UNIT I – BUSINESS COMBINATIONS

Business Combination –

 PFRS 3 definition– is a transaction or other event which an acquirer obtains control of one or
more businesses.
 Occurs when one company (acquirer) acquires another company (acquired) or when two or more
companies merge into one. After the combination, one company gains control over the other.

PFRS # 3 - objective is to improve the relevance, reliability and comparability of financial reporting of an entity in
relation to a business combination by establishing the recognition and measurement principles and disclosure
requirements for the acquirer.

Essential elements in the definition of a business combination:

1. Control
2. Business

Control
 an investor controls an investee when the investor is exposed or has rights and the ability to affect those
returns through its power over the investee.
 Normally presumed to exist when the ownership interest acquired in the voting rights of the acquire is
more than 50% or 51% or more.
 May still be obtained without necessarily acquiring more than 50% of the acquiree’s voting rights in the
following instances:
1. The acquirer has the power to appoint or remove the majority of the board of directors of the
acquire; or
2. The acquirer has the power to cast the majority votes at board meetings or equivalent bodies within
the acquire; or
3. The acquirer has the power over more than half of the voting rights of the acquire because of an
agreement with other investor; or
4. The acquirer has the power to control the financial and operating policies of the acquire because of
law or an agreement.

Acquisition Method of Accounting for Business Combinations

 Four steps are to be used as follows:
1. Identify the acquirer
2. Determine the acquisition date
3. Determine the consideration given (price paid) by the acquirer
4. Recognize and measure the identifiable assets acquired, the liabilities assumed, non-controlling
interest and previously held equity interest in the acquire. Any resulting goodwill or gain from bargain
purchase should be recognized.

Identify the acquirer

 Acquirer is the entity that obtains control of the acquire.
a. In asset acquisition, the acquirer is the company transferring cash or other assets and/or assuming
liabilities.
b. In stock acquisition, the acquirer is the company transferring cash and/or other assets for a
controlling interest in the voting common stock of the acquire. “Reverse acquisition” may occur
when a publicly traded company is acquired by privately traded company where the issuing company
is the acquire.

Determine the acquisition date

 Acquisition date – date on which the acquirer’s obtain control of the acquire – the date which the acquirer
legally transfers the consideration, acquires the assets and assumes the liabilities of the acquire –
generally the closing date.

 Acquisition date is usually the date the fair values are established for the accounts of the acquired
company
Determine the consideration given

 Consideration given is assumed to be the fair value of the acquire as an entity which is calculated as the
sum of:
a. The cash or noncash assets transferred by the acquirer
b. The shares of stocks or bonds issued by the acquirer.
c. Contingent consideration

 Contingent consideration –
 is an agreement to issue additional consideration (asset or stock) at a later date if specified
events occur - measured at its acquisition date fair value.

 Changes resulting from events after the acquisition date but within the measurement period
( which maybe a maximum period of 1 year from the acquisition date) are recognized as an
adjustment as an adjustments against the original accounting for the acquisition (may affect
goodwill or gain from acquisition)

 Changes resulting from events after the acquisition date but after the measurement period
( which maybe a maximum period of 1 year from the acquisition date) are not measurement
period adjustment. The additional consideration given is to be accounted for as follows:
a. If it is equity – the original amount is not measured
b. If additional consideration is cash or other assets, the changed amount is recognized in
profit or loss.

 Acquisition-related costs – costs incurred to effect business combination- broker’s fees, accounting,
legal and other professional fees, general and administrative costs are expensed.

 Stock issuance costs – when shares are issued for the net assets acquired, stock issuance costs – Sec
registration fees, documentary stamp tax, newspaper publication fees are treated as a deduction from
Share Premium(APIC) from previous share issuances. In case Share Premium or APIC is reduced to
zero, the remaining stock issuance costs is treated deduction from retained earnings.

 Cost to issue debt securities – accounted for as bond issue costs which are deducted from the bonds
payable when determining the carrying amount of the bonds.

Record and Measure Acquirer’s Assets and Liabilities that are assumed.

 Fair values of all identifiable assets and liabilities are recorded

 Total fair value of all identifiable assets less liabilities is equal to fair value of the net assets.
 The total identifiable assets should never include goodwill that may exist on the acquiree’s books.
 The goodwill to be recorded is the “new goodwill” which is the result of the combination or based on the
price paid by the acquirer.

a. If Price paid by the acquirer exceeds the fair value of net assets – the excess is recorded as
“Goodwill”. Goodwill (an asset) is not amortized but its impairment is tested in future accounting
periods.
b. If Price paid is less than the fair value of net assets (bargain purchase) – the difference is record as “
Gain on bargain purchase” and shown as gain in profit or loss statement. However, before
recognizing gain on bargain purchase, the acquirer shall reassess if it has correctly identified all the
assets and liabilities and shall recognize any additional assets or liabilities that are identified in that
review.

 Acquirer is not permitted to recognize valuation allowance as of acquisition date for assets acquired in a
business combination that are measured at acquisition-date fair values- no valuation allowance for
acquired accounts receivables, loans and property, plant and equipment.
  Classified into:
1. Asset acquisition - acquirer purchases the assets and assume the liabilities of acquiree in
exchange for cash or non cash assets or bonds or shares of stock of acquirer. Acquired company is
dissolved.

a. Merger - two or more companies merge into single company and the acquirer is one the
combining companies. Example: D Co + E Co,+ F Co. = E Co.,

b. Consolidation - two or more companies merge into single company and the acquirer is a new
company. Example: D Co + E Co,+ F Co. = G Co.,

c. Goodwill/Gain on acquisition
Consideration transferred xxx
Less: Fair value of net assets of acquiree xxx
Goodwill (Gain on acquisition) xxx

Note: If consideration transferred exceeds the fair value of net assets acquired, the
excess is Goodwill, but if consideration is less than the fair value of net assets
acquired the differences is a Gain or income from acquisition.

