BUSINESS

COMBINATION
Statutory Merger and
Statutory Consolidation
 Chapter Outline
2
ASSET 4
START ACQUISITION
FAIR VALUE OF FINISH
vs. STOCK
THE BUSINESS
ACQUISITION

1 3 5
INTRODUCTION CONSIDERATIO GOODWILL vs.
N BARGAIN
TRANSFERRED/ PURCHASE
GIVEN GAIN
Definition of Business Combination
A transaction or other event in
which an acquirer obtains
CONTROL of one or more
BUSINESSES. (PFRS3)

Sometimes
referred to as Key Aspects
“True Mergers” are Control
or “Merger of and Business
Equals”
 Identifying a Business

Definition (PFRS 3)* Elements

■ An integrated set of
activities and assets that ■ Input
is capable of being ■ Process
conducted and managed
for the purpose of ■ Output
providing goods or
services to customers,
generating investment *To distinguish from a mere
income or generating acquisitions of a group of
other income from assets
ordinary activities
 Nature of Business
Combination

The board of directors of the

Friendly potential combining companies

1
Combination negotiates mutually agrreable terms
of proposed combination.

Hostile The board of directors of a

company targeted for acquisition

2
Combination resists to combination
 Reason for Business
Combinations
Reasons:

Cost Advantage

Lower Risk

Avoidance of
Takeover
Acquisition of
Intangible Assets
Other reasons
 Structure of Business
Combination

Circular
Horizontal Vertical Conglomerat Combinatio
Integration Integration e Integration n

Involving Entails some

Involves Two companies in diversification,
companies companies unrelated but does not
within the involved in the industries have a drastic
same industry same industry having little, if change in
that have been bu on at any, operation as a
previously different production or conglomerate
been levels market
competitors
similarities
ACQUISITION
METHOD
 Types of Combinations
Type: Acquisition of Net Assets Type: Asset Acquisition

Chapter: One Chapter: One

Definition: The books of of the acquiree are Definition: Reflects the acquisition by one firm
closed out and its assets and of assets of another firm but not its
liabilities are transferred to the shares.
books of the acquirer

Classificatio A. Statutory Merger Type: Acquisition of Common Stock

n: (Shareholder)
X Company + Y Company =
X Company or Y Company Chapter: Two

A. Statutory Consolidation Definition: The books of the acquirer and

acquiree remain intact and
X Company + Y Company = consolidated financial statements are
Z Company prepared periodically
Step Acquisition Method
1

Identify the Acquirer

Step 3 Step 2

Determine the Acquisition date

Calculate the fair value of the Consideration given

Step 4

Recognize and measure the fair value of the

identifiable net assets of the business
Step 5

Recognize and measure either goodwill or Bargain

purchase Gain
 Identifying the Acquirer
Yes No Yes Yes
Transferred
Also
Also called as Also called as Also called as
Consideration to
Parent Company Subsidiary Company Acquiring Company
another company

Yes No No No
Received
Obtains control of Controlled by another Also called as
Consideration from
another company company Acquired Company
another company

Yes No Yes Yes

Measured assets and Measured assets and Record either goodwill Record
liabilities at fair value liabilities at cost on or bargain purchase acquisition-related
on acquisition date acquisition date gain cost
 Determining the
Acquisition Date
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dic

Mon Tue Wed Thu Fri Definition:

Date on which the acquirer obtains control pf the
acquiree.

It does not depend on the physical possession of the

assets acquired or actually pays out the consideration
to the acquiree

Point in time when the net assets of the acquiree

become the net assets of the acquirer.
CONSIDERATI
ON
TRANSFERRED
 Consideration
Transferred / Given
Cash or Other Non-monetary Equity
Monetary Assets Assets Instruments
At fair value (Readily Fair value per type of assets Fair values of own shares
determinable) (e.g. Inventory, PPE) (Quoted prices)

Liabilities Contingent Share-based

Undertaken Consideration Payment Awards
Present values of expected Add-on to the base Measured In accordance
future cash outflows acquisition price based on with PFRS 2, “Market-based
future events/ conditions measures”

It should measured at fair value at acquisition date.

