Scribd
Upload
433 views39 pages

PFRS 3, Business Combinations

This document provides an overview of PFRS 3 on business combinations. It defines key terms like business combination, acquisition method, and forms of business combinations. It explains the accounting treatment for identifying the acquirer, determining the acquisition date, recognizing assets acquired and liabilities assumed, accounting for non-controlling interests, and recognizing goodwill or gain on bargain purchase. Examples are provided to illustrate accounting entries and calculations.

Uploaded by

julia4razo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
433 views39 pages

PFRS 3, Business Combinations

This document provides an overview of PFRS 3 on business combinations. It defines key terms like business combination, acquisition method, and forms of business combinations. It explains the accounting treatment for identifying the acquirer, determining the acquisition date, recognizing assets acquired and liabilities assumed, accounting for non-controlling interests, and recognizing goodwill or gain on bargain purchase. Examples are provided to illustrate accounting entries and calculations.

Uploaded by

julia4razo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 39

PFRS 3, Business Combinations

Module 1

Instructor: Mr. Almario G. Parco, Jr., CPA, MBA


Intended Learning Outcomes
• 1. Define “business combination” and discuss the causes for business combinations.
• 2. Explain the nature and various forms of business combination and its accounting
issues.
• 3. Distinguish between an asset and a stock acquisition.
Overview
• Definition of Business Combination
• Legal Forms of Business Combination
• Types of Business Combination
• Motivations for Business Combination
• Accounting for Business Combination
• PFRS 3 Objective, Core Principles, Scope
• Acquisition Method
• PFRS for SME
Business Combination
• a transaction/other event in which an Acquirer obtains control of one or more
businesses.
• occurs when two or more separate businesses join into a single entity
Legal Forms of Business Combination
• Statutory Merger: A + B = A or B

• Statutory Consolidation: A+ B= C

• Acquisition of Stocks: A+ B=A+ B


Legal Forms of Business Combination
• Statutory Merger: A+ =

• Statutory Consolidation: + =

• Acquisition of Stocks: + = +
Types of Business Combination
• Horizontal – competitors • Market-extension – same products,
different markets

• Vertical – customer-supplier
• Product-extension – different but
related products

• Conglomeration – unrelated
Motivations for Business Combination
• By merging, the companies hope to benefit from the following:

✓ Staff reductions

✓ Economies of scale

✓ Acquiring new technology/ intangibles

✓ Improved market reach and visibility

✓ Others
PFRS 3, Business Combinations
• Objective: To improve the relevance, reliability and comparability of the information
about a business combination and its effects.
• Core Principle: An Acquirer recognizes the net assets of the Acquiree at their
acquisition date fair values.
• PFRS 3 DOES NOT APPLY TO:

a. Joint ventures

b. Acquisition of an asset that does not constitute a business.

c. Business combination under common control

d. Investment entity @ FVPL

e. Not for profit organizations


Example:
% of ownership Relationship Applicable Accounting Standard
0 to >20% N/A PAS 32 & 39; PFRS 9 Financial Instruments,
etc.
20% to >50% Significant influence PAS 28, Investments in Associates
50% (it depends Joint Control PFRS 11, Joint Arrangements
on type of joint
arrangement)
< 50% Control PFRS 3, Business Combinations – at the date
of acquisition
PAS 27, Separate FS
PFRS 10, Consolidated FS - subsequent
20% 50% 100%
Acquisition Method
• Identify the Acquirer
• Determine the Acquisition Date
• Recognize assets, liabilities and NCI
• Recognize goodwill/ gain on bargain purchase
Step 1: Identify the Acquirer
Acquirer is usually the entity that:
• transfers the cash or other assets or incurs the liabilities
• issues its equity interests, except for reverse acquisitions
Step 2: Determine the Acquisition Date
• date on which the Acquirer obtains control of the Acquiree
• can be earlier, later or same as ''closing date''
• Closing date: when Acquirer legally transfers the consideration, acquires the assets and
assumes the liabilities of the Acquiree
• Measurement Period - 1 year to adjust ''provisional amounts‘’
• Provisional amounts may be used if accounting is incomplete by the end of the
reporting period in which the combination occurs. Provisional amounts are adjusted
retrospectively for information obtained during the measurement period, which shall
not exceed one year from acquisition date. Adjustments arising from information
obtained beyond the measurement period shall be regarded as corrections of errors and
are accounted for in accordance with PAS 8 rather than PFRS 3.
Step 3: Recognize assets, liabilities and
NCI Fair Value

✓ Intangible Asset
• Identifiable assets acquired
X Previous Goodwill

X Prepaid Expenses

• Liabilities assumed
Fair Value

• Noncontrolling interest Fair Value Full Goodwill

Proportionate Share Partial Goodwill


Assets acquired and liabilities assumed

Microsoft Excel
Worksheet
Noncontrolling Interest (NCI)
• The equity in a subsidiary not attributable, directly or indirectly, to a parent.

