Chapter 13 - Business Combinations(IFRS 3)
Business Combination - (IFRS 3), a transaction or other event in which an acquirer obtains
control of one or more businesses(the acquiree). For each business combination, one of the
combining entities shall be identified as the acquirer.
Identifying a Business
Business - An integrated set of activities and assets that is capable of being conducted and
managed for the purpose of providing a return in the form of dividends, lower costs or other
economic benefits directly to investors or other owners, members or particular
Input - any economic resource that creates, or has the ability to create outputs when one or
more processes are applied to it.
- May include intangible assets or rights to use non-current assets, IP, the ability to obtain
access to necessary materials or rights and employees.
Process - Any system or other things that when applied to an input/s, creates or has the ability
to create output
Output - The result of inputs and process/s applied to those inputs that will provide or have the
ability to provide a return in different forms.
:Take note that although businesses USUALLY have outputs, they are not required for an
integrated set to qualify as a business.
- Has begun planned principal activities;
- Has employees, IP and other inputs and processes that could be applied to those inputs;
- Is pursuing a plan to produce outputs; and
- Will be able to obtain access to customers that will purchase the outputs
NOTE: WHEN GOODWILL IS PRESENT IT IS TO BE PRESUMED TO BE A
BUSINESS HOWEVER A BUSINESS NEED NOT HAVE GOODWILL
ACQUISITION OF CONTROL
Acquisition of assets
- All of the company’s assets are acquired directly from the company wherein in most
cases, existing liabilities of the acquired company also are assumed(net assets)
- TA - TL = net assets
- Statutory Consolidation, combining of two or more existing legal entities into one new
legal entity ( A + B = C)
- Statutory Merger, absorption of one or more existing legal entities by another existing
company that continues as the SOLE surviving legal entity( A + B = A OR B). The
absorbed company ceases to exist but may continue as a division of the surviving
company
Stock Acquisition
- A controlling interest( typically more than 50%) of another company’s voting common
stock is acquired.
- Acquiring company(parent, the acquirer) and the acquired company( subsidiary, the
acquiree)
- Both the parent and the subsidiary remain SEPARATE LEGAL ENTITIES and maintain
their own financial records and statements. However for EXTERNAL financial reporting
purposes, the company will usually combine their individual financial statements into a
single set of consolidated statements.
METHODS OF BUSINESS COMBINATIONS
Purchase method(acquisition method) - This is the primary method in use wherein all assets
and liabilities of the acquired company are usually recorded at fair value.
Pooling of interest method - BOOK VALUE
HOWEVER IFRS 3 ELIMINATED THE POOLING OF INTEREST METHOD
ACQUISITIONS METHOD OF ACCOUNTING FOR BUSINESS COMBINATIONS
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 and
non- controlling interest(formerly called minority interest) in the acquiree. Any resulting
goodwill or gain from a bargain purchase should be recognized.
Reverse Acquisition - may occur when a publicly traded company is acquired by a
privately traded company.
Contingent Consideration - “usually, an obligation of the acquirer to transfer additional
assets or equity interests to the former owners of an acquire as part of the exchange for control
of the acquire if specified future events occur or considerations are met” but may also give the
acquirer the right to the return of previously transferred consideration if specified conditions are
met.
- Form of additional cash consideration payable, financial liability.
- Form of issuing additional equity instrument, equity instrument
Acquisition-related Costs - The costs the acquirer incurs to effect a business combination, such
as broker’s fees; accounting,legal,and other professional fees, general administrative costs,
including the cost of maintaining an internal acquisition department, are not included in the price
of the company acquired are expensed
Stock Issuance Costs - Deduction from additional paid in capital(APIC) from share insurance.
- In case APIC is reduced to zero, the remaining stock issuance cost is treated as a contra
account from retained earnings presented as a separate line item.
Fair Value - the amount that the asset or liability would be bought or sold for in a current, normal
sale between willing parties.
- The total of all identifiable assets less liabilities recorded is referred to as the FVNA.
- The identifiable assets should NEVER include goodwill that may exist on the
acquiree’s books. The only goodwill recorded in an acquisition is “new” goodwill based
on the price paid by the acquirer.
PP > FVNA = “new” Goodwill
PP<FVNA = Gain on Bargain Purchase
As a general rule, assets and liabilities are recorded at their individually determined values.
- Preferred method is quoted market value wherein an active market for the item exists.
- Acquiring company is not required to establish values immediately on the acquisition
date. A measurement period of up to one year is allowed for measurement