2. Stock acquisition – The acquirer obtains control by acquiring a majority ownership in the voting
rights of the acquiree. Acquirer is the parent, the acquiree is the subsidiary. Both companies retain
their legal existence but for financial reporting purposes they are viewed as a single reporting entity.

 May described as:

1. Horizontal combination – combination of similar businesses, example a bank acquires another bank.
2. Vertical combination - combination of entities operating a different levels in a marketing chain. A
manufactures acquires a supplier of raw materials.
3. Conglomerate – combination of entities with dissimilar business, example a real estate acquires a
bank..

Net Asset acquisition (Purchase Method)

Basic Accounting Procedures:

1. All accounts identified ( Assets and liabilities) – measured at estimated fair value.
2. If the consideration given exceed the fair value of the net identifiable assets of the acquired company, the
excess is recorded as goodwill.
3. If the consideration given is less than the fair value of the net identifiable assets of the acquired
company, the excess is recorded as gain on acquisition (bargain purchase).
4. All acquisition-related costs are expensed in the period the costs are incurred.
5. If consideration given is share of stocks, the costs to issue equity securities are reduction from the value
assigned to additional paid in capital account.

To illustrate:
A Company and B Company
Balance Sheets
June 1, 2021
Assets A Company B Company
Book values FMV
Cash P 1,650,000
Accounts Receivable 350,000 P 250,000
Inventories 200,000 120,000 P 150,000
Building 800,000 550,000 300,000
Equipment 250,000 180,000 200,000
Goodwill ____________ ____20,000
P 3,250,000 P 1,120,000
Liabilities and Equity
Accounts Payable P 150,000 P 50,000 P 50,000
Bonds Payable 400,000 100,000 100,000
Ordinary Shares (P 100 par) 1,500,000 400,000
Share Premium 400,000 200,000
Retained Earnings 800,000 370,000
P 3,250,000 P 1,120,000
 A Company incurred the following expenses:
Direct acquisition costs P 45,000
Indirect acquisition costs 15,000
REQUIRED:

1. Journal entries on the books of A Company to record the purchase of the net assets of B company in
a business combination assuming the following purchase price:
a) P 945,000 b) 620,000

2. Assuming A Company issued 8,000 shares of its ordinary shares for the net assets of B company.
The market value of A Company’s share on June 1, 2021 was P 120 per share. Costs of SEC
registration and issuance of the equity securities amounted to P 40,000.
Solution:
Req. 1 (a) Price paid P 945,000
GENERAL JOURNAL
Date Particulars PR Debit Credit
2021
June 1 Accounts receivable 250,000
Inventories 150,000
Building 300,000
Equipment 200,000
Goodwill 195,000
Accounts Payable 50,000
Bonds Payable 100,000
Cash 945,000
Acquisition of B Company.

Acquisition Expense 60,000

Cash 60,000
To record acquisition related costs

To compute for Goodwill:

Total price paid:
Cash
Fair value of net asset acquired: 945,000
Total assets 900,000
Less: Total liabilities 150,000 750,000
Goodwill 195,000

In the books of the B Company (acquiree)

GENERAL JOURNAL
Date Particulars PR Debit Credit
2021
June 1 Cash 945,000
Accounts Payable 50,000
Bonds Payable 100,000
Loss on sale of business 25,000
Accounts receivable 250,000
Inventories 120,000
Building 550,000
Equipment 180,000
Goodwill 20,000
To record sale of net assets

Ordinary Shares 400,000

Share Premium 200,000
Retained Earnings 370,000
Cash 945,000
Loss on sale of business 25,000
Distribution of cash to stockholders and
liquidation of B Company
Req. 1 (b) Price paid P 620,000
GENERAL JOURNAL
Date Particulars PR Debit Credit
2021
June 1 Accounts receivable 250,000
Inventories 150,000
Building 300,000
Equipment 200,000
Accounts Payable 50,000
Bonds payable 100,000
Cash 620,000
Gain on acquisition 130,000
Acquisition of B Company.

Acquisition Expense 60,000

Cash 60,000
To record acquisition related costs

To compute for Gain on acquisition:

Total price paid:
Cash 620,000
Fair value of net asset acquired:
Total assets 900,000
Less: Total liabilities 150,000 750,000
Gain on acquisition (130,000)

The Statement of Financial Position of A Company after the combination:

A Company
Balance Sheet
June 1, 2021

Cash (1,650 – 620 – 60) P 970,000 Accounts Payable P 200,000

Accounts receivable 600,000 Bond Payable 500,000
Inventory 350,000 Total Liabilities P 700,000
Building 1,100,000
Equipment 450,000 Ordinary shares, P 100 par P 1,500,000
Share Premium 400,000
Retained Earnings (800 + 130 - 60) 870,000
___________ Total Equity P 2,770,000
Total Assets P 3,470,000 Total Liabilities & Equity P 3,470,000

Req. 2: Assuming A Company issued 8,000 shares of its ordinary shares for the net assets of B
company. The market value of A Company’s share on June 1, 2021 was P 120 per share.
Costs of SEC registration and issuance of the equity securities amounted to P 40,000.

