Pointers in AFAR

CANTORNE, J.
Business Combination – transaction which an acquirer obtain control of one or more businesses
Variation of definition – the asset (merger or consolidation) or stock acquisition of a corporation
(acquiree) by another (acquirer). Such acquisition must result to a business and such business is
controlled by the acquirer who will become known as Parent.
If the control is equally shared with another party PFRS 11 shall be applied instead of PFRS 3.
PAS 28 vs PFRS 3 – in investment in associate, the investee is exercising significant influence and is
evidence by 20% - 50% ownership. Significant influence means the ability to influence the operating and
financing policies. In business combination, the investee is exercising control and is evidence by 51% -
100% ownership. Control means the ability to direct the operating and financing policies.
Any 19% and less ownership – PFRS 9 and PAS 32 shall be applied unless such investments is unquoted
– the investment is measured at cost and is not adjusted for fair value fluctuations.
Consideration – the asset forgone by the acquirer to acquire the acquiree. The consideration must be
directly related to the former owners of the acquiree. Consideration is measured at fair value.
Considerations and their measurement:
1. Cash – at Face Value
2. Bond issuance – at fair value
3. Equity issuance – at fair value
4. Deferred payments – at Present Value
5. Other noncash – at fair value
Acquisition-related cost – expensed except equity or debt instrument issuance cost
Treatment
1. Bonds at FVPL – bond issue cost is expensed
2. Bonds not at FVPL – bond issue cost is deducted from issue price of bonds payable OR added to
discount on bonds OR deducted from premium on bonds
3. Equity instruments – deducted from share premium first and if not sufficient, deducted from
retained earnings
Conceptually why acquisition related cost is expensed and not capitalized to the consideration
transferred or to the asset acquired or investment in subsidiary?
The acquisition related costs are not consideration transferred to the former owners and the acquisition
related cost is not incurred by the subsidiary for it to be included but rather incurred by the parent.
Remember that we will only capitalize when it is direct or is otherwise incremental.
This is related to the reason why the losses due to fair value adjustments of net assets of subsidiary is
recognized as loss by the subsidiary.
Noncontrolling interest or NCI – ownership not attributed to the parent but to the other shareholders.
Net identifiable assets recognition and measurements
 1. Asset – identifiable and meet the criteria stated in Conceptual Framework – at fair value
2. Liability – as long as assumed and is a present obligation of the acquiree – at fair value but
usually liability does not have available fair value so use the adjusted carrying amount
3. Internally created identifiable intangible asset – as long as part of acquired asset – at fair value
Internally generated intangible assets are not recognized, such items are recognized as part of
internally generated Goodwill (PAS 38, par 63) (WHY? – because it cannot be identified
separately from the cost of developing a business as a whole) – this is the reason why acquiree
need to reassess its total assets during acquisition date.
Conceptually the internally generated intangible assets of the acquiree becomes identifiable or
separable on acquisition date because the acquirer has acquired the business.
4. Reassessment – if acquirer intends to sold a PPE after the acquisition date, the PPE shall be
reclassified as Noncurrent asset held for sale and accounted using PFRS 5 rather than PAS 16
In other words, there will be discontinuance of currently applying PFRS when the item no longer
meets the criteria of such PFRS in subsequent dates.
Formulas for computing goodwill
Symbol
1. G: Goodwill
2. Ct: Consideration transferred
3. NCI: Noncontrolling interest at fair value
4. O%: Percent of interest of acquirer
5. NCI%: Percent of interest of NCI
6. NA: Net identifiable asset

