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Chapter 1 Business Combination

The document outlines the concept of business combinations, defining it as a transaction where an acquirer gains control of one or more businesses. It categorizes business combinations by structure, legal method, and accounting method, detailing the acquisition method as the primary approach for accounting. Key steps in applying the acquisition method include identifying the acquirer, determining the acquisition date, measuring identifiable assets and liabilities, and recognizing goodwill or gains from bargain purchases.

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14 views3 pages

Chapter 1 Business Combination

The document outlines the concept of business combinations, defining it as a transaction where an acquirer gains control of one or more businesses. It categorizes business combinations by structure, legal method, and accounting method, detailing the acquisition method as the primary approach for accounting. Key steps in applying the acquisition method include identifying the acquirer, determining the acquisition date, measuring identifiable assets and liabilities, and recognizing goodwill or gains from bargain purchases.

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kendrickleonor275
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Refresher 3

Chapter 1 - Business Combination

Business Combination
A business combination is a transaction or event in which an acquirer obtains control of one or
more businesses. A business is defined as an integrated set of activities and assets that is
capable of being conducted and managed for the purpose providing goods or services to
customers, generating investment income (such as dividends or interest) or generating other
income from ordinary activities.

Classification of Business Combination


A. As to Structure
1. Horizontal Integration. It is a business strategy consummated through business
combination in which one entity acquires another entity at the same level within the
industry.
2. Vertical integration. It is a business strategy consummated through business
combination in which one entity acquires another entity at different level but within the
industry.
3. Conglomerate Combination. It is a business strategy consummated through business
combination in which one entity acquires another entity that belongs to different industry.
B. As to Method or from a Legal Point of View
1. Acquisition of Assets
a. Statutory Merger: A Corp. + B Corp. = A or B Corporation
b. Statutory consolidation: A Corp. + B Corp. = C Corp.
2. Stock Acquisition or Acquisition of ordinary Shares: Financial Statements of P Corp. +
Financial Statements of S Corp. = Consolidated Financial Statements of A Corp. and S
Corp.
C. As to Accounting Method
1. Pooling of Interest Method. This is used to account combination of entities under
common control.
2. Purchase Method. This method is used to account for business combination under
PFRS for SMEs
3. Acquisition method. This method is used to account for business combination under full
PFRS, specifically PFRS 3. Use this method if the problem is silent.

Applying the Acquisition Method


Acquisition Method. The acquisition method (called the ‘purchase method” in the previous
version of PFRS 3) is used for all business combinations.

Steps in applying the acquisition method


1. Identification of the ‘acquirer” – the combining entity that obtains control of the acquiree.
2. Determination of the “acquisition date” – the date on which the acquirer obtains control of
the acquiree.
3. Recognition and measurement of the identifiable assets acquired, the liabilities assumed
and any non-controlling interest (NCI, formerly called minority interest) in the acquiree.
4. Recognition of goodwill or a gain from bargain purchase.

Computation of Goodwill/Gain from bargain purchase (negative goodwill)


Fair value of consideration transferred xx
Non-controlling interest xx
Fair value of previously held equity interest xx
Total xx
Less: Fair value if identifiable net assets xx
Goodwill (gain on bargain purchase xx

Note: All items should be measured at the date of acquisition.

A. Consideration Transferred
1. Measurement of consideration transferred. Consideration transferred shall be measured
at the sum of the acquisition-date fair values.
2. Contingent consideration. Contingent consideration must be measured at fair value at
the time of the business combination.
3. Provisional Accounting
If the initial accounting for a business combination is incomplete by the end of the
reporting period in which the combination occurs, the acquirer shall report in its financial
statement’s provisional amounts for the items for which the accounting is incomplete.
4. Acquisition related costs
Category Examples Accounting treatment
Direct costs of Could include pre-audit, They are expensed in the
combination finder’s fees, advisory fee, consolidated FS for the
broker’s fees, legal fees, period and not included in
valuation and other the price paid.
professional or consulting
fees, and general and
administrative costs,
including the costs of
maintaining an internal
acquisitions department.
Indirect costs of Allocation of existing They are expensed in the
combination expenses of the acquiring consolidated FS for the
firm connected to period and not included in
negotiating and the price paid.
consummating the
purchase. Could include
salaries for employees who
worked on the acquisition
and related overhead
expenses.
Share issuance cost Printing of stock Debited to:
certificates and SEC a. APIC/Share premium
registration fees b. Retained earnings
Debt issue cost Cost incurred in issuing Included as part of the
bonds initial carrying amount of
the bonds issued.

Note:
 All other costs associated with the acquisition must be expensed, including
reimbursements to the acquiree for bearing some of the acquisition costs.
 Listing fee of shares is expensed outright.

B. Measurement of NCI
Fore ach business combination, the acquirer shall measure at the acquisition date
components of non-controlling interests in the acquiree that are present ownership interests
and entitle their holders to a proportionate share of the entity’s net assets in the event of
liquidation at either.
a. Full goodwill method – NCI is measured at fair value.
b. Partial goodwill method – the NCI is measured at the present ownership instruments’
proportionate share in the recognized amounts of the acquiree’s net identifiable net
assets.

All other components of non-controlling interests shall be measured at their acquisition-date


fair values, unless another measurement basis is required by PFRSs.

C. Business combination achieved in stages (step acquisition)


Prior to control being obtained, the investment is accounted for under PAS 28, PFRS 11, or
PFRS 9, as appropriate. On the date that control is obtained, the acquirer shall remeasure
the previously held equity interest in the acquiree at its acquisition-date fair value and
recognize the resulting gain or loss, if any, in profit or loss or other comprehensive income,
as appropriate.

D. Net Asset Acquired


1. Measurement of acquired assets and liabilities. Assets and liabilities are measured at
their acquisition-date fair value, except for the following:
a. Exception to the recognition principle
 Contingent Liability. Only those contingent liabilities assumed in a business
combination that are a present obligation and can be measured reliably are
recognized.
b. Exception to both the recognition and measurement principles
 Income tax
 Employees benefits
 Indemnification asset
 Leases in which the acquiree is the lessee.
c. Exceptions to the measurement principle
 Share-based payment
 Non-current assets held for sale
 Reacquired rights
 Insurance contracts
2. Pre-existing relationships
If the acquirer and acquiree were parties to a pre-existing relationship (for instance, the
acquirer had granted the acquiree a right to use its intellectual property), this must be
accounted for separately from the business combination.
3. Acquired intangible assets. Must always be recognized and measured at fair value.
There is no ‘realizable measurement” exception.

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