ISO 9001: 2015 CERTIFIED
EMILIO AGUINALDO COLLEGE QUALITY MANAGEMENT SYSTEM
CITY OF DASMARIÑAS, CAVITE
PFRS 3 BUSINESS COMBINATIONS
Learning Objectives
• Define a business combination.
• Explain briefly the accounting requirements for
a business combination.
• Make basic computations of goodwill.
VIRTUE EXCELLENCE SERVICE 1
ISO 9001: 2015 CERTIFIED
EMILIO AGUINALDO COLLEGE QUALITY MANAGEMENT SYSTEM
CITY OF DASMARIÑAS, CAVITE
Definition of a Business
Combination
A business combination is “a transaction or other event in which
an acquirer obtains control of one or more businesses.” (PFRS 3)
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ISO 9001: 2015 CERTIFIED
EMILIO AGUINALDO COLLEGE QUALITY MANAGEMENT SYSTEM
CITY OF DASMARIÑAS, CAVITE
Control
• 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.
• Control is normally presumed to exist when the
ownership interest acquired in the voting rights of
the acquiree is more than 50% (or 51% or more).
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ISO 9001: 2015 CERTIFIED
EMILIO AGUINALDO COLLEGE QUALITY MANAGEMENT SYSTEM
CITY OF DASMARIÑAS, CAVITE
Control - continuation
• Control may exist even if the acquirer holds less than
50% interest in the voting rights of acquiree, such as
in the following cases:
1. The acquirer has the power to appoint or remove the majority of the
board of directors of the acquiree; or
2. The acquirer has the power to cast the majority of votes at board
meetings or equivalent bodies within the acquiree; or
3. The acquirer has power over more than half of the voting rights of the
acquiree because of an agreement with other investors; or
4. The acquirer has power to control the financial and operating policies
of the acquiree because of a law or an agreement.
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ISO 9001: 2015 CERTIFIED
EMILIO AGUINALDO COLLEGE QUALITY MANAGEMENT SYSTEM
CITY OF DASMARIÑAS, CAVITE
Accounting for business combinations
• Business combinations are accounted for using the acquisition
method. This method requires the following:
1. Identifying the acquirer;
2. Determining the acquisition date; and
3. Recognizing and measuring goodwill. This requires recognizing
and measuring the following:
a. Consideration transferred
b. Non-controlling interest in the acquiree
c. Previously held equity interest in the acquiree
d. Identifiable assets acquired and liabilities assumed on the
business combination.
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ISO 9001: 2015 CERTIFIED
EMILIO AGUINALDO COLLEGE QUALITY MANAGEMENT SYSTEM
CITY OF DASMARIÑAS, CAVITE
Identifying the acquirer
• The acquirer is the entity that obtains control of the
acquiree. The acquiree is the business that the
acquirer obtains control of in a business combination.
• The acquirer is normally the entity that:
a. Transfers cash or other assets and incurs liabilities;
b. Issues its equity interests (except in reverse acquisitions);
c. Receives the largest portion of the voting rights;
d. Has the ability to elect or appoint or to remove a majority ;
e. Dominates the management of the combined entity;
f. Significantly larger of the combining entities;
g. Initiated the combination
VIRTUE EXCELLENCE SERVICE 6
ISO 9001: 2015 CERTIFIED
EMILIO AGUINALDO COLLEGE QUALITY MANAGEMENT SYSTEM
CITY OF DASMARIÑAS, CAVITE
Determining the acquisition date
• The acquisition date is the date on which
the acquirer obtains control of the
acquiree.
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EXCELLENCE SERVICE 7
ISO 9001: 2015 CERTIFIED
EMILIO AGUINALDO COLLEGE QUALITY MANAGEMENT SYSTEM
CITY OF DASMARIÑAS, CAVITE
Recognizing and measuring goodwill
Consideration transferred xx
Non-controlling interest in the acquiree (NCI) xx
Previously held equity interest in the acquiree xx
Total xx
Less: Fair value of net identifiable assets acquired (xx)
Goodwill / (Gain on a bargain purchase) xx
On acquisition date, the acquirer recognizes a resulting:
a. Goodwill as an asset.
b. Gain on a bargain purchase as gain in profit or loss.
VIRTUE EXCELLENCE SERVICE 8
ISO 9001: 2015 CERTIFIED
EMILIO AGUINALDO COLLEGE QUALITY MANAGEMENT SYSTEM
CITY OF DASMARIÑAS, CAVITE
Consideration transferred
• The consideration transferred in a business
combination is measured at fair value.
• Examples of potential forms of consideration
include:
1. Cash,
2. Other assets,
3. A business or a subsidiary of the acquirer,
4. Contingent consideration,
5. Ordinary or preference equity instruments, options,
warrants and member interests of mutual entities.
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ISO 9001: 2015 CERTIFIED
EMILIO AGUINALDO COLLEGE QUALITY MANAGEMENT SYSTEM
CITY OF DASMARIÑAS, CAVITE
Acquisition-related costs
• Acquisition-related costs are costs the acquirer incurs to
effect a business combination.
• Acquisition-related costs are recognized as expenses in
the periods in which they are incurred, except for the
following:
a. Costs to issue debt securities measured at amortized
cost – included in the initial measurement of the
resulting financial liability.
b. Costs to issue equity securities – are accounted for as
deduction from share premium. If share premium is
insufficient, the issue costs are deducted from retained
earnings.
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ISO 9001: 2015 CERTIFIED
EMILIO AGUINALDO COLLEGE QUALITY MANAGEMENT SYSTEM
CITY OF DASMARIÑAS, CAVITE
Non-controlling interest (NCI)
• Non-controlling interest (NCI) is the equity in
a subsidiary not attributable, directly or
indirectly, to a parent.
• NCI is measured either at:
a. Fair value, or
b. The NCI’s proportionate share of the
acquiree’s
identifiable net assets.
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ISO 9001: 2015 CERTIFIED
EMILIO AGUINALDO COLLEGE QUALITY MANAGEMENT SYSTEM
CITY OF DASMARIÑAS, CAVITE
Previously held equity interest in
the acquiree
• Previously held equity interest in
the acquiree pertains to any interest
held by the acquirer before the
business combination.
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ISO 9001: 2015 CERTIFIED
EMILIO AGUINALDO COLLEGE QUALITY MANAGEMENT SYSTEM
CITY OF DASMARIÑAS, CAVITE
Net identifiable assets acquired
• On acquisition date, the acquirer shall
recognize, separately from goodwill, the
identifiable assets acquired, the liabilities
assumed and any non-controlling interest in
the acquiree.
• Any unidentifiable asset of the acquiree (e.g.,
any recorded goodwill by the acquiree) shall
not be recognized.
• The identifiable assets acquired and the
liabilities assumed are measured at their
acquisition-date fair values.
VIRTUE EXCELLENCE SERVICE 13