G=Ct + NCI −NA

G=Ct + NA × NCI %−NA
G=Ct −NA ×O %
G=Ct −NA ×O %+ NCI −NA × NCI %

NCI fv at proportion of consideration= ( OCt% ) × NCI %

Restructuring provisions – major changes that affect definitely the operation of the acquiree; it includes
liquidating cost such as cost of terminating business activity or terminating employees – such costs are
generally not recognized, unless entity has an existing liability for restructuring – best evidence by
detailed formal plan for restructuring on or before acquisition date.
Operating leases – be accounted for only when the acquiree is the lessee – favorable, recognized as an
intangible asset; unfavorable, recognized as liability.
Operating lease – lessor
The lessor is the acquirer, this means that the leased asset is of short-term lease or of low value (however,
the option granted by the PFRS 16 is “may or may not”, so better watch out if the problem does not
provide whether the lease is finance lease or operating lease). The acquirer is the one who is entitled to
rent income payments. The fair value of differential is added to asset because there is internally
generated goodwill because the market participants are willing to pay at above market rates.
Intangible asset – as long as separable and arises from contractual or other legal rights
Separability criterion is best evidence by transaction related to the intangible with other party such as
sale, transfer, licensing, rental, or exchange.
PAS 38 stated either of the two criteria is sufficient to classify an intangible asset as identifiable.
Patent
Cost of patent includes purchase price, import duties, nonrefundable purchase taxes, and any directly
attributable cost of preparing the asset for intended use.
If it is internally generated, the cost of developing the patent is recognized as R&D expense but the cost
of licensing is capitalized as the cost of the patent. Any cost incurred to make the patent commercially
feasible may be capitalized as patent cost or separately accounted for as development cost. Any litigation
cost is expensed outright because such will only maintain the patent rather than enhance it.
The reason why R&D is expensed outright is because there is uncertainty whether such cost will benefit
the entity in the future.
The patent shall be amortized shorter of its remaining life or legal life. JUST REMEMBER WHEN IT
COMES TO ASSET LIFE, THE SHORTER ONE IS SELECTED AS THE ASSET LIFE: CONSERVATISM
PRINCIPLE.
However, if the business is acquired, the R&D expense is recognized as part of the asset because the
R&D has finally benefit the acquiree through acquisition of the acquirer.
Patent is always identifiable because there is a party (the government) granting the patent right to the
patentee over his invention.
Contingent liability – as default, contingent asset is never recognized under PFRS (the reason is that it
may lead to an income that has never occurred); however, contingent liability is recognized under PFRS 3
when it is a present obligation and can be measured reliably (PFRS 3 is applied instead of PAS 37)
Income taxes – the remeasurement at acquisition date fair values may increase/decrease the value of total
assets and total liabilities, there will be deferred tax asset recognized if the value of asset decreases or
liability increases as a result of remeasurement and there will be deferred tax liability recognized if the
value of the asset increases or the liability decreases. Take note that the Goodwill derecognized is not a
factor for measuring deferred taxes. Similarly, Goodwill recognized as a result of business combination is
not also a factor.
1. T%: Tax rate
2. DTA: Deferred tax asset
3. DTL: Deferred tax liability
4. FVL: Fair value of liability
5. FVA: Fair value of asset
6. CAL: Carrying amount of liability
7. CAA: Carrying amount of asset

DTA=( CAA >−FVA ) ×T % + ( FVL>−CAL ) × T %

DTL=( FVA>−CAA ) ×T %+ (CAL >−FVL ) ×T %

Net of DTL∧DTA =( ( FVA−FVL )− (CAA −CAL ) ) ×T %

If the result is negative, deduct from net assets; if positive, add to the net assets.

G=Ct + NCI −(Total assets−Total liabilities ±( ( FVA −FVL )−( CAA −CAL ) )×T %)
Employee benefits – remeasured at actuarial valuations
Indemnification assets – remeasured at measurement of the indemnified item

Ct =Downpayment + Deferred payment ÷(1+ R ate)Period

OR

Deferred payment ÷ ( 1+ Rate )Period −Deferred payment

Ct =Downpayment + (−1 ) ( Rate )
Dividends declared to the former owners – deducted from consideration transferred
Share for share exchanges

Combined entity total shares−Acquire r ' s total shares

Numbers of share issued=
Fair value∨Par value

Combined entity total share capital−Acquire r ' s total share capital

Par value of shares=
Number of shares issued

Combined entity total share equity− Acquire r ' s total share equity
Fair value of shares=
Number of share issued
Ct =Fair value of share × Number of share issued

Combined total share equity=Number of share issued × Fair value+ Acquire r ' s total share equity
Step acquisition of business combination
1. The equity previously held is remeasured at fair value on acquisition dates.
2. Any difference between carrying amount and fair value is recognized in profit or loss if the equity
held is measured is at FVPL, or investments in associate and joint venture. In OCI, if the equity
held is measured at FVOCI
Query
What if the entity acquired all the asset and assumed all liabilities rather than acquiring more stock?
Answer: Same application, the consideration transferred plus the previously held interest remeasured at
FV minus the net assets.
Joint operation vs Joint venture
In PFRS 11, joint operators have interest directly on asset and obligation on liabilities; while the joint
venturers have interest directly on net assets. The interest solely on net assets is best evidence if investee
or the acquired is a separate vehicle.
Therefore, in accounting for business combination coming from joint operation, the acquirer interest is
computed item by item. Example, the interest of acquirer in PPE is 15% while for obligation in accounts
payable is 16%. Of course, the value of the item is remeasured at fair value first before computing the
interest.
Without consideration – NO GOODWILL MUST BE RECOGNIZED and NO ATTRIBUTIONS OF
PREVIOUSLY HELD INTEREST
1. Treasury shares – an entity may increase its percentage of ownership if the investee repurchases
the shares of other holders. (This a method used by corporation to avoid hostile takeover)
New interest X Net assets = Total interest on net asset of entity now Acquirer
2. Conventional – no ownership on the acquiree but there is control of business. (Remember that
business combination can be contractually arranged, for as long as there are control and business
there is a business combination unless such control is joint control)
All interest in net asset is attributed to NCI