GENERAL JOURNAL
Date Particulars PR Debit Credit
2021
June 1 Accounts receivable 250,000
Inventories 150,000
Building 300,000
Equipment 200,000
Goodwill 210,000
Accounts Payable 50,000
Bonds Payable 100,000
Ordinary Share (8,000 x 100) 800,000
Share Premium ( 8,000 x 20) 160,000
Acquisition of B Company.

Acquisition Expense 60,000

Share Premium 40,000
Cash 100,000
 To record acquisition related costs

To compute for Goodwill:

Total price paid:

Stocks issued ( 8,000 shares x P 120(mv.)) 960,000
Fair value of net asset acquired:
Total assets 900,000
Less: Total liabilities 150,000 750,000
Goodwill 210,000

The Statement of Financial Position of A Company after the combination:

A Company
Balance Sheet
June 1, 2021

Cash P 1,550,000 Accounts Payable P 200,000

Accounts receivable 600,000 Bond Payable 500,000
Inventory 350,000 Total Liabilities P 700,000
Building 1,100,000
Equipment 450,000 Ordinary shares, P 100 par P 2,300,000
Goodwill 210,000 Share Premium (560,000 – 40,000) 520,000
Retained Earnings (800,000 -60,000) 740,000
__________ Total Equity P 3,560,000
Total Assets P 4,260,000 Total Liabilities & Equity P 4,260,000

Note: The Statement of Financial Position of the acquirer after the combination includes book
value of all assets and liabilities of the acquirer plus the fair value of assets and liabilities
of the B Company – the acquire.

In the books of the B Company (acquiree)

GENERAL JOURNAL

Date Particulars PR Debit Credit

2021
June 1 Investment in A Company 960,000
Accounts Payable 50,000
Bonds Payable 100,000
Loss on sale of business 10,000
Accounts receivable 250,000
Inventories 120,000
Building 550,000
Equipment 180,000
Goodwill 20,000
To record sale of net assets

Ordinary Shares 400,000

Share Premium 200,000
Retained Earnings 370,000
Investment in A Comp 960,000
Loss on sale of business 10,000
Distribution of A’s share to
stockholders and liquidation of B Company
Problem 2:

The company to be acquired by MMC, Inc. has the following balance sheet on December 31, 2020:

JYR Company
Balance Sheet
December 31, 2020

Cash P 40,000 Current Liabilities P 25,000

Marketable Securities 60,000 5%, 5-year Bond Payable 100,000
Inventory 100,000 Total Liabilities P 125,000
Land 30,000
Building ( net) 150,000 Ordinary shares, P 1 par P 10,000
Equipment 80,000 Share Premium 140,000
Retained Earnings 185,000
_________ Total Equity P 335,000
Total Assets P 460,000 P 460,000

Note 1: A customer list with a significant value exists.

Note 2: There is an unrecorded warranty liability on prior product sales.

Fair values of all accounts have been established as of December 31, 2020, in conformity with the fair
value measurement as follows:

Account Method of Estimation Fair value

Cash Book value P 40,000
Marketable Securities Market value 66,000
Inventory Market value 110,000
Land Adjusted market value 72,000
Building Adjusted market value 288,000
Equipment Market value 145,000
Customer list Other estimate, discounted cash
flow based on estimated future 125,000
cash flows
Current liabilities Book value ( 25,000)
Bonds Payable Fair value(adjusted with 100,000
premium/discount)
Premium on Bonds Payable Adjusted market value using
market based interest rate applied (4,000)
to contractual cash flows
Warranty liability Other estimate, discounted cash
flow based on estimated future (12,000)
cash flows

On December 31, 2020, MMC, Inc. issued 40,000 shares of its P1 par value ordinary shares with
a market value of P 20 each for JYR Company. MMC, Inc. also incurred the following costs of
P 47,000 as a result of this transaction:

 P 16,000 for consultant’s fee and brokerage fee, P 5,000 for accountant’s fee and P 4,000 for attorney’s
fee.
 Internal secretarial and administrative costs of P 10,000 are indirectly attributable to combination.
 Costs to register (SEC) such as accountant’s and legal fees and issue (printing stock certificates) stock
certificates amounts P12,000.

REQUIRED; Record the acquisition of the net assets of JYR Company and related transactions on
MMC’s books.
Solution:
Problem 2:
GENERAL JOURNAL
Date Particulars PR Debit Credit
2020
Dec. 31 Cash 40,000
Marketable Securities 66,000
Inventory 110,000
Land 72,000
Building 288,000
Equipment 145,000
Customer List 125,000
Goodwill 95,000
Current liabilities 25,000
Bonds Payable 100,000
Premium on bonds payable 4,000
Warranty Liability 12,000
Ordinary Shares (40,000 x P 1) 40,000
Share Premium 760,000
Acquisition of net assets of JYR Co.

Acquisition expenses 35,000

Share Premium 12,000
Cash 47,000
Direct and indirect acquisition
expenses and cost to issue & register stocks.

To compute for Goodwill:

Total price paid:

Stocks issued ( 40,000 shares x P 20(mv.)) 800,000
Fair value of net asset acquired:
Total assets 846,000
Less: Total liabilities 141,000 705,000
Goodwill 95,000

RECORDING CONTINGENT CONSIDERATION IN ACQUISITION OF NET ASSETS

 Contingent consideration –
 is an agreement to issue additional consideration (asset or stock) at a later date if specified
events occur - measured at its acquisition date fair value.

