Accounting for Business Combination

Business Combination
Standard: IFRS 3 (Revised Version issued January 2008).
Key Definitions:
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
an

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
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]
Types of Business Combination
1. Acquisition of Asset/ Net Asset (Statutory Merger and Statutory Consolidation)- There is an
actual purchase of ALL the assets and liabilities of the acquiree.

2. Acquisition of Stock (Accounting Consolidation)- control is obtained usually by purchasing all or

majority of the voting shares of another company. The acquiree (parent) and acquirer (subsidiary)
continue their separate existence. At the end of the reporting period, they are consolidated into
one company.
Stock acquisition
1-19% Financial Asset Through Profit or Loss/ Financial Asset through OCI (Cost Model or Fair Value
Model)
20-50% Investment in Associate (Equity Model)
51%+ Investment in Subsidiary (Parent- FV, Cost or Equity), Consolidation (Acquisition Method)
Elements of Control (All must be present)
1. Power over the investee (Substantive Right, OS; Protective, PS)- ability of the investor to direct
the relevant activity of the investee.
2. Exposure, or rights, to variable returns from involvement with the investee; and
3. The ability to use power over the investee to affect the amount those returns.
Determining whether a transaction is a business combination
Guidance by IFRS 3:

 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]
Inputs – an economic resource (e.g. non-current assets, intellectual property) that creates outputs
when one or more processes are applied to it
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)
Output – the result of inputs and processes applied to those inputs.
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]

 Identification of the 'acquirer'

 Determination of the 'acquisition date'
 Recognition and measurement of the identifiable assets acquired, the liabilities assumed and any
non-controlling interest (NCI, formerly called minority interest) in the acquiree
 Recognition and measurement of goodwill or a gain from a bargain purchase
Acquisition of Net Assets
Example:
On January 1, 2020, BTS Corp. acquired all the assets and assumed all the liabilities of Blink Corp. for
1,000,000 cash. The fair values, which is equal to their book values, of Blink Corp.s’ assets and liabilities
at the date of acquisition is 1,500,000 and 700,000, respectively.
Books of BTS (Acquirer)
Assets of Blink Corp. 1,500,000
Goodwill 200,000
Cash 1,000,000
Liabilities of Blink Corp. 700,000
Books of Blink Corp.
Liabilities of Blink Corp. 700,000
Equity 800,000
Assets of Blink Corp. 1,500,000

Acquisition of Stock
Example:
2NE1 purchased 100% of the voting shares of Suju for 1,000,000 cash. The fair values of Suju’s assets
and liabilities at the date of acquisition is 1,500,000 and 700,000, respectively.
Books of 2NE1 (Parent)
Investment in Suju 1,000,000
Cash 1,000,000

Books of Suju (Subsidiary)

No journal entry is made

Consolidated Books
Equity- Suju 800,000
Goodwill 200,000
Investment in Suju 1,000,000
Recognizing and Measuring Goodwill and Gain from a Bargain Purchase
Formula:
Cost of Investment (COI)1 xxx
Less: Fair Value of the Identifiable2 Net Assets of the Acquiree (FVNA) xxx
Goodwill/(Bargain Purchase Gain) xxx
Acquisition Related Costs3 – Necessary costs to effect business combination.

1
Cost of Investment
a. Cash Consideration
b. Non-monetary assets
c. Equity instruments (Fair Value)
d. Liabilities
e. Contingent Consideration Payable1.1
f. Share-Based Payments
g. Non-controlling Interest (NCI)1.2
h. Previously-held Interest (PHI)1.3

1.1
Contingent Consideration (CC)- Additional Consideration by the acquirer to the former owners if a
certain condition is met. It is measured at Fair Value.
Note: Change in Fair Value within measurement period adjust in Goodwill. If not, profit or loss
except if the consideration is equity instrument.

1.2
Non- Controlling Interest (NCI)1.2.1 - arises in acquisition of stock and less than 100% of the voting
shares are acquired by parent. Measurement: Fair Value or Implied Value vs Proportionate value
Control Premium- is the excess paid by a buyer over the market price of a target company in order to
gain control. This premium can be substantial when a target company owns crucial intellectual
property, real estate, or other assets that an acquirer wishes to own. It should be deducted from
purchase price before grossing up to get the assumed fair value.

1.3
Previously-held Interest (PHI)- interests already acquired prior to acquisition of control; re-measured
at Fair Value and difference should be treated as Gain or Loss on measurement (effect on Profit or
Loss).

2
Identifiable Net Assets
 a. Identifiable Tangible Assets (Probable and FV can be measured reliably)
b. Identifiable Intangible Assets (Can be separated or meets the contractual-legal criterion)
c. Liabilities (Probable and FV can be measured reliably)
d. Contingent Liabilities (Present obligation, FV can be measure reliably, regardless of
probability)d.1
d.1 Contingent Assets are recognized when PROBABLE, Contingent Liabilities are recognized
when POSSIBLE.

2 Acquisition Related Cost- Share/ Debt Issuance Cost (Reduction to Share Premium), Other Costs
(Expensed)
Subsequent Date
Consolidated Financial Statements
Standard: IFRS 10 (Issued in May 2011).
Outlines the requirements for the preparation and presentation of consolidated financial statements,
requiring entities to consolidate entities it controls.
Key Definitions:
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
Parent
An entity that controls one or more entities
Power
Existing rights that give the current ability to direct the relevant activities
Consolidation Procedures
Consolidated financial statements: [IFRS 10:B86]
a. combine like items of assets, liabilities, equity, income, expenses and cash flows of the parent
with those of its subsidiaries
b. offset (eliminate) the carrying amount of the parent's investment in each subsidiary and the
parent's portion of equity of each subsidiary
c. 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).

Note:
NCI will only exist in consolidated FS
Net Income parent and subsidiary
Goodwill only recognized in consolidated fs
Dividend
ALE of Subsidiary are still recorded at book value in separate books, adjusted to FV in consolidaton