KINGFISHER SCHOOL OF BUSINESS

AND FINANCE

Acctg 11
ONLINE CLASS
Business Combinations

John Leo D. Ambuyoc, CPA

Instructor
Business Combination
A transaction or other event in which an acquirer obtains control of one or more businesses.
Control
An investor controls an investee when the investor has the power to direct the investees
relevant activities (operating and financing policies) thereby affecting the variability of the
investors investment returns from the investee.
General Presumption:
Control normally exist when the acquirer holds more than 50% interest in the acquirer’s voting
rights.
Other factors that indicates control.
▪ Power to appoint or remove the majority of the BOD of acquiree.
▪ Power to cast the majority votes at board meetings.
▪ Power over more than half of the voting rights of the acquiree because of an agreement
with the investors.
▪ The acquirer controls the acquiree’s operating and financing policies because of law or an
agreement
Types Business Combination
A. Acquisition of Net Assets
▪ The acquirer purchases the assets and assumes the liabilities of the acquiree.

▪ The acquirer must acquire 100% of the net assets of the acquiree.
▪ After the acquisition the acquired entity normally ceases to exist a separate legal or
accounting entity.

Statutory Merger – acquiring company survives, whereas the acquired company ceases
to exist as separate legal entity. Acquirer + Acquiree = Acquirer

Statutory Consolidation – results when a new corporation is formed to acquire two or

more other corporations. Acquirer + Acquiree = New Company
Types Business Combination
B. Acquisition of Common Stock
▪ The acquirer obtains control over the acquiree by acquiring majority ownership interest.
▪ After the business combination, the parent and the subsidiary retain their separate legal
existence.
▪ The books of the acquirer and the acquiree remain intact and consolidated financial
statement is prepared periodically.
▪ The parent records the ownership interest acquired as Investment in Subsidiary in its
separate accounting books.

Separate F/S Consolidated F/S

Investment in Subsidiary Presented as NCA Not Presented
Goodwill from Business Not Presented Presented as NCA
Combination
Accounting Procedure for a Business Combination
Required Accounting Method: Acquisition Method

Process in Business Combination

▪ Identify the Acquirer
▪ Determine the Acquisition Date
▪ Recognize and Measure either goodwill or a gain from a bargain purchase, either exists in
the transaction.
✓ Consideration Transferred
✓ Non-controlling interest in the acquiree
✓ Previously held equity interest in the acquiree
✓ Identifiable assets acquired and liabilities assumed on the business combination
Acquisition Method – Process in Business Combination
STEP 1: Identify the Acquirer
The acquirer is the entity that obtains control of the acquiree. (PFRS 3 par. 7)

▪ Transfer cash, or other assets or incur liabilities.

▪ The entity that issues its equity interest (Except Reverse Acquisition).
▪ Relative size is significantly greater than that of the other combining entity.

▪ The one who initiated the combination.

Acquisition Method – Process in Business Combination
STEP 2: Determine the Acquisition Date
▪ date on which the acquirer obtains control of the acquiree.
▪ Can be earlier, later or same as “closing date”.
Closing Date – the date on which the acquirer legally transfer the consideration, acquires
the assets and assumes the liabilities of the acquiree.

The ff are determined at the acquisition date:

▪ The fair value of the non cash assets, if any, paid for business combination.
▪ The fair value of the acquirees net assets acquired by the entity.
▪ The fair value of Non-controlling interest (if acquisition is not 100%).

Measurement period – 1 year to adjust “provisional amount”.

Acquisition Method – Process in Business Combination
STEP 3: Recognition of Goodwill or Bargain Purchase Gain
Goodwill resulting from a business combination is computed as follows:
Indirect Valuation Residual approach where in goodwill is measured as the excess of the sum of
consideration transferred, NCI in the acquiree, and previously held interest over
the fair value of net assets of the acquiree.

Consideration Transferred XXX

Non-controlling Interest (NCI) in the acquiree XXX
Previously held equity interest in the acquiree XXX
Total XXX
Book Value of Net Asset (XXX)
Excess XXX
Undervaluation of Net Assets (XXX)
Overvaluation of Net Assets XXX
Goodwill (Gain on bargain purchase) XXX
Acquisition Method – Process in Business Combination
STEP 3.1 : Acquisition Cost – Fair Value of Consideration
Cash At Face Value

Non Cash At Fair Value (Difference between fair and book value is recognized in profit or
loss.