 Changes resulting from events after the acquisition date but within the measurement period
( which maybe a maximum period of 1 year from the acquisition date) are recognized as an
adjustment against the original accounting for the acquisition (may affect goodwill or gain from
acquisition)

 Changes resulting from events after the acquisition date but after the measurement period
( which maybe a maximum period of 1 year from the acquisition date) are not measurement
period adjustment. The additional consideration given is to be accounted for as follows:
c. If it is equity – the original amount is not measured
d. If additional consideration is cash or other assets, the changed amount is recognized in
profit or loss.
To Illustrate:

Problem 3 –Using Problem 2: Prepare the necessary journal entries in the books of MMC, under the following
independent cases:

1. (Cash contingency): Using the same information in Problem 2, assuming that MMC Inc. , issued 33,500
shares and the acquirer agreed to pay an additional P 100,000 on January 1, 2023 , if the average
income during the 2-year period of 2021-2022 exceeds P 5,000,000 per year. The expected value is
P 40,000 calculated based on the 40% probability of achieving the target income.

Solution:
GENERAL JOURNAL
Date Particulars PR Debit Credit
2020
Dec. 31 Cash 40,000
Marketable Securities 66,000
Inventory 110,000
Land 72,000
Building 288,000
Equipment 145,000
Customer List 125,000
Goodwill 5,000
Current liabilities 25,000
Bonds Payable 100,000
Premium on bonds payable 4,000
Warranty Liability 12,000
Contingent consideration payable 40,000
Ordinary Shares (33,500 x P 1) 33,500
Share Premium 636,500
Acquisition of net assets of JYR
Company.

To compute for Goodwill:

Total price paid:

Stocks issued ( 33,500 shares x P 20(mv.)) 670,000
Estimated value of contingent considerion 40,000
Total 710,000
Fair value of net asset acquired:
Total assets 846,000
Less: Total liabilities 141,000 705,000
Goodwill 5,000

2. (Cash contingency) Using the same information in Problem 2, assuming that in addition to the
stock issue, the acquirer agreed to pay an additional P 100,000 on January 1, 2023 , if the
average income during the 2-year period of 2021-2022 exceeds P 5,000,000 per year. The
expected value is P 40,000 calculated based on the 40% probability of achieving the target
income.

On February 1, 2021, the expected value of the contingent consideration was revised to P 65,000,
due to facts and circumstances existing on the acquisition date.

On March 1, 2021, the estimate was again revised to P 62,000 due to events that affect the
contingency.

On January 1, 2023, the average income for 2021 amounted to P 5,500,000 and P 2022 amounted
to P 5,700,000.
Solution:

GENERAL JOURNAL

Date Particulars PR Debit Credit

2020
Dec. 31 Cash 40,000
Marketable Securities 66,000
Inventory 110,000
Land 72,000
Building 288,000
Equipment 145,000
Customer List 125,000
Goodwill 135,000
Current liabilities 25,000
Bonds Payable 100,000
Premium on bonds payable 4,000
Warranty Liability 12,000
Contingent consideration payable 40,000
Ordinary Shares (40,000 x P 1) 40,000
Share Premium 760,000
Acquisition of net assets of JYR Co.

2021
Feb. 1 Goodwill 25,000
Contingent consideration payable 25,000
Revised within the measurement period.

Mar 1 Contingent consideration payable 3,000

Gain on contingent consideration 3,000
One time measurement is allowed,
charge to operations (subsequent measurement)

2023
Jan. 1 Contingent consideration payable 62,000
Loss on contingent consideration 38,000
Cash 100,000
Payment, contingent event happens.

To compute for Goodwill – acquisition date :

Total price paid:

Stocks issued ( 40,000 shares x P 20(mv.)) 800,000
Estimated value of contingent considerion 40,000
Total 840,000
Fair value of net asset acquired:
Total assets 846,000
Less: Total liabilities 141,000 705,000
Goodwill 135,000

** If the average income during the 2-year period of 2021-2022 is less than P 5,000,000 per year (contingent
event did not occur), on January 1, 2023, no additional payment is made .. the entry is to close
contingent consideration payable to gain on contingent consideration.

3 Stock contingency with Market value given)

Using the same information in Problem 2, assuming that in addition to the stock issue, MMC also agreed to
issue additional stock to the former stockholders of JYR Company if the average post-combination earnings
over the next two years equaled or exceeded P 700,000 per year. The additional 10,000 shares expected to
be issued are valued at P 15,000.
 On January 1, 2023, the earnings for 2021 and 2022 amounted to P 700,000 and P 760,000, respectively.

Solution:
GENERAL JOURNAL
Date Particulars PR Debit Credit
2020
Dec. 31 Cash 40,000
Marketable Securities 66,000
Inventory 110,000
Land 72,000
Building 288,000
Equipment 145,000
Customer List 125,000
Goodwill 110,000
Current liabilities 25,000
Bonds Payable 100,000
Premium on bonds payable 4,000
Warranty Liability 12,000
Contingent consideration payable 15,000
Ordinary Shares (40,000 x P 1) 40,000
Share Premium 745,000
Paid in capital for contingent consideration. 15,000
Acquisition of net assets of JYR Co. .

2023
Jan. 1 Paid in Capital for contingent consideration 15,000
Ordinary share 10,000
Share Premium 5,000
Payment. Contingent event happens.

4. Stock contingency

Using the same information in Problem 2, assuming that in addition to the stock issue, MMC Inc.
also agreed to issue 5,000 additional shares if the average income during the 2 year period of
2021 – 2022 exceeded P 80,000 per year.

On January 1, 2023, the average income amounted to P 110,000. (the contigent event happens)
Solution:
GENERAL JOURNAL
Date Particulars PR Debit Credit
2020
Dec. 31 Cash 40,000
Marketable Securities 66,000
Inventory 110,000
Land 72,000
Building 288,000
Equipment 145,000
Customer List 125,000
Goodwill 95,000
Current liabilities 25,000
Bonds Payable 100,000
Premium on bonds payable 4,000
Warranty Liability 12,000
Ordinary Shares (40,000 x P 1) 40,000
Share Premium 760,000
Acquisition of net assets of JYR Co.

