ABC Module 01: Business - Upward Vertical Business

Combinations- v1 Combination- when customer buys

the supplier.
 Business Combinations- transaction or o Usually in order to improve
event in which acquirer obtains control of the supply chain.
one or more company. - Downward Vertical Business
- Occurs when two or more entity join Combination- when supplier buys
into a single accounting entity but the customer.
not legal entity. o Usually in order to improve
the supply chain in
3 LEGAL FORMS OF BUSINESS downward perspective.
COMBINATIONS o Example: When Disney buys
Pixar (Animation studio).
 Statutory Merger
- Usually there is a surviving company  Market-Extension- sells same products in
either A or B. different markets.
- Example: A+B= A or B. Grab + - Example: When Ayala (sells at
Uber = Grab. malls) buys Zalora (sells online).
- To have different channels of selling
 Statutory Consolidation products.
- There is NO surviving company and
there is another name after the  Product-Extension- sells different but
consolidation. related products.
- Example: A+B=C. BDO Unibank + - Example: When Pepsico (sells
Equitable PCI= BDO Equitable PCI. beverages) buys Pizza hut (sells
foods/snacks).
 Acquisition of Stocks - To leverage technology and improve
- There are only changes in its how they produce their products.
relationship. It became parent and
subsidiary.  Conglomeration- combination of two
- Example: A+B= A + B. There are no unrelated business.
changes aside from A is now the - Example: SM buys 2Go Travel.
parent of B and B is a subsidiary of - Usually, to improve diversification
A. Jollibee + TCBTL= Jollibee and to have business in other
(parent) + TCBTL (subsidiary). industries.

5 TYPES OF BUSINESS
COMBINATIONS MOTIVATIONS FOR BUSINESS
COMBINATIONS
 Horizontal- competitors.
- Usually, to improve market share  Staff Reduction
and reach wide range of customers.  Economies of scale- reduce cost through
- Example: Grab buys Uber. increasing the level of production.
 Access to new technologies and
 Vertical- has customer-supplier intangibles
relationship  Improve market reach and visibility.
 OTHERS. - Investment entity @FVPL
- Not for Profit Organizations
2 MAIN METHODS FOR
ACCOUNTING FOR BUSINESS % OF OWNERSHIP/
COMBINATIONS RELATIONSHIP/APPLICABLE
STANDARDS
 Pool of Interest Method
- uses Historical Book Value to record 20% and Below
net assets of the acquiree. - NA- PAS 32&39, PFRS 9- Financial
- Allowed through PIC, Q&A, 2011- Instruments
02, when they are under a common 20% - 50%
control and there is no commercial - Significant Influence, PAS 28-
substance. Investment on Associates
 Acquisition Method 50%
- The assets acquired and liabilities - Joint Control, PFRS 11- Joint
assumed are recorded at fair value of Arrangements
the net assets at the date of 50% and Above
acquisitions. - PFRS 3- Business Combinations
- This is the ONLY method - PAS 27- Separate FS
ALLOWED by the PRFS 3. - PFRS 10- Consolidated FS