Note: for consideration transferred, “control premium” shall be deduct only if included in
purchase price
NCI @ FV, Control Premium

Microsoft Excel
Worksheet
NCI @ Proportionate Share

Microsoft Excel
Worksheet
Microsoft Excel
Worksheet
Step 4: Recognize goodwill/ gain on
bargain purchase
Consideration Transferred at FV, including Contingent consideration

+ Non Controlling Interest either at FV or Proportionate share

+ Previously Held Equity Interest at acquisition date FV

TOTAL
- Net identifiable assets acquired at acquisition date FV

Goodwill (Gain on bargain purchase)


Goodwill

Microsoft Excel
Worksheet
Measurement of Goodwill
• a. Indirect valuation approach
 Goodwill is measured by the excess of the cost of investments over the fair value of the net
tangible assets acquired.

• b. Direct valuation or excess of earnings approach


 This approach is the measurement of goodwill by using the future earnings of the business. This
approach needs the following data:
1. The normal rate of return of the sample industry where the company operates.
2. The fair value of the tangible assets.
3. Future earnings.
In computing for the future earnings, the following should be noted:
a. Normal operating income is needed as such any gains and losses from sale of property, plant and
equipment or investments should be excluded.
b. The key management bonus should be excluded from the computation and is therefore added back
from the net income.
Microsoft
4. Period of duration of the excess earnings. PowerPoint Presentation
Gain on bargain purchase

Microsoft Excel
Worksheet
NCI and goodwill can actually both be
computed with the schedule below

First enter the purchase price (includes the control premium) in (a) and the fair value of the
acquiree’s net assets in (b). Remember that existing goodwill of acquiree is not included. Multiply
(b) with the controlling interest % for (c) and with the NCI % for (d)

(d) Is the proportionate/relevant share, which is the basis for the floor test. If the NCI’s fair value or
implied value is lower than this amount, (d) is copied to (e). (a) and (e) are then added, and deducted
with (b) for the goodwill/gain (g)
PREVIOUSLY-HELD INTEREST
• This refer to the interest on the acquiree by the acquirer below 51% such as investments in associate and
equity securities that didn’t grant it control over the former. Its fair value shall form part of the purchase
price for the computation of goodwill, which can be computed as follows:

• For instance, if the acquirer previously had an investment in associate (25%) over the acquiree, and pays
Php 100,000 for another 30% interest, thereby granting it control, Php 100,000 is the additional
consideration and the 30% is the additional interest percentage. 25% is the previously-held interest
percentage
• Gains/losses from previously-held interest forms part of total equity. To compute, the carrying value of the
investment in associate (or any other investment) has to be adjusted (for income, dividends, impairment)
and compared with the computed fair value
• A business combination in which this arises is called step-up acquisition
Step Acquisition

Microsoft Excel
Worksheet
Reverse Acquisition
• occurs when the entity that issues securities (the legal Acquirer) is identified as the
Acquiree for accounting purposes.
• e.g. ''backdoor listing"
Reverse Acquisition

Microsoft Excel
Worksheet
ACQUISITION RELATED EXPENSES
AND OTHER ITEMS
• There are generally three expense accounts in business combinations – direct costs,
indirect costs, and costs to issue and register (or stock issuance costs). They form part
of the computation for total assets, liabilities and equity
• These expenses, including direct cost, are not capitalized in the investment in subsidiary
account
• Also included in the purchase price in the computation of goodwill are fully amortized
and internally-generated intangible assets, both of which are considered identifiable
ACQUISITION RELATED EXPENSES
AND OTHER ITEMS

Microsoft Excel
Worksheet
PFRS FOR SME
• Assets: P3M to P350M; or Liabilities: P3M to P250M;
• Not in the process of issuing instruments in a public market;
• Not required to file FS under SRC Rule 68, Part II {issuers of securities to the public};
• Not a holder of a secondary license issued by a regulatory agency;
 A secondary license is the registration which gives a 'corporation' a license or authority to engage
in regulated activities like being a securities broker, dealer, stock exchange, investment houses,
financing companies, lending companies, etc.

• Not a public utility.


Differences vs Full PFRS – Business
Combi.
Differences vs Full PFRS
Differences vs Full PFRS
Stock Acquisition – PFRS for SME

Microsoft Excel
Worksheet
Asset Acquisition – PFRS for SME

Microsoft Excel
Worksheet

Microsoft Excel
Worksheet
• End of slides

You might also like