2023
Jan. 1 Share Premium 5,000
Ordinary share 5,000
Issuance, contingent event happens.
 Note: If contingent event did not occur, NO ENTRY ( No issuance of additional shares.)

5. Stock contingency

Using the same information in Problem 2, assuming that in addition to the stock issue, MMC Inc.
also agreed to issue 5,000 additional shares two years later if the fair value of acquirer’s common stock
fell below P 20 per share.

On January 1, 2023, the contingent event happens and the common stock of MMC had a fair value below P 20.

Solution:
GENERAL JOURNAL

Date Particulars PR Debit Credit

2020
Dec. 31 Cash 40,000
Marketable Securities 66,000
Inventory 110,000
Land 72,000
Building 288,000
Equipment 145,000
Customer List 125,000
Goodwill 95,000
Current liabilities 25,000
Bonds Payable 100,000
Premium on bonds payable 4,000
Warranty Liability 12,000
Ordinary Shares (40,000 x P 1) 40,000
Share Premium 760,000
Acquisition of net assets of JYR Co.
2023
Jan. 1 Share Premium 5,000
Ordinary share 5,000
Issuance, contingent event happens.

Note: If contingent event did not occur, NO ENTRY ( No issuance of additional shares. )

6. On December 31, 2020, MMC issued 40,000 shares of its P 1 par value common stock with a market value of
P 800,000. In addition to the stock issue, MMC also agreed that added shares would be issued on January 1,
2023, to compensate for any fall in the market of MMC common stock below P 20 per share. The settlement
would be to cure the deficiency by issuing added shares based on their fair value on January 1, 2023.

On January 1, 2023, the contingent event happens and the stock had fair value of P 16.

Solution:
GENERAL JOURNAL

Date Particulars PR Debit Credit

2020
Dec. 31 Cash 40,000
Marketable Securities 66,000
Inventory 110,000
Land 72,000
Building 288,000
Equipment 145,000
Customer List 125,000
Goodwill 95,000
Current liabilities 25,000
Bonds Payable 100,000
Premium on bonds payable 4,000
Warranty Liability 12,000
Ordinary Shares (40,000 x P 1) 40,000
 Share Premium 760,000
Acquisition of net assets of JYR Co.

2023
Jan. 1 Share Premium 10,000
Ordinary share ( 10,000 x 1) 10,000
Issuance, contingent event haapens.

Note: If contingent event did not occur, NO ENTRY ( No issuance of additional shares.

Stock Acquisition

a. Non-controlling interest (NCI)-

 Equity in the subsidiary not attributable directly or indirectly to parent, also called minority interest.

 Measured by the acquirer either at:

1. Fair value, or
2. The NCI’s proportionate share of the acquiree’s identifiable net assets.

 Fair value of NCI in net assets of subsidiary computation:

a. If problem is silent –
1. = if there is an assessment , higher between Fair value of Assessed and
Proportionate share, or
2. = If there is no assessment , higher between Fair value Implied and Proportionate
share

to compute: Fair value Implied = Consideration transferred /acquirer’s interest x

NCI’s interest

Note: the Fair value of NCI can never be less than the NCI percentage of the fair
value of the net assets of the subsidiary.

b. If problem is not silent:

a. Problem selected Full Goodwill Method, use
1. Fair value assessed, if given,
2. If not given, then implied fair value ( based on acquirer’s consideration given)
b. Problem selected Partial Goodwill Method, use Proportionate share basis

b. Statement of Determination and allocation of Excess:

Consideration transferred xxx
Fair value of Non-controlling interest in net assets of subsidiary xxx
Total value of subsidiary xxx
Less: Book value of net assets of subsidiary xxx
Allocated Excess
Allocation of excess:
Add: Decrease in asset or Increase in liabilities xxx
Deduct: Increase in asset or Decrease in liabilities (xxx)
Goodwill or (Gain or Income from acquisition) xxx
KEY DIFFERENCES BETWEEN FULL PFRS AND PFRS FOR SME

Item Full PFRS PFRS for SMEs

Acquisition method – Purchase method – under
1. As to method PFRS3 Sec. 19 par. 6

2. As to non-controlling interest At the option of the entities: at Proportionate share

Measurement 1. at Fair value in the Net Asset of the
2. at Proportionate share acquiree
In the Net identifiable
Asset of the acquiree

2. Contingent Consideration Initially recognized as part of -Initially recognized in the

the consideration transferred cost of the combination only
- non occurrence of a future if it meets probability and
event(e.g. not meeting reliably easurable” criteria
earnings target) is not - if future event does not
considered to be a occur, then only the
measurement period adjustments to the cost of
adjustment – therefore not business combination are
adjusted against goodwill made against goodwill.

3. Cost incurred in a business

combination
 Direct costs Expensed Capitalized – added to
consideration transferred
 Indirect costs Expensed Expensed

 Cost to issue and Debited to APIC/Share Debited to APIC/Share

register stocks Premium Premium

 Costs to issue debts Debited to Bond issue costs Debited to Bond issue costs

4. Recognizing and measuring

assets acquired and liabilities
assumed on initial
recognition.
- identifiable intangible Recognized separately from Requires recognition if their
assets goodwill if it is either fair value can be measure
contractual or separable reliably

5. Exceptions to recognition or
measurement principles or
both, on initial recognition. Recognized only where there Requires recognition of
- Contingent liabilities is a present obligation that possible obligations if their fair
arises from past events and its value can measured reliably.
fair value be measured
reliably.