STEPS FOR ACQUISITION METHOD

(IDRR)
 Identify the acquirer.
 Determine the acquisition date.
 Recognize the assets, liabilities, and
ABC Module 01: Business any non-controlling interest (NCI)
Combinations- v2  Recognize goodwill/gain on bargain
purchase.
PFRS 3- Business Combinations STEP 1: Identify the acquirer.
- Acquirer is the entity that usually
 Objective- to improve the relevance, transfer cash or other assets, incurs
reliability, and comparability of liabilities.
information about business combinations - Issues its own interest, except for
and its effects. reverse acquisitions.
 Core Principles- the acquirer must - NOTE! The consideration will be
recognize the net assets of the acquiree at transferred to the previous owners of
the acquisition date fair value. the acquiree.
 PFRS 3 does not apply to: (JABIN)
- Join Ventures (PFRS 11- Joint STEP 2: Determine the acquisition date.
Arrangements) - This is when the acquirer obtains
- Acquisition of Assets not CONTROL over an acquiree.
constituting a business. - This can be earlier, later, or same as
- Business combinations under to “closing date”
common control
 o Closing date- is the date (GAIN ON BARGAIN PURCHASE
where the acquirer legally OPTION)- Income outrightly in P/L.
transfers the consideration,
acquire asset, and assume the Previously Held Equity Interest (PHEI)
liabilities of the acquiree. - In step acquisition or business
- Measurement Period- 1 year to combination achieved in stages.
adjust the “Provisional amounts.” - All interest acquired before the date
of acquisition of the same company.
STEP 3: Recognize the assets, liabilities, Reverse Acquisitions
and any non-controlling interest (NCI) - Entity that issue its own securities
(Legal Acquirer) is treated as the
 Assets Acquired- FAIR VALUE Acquiree for Accounting purposes.
- /, Intangibles - Ex: Backdoor Listing
- X, Previous Goodwill - It is usually done by private entities
- X, Prepaid Asset through acquiring publicly listed
 Liabilities Assumed- FAIR VALUE companies to have stock listing.
 Non-Controlling Interest
- It is the equity interest not Acquisition Related Cost
attributable, direct, or indirect, to a - Related cost that acquirer incurred in
parent. effecting a business combination.
- The remaining interest, not acquired - Therefore: (DIDSC)
by the acquirer. o Direct Cost- Expense
- It shall be measured at either: o Indirect Cost- Expense
o Debt and Equity Interest-
 FAIR VALUE, Full Goodwill Amortized thru EIM
- Should exclude “Control Premium” o Stock Registration and
- Formula: NCI@FV Issuance Cost- Deduction in
Consideration transferred APIC and RE
% Of Acquirer’s Interest o Cost of Public Offerings of
Shares- Expense according to
 PROPORTIONATE SHARE, Partial PIC, Q&A, 2011-04
Goodwill
- Formula: NCI@ Proportionate PRFS FOR SMALL AND MEDIUM
NIA of Acquiree x % of NCI ENTITIES (SMEs) – A4N
- Assets, 3M-350M; Liabilities, 3M-
STEP 4: Recognize goodwill/gain on 250M
bargain purchase. (CNP-N) - Not in the process of issuing
- Formula: instrument in a public market.
Consideration Transferred @FV - Not required to file FS under SRC,
+ Contingent Consideration @FV Rule 68, Part II (for issuers of
+ NCI @acquisition date FV instruments in Public)
+ Previous Held Equity Interest @ADFV - Not a holder of secondary license
TOTAL issued by a regulatory agency.
- NIA acquired by acquirer o Secondary license- given to
GOODWILL- Asset at Balance sheet. corporations to have
authority to operate in
 regulated activities like ment
broker securities, dealer etc. date
IIA can Contra FV can
o Anything that manages
be ctual be
money of other people or in a recogni and measur
“trust position” zed if: Separa ed
- Not a public utility. ble reliably
- NOTE that under these conditions, Conting Presen FV can
ent Liab t be
they are mandated to apply PFRS for can be Obliga measur
SMEs. recogni tion+ ed
zed if: Proba reliably
Exemptions for PFRS for SMEs- PSPP ble
- Under discretion/Can use Full PFRS and
Measu
- Part of a group reporting entity under
red
Full PFRS (ex: Subsidiary, Parent, Reliab
Joint Ventures, Associates, and ly
Branch Office.) Goodwi Consi Consid’
- Subsidiary of a foreign parent ll d’n n
moving towards full IFRS transfe transfer
rred red
- Projected to breach quantitative + NCI - %
threshold. +
- Plan to conduct IPO within 2 years. PHEI (FVNA
- Ax%
Difference vs. Full PFRS- ACRICGGM FVNA acquire
A d)
Goodwi Not Amorti
FULL PFRS ll- amorti zed
PFRS for subsequ zed; over its
SMEs ent tested useful
Accoun Acqui Purchas for life, not
ting sition e impair exceedi
Method Metho Method ment ng 10
d annual years
Conside Acqui Acquisi ly
ration sition tion Measur FV or Proport
Transfe cost+ cost+ ement Propor ionate
rred Contin Conting of NCI tionate Share
gent ent Share ONLY
Consi Consid’
d’n n (if
probabl
e and
measur
ed
reliably
)+
Direct
Cost
Remeas X /
urement Good Goodwi
of IIA will ll
after (must
measure be)