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Step Acquisition

This document discusses step acquisitions, where a business combination involves successive share purchases of a target company over time. The key principles are that a business combination occurs when control is achieved, assets and liabilities are remeasured at fair value on the acquisition date, and non-controlling interests can be measured at either fair value or proportionate share of net assets. An illustration is provided to demonstrate calculating goodwill using the proportionate and full goodwill approaches for a step acquisition.

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Isaiah Valencia
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1K views3 pages

Step Acquisition

This document discusses step acquisitions, where a business combination involves successive share purchases of a target company over time. The key principles are that a business combination occurs when control is achieved, assets and liabilities are remeasured at fair value on the acquisition date, and non-controlling interests can be measured at either fair value or proportionate share of net assets. An illustration is provided to demonstrate calculating goodwill using the proportionate and full goodwill approaches for a step acquisition.

Uploaded by

Isaiah Valencia
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Step Acquisition

A business combination may involve more than one exchange transactions, that is when there are successive share
purchases. This is known as step acquisition, where the purchases of block of shares in an investee are made at
different points in time.
The principles to be applied are :
 A business combination occurs only in respect of the transaction that gives one entity control of another;
 The identifiable net assets of the acquiree are remeasured to their fair value on the date of acquisition (i.e.
the date that control passes);
 Non- controlling interests are measured on the date of acquisition under one of the two options permitted
by PFRS 3 , fair value basis (Option1) or proportionate basis(option 2),

Illustration: P Company acquires 15% of S Company’s common stock for P600,000 cash and carries the investment
using the cost model. A few months later, P Company purchases another 60% of S Company’s stock for P2,592,000.
At that date, S Company reports identifiable assets with a book value of P4,680,000 and a fair value of P6,120,000
and it has liabilities with a book value and fair value of P2,280,000. The fair value of the 25% non controlling interest
in S Company is P1,080,000.
1. Compute the amount of goodwill, using partial goodwill or proportionate basis approach.

Proportionate Basis (Partial-goodwill Approach)


Partial-goodwill
Fair value of subsidiary (75%):
Consideration transferred: Cash………………………..P 2,592,000 ( 60%)
Fair value of previously held equity interest
in acquiree P2,592,000/60% = P4,320,000 x 15%..... 648,000 ( 15%)
Fair value of Subsidiary ..………………………………………. P 3,240,000 (75%)
Less: Book value of stockholders’ equity (net assets)
– S Company: (P4,680,000 – P2,280,000) x 75%......... 1,800,000 . (75%)
Allocated Excess.……………………………………………….....P1,440,000 (75%)
Less: Over/undervaluation of assets and liabilities:
[(P6,120,000 – P2,280,000) –
(P4,680,000 – P2,280,000)] x 75%................................ 1,080,000 (75%)
Positive excess: Goodwill (partial)……………………………...P 360,000 (75%)

2. Compute the amount of goodwill, using full goodwill or fair value approach.

Fair Value Basis (Full-goodwill Approach)


Fair value of subsidiary (100%):
Consideration transferred: Cash………………………..P 2,592,000 (60%)
Fair value of previously held equity interest
in acquiree P2,592,000/60% = P4,320,000 x 15%..... 648,000 (15%)
Fair value of NCI (given)………………………………… 1,080,000 (25%)
Fair value of subsidiary……………………………………… . P 4,320,000 (100%)
Less: Book value of stockholders’ equity (net assets)
– S Company: P2,400,000 x 100%............................. 2,400,000 (100%)
Allocated Excess.…………………………………………… …P 1,920,000 (100%)
Less: Over/undervaluation of assets and liabilities:
(P3,840,000 – P2,400,000) x 100%............................... 1,440,000 (100%)
Positive excess: Goodwill (full)…………………………… … ..P 480,000 (100%)

The full – goodwill of P480,000 consists of two parts:


Full-goodwill……………………………………………...P 480,000
Less: Controlling interest on full-goodwill
or partial-goodwill……………………………... 360,000
NCI on full-goodwill……………………………………..P. 120,000
3. Compute the non controlling interest on acquisition , using partial goodwill or
proportionate basis approach.

Non-controlling interest
Book value of stockholders’ equity of subsidiary…………. .P 2,400,000
Adjustments to reflect fair value (over/ undervaluation
of assets and liabilities): (P3,840,000 – P2,400,000)…. 1,440,000
Fair value of stockholders’ equity of subsidiary…………… P 3,840,000
Multiplied by: Non-controlling Interest percentage............ 25%
Non-controlling interest (partial)…………………………… …P 960,000

4. Compute the non controlling interest on acquisition, using full goodwill or fair value basis
approach.

Non-controlling interest
Non-controlling interest (partial) –refer to No. 44.…………P 960,000
Add: Non-controlling interest on full -goodwill
(P480,000 – P360,000 partial-goodwill)…………....... 120,000
Non-controlling Interest (full)……………………………… …P 1,080,000

II. P Corporation purchased a 10% interest in S Company on January 2, 20x2 as an available


for sale investment for a price of P80,000.
On January 2,20x7, P Corporation purchased 7,000 additional shares of S Company from
existing shareholders for P630,000.The purchase raised P’s interest to 80%. S
Company has total assets at book value of P810,000 and liabilities at book and
fair value of P130,000. The shareholders’ equity of S Company on the 2 nd
purchase consists of Common Stock,P20 par, P200,000 and Retained earnings,
P480,000. On the date of second purchase, S’s equipment was undervalued by
P100,000 and had a five year remaining life. All other book values approximate fair
values. Any remaining excess is attributed to goodwill.
1. What is the estimated fair value of the 20% non controlling interest on January 2,20x7?

Fair value per share:


New acquisition (P630,000/7,000 shares) P90

Fair value of previously owned shares (1,000* shares x P90) P 90,000 (10%)
Acquisition of new shares 630,000 (70%)
Total price paid for 80% interest P 720,000
Non-controlling interest (P720,000/80%) x 20% P 180,000
* P200,000 / P20 x 10% = 1,000 shares

2. What is the amount of goodwill to be reported in consolidated statement of financial


position on January 2, 20x7?

Fair value of previously owned interest (10%) P 90,000


Price paid for new additional interest (70%) 630,000
Non-controlling interest 180,000
Total 900,000
Less fair value of net assets acquired (P910,000 – P130,000) 780,000
Goodwill P120,000
Or :
Fair value of subsidiary 900,000
Less: Book value of interest acquired :
Connon stock 200,000
Retained earnings 480,000 680,000
Excess over book value 220,000
Allocation:
Equipment 100,000
Goodwill 120,000

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