6. Accounting Method
 Term used Acquisition method Purchase Method
 Measuring Options: Proportionate share of
goodwill/bargain 1. Full Fair value/Full identifiable net assets (Partial
purchase gain goodwill Goodwill)
2. Proportionate share of
identifiable net
assets (Partial Goodwill)
 Valuation of goodwill Cost less impairment loss Cost less impairment losses
 and amortization (life should
be presumed to be 10 years)

Cost less accumulated

impairment loss less
amortization

Problem: (Adapted)

On January 1, 2020, AA Co. acquired 80% of the outstanding voting stocks of ABC Company for
P 600,000. On the same date, the book value of net assets of ABC Company was P 550,000 and the
land is understated by 100,000. The direct costs and indirect costs incurred and paid amounted to
P 10,000 and P 5,000, respectively.

Q1: How much is the amount of consideration transferred under Full PFRS and PFRS for SMEs?
Solution:
Full PFRS PFRS for SMEs
Consideration transferred = P 600,000
Consideration transferred = P 600,000 Add: Direct transaction cost 10,000
Total consideration given P 610,000

Q2: Under Full PRS, how much is the amount of full goodwill to be recognized?

Consideration transferred 600,000

Add: NCI at fair value (implied) (600,000 ÷ 80%) × 20% 150,000
Total value of Acquiree 750,000
Less: Fair value of net assets of Acquiree ( 550,000 + 100,000) 650,000
Goodwill - full 100,000

Q3: Under Full PRS, how much is the amount of partial goodwill to be recognized?

Consideration transferred 600,000

Add: NCI at proportionate share (650,000 × 20%) 130,000
Total value of Acquiree 730,000
Less: Fair value of net assets of Acquiree ( 550,000 + 100,000) 650,000
Goodwill - partial 80,000

Q4: Under PFRS for SMEs, how much is the amount of partial goodwill to be recognized?

Consideration transferred 600,000

Add: Direct costs 10,000
Total consideration given 610,000
Add: NCI at proportionate share (650,000 × 20%) 130,000
Total value of Acquiree 740,000
Less: Fair value of net assets of Acquiree ( 550,000 + 100,000) 650,000
Goodwill 90,000

Reverse Acquisition (source: Accounting for Business Combination by Zeus Vernon B. Milan)

 The entity that issued the securities (legal acquirer) is identified as the acquiree for accounting purposes
and the entity whose equity interests are acquired (the legal acquiree) is the acquirer for accounting
purposes.

 Example: ABC Co. a private entity wants to become a public entity but does not want to register its
shares. To accomplish this, ABC will arrange for a public entity, DBC Co., to acquire its equity interests
in exchange for public entity’s equity interest.

In substance, the accounting entity acquirer, DBC Co. issues no consideration to the acquire. Instead the
accounting acquire, ABC Co., issues its equity shares to the owners of the accounting acquirer, DBC
Co., to enable the accounting acquirer to obtain control over the accounting acquire, ABC Co.
 The acquisition date fair value of the consideration transferred by the accounting acquirer shall be
measured as an amount based on the number of equity interests the legal subsidiary (accounting
acquirer) would have to issue to give the owners of the legal parent (accounting acquire) the same
percentage of equity interest in the combined entity that results from the reverse acquisition.

KEY DIFFERENCES BETWEEN CONVENTIONAL ACQUISITION AND REVERSE ACQUISITION

Item Conventional Acquisition Reverse Acquisition

Issuer of shares as The issuer of shares is the The issuer of shares is the accounting
consideration transferred accounting acquirer acquire

Reference to combining - accounting acquirer – Legal - accounting acquirer – Legal

constituents Parent Subsidiary
- accounting acquire – Legal - accounting acquire – Legal
Subsidiary Parent

Measurement of Fair value of consideration Fair value of the notional number of

consideration transferred by the accounting equity that the accounting acquirer
acquirer would have to issue to the accounting
acquiree to give the owners of the
accounting acquire the same
percentage of ownership in the
combine entity.

Illustrative Problem: Please refer to Accounting for Business Combination by Milan.

 UNIT I – BUSINESS COMBINATION
Activity 1 – Problems
1. On June 1, 2021, BIG Company acquired all of the assets and liabilities and assumed all the
liabilities of SMALL Company. As of this date, the carrying amounts and fair values of the assets
and liabilities of SMALL Company are shown below:

Carrying amounts Fair values

Cash in bank 15,000 15,000
Receivables 195,000 115,000
Allowance for bad debts (25,000)
Inventory 420,000 300,000
Furniture and Equipment , net 100,000 50,000
Land 200,000 250,000
Building, net 1,000,000 1,200,000
Goodwill 100,000
Total assets 2,005,000

Liabilities
Payables 650,000 650,000
Equity:
Ordinary shares, P 10 700,000
Share Premium 350,000
Retained Earnings 305,000
Total liabilities & Equity 2,005,000

BIG Company incurred transactions costs amounting to P 125,000 for legal, accounting and
consultancy services.
.
REQUIRED:
1. Journal entries on the books of BIG Company to record the purchase of the net assets SMALL company
in a business combination assuming BIG Company paid cash of:

a) P 1,500,000 b) P 1,000,000

2. Journal entries on the books of SMALL Company to record the combination and the liquidation of
the company under requirement 1-a and b.