Incomplete accounting – the use of provisional amount

It is not always expected that fair value is available on acquisition date, therefore, provisional amount is
assigned to an item in which the fair value is unidentified.
If the fair value is subsequently identified within the measurement period (12 months after the acquisition
date), the provisional amount is retrospectively adjusted using PFRS 3.
If beyond the measurement period, use PAS 8 as a correction of errors.
More on technicality, “retrospective adjustment” is under PFRS 3 while “retrospective restatement” is
under PAS 8.
Both are the same, they vary only in disclosures required.
Measurement period starts from the date earlier of (and ends after 12 months from that date):
a. Acquisition date
b. Acquirer learns that more information is not obtainable
Same application is to be applied when there is unrecorded identifiable asset discovered subsequent to the
acquisition dates.
Reacquired rights – right previously granted to an acquiree by the acquirer but subsequently reacquired
through business combination. Such reacquired right is recognized as intangible asset.
Example of reacquired rights is the settlement of pre-existing relationship which is either contractual or
noncontractual.
Settlement from contractual

Adjusted settlement loss∨gain=Offmarket value−Carryin g amount of deferred liability

“Off market value” is the excess of fair value of the license agreement derived from cash flow estimates
over its “at market value”. The off-market value can be substituted with settlement amount of the
contract if the latter is lower.
Carrying amount of deferred liability is available in the Acquirer book. It is the acquirer who has the
deferred liability – the deferred liability is the unearned income which will be amortized over the course
of the grant of the right. Remember also that in reacquired right, it is the acquirer who must grant the
right.

Ct =Issue price−Offmarket value

Since the deferred liability will never be earned as income by the acquirer, the acquirer should pay the
deferred liability using the off-market value but if the contract of granting right provides for settlement
amount and the settlement amount is lower, then use the settlement amount.
At the date of the granting right, the acquirer has received a consideration which is equal to the contract
price – amortized over the course of the grant, but cancelled because of business combination (NOTE:
due to the reason that parent and subsidiary is viewed as single reporting entity, it is treated as
reacquired right because the parent is now the main owner of the subsidiary – you cannot contract with
yourself)

NA =Total asset −Total liabilities+ Atmarket value−Carrying amount of prepayments

When there is an unearned income to a party, there is an equivalent prepaid expense on another
contracting party (like Accounts payable on you and Accounts receivable on me). Practically, the
carrying amount of deferred liability or unearned income on the book of acquirer is not the same with the
carrying amount of prepayments of acquiree.
At-market value is the measurement of intangible asset, the subsidiary will derecognize its prepayment
and the right will be used by the subsidiary without compensation given to the acquirer because they are
viewed as single reporting entity.
If the acquiree who has granted the right, it is subsumed to the goodwill.
Non contractual settlement – if the acquirer is the defendant, the fair value of settlement is deducted from
consideration transferred.
After acquisition dates, assets and liabilities are accounted for using other applicable standards (for
example, PPE is remeasured at fair value; however, this will not be reflected in the book of acquiree
because the remeasurement is for the purpose of business combination. In the book of acquiree and
subsequent to acquisition dates, it will be accounted for using PAS 16), there are exceptions for which
PFRS3 should still be applied:
1. Reacquired rights – measurement: amortized using remaining life
2. Indemnification assets – measurement: same measurement of the indemnified items; if
indemnified asset is not measured at fair value, collectability is assessed.
3. Contingent liabilities – measurement: higher of amount that would be recognized using PAS 37
and amount initially recognized using PFRS 15
4. Contingent consideration – a promise made by acquirer to provide acquiree a consideration upon
happening of the contingency
Initially, it is included in the consideration transferred and measured at acquisition date fair value.
Subsequently, the measurement is adjusted when additional information is obtained, accounted
for as retrospective adjustment to provisional amount if within measurement period.
Changes in fair value that are not measurement period adjustments are accounted for
remeasurement of fair value if the contingent is classified as liability or asset, not remeasured if
equity.