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Business Combinations Part 1

This document provides an overview of accounting for business combinations according to PFRS 3. It defines a business combination as when an acquirer obtains control of one or more businesses. The acquisition method requires identifying the acquirer, determining the acquisition date, and recognizing and measuring goodwill. Goodwill is measured as the consideration transferred, plus the non-controlling interest and any previously held equity interest, minus the fair value of identifiable net assets acquired.

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68 views

Business Combinations Part 1

This document provides an overview of accounting for business combinations according to PFRS 3. It defines a business combination as when an acquirer obtains control of one or more businesses. The acquisition method requires identifying the acquirer, determining the acquisition date, and recognizing and measuring goodwill. Goodwill is measured as the consideration transferred, plus the non-controlling interest and any previously held equity interest, minus the fair value of identifiable net assets acquired.

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Gracias
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© © All Rights Reserved
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BUSINESS COMBINATIONS

Overview on the topic:


Chapter Title Sub-topics___
14 Bus. Com. (Part 1) Recognition and
measurement
15 Bus. Com. (Part 2) Specific cases
16 Bus. Com. (Part 3) Special
accounting topics

Related standard:
⚫PFRS 3: Business Combinations
 

Learning Objectives
⚫Define a business combination.
⚫Explain briefly the accounting
requirements for a business combination.
⚫Compute for goodwill.
Definition of a Business Combination

A business combination is “a transaction or other event in


which an acquirer obtains control of one or more
businesses.” (PFRS 3)
Control
⚫ An investor controls an investee when the investor is
exposed, or has rights, to variable returns from its
involvement with the investee and has the ability to affect
those returns through its power over the investee.

⚫ Control is normally presumed to exist when the ownership


interest acquired in the voting rights of the acquiree is more
than 50% (or 51% or more).
Control - continuation

⚫Control may exist even if the acquirer holds less


than 50% interest in the voting rights of acquiree,
such as in the following cases:
1. The acquirer has the power to appoint or remove the majority
of the board of directors of the acquiree; or
2. The acquirer has the power to cast the majority of votes at
board meetings or equivalent bodies within the acquiree; or
3. The acquirer has power over more than half of the voting rights
of the acquiree because of an agreement with other investors;
or
4. The acquirer has power to control the financial and operating
policies of the acquiree because of a law or an agreement.
Accounting for business combinations
⚫ Business combinations are accounted for using the
acquisition method. This method requires the following:
1. Identifying the acquirer;
2. Determining the acquisition date; and
3. Recognizing and measuring goodwill. This requires
recognizing and measuring the following:
a. Consideration transferred
b. Non-controlling interest in the acquiree
c. Previously held equity interest in the acquiree
d. Identifiable assets acquired and liabilities assumed on
the business combination.
Identifying the acquirer

⚫ The acquirer is the entity that obtains control of the


acquiree. The acquiree is the business that the
acquirer obtains control of in a business combination.
⚫ The acquirer is normally the entity that:
a. Transfers cash or other assets and incurs liabilities;
b. Issues its equity interests (except in reverse acquisitions);
c. Receives the largest portion of the voting rights;
d. Has the ability to elect or appoint or to remove a majority ;
e. Dominates the management of the combined entity;
f. Significantly larger of the combining entities;
g. Initiated the combination
Determining the acquisition date
⚫ The acquisition date is the date on which the acquirer
obtains control of the acquiree.
Recognizing and measuring goodwill

Consideration transferred xx
Non-controlling interest in the acquiree (NCI) xx
Previously held equity interest in the acquiree xx
Total xx
Less: Fair value of net identifiable assets acquired (xx)
Goodwill / (Gain on a bargain purchase) xx
On acquisition date, the acquirer recognizes a resulting:
a. Goodwill as an asset.
b. Gain on a bargain purchase as gain in profit or loss.
Consideration transferred

⚫The consideration transferred in a business


combination is measured at fair value.
⚫Examples of potential forms of consideration
include:
1. Cash,
2. Other assets,
3. A business or a subsidiary of the acquirer,
4. Contingent consideration,
5. Ordinary or preference equity instruments, options, warrants and
member interests of mutual entities.
Acquisition-related costs

⚫ Acquisition-related costs are costs the acquirer incurs to


effect a business combination.
⚫ Acquisition-related costs are recognized as expenses in
the periods in which they are incurred, except for the
following:
a. Costs to issue debt securities measured at
amortized cost – included in the initial measurement
of the resulting financial liability.
b. Costs to issue equity securities – are accounted for
as deduction from share premium. If share
premium is insufficient, the issue costs are deducted
from retained earnings.
Non-controlling interest (NCI)

⚫ Non-controlling interest (NCI) is the equity in a subsidiary


not attributable, directly or indirectly, to a parent.
⚫ NCI is measured either at:
a. Fair value, or
b. The NCI’s proportionate share of the acquiree’s
identifiable net assets.
Previously held equity interest in the
acquiree
⚫ Previously held equity interest in the acquiree pertains to
any interest held by the acquirer before the business
combination.
Net identifiable assets acquired

⚫ On acquisition date, the acquirer shall recognize,


separately from goodwill, the identifiable assets
acquired, the liabilities assumed and any non-controlling
interest in the acquiree.
⚫ Any unidentifiable asset of the acquiree (e.g., any
recorded goodwill by the acquiree) shall not be
recognized.
⚫ The identifiable assets acquired and the liabilities
assumed are measured at their acquisition-date fair
values.
END OF DISCUSSION

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