Notes
It can be a combination of the item above.
 Contingent Consideration
• Follow PFRS 2 Share Based payments
Contingent Liability
• Should be recognize even if there is no probable
• Does not follow PAS 37 Provisions, Contingent
outflow of resources from the entity
Liability, and Contingent Assets
• Can be presented as Share Premium –
• Should be recognize even if there is no probable
Contingent Consideration
outflow of resources from the entity
• Amount is based from fair value of the shares
• Presented as a contingent liability account
multiplied by the probability.
• Amount is based from fair value multiplied by
• May change due to incomplete information at
the probability
acquisition date.
• May change due to incomplete information at
acquisition date

Stock Consideration
 Acquisition-Related
Date:
Cost
Acquisition-Rela
Examples Treatment
ted Cost
Directly attributable Legal fees, finders and brokerage fess, advisory, accounting, valuation Expenses
costs (valuers) and other professional and consulting fees to effect the (Retained
combination Earnings)

Indirect acquisition General and administrative costs that are allocated to the merger but Expenses
costs would have existed in its absence and other costs of which cannot be (Retained
directly attributed to the particular acquisition. Earnings)

Costs of Issuing Transaction costs such as stamp duties on new shares, professional Deduction to
equity securities adviser’s fees, underwriting costs and brokerage fees may be incurred. Share Premium

Cost of Issuing debt Professional adviser’s fees, underwriting costs and brokerage fess may Bond Issue Cost
securities be incurred.
FAIR VALUE
OF THE
BUSINESS
 Recognition and Measurement of Assets
Acquired and Liabilities Assumed
• Acquirer is required to:
A. Recognize identifiable assets and liabilities separately from goodwill,
and
B. Measure such assets and liabilities at their fair value on the date of
acquisition.

• Two recognition criteria

A. Probable of any future economic benefit that will flow to / from the
entity (Probability Test), and
B. Items are reliably measured. (Reliability Test)
 Summary for Recording the Assets
and Liabilities of the Acquiree
Identifiable Tangible Assets
A. Current Asset – recorded at estimated fair value and should be presented as net (No separate
valuation for the allowance)

B. Asset Held for Sale – recorded at fair value less costs to sell

C. Property, Plant, and Equipment - recorded at estimated fair value and should be presented
as net (No separate valuation for the allowance)

D. Investments in Equity-accounted Entities – no difference between an investment that is an

associate or an investment that is trade investment. The fair value of the associate should be
determined on the basis of the value of the shares of the associates.
 Summary for Recording the Assets
and Liabilities of the Acquiree (Cont…)
Identifiable Intangible
Assets
• Acquirer to recognize identifiable (Separability and contract-legal Criterion) assets acquired
regardless of the degree of probability of an inflow of economic benefits.

A. Existing Intangible Assets – recorded at estimated fair value (e.g. Discounted cash flow
analysis)

B. Intangible Assets not Currently recorded by the Acquiree – must be separately recorded.

C. When the Acquiree is a lessee with respect to assets in use – If the terms are favorable, the
intangible asset would be recorded equal to the discounted present value of the SAVINGS
but if it is not then it will be an estimated liability equal to the Discounted present value of
the rent in excess of fair rental rates.
 Summary for Recording the Assets
and Liabilities of the Acquiree (Cont…)
Existing Liabilities
A. Current Contractual Liabilities – likely be the existing recorded value.

B. Long-term Liabilities – adjusted the recorded value if there is a material change with the
interest rates.

C. Deferred Revenue – fair value at the date of acquisition.

Contingent Liabilities
In a business combination setting, Acquirer should recognize a contingent liability when:
A. It is a present obligation that arises from past events; and
B. its fair value can be measured reliably.
GOODWILL vs
BARGAIN
PURCHASE
GAIN
Results: Formula

Acquisition Fair Value

GOODWILL of the
Cost
Business

BARGAIN Fair Value

Acquisition
PURCHASE of the
Cost
GAIN Business
 Measurement Period
Period after the initial acquisition date during which acquirer may adjust
Definition:
the “provisional amounts” recognized at the acquisition date

Adjustments Adjustment to Goodwill

a. One year from the date of acquisition ✔

b. Beyond one year after the date of acquisition

Information received that existed at the date of

c.
acquisition ✔

Information received that existed after the date of

d.
acquisition