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Notes in Business Combination

This document discusses accounting for business combinations. It defines a business combination as when an acquirer obtains control of one or more businesses. There are two main types of business combinations: asset acquisitions and stock acquisitions. The acquisition method of accounting is used, which involves identifying the acquirer, determining the acquisition date and fair value of assets and liabilities, and recognizing any resulting goodwill or gain on acquisition. Goodwill is computed based on the fair value of consideration transferred less the fair value of identifiable net assets acquired. The document provides details on various aspects of applying the acquisition method and accounting for business combinations.

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Ellen Buenafe
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199 views

Notes in Business Combination

This document discusses accounting for business combinations. It defines a business combination as when an acquirer obtains control of one or more businesses. There are two main types of business combinations: asset acquisitions and stock acquisitions. The acquisition method of accounting is used, which involves identifying the acquirer, determining the acquisition date and fair value of assets and liabilities, and recognizing any resulting goodwill or gain on acquisition. Goodwill is computed based on the fair value of consideration transferred less the fair value of identifiable net assets acquired. The document provides details on various aspects of applying the acquisition method and accounting for business combinations.

Uploaded by

Ellen Buenafe
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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NOTES IN BUSINESS COMBINATION:

BUSINESS COMBINATION: Transaction or event in which the acquirer obtains control of one or more businesses.

DATE OF ACQUISITION:

TYPES OF BUSINESS COMBINATION:


1. ASSET ACQUISITION – 100%
A. Statutory Merger: A+B= A or B
B. Statutory Consolidation: A+B = C
2. STOCK ACQUISITION
A. Full Acquisition-100%- Parent/Subsidiary
B. Partial Acquisition- <100%-Control

ACCOUNTING METHOD: ACQUISITION METHOD


1. Identify the Acquirer
2. Determine the Acquisition Date (Fair Value at Acquisition Date)
3. Recognize and Measure the Fair Value of Consideration Transferred, Identifiable Assets and NCI
4. Recognize Goodwill

GOODWILL COMPUTATION:

FV of Consideration Transferred xx
FV of Previously Held Interest xx
Value of Non-Controlling Interest xx
FV of Identifiable Net Assets (exclude existing goodwill) (xx)
Goodwill/ (Gain on Acquisition) XX (XX)

COMPONENTS OF FV OF CONSIDERATION TRANSFERRED:


1. Cash/Non-Cash
2. Liability
3. Shares
4. Contingent Consideration – Conditional/Potential Payment
5. Existing Goodwill of Acquiree – Fair Value is Zero (nil).
COMPONENTS OF PREVIOUSLY-HELD-INTEREST: Converted to Fair Value and charge the difference to profit or loss
COMPONENTS OF VALUE OF NCI:
1. Fair Value
2. Proportionate Share in Fair Value of Net Asset
3. Implied Fair Value
RULE IN VALUATION OF NCI:
1. Always check whichever is higher for NCI (Fair Value, Implied Fair Value or Proportionate Share in FV of INA
2. For Implied Fair Value, Include contingent consideration, exclude control premium.

MEASUREMENT PERIOD: 1 YEAR


1. Changes in Fair Values within 1 year should be charge to Goodwill, if more than 1 year, charge to profit or
loss
2. Change in Contingent Consideration: if due to change in estimate: Charge to Goodwill, otherwise, charge to
profit or loss

ACQUISITION RELATED COST:


1. Direct Expenses: Charge to Expense
2. Indirect Expenses: Charge to Expense
3. Debt issue cost: Deduct to the Face Value of Debt issued
4. Stock Issue Cost: Deduct to resulting APIC. If resulting APIC is not enough, charge to Retained Earnings.
STOCK ISSUE COST:
1. SEC Registration Fee
2. Docstamp
3. Publication Fee
4. Printing Stock Certificate
5. Listing Fee

CONSOLIDATION (YEAR OF ACQUISITION):

1. Consolidate in full all subsidiaries line by line 100%


2. Eliminate (deduct) in full 100% all intercompany transactions and balances

Usual Problems:
Total Assets Total Liabilities Total Equity
BV of Acquirer BV of Acquirer BV of Acquirer
+ FV of Acquiree + FV of Acquiree + FV of Shares Issued
+ Goodwill + Liability Issued + Gain from Bargain Purchase
(-) Asset Consideration + Contingent Consideration Payable +/(-) Gain/Loss on Previously Held Interest
(-) Acquisition Cost + Acquisition Cost Incurred +/(-) Gain/Loss on Change in Cont. Cons.
Total Assets Total Liabilities (-) Acquisition Cost
+ NCI
Total Equity
**if the question is increase/decrease: Exclude BV of Acquirer

