COURSE CODE AND TITLE: ACTP5 – BUSINESS COMBINATION

LESSON NUMBER: 03
TOPIC: GOODWILL COMPUTATION – ASSET ACQUISITION
DESCRIPTION: This topic will discuss how goodwill is computed under asset acquisition

LEARNING OBJECTIVES: At the end of this lesson you should be able to:
1. Apply the concepts of acquisition method under PFRS 3 for asset acquisitions
2. Compute for goodwill or gain on bargain purchase, as applicable

PRE-ASSESSMENT: 1. Under PFRS 3, the following are considered in the computation of goodwill, except
a. Consideration transferred
b. Fair value of any existing investment in the acquiree, in the case of step acquisitions
c. Fair value of the identifiable assets acquired, and liabilities assumed from the acquiree
d. Acquisition-related costs

2. Which of the following is true regarding goodwill?

a. It is an identifiable intangible asset
b. It is amortized over 10 years
c. It is subjected to impairment testing annually and when there are indications
d. It is tested for impairment separately from the cash-generating unit it relates

3. Under PFRS 3, all of the following is measured at acquisition-date fair value except?
a. Property, plant and equipment
b. Investment properties
c. Equipment held for sale
d. Inventories
4. When the acquisition-date fair value of the net assets acquired is greater than consideration transferred by the acquirer,
which of the following must be done in accordance with PFRS 3
a. Recognize a goodwill for the excess

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 b. Recognize a gain on bargain purchase for the excess
c. Conduct a re-evaluation of the fair value of the net assets
d. Should ignore the difference in exercise of prudence under PAS 37

5. On December 31, 2019, Company A acquired the net assets of Company B for P10,000,000 cash. At acquisition date,
Company B’s net asset has a carrying amount of P8,000,000 and a fair value of P9,500,000. Company A incurred and
paid P500,000 for acquisition-related costs. Compute for the goodwill
a. 1,000,000
b. 500,000
c. 2,000,000
d. None

LESSON PRESENTATION GUIDELINES IN SOLVING BUSINESS COMBINATION PROBLEMS

In solving the problems related to business combination the following should be observed:
 Apply the four (4) step process discussed in the overview of business combination
 Determine whether the problem represents an asset acquisition or a stock acquisition
 Acquiree’s net assets are remeasured at acquisition-date fair values, except certain items discussed in the overview of
business combination
 Watch out for assets with provisional amounts and the application of measurement period
 Acquisition related costs are expensed outright.
 Any difference between the consideration and fair value of the net assets acquired is accounted for as either goodwill or a
gain on bargain purchase, whichever is applicable

SAMPLE PROBLEM
On December 31, 2020, Company A acquired the net assets of Company B by issuing 100,000 ordinary shares with par value of
P10 and bonds payable with face amount of P5,000,000. The bonds are classified as financial liability at amortized cost.

At the time of acquisition, the ordinary shares are publicly quoted at P20 per share. On the other hand, the bonds payable,
classified as financial liability at amortized cost, are trading at 110.

Company A paid P100,000 share issuance costs and P200,000 bond issue costs. Company A also paid P400,000 acquisition
related costs and P300,000 indirect costs of business combination.

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 Before the date of acquisition, Company A and Company B reported the following data:

Company A Company B
Current assets 10,000,000 5,000,000
Noncurrent assets 20,000,000 10,000,000
Current liabilities 2,000,000 4,000,000
Noncurrent liabilities 3,000,000 5,000,000
Ordinary shares 5,000,000 2,000,000
Share premium 12,000,000 3,000,000
Retained earnings 8,000,000 1,000,000

At the time of acquisition, the current assets of Company A have fair value of P12,000,000 while the noncurrent assets of
Company B have fair value of P13,000,000. On the same date, the current liabilities of Company B have fair value of P6,000,000
while the noncurrent liabilities of Company A have fair value of P5,000,000.

REQUIREMENTS
1. Identify the acquirer
2. Determine the acquisition date
3. What is the fair value of the assets acquired and liabilities assumed?
4. How much is the amount of consideration?
5. How much is the acquisition expense charged against profit or loss?
6. What is the goodwill or gain on bargain purchase arising from business combination?
7. What is Company A’s amount of total assets after the business combination?
8. What is Company A’s amount of total liabilities after the business combination?
9. What are the relevant journal entries in the books of Company A?