2. Pool Company issued 120,000 shares of P10 par common stock with the fair value of P2,550,000 for the net
assets of Spot Company. In addition, Pool incurred the following acquisition-related costs:

Legal fees to arranged the business combination P25,000

Cost of SEC registration, including accounting and legal fees 12,000
Cost of issuing stock certificates 3,000
General administrative costs 20,000

Immediately before the business combination in which Spot Company was dissolved, Spot’s assets
and equities were as follows (in thousands):
Book Value Fair Value
Current assets P2,000 P1,100
Plant assets 1,500 2,200
Liabilities 300 300
Ordinary Shares 2,000
Retained earnings 200
Q1: What is the amount of goodwill (income from acquisition) and Share Premium to be
recognized by Pool Company?

Q2. Prepare the necessary journal entries in the books of Pool Company.

3. FEER Corporation acquired all the assets and liabilities of CARE Corporation by issuing shares of
its common stock on January 1, 2021. Partial balance sheet data for the companies prior to the
business combination and immediately following the combination is provided:

FEER CARE Combination

Corporation Corporation
Book value Book value
Cash P 65,000 P 25,000 P 90,000
Accounts receivable 72,000 20,000 94,000
Inventory 33,000 45,000 88,000
Building and Equipment (net) 400,000 150,000 650,000
Goodwill _________ _________ ?
Total Assets P 570,000 P 240,000 ?

Accounts Payable P 50,000 P 25,000 P 75,000

Bonds Payable 250,000 100,000 350,000
Ordinary shares, P 2 par 100,000 25,000 160,000
Share Premium 65,000 20,000 245,000
Retained Earnings 105,000 70,000 ?
Total Liabilities and stockholders’ equity P 570,000 P 240,000 P ?

Determine:

Q1. The number of shares issued by FEER for this acquisition _______________.

Q2. The market value per share of the stock issued by the acquiring corporation on January 1, 2021:

Q3. The fair value of the net assets of CARE Corporation on the date of combination ___________

Q4. The amount of Goodwill to be reported immediately following the combination_____________

Q5. The Retained Earnings balance immediately following the combination ___

Q6. Prepare journal entries in the books of FEER.

 UNIT I – BUSINESS COMBINATION
Activity 2 – Short Problems
The balance sheet of Green Company as of December 31, 2021 is as follows:

Assets Liabilities and Stockholders’ Equity

Cash P 175,000 Current liabilities P 250,000
Accounts receivable 250,000 Mortgage payable 450,000
Inventories 725,000 Common Stock 200,000
Property, Plant and 950,000 Additional paid-in capital 400,000
Equipment
________ Retained Earnings 800,000
Total assets P 2,100,000 P 2,100,000

On January 1, 2022, Red Company bought all the outstanding stock of Green Company for P1,800,000 for cash.
On the date of purchase, the fair value of Green’s inventories was P 675,000 while the fair value of Green’s
property, plant and equipment was P 1,100,000. The fair values of all other assets and liabilities of Green
Company were equal to their book values.

1. The goodwill to be recorded in the books of Green Company is ________________

2. The journal entry in the books of Red Company to record the business combination:
Date Particulars PR Debit Credit

For items 3 - 5:
On July 1, 2021 A Company acquired the net assets of Company B by issuing 10,000 ordinary shares with
par value of P 20 and bonds payable with face amount of P 1,000,000. The bonds are classified as financial
liability at amortized cost. At the time of acquisition, the ordinary shares are publicly quoted at P 40 per
share. On the other hand, the bonds payable are trading at 110.

Company A paid P 20,000 share issuance costs and P 40,000 bond issue costs. Company A also paid
P80,000 acquisition related costs and P 40,000 indirect costs of business combination. On the same date,
the current liabilities of Company B have fair value of
P 1,200,000 while the noncurrent liabilities of Company A have fair value of P 1,000,000

Before the date of acquisition, Company A and Company B reported the following data:
Company A Company B
Current assets 2,000,000 1,000,000
Noncurrent assets 4,000,000 2,000,000
Current liabilities 400,000 800,000
Noncurrent liabilities 600,000 1,000,000
 Ordinary shares 1,000,000 400,000
Share premium 2,400,000 600,000
Retained Earnings 1,600,000 200,000

At the time of acquisition, the current assets of Company A have fair value of P 2,400,000 while the
noncurrent assets of Company B have fair value of 2,600,000 on the same date.

3. What is the goodwill or (gain on bargain purchase) arising from business combination? _______

4 – 5: Prepare the journal entries in the books of Company A to record the business combination.

6. On October 1, 2021, the Great Company acquired the net assets of the Lite Company when the fair value of
Lite Company’s net assets was P 116 million and their carrying amount was P 120 million. The
consideration transferred comprised P 200 million in cash transferred at the acquisition date, plus another P
60 million in cash to be transferred 11 months after the acquisition date if a specified profit target was met by
Lite . At the acquisition date there was only a low probability at the profit target being met, so the fair value of
the additional consideration liability was P 10 million. In the event the profit target was met, the P 60 million
cash will be transferred.

What amount should Great Company present for Goodwill in its statement of consolidated financial position
on December 31, 2021? _________________

7. On January 1, 2021, ART Company and DRAW Company entered into a contract of merger wherein ART
will issue 100,000 ordinary shares with par value with a par value of P 10 and a quoted price of P 21 to the
existing shareholders of DRAW in exchange for the net assets of Draw. Art paid acquisition related costs of
business combination amounting to P 100,000 and stock issuance cost amounting to P 200,000. AS of
December 31, 2018 ART company has total assets with book value of P 50,000,000 and fair market value of
P 60,000,000 while DRAW has total assets with book value of P 5,000,000 and fair market value of P
4,000,000. The net assets of Draw on December 31, 2020 is P 2,600,000.

