Business Combination

(PFRS 3)

AGGREGATE AMOUNT OF: 1. Consideration given:

a. Cash
b. Issued share(@FMV)
c. Bonds(@FMV)
d. Contingent consideration(@FMV)
2. Non-controlling interest (NCI)
3. FMV of previously held equity share if achieved in stage

LESS: FMV of Identifiable Net Assets of Acquiree (Exc: Existing Goodwill)

RESULT OF BUSINESS COMBINATION

If: AGG. AMT. > FMV of IDEN. NA = GOODWILL

AGG. AMT. < FMV of IDEN. NA = GAIN ON ACQUISITION (P/L)

ACQUISITION COSTS
1. Acquisition Related Cost (ARC)
a. Accounting Fees
b. Legal Fees
c. Brokers Fees EXPENSE IMMEDIATELY
d. Listing Fees

2. Indirect Costs

3. Stock Issuance Cost (SIC)

a. SEC registration fees To be absorbed by in order of priority:
b. Documentary stamp tax 1. Resulting APIC
c. Newspaper publication fees 2. Any excess is debited to “ Stock
d. Printing stock certificate Issuance Cost” account and will be
contra-account in order of priority:
a. Prev. related APIC - Acquirer
b. R.E – Acquirer

Illustration (Adapted and revised problem)

*Values are all assumed to illustrate the concepts above.

Entity A acquired the net assets of Entity B by issuing 10,000 of its ordinary shares with par
value of P10 and bonds payable with face value of P500,000. The bonds are classified as
financial liability at amortized cost.
At the time of acquisition, the ordinary shares are publicly quoted at P20 per share. On the
other hand, the bonds payable are trading at 110.

Assuming entity A paid P160,000 stock issuance costs and P20,000 bond issue costs. Entity A
also paid P40,000 acquisition related costs and P30,000 indirect costs of business combination.

Before the date of acquisition, Entity A and Entity B reported the following data:

Entity A Entity B
Current assets P1,000,000 P 500,000
Noncurrent assets 2,000,000 1,000,000
Current liabilities 500,000 400,000
Noncurrent liabilities 1,150,000 500,000
Ordinary shares 500,000 200,000
Share premium 50,000 300,000
Retained earnings 800,000 100,000

At the time of acquisition, the current assets of Entity A have fair value of P1,200,000 while the
noncurrent assets of Entity B have fair value of P1,300,000. On the same date, the current
liabilities of Entity B have fair value of P600,000 while the noncurrent liabilities of Entity A have
fair value of P500,000.
1. What is the goodwill or (gain on bargain purchase) arising from business combination?

Solution: AGGREGATE AMOUNT OF: 1. Consideration given:

a. Cash 0
b. Issued share(@FMV) 200,000
c. Bonds(@FMV) 550,000
d. Contingent consideration(@FMV) 0

2. Non-controlling interest (NCI) 0

3. FMV of previously held equity share if achieved in stage 0

LESS: *FMV of Identifiable Net Assets of Acquiree (Exc: Existing Goodwill) (700,000)

GOODWILL 50,000

Entity B
FMV Current asset 500,000
FMV N-current asset 1,300,000
FMV Current liabilities (600,000)
FMV N-current liabities (500,000)
*FMV of Identifiable Net Asset 700,000

2. What is the amount that shall be expensed immediately as incurred at the time of
business combination?

Solution: ARC 40,000

Indirect costs 30,000
Expense 70,000

*Bond issue costs @ amortized cost is charged directly to bonds(FMV)

* Bond issue costs @ FVPL is expense immediately
 3. How much Resulting APIC “and” Retained earnings is to be charged or debited for the
stock issuance cost?

Solution: SIC 160,000

1st - Resulting APIC (100,000)

2nd - Prev. APIC (50,000)

3rd - R.E (10,000)

Measurement of Non-Controlling Interest (NCI)

1. Proportionate Share
FMV Current asset xxx
FMV N-current asset xxx
FMV Current liabilities (xxx)
FMV N-current liabities (xxx)
FMV of Identifiable Net Asset xxx
Multiply by: NCI % x%
NCI @ Proportionate share xx

If the result of business combination is:

GOODWILL - Attributable to Parent and Subsidiary
GAIN ON BARGAIN PURCHASE - Attributable to Parent Only

2. FMV of NCI
a. Given FMV
b. Assumed/Implied FMV
*Whether Given/Assumed FMV of NCI, ALWAYS check if it is greater or
equal to Proportionate Share.
Minimum amount to record NCI.
*If the problem is silent, use FMV to measure NCI but don’t forget to
consider the above consideration.
*If NCI is to be measured @ proportionate share, use immediately without
any consideration of FMV of NCI

If the result of business combination is:

GOODWILL - Attributable to Parent Only
GAIN ON BARGAIN PURCHASE - Attributable to Parent Only
Control Premium
1. ALWAYS part of the purchase price
2. It affects computation of Goodwill or Gain on bargain purchase
3. When computing ASSUMED/IMPLIED FMV of NCI, EXCLUDE the control premium.
Formula:
Purchase Price – Control Premium
Assumed/Implied FMV = *Related Purchased Interest X NCI %

*Related purchased interest at the time you acquired control.

