BUSINESS COMBINATIONS NOTES

CHAPTER 1-3

GENERAL CONCEPTS

TOPIC OUTLINE

1
2

From Youtube discussions

 Acquisition of net assets :
- Share issuance cost- charged to share
premium

Possible entry
Share premium
Cash (if paid in cash)

 After acquisition J/E

- Record acquisition of net assets
- Record acquisition related expense

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 The assets transferred by acquirer

 The liabilities incurred by the acquirer to former
owners of the acquiree
 The equity interest issued by the acquirer

TOPIC 1 CONSIDERATION TRANSFERRED INCLUDES:

 Cash or Other Monetary Assets
Methods or types of combinations  Non-monetary assets
1. Acquisition of net assets: A-L= NA  Equity instruments
2. Acquisition of common stock  Liabilities undertaken.
3. Asset acquisition  Contingent Consideration- an add on to the base
acquisition price that is based on events
 Business combination is- occurring or conditions being met some time
after the purchase takes place

ACQUISITION RELATED COST

ACQUISITION OF NET ASSETS - Are exclude from the consideration paid
 STATUTORY MERGER- entails that because such costs are not part of the fair
acquiring company survives, and acquired value of the acquiree and are not assets.
company ceases to exist as a separate legal - Accounted for as expense in the periods
entity, although it may be continued as a separate incurred and the services are received.
division of the acquiring company.
1. Cost directly attributable to the combination
X Co. + Y Co. = X Co or Y Co.  Legal fees
 Finder’s and brokerage fees
 STATUTORY CONSOLIDATION – when a  Advisory
new corporation is formed to acquire two or  Accounting
more other corporations, the acquired  Valuation
corporation ceases to exist (dissolve) as separate  Professional and consulting fees
legal entities.
2. Indirect, ongoing cost, general cost including the
X Co + Y Co = Z Co cost to maintain an internal acquisition,
department.
 General and administrative cost
PFRS 3: BUSINESS COMBINATIONS
 A transaction or event in which the acquirer SHARE ISSUANCE COST
obtains control over on or more businesses. Cost of issuing equity instruments (EXCLUDED FROM
CONSIDERATION AND ACCOUNTED
SEPARATELY)
Scope of business combinations -reduction in share capital (APIC) – If apic is not enough it
1. Combinations involving mutual agency shall be debited to SHARE ISSUANCE COST deducted to
- Mutual agency is an entity other than an the following in order:
investor-owned entity, that provides 1. Share Premium from previous share issuance
dividends, … 2. retained earnings with appropriate disclosure.
2. Combinations achieved by contract alone. pp. 14 book , summary of acquisition related cost
PP. 19 of Book: List of asset and liab included in the
THE ACQUISITION METHOD acquisition
 Is applied on the acquisition date which is the
date the acquirer obtains control of the acquiree.
 All assets and liabilities are reported at: FAIR -
VALUE

CALCULATING FOR CONSIDERATION

TRANSFERRED :
- Measured at FAIR VALUE on acquisition Goodwill
date  Acquirer shall recognize goodwill as of
- Sum of the acquisition date FAIR VALUES acquisition date measured as: Consideration
of : transferred- Net Assets

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 Accounted for as an asset representing future interest in the investment.

economic benefits arising from other assets.

Items include as goodwill PURPOSE OF CONSOLIDATED FS

- Primarily for the benefit of the owners and
 Assembled workforce of the acquire creditors of the parent, the results of the
 Potential contracts operations and the financial position of a
 Contingent assets parent company and all its subsidiaries as if
 Future contracts renewal the consolidated group were a single
economic entity.

Bargain Purchase Gain

 The difference when the acquirer’s interest in
net fair value of the acquiree’s identifiable Allocated excess
assets and liabilities is greater than the  Difference between the fair value of the
consideration transferred. subsidiary and the book value of the acquiree’s
net identifiable assets.
Measurement period
 A period after the initial acquisition date during Economic Entity(Unit) Theory pp. 119
which the acquirer may adjust the “provisional - Non-controlling interest are deemed to be as
amount” important as a stakeholder of the combined entity
 One year period is known as the measurement similar to the majority shareholders.
period. - Requires consistent accounting treatment for
both parent and NCI.
Formula: Consolidated equity
MAIN TOPIC: Consolidated FS (Controlling and NCI) = Consolidated assets- Consolidated
liabilities)
TOPIC OUTLINE Parent theory pp. 120
- Focuses on the information needed by the parent
1 Topic 1: FROM BOOK company shareholders.
2 Topic 2: from yt discussion Proprietary theory
- Parent is seen as having a direct interest in a
TOPIC 1 subsidiary’s assets and liabilities

Consolidation
1. Process of combining the assets, liabilities,
earnings and cash flows of a parent and its
subsidiaries as if they were one economic entity.
Subsidiary
 It is a corporation that is controlled by a
parent that owns, usually of the voting
shares/rights of the subsidiary.

The default presumption

 Presence of control determines a parent-
subsidiary relationship. 50% ABOVE =
control

Separate Financial Statements PAS 27

 Those presented by a parent, an investor in an
associate or a joint venture in which the
investments are accounted for on the basis of the
direct equity interest rather than on the basis of
the reported results and net assets of the investee.
NOTE: Investor’s separate FS reflects the legal

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