Q1. What is the total assets of ART Company on January 1, 2021 after the merger? __________

Q2. What is the goodwill (gain on bargain purchase) arising from business combination? ________

8. ABC Corporation paid P 800,000 to acquire all the net assets of PRT Company. PRT Company
reported assets with a book value of P 980,000 but with a fair value of P 1,080,000 and liabilities
with a book value and fair value of P 230,000 on the date of combination. ABC Corp. also paid
P 30,000 for finder’s fees related to the acquisition.

The goodwill/(Gain on acquisition) is: __________________

9. On September 30, 2021, ABC Company acquired all the TUV Company’s P 2,150,000 identifiable
assets and P 530,000 liabilities. book values of the TUV’s assets and liabilities equal to their fair
values except for the overvalued furniture and fixtures. As a consideration, ABC issued its own
shares of stock with a market value of P 1,715,000 and cash amounting P 375,000. Contingent
consideration
is determined to be P 148,000 on the date of acquisition. The merger resulted into P 647,000
goodwill.

Assuming ABC had P 4,890,000 total assets and P 2,731,000 total liabilities prior to the
combination and no additional cash payments were made, but expenses were incurred for related
cost amounting to P 28,000.

After the merger, how much is the combined total assets in the books of the acquirer? ________

10. ABC Company acquired all of DOM Company’s assets and liabilities on July 1, 2021, in a
business combination at that date. DOM reported assets with a book value of P 2,496,000 and
liabilities of P 1,424,000. ABC noted that DOM had P 160,000 of research and development
costs at the acquisition date that did not appear of any value. ABC also determined that patents
 developed by DOM had a fair value of P 480,000, but had not been recorded by DOM. Except for
building and equipment. ABC determined the fair value of all other assets and liabilities reported
by DOM approximated the recorded amounts. In recording the transfer of assets and liabilities
in its books, ABC recorded goodwill of P 372,000. ABC paid P 2,068,000 to acquire DOM’s
assets and liabilities.

If the book value of DOM’s building and equipment was P 1,364,000, what as their fair value? ____

11. D Company, acquirer, made the following entry to report the acquisition:
Tangible assets 400,000
Customer lists 60,000
Goodwill 100,000
Liabilities 200,000
Cash 360,000

Six months after the acquisition , the customer lists is determined to be worthless. How is this new information
reported if (1) the new information relates to the value of the customer lists as of the date of acquisition and
(2) the new information relates to change in value since acquisition. Customer lists are written off, and:

(1) (2)
a) A gain on acquisition of P 60,000 is recorded Goodwill decreases P 60,0000
b) Goodwill increases P 60,000 A loss of P 60,000 is recorded
c) A loss of P 60,000 is recorded Goodwill increases P 60,000
d) Cash is reduced by P 60,000 A loss of P 60,000 is recorded.

12. Sweet Company purchased Sour Company in 2020. At that time the existing patent was not recorded as
separately identified intangible asset. At the end of fiscal year 2021, the patent is valued at P 15,000 and
goodwill has a book value of P 100,000. How should these assets be reported at the beginning of year
2022?

a) Goodwill, P 100,000; Patent P 0 c) Goodwill, P 100,000; Patent P 15,000

b) Goodwill, P 115,000; Patent P 0 d) Goodwill, P 85,000 : Patent P 15,000

13. POP Corporation acquires all of SISY Company at an acquisition cost of P 75,000,000 in cash.
Assets and liabilities of the acquired company are as follows:
Book value Fair value
Current assetss P 500,000 P 700,000
Land, buildings and equipment (net) 6,000,000 8,000,000
Brand names 0 2,000,000
Potential profitable future contracts 0 10,000,000
Liabilities 2,000,000 1,750,000

POP records goodwill of: __________________

14. AD Corp. acquired the net assets of CE Company on July 1, 2021. In exchange for net assets at
fair market value of CE Company amounting to P 835,740. AD issued 81,600 shares at a market
price of P 12 per share (P 9 par value).

Out of pocket costs of the combination were as follows:

Legal fees for the contract of business combination P 10,000
Audit fees for SEC registration of share issue 13,000
Cost of shares of stock certificates 7,000
Broker’s fee 8,000
Other direct cost of acquisition 22,000
General and allocated expenses 25,000

AD will pay an additional cash consideration of P 546,000 in the event that CE’s net income will be equal or
greater than P 1,140,000 for the period ended December 31, 2022. At acquisition, there is a high probability of
reaching the target net income and the fair value of the additional consideration was determined to be P
234,000. Actual net income for the period ended December 31, 2022 amounted to P 1,500,000. The additional
consideration was paid.
 Q1. Goodwill to be recognized as of December 31, 2021 is ____________________

Q2. The amount chargeable to operations (loss/expense) for the year ended December 31,2022 is
____________________.

15. DREAM Company is acquiring the net assets of BANN Company for an agreed-upon price of
P 900,000 on July 1, 2021. The value was tentatively assigned as follows:

Current assets P 100,000

Land 50,000
Equipment - ( 5-year life) 200,000
Building ( 20- year life) 500,000
Current liabilities (150,000)
Goodwill 200,000

Values were subject to change during the measurement period. Depreciation is taken to the nearest
month. The measurement period expired on July 1, 2022, at which time the fair values of the
equipment and building as of the acquisition data was revised to P 180,000 and P 550,000,
respectively.

REQUIRED: At the end of 2022 what adjustments are needed for the financial statements for the
period ending December 31, 2021 and 2022?