Deferred payment At fair value upon issuance of bonds or notes

Equity Instruments At far value of the acquirer’s own shares of stocks

Contingent Consideration • Future payment subject to conditions

• At acquisition date fair value with the subsequent measurement rules as
follow:
Remeasurement Changes in FV
Asset/Cash Each Reporting Date Profit or Loss
Contingency
Stock Contingency No remeasurement N/A
Acquisition Method – Process in Business Combination
STEP 3.1 : Acquisition Cost – Fair Value of Consideration
ACQUISITION RELATED COST
Expense • Cost directly attributable to the combination which includes such
as finder’s fee, advisory, legal accounting, valuation and other
professional or consulting fees.
• Indirect, ongoing costs, general costs including costs to maintain
an internal acquisition department (mergers and acquisition
department).
Issuance Cost • Stock Issuance costs - decrease in share premium account
• Debt Issuance costs - increase in discount or decrease in
premium
Acquisition Method – Process in Business Combination
STEP 3.1 : Identifiable assets acquired and liabilities assumed on the business combination
As of acquisition date the acquirer should recognize identifiable assets acquired, the liabilities
assumed and any Noncontrolling Interest.

Conditions for Recognition

▪ Must be part of the business acquired (Substance over form).

▪ Must meet the definitions of Assets and Liabilities in the Framework (including
unrecognized asset & liabilities).

Expected future costs are not included in the assets & liabilities (e.g. post acquisition
reorganization costs)
Condition for Recognition
Contingent Liability
Recognized by the acquirer if:
▪ It is a present obligation that arises from past events; and
▪ It’s fair value can be measured reliably.

Requirement for recognition:

▪ Acquiree (separate FS) – probable.

▪ Acquirer (combined FS) – measured at fair value even if it is not probable.

Condition for Recognition
Identifiable Intangible Assets
PFRS 3 requires the acquirer to recognize identifiable assets acquired regardless of the
degree of probability of inflow of economic benefits.

identifiable if:
▪ Can be separated; or
▪ Arises from contractual or legal rights.

Intangible Assets recognized in Business Combination:

▪ Existing intangible Assets

▪ Intangible assets not recorded by acquiree (e.g. In process R&D, Internally generated
intangibles, internally generated brands)
Condition for Recognition
Items not recognized as Identifiable Assets/Liability
▪ Assembled workforce of the acquiree.
▪ Potential Contracts.
▪ Contingent Assets.
▪ Future Contract Renewal.
▪ Post acquisition reorganization cost
Acquisition Method – Process in Business Combination
STEP 3.1 : Identifiable assets acquired and liabilities assumed on the business combination
General Rule: Identifiable Assets Acquired and Liabilities assumed are measured at their
acquisition date Fair Value.

Asset/Liability Measurement
Non Current Asset Held for Sale Fair Value less Cost to sell
Intangible Assets Not Currently Recorded by Fair Value
Acquiree (In process R&D, Internally generated
brands)
Contingent Liability (Recognized as liability even Fair Value
if it is not probable)
Use Provisional Values
Financial Statements should be prepared using provisional amounts for items which the
accounting is incomplete.

Adjustments to Provisional Values

PFRS 3 permits adjustments to items recognized in the original accounting for business
combination as long as it is with in the measurement period.

Measurement period
▪ One year from the date of acquisition; or
▪ The date when the acquirer receives the need information about the facts and
circumstances.
Use Provisional Values
Adjustments to Provisional Values
A. Measurement period adjustments.
▪ Additional information obtained during the measurement period which provide
evidence of facts that existed as of acquisition date.

▪ Retrospective adjustment to provisional amount (adjustment to Goodwill)

Increase in Net Identifiable Asset Decrease in Goodwill

Decrease in Net Identifiable Asset Increase in Goodwill
Use Provisional Values
Adjustments to Provisional Values
B. Not Measurement period adjustments.

▪ Changes in value is a result of events occurring subsequent to date of acquisition.

▪ Accounted as Prior Period Adjustments under PAS 8.

Contingent Consideration
Refers to the additional consideration for the business combination to be given to acquiree
upon the happening of a contingency which is pre-agreed at the date of acquisition.
Initial Measurement
Fair value of the contingent consideration.
Subsequent Measurement
A. Measurement period adjustments.
Increase in FV of CC Increase in Goodwill
Decrease in FV of CC Decrease in Goodwill

B. Not Measurement period adjustments.

Meeting of earning target, reaching specified share price, reaching milestone in R&D project.
Increase in FV of CC Loss in P&L
Decrease in FV of CC Gain in P&L