)
Goodwill P ( 96,000)

Course Code – Advance Financial Accounting and Reporting 2 37

School of Business, First Semester, SY 2020-2021
 Adaptive Community for the Continuity of Education and Student Services
National Teachers College

Working Paper Elimination Entries

• Eliminate 100% of the subsidiary stockholders’ equity

E(1) Common Stock – S Company 20,000
Additional paid in capital – S Company 180,000
Retained earnings – S Company 120,000
Investment in S Company 256,000
Non-controlling interest (NCI) 64,000
• Adjust the assets to their fair values
E(2) Inventory 10,000
Land 50,000
Buildings 200,000
Equipment 40,000
Retained earnings – P Company 96,000
Investment in S Company 144,000
Non-controlling Interest (NCI) 60,000

P Company and Subsidiary

Consolidation Working Paper
December 1, 2017

P Company S Company Eliminations Consolidated

Debit Credit
Assets
Cash P168,000 P -0- P168,000
Accounts Receivable 144,000 40,000 184,000
Inventory 160,000 100,000 2/ 10,000 270,000
Land 200,000 80,000 2/ 50,000 330,000
Building 840,000 300,000 2/ 200,000 1,340,000
Equipment 400,000 80,000 2/ 40,000 520,000
Investment in S
Company 400,000 1/ 256,000 -
2/ 144,000
Total Assets P2,312,000 P600,000 2,812,000

Liabilities and Equity

Accounts payable P160,000 P 80,000 P240,000
Bonds payable 400,000 200,000 600,000
Common stock:
P Company 480,000 480,000
S Company 20,000 1/ 20,000
Additional paid-in capital
P Company 820,000 820,000
S Company 180,000 1/ 180,000
Retained earnings
P Company 452,000 2/ 96,000 548,000
S Company 120,000 1/ 120,000

Course Code – Advance Financial Accounting and Reporting 2 38

School of Business, First Semester, SY 2020-2021
 Adaptive Community for the Continuity of Education and Student Services
National Teachers College

NCI to consolidated 1/ 64,000 124,000

2/ 60,000
Total Liabilities and
Equity P2,312,000 P600,000 P620,000 P620,000 P2,812,000

Push-Down Accounting

The foregoing examples does not record the allocation of the excess to the adjust the specific asset or
liability account as well as goodwill, they only appear in the working papers while only the investment
account appears in the books of the parent company. Under push-down accounting, those changes in
the asset and liabilities are recorded int eh books of the subsidiary company, including the goodwill.

Things to take note:

1. Push-down accounting revalues subsidiary accounts directly on the books of the subsidiary
based on the adjustments shown in the D&A of Excess schedule.
2. No allocation of excess (to adjust accounts) is required on the consolidation working paper.

References
Guerrero, P & Peralta, J 2017. Advance Accounting Volume 2. C.M. Recto, Manila. GIC
Enterprises & Co., Inc.

Deloitte. IFRS 3. Retrieved July 15, 2020 from iasplus.com

Deloitte. IFRS 10. Retrieved July 15, 2020 from iasplus.com

Case 3

On April 30, 2017. Pop Corporation issued 30,000 shares of its no-par value common
stock having a current fair value of P20 a share for 8,000 shares of Sea Company’s P10
par common stock. Acquisition related costs of the business combination, paid by Sea
Company on behalf of Pop Corporation on April 30, 2017, were as follows: Professional
fee related to business combination P40,000; SEC registration costs P30,000.

Separate statement of financial positions of the two companies on April 30, 2017, prior
to the business combination, were as follows:

Pop Corporation Sea Company

Assets
Cash P 50,000 P 150,000
Accounts receivable (net) 230,000 200,000
Inventories 400,000 350,000
Plant assets (net) 1,300,000 560,000
Total P1,980,000 P1,260,000

Course Code – Advance Financial Accounting and Reporting 2 39

School of Business, First Semester, SY 2020-2021
 Adaptive Community for the Continuity of Education and Student Services
National Teachers College

Liabilities and Stockholders’

Equity
Current liabilities P 310,000 P 250,000
Long-term debt 800,000 600,000
Common stock 500,000 100,000
Additional paid-in capital 360,000
Retained earnings (deficit) 370,000 (50,000)
Total P1,980,000 P1,260,000

Current fair values of Sea Company’s identifiable net assets were the same as their book
values, except for the following:

Current Fair Values

Inventories P440,000
Plant assets (net) 780,000
Long-term debt 620,000
NCI is measured at estimated fair value.

Required:
1. Prepare journal entry for Sea Company on April 30, 2017, to record its payment of
out-of-pocket costs of the business combination on behalf of Pop Corporation.
2. Prepare journal entries for Pop Corporation to record the business combination
with Sea Company on April 30, 2017.
3. Prepare consolidation working paper for consolidated statement of financial
position of Pop Corporation and subsidiary on April 30, 2017.

Course Code – Advance Financial Accounting and Reporting 2 40

School of Business, First Semester, SY 2020-2021