SOLUTION:

Acquirer: Company A
Acquisition Date: December 31, 2020
Fair value of Net Assets of Company B: P7,000,000

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 Current assets 5,000,000
Noncurrent assets 13,000,000
Current liabilities 6,000,000
Noncurrent liabilities 5,000,000
Fair Value of Net Assets 0

Fair of Considerations transferred by Company A: P7,500,000

Shares issued (100,000 x 20) 2,000,000

Bonds (5,000,000 x 110%) 5,500,000
Fair Value of Consideration 0

Acquisition expense charged against profit or loss: P700,000

Direct costs 400,000

Indirect costs 300,000
Total 700,000

Goodwill or Gain on Bargain Purchase: P500,000 Goodwill

Consideration 7,500,000
Fair Value of the Net Assets 7,000,000
Goodwill 500,000

Total Assets of Company A after the business combination: P47,500,000

Total Liabilities of Company A after the business combination: P21,300,000

Company A Company B Adjustments Total

at Book Value at Fair Value

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 Current assets 10,000,000 5,000,000 (1,000,000)* 14,000,000
Noncurrent assets 20,000,000 13,000,000 33,000,000
Goodwill 500,000 500,000
Total Assets P47,500,000

Current liabilities 2,000,000 6,000,000 8,000,000

Noncurrent liabilities 3,000,000 5,000,000 5,300,000** 13,300,000
Total Liabilities P21,300,000

* Sum of all acquisition costs “paid” = 100,000 + 200,000 + 400,000 + 300,000

**Carrying amount bonds, net of discount = 5,500,000 – 200,000

Relevant Journal Entries:

1. To record the consideration transferred, and the net assets acquired from Company A:

DEBIT CREDIT
Current assets 5,000,000
Noncurrent assets 13,000,000
Goodwill 500,000
Current liabilities 6,000,000
Noncurrent liabilities 5,000,000
Share Capital 1,000,000
Share Premium 1,000,000
Bonds Payable 5,000,000
Premium on Bonds Payable 500,000

2. To record the issuance costs and other acquisition-related costs paid by Company A:

DEBIT CREDIT
Acquisition expense 700,000
Premium on Bonds Payable 200,000

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 Share Premium 100,000
Cash 1,000,000

GENERALIZATION  Acquisition method is used in accounting for business combination

 Assets acquisitions always results to automatic consolidation of the combining entities
 Not all assets acquired in the business combination is measured at fair value
 Acquisition related costs are expensed outright
 The assets of the acquirer are not adjusted at acquisition-date fair values
 The difference of consideration transferred, and the fair value of the net assets acquired may be a goodwill or a gain on
bargain purchase.
 The total assets of the newly combined entity shall include the carrying amount of the ACQUIRER’s ASSETS, fair value of
the ACQUIREE’s ASSETS, the resulting goodwill, less any consideration, acquisition-related costs, share issuance and bond
issuance costs PAID.
 The total liabilities of the newly combined entity shall include the carrying amount of the ACQUIRER’s LIABILITIES, fair value
of the ACQUIREE’s LIABILITIES, plus any liabilities issued by the acquirer, contingent considerations payable in cash,
acquisition-related costs not yet paid less bond-issuance costs incurred.

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 ACTIVITY / EVALUATION Miracle acquires assets and liabilities of Luck Company on January 1, 2020. To obtain these shares, Miracle pays P245,000 and
issues 13,550 shares of P15 par value common stock on this date. Miracle’s stock had a fair value of P28 per share on that date.
Miracle also pays P25,000 to a local investment firm for arranging the transaction. An additional P18,000 was paid by Miracle in
stock issuance costs.
The book values for both Miracle and Luck as of January 1, 2020 follow. The fair value of each of Miracle and Luck accounts is
also included. In addition, Miracle holds a fully amortized patent that still retains a P18,000 value

Luck Company
Miracle, Inc. Book Value Fair Value
Cash………………………......P660,000 P75,000 P75,000
Accounts Receivable………….325,000 136,000 112,000
Inventory………………………..555,000 195,000 210,000
Land……………………………..300,000 120,000 150,000
Building-net…………………...1,100,000 300,000 360,000
Equipment-net…………………..490,000 85,000 70,000
Accounts Payable………………510,000 60,000 60,000
Long-term liabilities…………..1,040,000 380,000 315,000
Common Stock……………….1,020,000 90,000
Retained Earnings……………..560,000 261,000
Assuming the combination is accounted for as an acquisition, immediately after the acquisition, in the balance sheet of Miracle,

Determine the following:

1. Goodwill
2. Retained Earnings
3. Common Stock
4. Cash
5. Total assets

REINFORCEMENT / By referring to the available references in advance financial accounting reporting, create a problem which encompasses the
ASSIGNMENT concepts related to goodwill computation under asset acquisition. (SEND YOUR SOURCE AS WELL AND PLEASE AVOID
PLAGIARISM)

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