BUSINESS

COMBINATION
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Business Combination
Bringing together of separate entities or businesses
into one reporting entity. The result is that one entity, the
acquirer, obtains control of one or more other businesses,
the acquiree.
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Control
“The investor controls an investee when the investor,
through its power over the investee, is exposed, or has
rights, to variable returns from its involvement with the
investee and has the ability to affect those returns.”
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Structure
1) Horizontal Integration
2) Vertical Integration
3) Conglomerate Combination
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Types
1) Acquisition of Net Assets
2) Acquisition of Common Stock
(Stock Acquisition)
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Net Asset Acquisition
Under asset acquisition, the acquiree/s shall cease to
exist after the business combination and their assets
and liabilities will be directly transferred and merged
with the acquirer’s assets and liabilities.

STATUTORY STATUTORY
MERGER
X + Y = X or Y CONSOLIDATION
X+Y=Z
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Stock Acquisition
There is parent-subsidiary relationship in which the
acquirer is the parent and the acquiree a subsidiary
of the acquirer. The books of the acquiree remains.
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Acquisition Method
Steps in the application of acquisition method:
1) Identification of the 'acquirer‘.
2) Determination of the 'acquisition date'.
3) Recognition and measurement of the identifiable assets
acquired, the liabilities assumed and any noncontrolling
interest (NCI, formerly called minority interest) in the acquiree.
4) Recognition and measurement of goodwill or a gain from a
bargain purchase option.
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Acquisition-Related Cost
Excluded from the measurement of the consideration
paid because such costs are not part of the fair value
of the acquiree and are not assets. Accounted as
expense, except cost of issuing equity and debt
instruments.
1. Costs directly attributable
2. Indirect cost
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Mina paid the following:
• Finder’s fees – P40,000
• Accountant fees – P10,000
• Salaries of Mina’s employees assigned to the implementation of the
merger – P16,000
• Cost of closing duplicate facilities – P12,000
• Cost of shareholder’s meeting to vote on the merger – P14,000
• Cost of printing certificates – P7,000
• Audit fee related to stock issuance – P3,000
• SEC Registration Fee – P5,000
• Stock Listing Application Fees – P4,000

What amount related to the business combination should be expensed?

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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
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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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Non-controlling Interest
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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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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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.
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Specific Recognition Principles
Operating leases (whereby the acquiree is the lessee) - If the terms of
an operating lease relative to market terms is:
✓ Favorable – the acquirer shall recognize an intangible
asset.
✓ Unfavorable – the acquirer shall recognize a liability.

Intangible assets – The acquirer recognizes the identifiable intangible

assets acquired in a business combination if they meet either the (a)
separability criterion or the (b) contractual-legal criterion.
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A Co. is acquiring B Inc. A Co. has the following intangible asset:
✓ Patent on a product that is deemed to have no useful life –
P10,000
✓ Customer list with an observable fair value of P50,000
✓ A 5-year operating lease with favorable terms with a
discounted present value of P8,000
✓ Identifiable R&D of P100,000

How much should be recorded for the acquired intangible assets

from the purchase?
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A purchased B in 2019. At that time, an existing patent was
not recorded as a separately identifiable intangible asset.
At the end of the year 2020, the patent is valued at P15,000
and goodwill has a book value of P100,000. How much
should the assets be reported at the end of the year 2020?
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Thank you! ☺
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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
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GOODWILL - Treatment
1. Initial Recognition - Goodwill is recognized on
acquisition date (only goodwill from business
combination)
2. Subsequent Treatment –
• Subsequent expenditures on maintaining
goodwill is expensed
• Tested for impairment at least annually (and
allocated to each CGU in the year of business
combination)
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GOODWILL – Initial Recognition
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GOODWILL – Initial Recognition
GOODWILL – Partial GW Approach
GOODWILL – Full GW Approach
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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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JOURNAL ENTRIES
Thank you! ☺
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Consolidated Financial Statements
The financial statements of a group in which the assets,
liabilities, equity, income, expenses and cash flows of the
parent and its subsidiary are presented as those of a single
economic entity.
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Consolidated Financial Statements
All parents are required to prepare consolidated financial
staments, except:
1. The parent is a subsidiary of another entity and all
its other ownders do not object to its non-
presentation of the consolidated FS
2. The debt or equity instruments are not traded in a
public market
3. Its ultimate or any intermediate parent produces
consolidated FS that are available to the public use
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Intercompany Transactions
Both parent and subsidiary are viewes as a single
reporting entity for financial reporting purposes
that is why eliminating intercompany transactions
is necessary.
• Sale of Inventory
• Sale of Property, Plant and Equipment
• Dividends
• Bond transactions
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Intercompany Sale of Inventory
✓ Any gain or loss is deferred and
▪ Amortized over the asset’s remaining life (if depreciable)
▪ Not amorized (if not depreciable)
✓ If the asset is subsequently sold to an unrelated party or
derecognized, the unamortized balance of the deferred gain or
loss is recognized in profit or loss

DOWNSTREAM UPSTREAM

✓ The parent sells to the subsidiary ✓ The subsidiary sells to the parent
✓ NCI is not affected ✓ NCI is affected
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Steps in Consolidation of FS – at the date of acquisition
1. Eliminate the “Investment in Subsidiary” Account:
a) Measure the identifiacble assets acquired and liabilities
assumed at their acquisition-date fair values
b) Recognize goodwill from the business combination
c) Eliminate the subsidiary’s precombination equity
accounts and replacing them with non-controlling interest
2. Add similar items of assets and liabilities of the combining
entities. (100% included irrespective of the interest acquired by
the parent)
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Steps in Consolidation of FS – subsequent to date of acquisition

1. Eliminate the “Investment in Subsidiary” Account:

a) Measure the identifiacble assets acquired and liabilities
assumed at their acquisition-date fair values
b) Recognize goodwill from the business combination
c) Eliminate the subsidiary’s precombination equity
accounts and replacing them with non-controlling interest
2. Add similar items of assets and liabilities of the combining
entities. (100% included irrespective of the interest acquired by
the parent)
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