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Lesson 3 Business Combination

The document outlines IFRS 3 regarding business combinations, defining key concepts such as control and business. It describes types of business combinations, including asset acquisitions and stock acquisitions, and details the acquisition method of accounting, including steps to identify the acquirer, determine acquisition date, and recognize assets and liabilities. A sample problem illustrates the application of these principles in a practical scenario involving White Corporation's acquisition of Black Company.

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Andrei Alfonzo
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24 views10 pages

Lesson 3 Business Combination

The document outlines IFRS 3 regarding business combinations, defining key concepts such as control and business. It describes types of business combinations, including asset acquisitions and stock acquisitions, and details the acquisition method of accounting, including steps to identify the acquirer, determine acquisition date, and recognize assets and liabilities. A sample problem illustrates the application of these principles in a practical scenario involving White Corporation's acquisition of Black Company.

Uploaded by

Andrei Alfonzo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Business

Combination
IFRS 3: Business Combination
•A
transaction or event in which an acquirer obtains control of one or
more business.
•Control – power to govern the financial and operating policies of an
entity as to obtain benefits.
•Business – main purpose is to provide return to investors and
owners.
Types of Business Combination
1. Acquisition of assets
◦ All of the company’s assets are acquired directly from the company.
◦ Also known as acquisition of “net assets”. (Assets – liabilities)
◦ Statutory Consolidation – a + b = c
◦ Statutory Merger – a + b = a or b

2. Stock acquisition
◦ More than 50% of another company’s voting common stock is acquired.
◦ Parent or Acquirer – acquiring company.
◦ Subsidiary or Acquiree – acquired company
Acquisition Method of
Accounting for Business
Combination
1. Identify the Acquirer
In an asset acquisition, the company transferring cash or other assets and/or assuming liabilities.
In a stock acquisition, the company transferring cash or other asset or issuing the voting
common stocks.
2. Determine the Acquisition Date
The date on which the acquirer obtains control.
The date used to establish the fair value of the company acquired.
Acquisition Method of
Accounting for Business
Combination
3. Determine the Consideration Given
o Price paid by the acquirer measured at fair value
o Assets transferred
o Liabilities incurred
o Equity interests issued

o Contingent consideration – additional consideration by the acquirer to the acquiree.


o Changes that are the result of the acquirer obtaining additional information and should occur within
the following:
o Within measurement period – maximum of one year from the acquisition date. Recognized as
adjustment to goodwill or bargain purchase
o After measurement period – included in profit or loss. If no issue additional shares, the only entry
made is at the date when additional shares are issued
o Acquisition related costs are expensed outright (legal fees, brokerage, advisory) while stock issuance
costs (docs stamp, SEC costs) will be deducted to APIC then RE.
Acquisition Method of
Accounting for Business
Combination
4. Recognize and measure the identifiable assets acquired, the liabilities assumed and any non-
controlling interest. Recognized any goodwill or gain from a bargain purchase.
Purchase Method or Acquisition Method – all assets and liabilities of the acquired company are
usually recorded at fair value.
◦ Note that the fair value assigned to net assets should not include the goodwill that may exist
on the acquiree’s book.
◦ The acquirer may recognize some assets and liabilities that the acquiree had not previously
recognized in its financial statements
Goodwill = Price paid exceeds the fair values assigned to net assets. Subject to impairment
testing.
Bargain purchase = Price paid is less than the fair value assigned to net assets.
Sample Problem

Microsoft Excel
Worksheet
Sample Problem
On June 30, 2020, White Corporation issued 100,000 shares of its P20 par value common stock for
the net assets of Black Company. The market value of White’s common stock on June 30 was P36
per share. Total fair value of the net assets of Black Company amounts to P3,700,000. White paid a
fee of P100,000 to the broker who arranged this acquisition. Costs of SEC registration and issuance
of the equity securities amounted to P50,000.
Contingent consideration determined to be paid after acquisition amounts to P120,000.
1. Who is the acquirer?
2. When is the acquisition date?
3. What is the total consideration given?
4. How much is the goodwill or bargain purchase?
5. How much additional paid in capital is recorded by White Corporation?
6. How much White should recognize expense of?
Answers:
1. White Corporation
2. June 30, 2020
3. 3,720,000
4. Goodwill of 20,000
5. 1,550,000
6. 100,000

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