Illustration (Adapted and revised problem)

*Values are all assumed to illustrate the concepts above.

On January 1, 2020, Entity A acquires 30,000 out of 100,000 outstanding ordinary shares of
Entity B for P90,000. For the six months ended June 30, 2020, Entity B reported net income of
P40,000.

On July 1, 2020, Entity A acquires additional 60,000 ordinary shares of Entity B at a price of
P240,000. Entity A paid P20,000 acquisition related costs and P10,000 indirect costs of business
combination.

The acquisition price of per share of the additional shares clearly reflects the fair value of the
existing interest of Entity A on Entity B. It is the policy of Entity A to initially measure the
noncontrolling interest in net assets of the acquiree at fair value. The fair value of the
noncontrolling interest in net assets of the acquire is appraised at P30,000.

At the acquisition date, the net assets of Entity B are reported at P400,000. An asset of Entity B
is overvalued by P50,000 while one of its liability is overvalued by P30,000.

1. What is the goodwill or (gain on bargain purchase) as a result of business combination?

Solution: AGGREGATE AMOUNT OF: 1. Consideration given:

a. Cash 240,000
b. Issued share(@FMV) 0
c. Bonds(@FMV) 0
d. Contingent consideration(@FMV) 0

2. Non-controlling interest (NCI)

(HIGHER FMV: 30,000 vs. P.S: 38,000) 38,000

3. FMV of previously held equity share if achieved in stage 120,000

LESS: FMV of Identifiable Net Assets of Acquiree (Exc: Existing Goodwill) (380,000)

GOODWILL 18,000
 2. Assuming there is NO GIVEN fair value of NCI , what amount is to be presented as NCI?

Solution: Related Purchased Interest 240,000 (60%)

Divide by: 60%
Balance 400,000 (100%)
x NCI % 10%
NCI 40,000

3. Assuming there is NO GIVEN fair value of NCI and the purchase price is inclusive of
control premium of 6,000, what amount is to be ?

Solution: Related Purchased Interest 240,000 – 6,000 (60%)

Divide by: 60%
Balance 390,000 (100%)
x NCI % 10%
NCI 39,000

4. Assuming there is NO GIVEN fair value of NCI and the purchase price is exclusive of
control premium of 20,000,
a. What amount is to be presented as NCI?

Solution: Related Purchased Interest 240,000 (60%)

Divide by: 60%
Balance 400,000 (100%)
x NCI % 10%
NCI 40,000

b. What is the goodwill or (gain on bargain purchase) as a result of business

combination?

Solution: AGGREGATE AMOUNT OF: 1. Consideration given:

a. Cash 240,000 + 20,000

b. Issued share(@FMV) 0
c. Bonds(@FMV) 0
d. Contingent consideration(@FMV) 0

2. Non-controlling interest (NCI)

(HIGHER FMV: 40,000 vs. P.S: 38,000) 40,000

3. FMV of previously held equity share if achieved in stage 120,000

LESS: FMV of Identifiable Net Assets of Acquiree (Exc: Existing Goodwill) (380,000)

GOODWILL 40,000

Contingent Consideration/ Provisional Fair Values

Measurement Period
- 1 year period after the date of acquisition
 a. If the information and circumstances existed already at the time of acquisition and
it is within the measurement period, any adjustment in the fair value would affect
the result of business combination except if the following reasons which
adjustment will be made through P/L:
a. Reaching target net income
b. Reaching target share price
c. Reaching a milestone on R&D

b. However, if it is not within the measurement period, any adjustment in the fair
value will be made through P/L.

SME
a. NCI is measured at Proportionate Share
b. ARC or direct costs are capitalized.
c. Goodwill goes to parent only and subject to amortization (10 years).

Illustration:
Entity A acquired 80,000 out of 100,000 outstanding ordinary shares of Entity B which enables
the former to obtain control of the latter at an acquisition price of P1,000,000. Entity A paid
P100,000 acquisition related costs and P50,000 indirect costs of business combination.
At the date of acquisition, the net assets of Entity B are reported at P1,600,000. An asset of
Entity B is overvalued by P60,000 while one of its liability is undervalued by P40,000. Both
entities are considered as small-medium enterprises.

1. What is the initial measurement of noncontrolling interest in net assets in the

consolidated statement of financial position?

Solution: 1,600,000
(60,000)
(40,000)
1,500,000 x 20% (NCI PERCENTAGE) = 300,000

2. What is the amount that shall be expensed as incurred at the time of business
combination?

Solution: Indirect Cost = 50,000 (EXPENSE IMMEDIATELY BECAUSE THE PROBLEM IS SILENT)

3. What is the goodwill or (gain on bargain purchase) arising from business combination?
Solution: AGGREGATE AMOUNT OF: 1. Consideration given:

a. Cash 1,100,000
b. Issued share(@FMV) 0
c. Bonds(@FMV) 0
d. Contingent consideration(@FMV) 0

2. Non-controlling interest (NCI) 300,000

 3. FMV of previously held equity share if achieved in stage 0

LESS: FMV of Identifiable Net Assets of Acquiree (Exc: Existing Goodwill) (1,500,000)

GAIN ON ACQUISITION (100,000)