Consolidated FS:
Balance Sheet:
Assets/Liabilities: add line by line-100%
Equity: Split:
 Parent: CS-Parent + APIC Parent + Conso RE
 NCI

Income Statement:
Income/Expenses: add line by line-100%
Net Income: Split:
 Parent’s Share: to conso RE
 NCI share: to NCI
Consolidated Net Income:
CNI PARENT NCI
Net Income-Parent XX
Dividends Share(From NCI) (XX)
Net Income-NCI XX XX
Amortization/Depreciation of Fair Value Adjustment XX/(XX) XX/(XX)
Goodwill Impairment (XX) (XX)
Gain on Acquisition XX
CNI-PARENT XX CNI-NCI XX
Rules:
1. Net Income-Parent: Add full year
2. Dividends Share-Parent: Deduct, but if the dividends are from own operations, do not deduct.
3. Net Income NCI: Add from date of acquisition only (split according to percentage of ownership)
4. Amortization of Fair Value Adjustment:
4.1 If Book Value is less than Fair Value (Undervalued): Deduct
4.2 If Book Value is more than Fair Value (Overvalued): Add
4.3 If the revalued asset is an inventory: add/deduct the adjustment only when sold to 3rd parties. If the
problem is silent, consider it was sold to 3rd parties.
4.4 If the revalued asset is a depreciable asset: depreciate the asset over its remaining useful life. The amount of
depreciation is the amount to be added or deducted in consolidating the Net Income.
4.5 If the revalued asset is a Land: add/deduct the adjustment only when sold to 3 rd parties. If the problem is
silent, consider it unsold to 3rd parties.
5. Goodwill impairment: Deduct (Split according to percentage of ownership)
6. Gain on Acquisition- For Parent only.

Consolidated Balance Sheet:

NCI, Beg. XX
CNI-NCI XX
Dividends Declared and Paid (XX)
NCI, End XX

Retained Earnings-Parent XX
CNI-Parent XX
Dividends Declared and Paid (X
X)
Consolidated Retained Earnings XX
Share Capital-Parent XX
APIC-Parent XX
Consolidated Retained Earnings XX
NCI, End XX
Consolidated Shares Holders Equity XX

CONSOLIDATION (SUBSEQUENT YEAR/S):

Intercompany Transactions:
1. Sale/Transfer of Inventory
2. Sale/Transfer of Depreciable Asset
3. Sale/Transfer of Land

a. Upstream Sales/Transfer- From NCI to Parent: Split the Gross Profit according to ownership
b. Downstream Sales/Transfer- From Parent to NCI: Gross Profit is for Parent Only.

Consolidated Net Income (With Intercompany Transactions):


CNI PARENT NCI
Net Income-Parent XX
Dividends Share (XX)
Net Income-NCI XX XX
Amortization/Depreciation of Fair Value Adjustment XX/(XX) XX/(XX)
Goodwill Impairment (XX) (XX)
Gain on Acquisition XX
Upstream Sales-Unrealized Gross Profit (XX) (XX)
Upstream Sales-Realized Gross Profit XX XX
Downstream Sales-Unrealized Gross Profit (XX)
Downstream Sales- Realized Gross Profit XX
CNI-PARENT XX CNI-NCI XX

Intercompany Sales of Inventory:


1. Realized Gross Profit = Beginning Inventory of Buyer x GP rate of Seller.
Rationale: Effect: Beginning Inventory is overstated, Cost of Goods Sold is overstated, and Net Income is
understated.
2. Unrealized Gross Profit = Ending Inventory of Buyer x GP rate of Seller.
Rationale: Effect: Ending Inventory is overstated, Cost of Goods Sold is understated, and Net Income is
overstated.
Intercompany Sale of Depreciable Asset:
1. Gain (Loss) = Sales Proceeds versus Book Value
2. Gain (Loss) is to be divided over the remaining life of the Asset.

Intercompany Sale of Land:


1. Gain (Loss) = Sales Proceeds versus Carrying Amount
2. Gain (Loss) is added/deducted on the year of Sale

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