BUSINESS COMBINATION

Method of Accounting for

Business Combination
Prepared by:
Rowel Dela Cruz
Marc Jomel Navarro
 BUSINESS
A business consists of inputs and processes applied to those inputs that have
the ability to contribute to the creation of outputs.

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 BUSINESS COMBINATION
Is a transaction or event in which an acquirer obtains control of one or more
businesses. Transactions sometimes referred to as 'true mergers' or 'mergers of
equals' are also business combinations as that term is used in this PFRS .

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 Method in Business Combination
Old Method Current Method
Pooling of Interest Acquisition
Purchase Method
Method Method

Pooling method is Purchase method Acquisition Method is

pooling away By has been replaced the method that we
FASB or renamed. currently using.

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 COMPARISON:

Pooling Interest method • Revaluating process based on the Fair

market value.
• There is a Goodwill as a result of using
• No revaluation to the fair market value this method.
under this method. But it is recorded at • Any excess of cost over the fair value
Book value. of net assets acquired is recorded as
• No goodwill as a result of using this goodwill.
method.
ACQUISITION
• No excess of cost over the book value METHOD
exist, and no goodwill is recorded.

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ACQUISITION METHOD
The acquisition method (called the 'purchase method' in
the 2004 version of IFRS 3) is used for all business
combinations. [IFRS 3.4]

Steps in applying the acquisition method are: [IFRS 3.5]

1.Identification of the 'acquirer'

2. Determination of the 'acquisition date’
3. Determine the consideration given by the acquirer.
4. Recognition and measurement of the identifiable assets
acquired, the liabilities assumed and any non-controlling
interest (NCI, formerly called minority interest) in the
acquiree
5. Recognition and measurement of goodwill or a gain
from a bargain purchase

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 STEPS IN APPLYING THE ACQUISITION METHOD

4. RECOGNITION AND
2. DETERMINE 3. DETERMINE MEASUREMENT OF
1. IDENTIFY ACQUIRER
ACQUISITION DATE CONSIDERATION GIVEN IDENTIFIABLE ASSETS,
Entity that transfer cash and An acquirer considers all the Consideration given or price LIABILITIES AND NCI
other assets where the pertinent facts and paid by the acquirer is Recognition principl. Identifiable
business combination is circumstances when assumed to be fair value of the assets acquired, liabilities assumed
effective in this manner. The determining the acquisition acquiree as an entity. IFRS 3 and non-controlling interest in the
acquirer is usually the entity date (the date on which it requires these consideration to acquiree are recognized separately
with the largest size of assets, obtains control of the be measured at fair value on from Goodwill.
revenues or profit. acquiree). the acquisition date.
Consideration can be cash, Measurement principle. All assets
non-cash, bonds, ordinary acquire, liabilities assumed are
share or preference share. measured at acquisition date fair
value.
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 STEPS IN APPLYING THE ACQUISITION
METHOD

Consideration Paid Pxx

Fair Value of the Net asset of Acquiree (xx)

Goodwill (Gain on Bargain Purchase) xx/(xx)
4. RECOGNITION AND
2. DETERMINE 3. DETERMINE MEASUREMENT OF
5. GOODWILL OR A GAIN ACQUISITION DATE CONSIDERATION GIVEN IDENTIFIABLE ASSETS,
FROM A BARGAIN LIABILITIES AND NCI
An acquirer considers all the Consideration given or price
PURCHASE Goodwill is measured
pertinent facts and as the difference
paid by the between:
acquirer is
circumstances when assumed to be fair value of the
the aggregate of (i) the valuedetermining
of consideration transferred
the acquisition (generally
acquiree at fair
as an entity. value),
IFRS 3 (ii) the amount of any
non-controlling interest anddate
(iii)(the
in adate
business
on whichcombination
it requiresachieved in stages,to the acquisition date fair
these consideration
value the acquirer previously-held
obtainsequity interest
control of the in the acquiree,atand
be measured the net
fair value on of the acquisition date
acquiree).and the liabilities
amounts of the identifiable assets acquired theassumed(measured
acquisition date. accordance with IFRS 3 )
Consideration can be cash,
non-cash, bonds, ordinary
share or preference share.
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SAMPLE PROBLEM:
The condensed Balance sheet of LYLIA Corporation as of December 31,2022 is shown below:
BOOK VALUE FAIR VALUE
Current Assets P 200,000 P 225,000
Plant Assets 300,000 400,000
Total Assets P 500,000

Liabilities P 150,000
Capital Stock,P10 par 50,000
Additional Paid in Capital 100,000
Retained Earnings 200,000
Total Equities P 500,000

On January 1, 2023, ATLAS Company paid P500,000 for the net asset of LYLIA
Corporation. How much is the Goodwill as a result of the merger?

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 ANALYZING THE PROBLEM:
BOOK VALUE FAIR VALUE
Current Assets P 200,000 P 225,000 STEPS:
Plant Assets 300,000 400,000 1. Identification of the 'acquirer’
Total Assets P 500,000 2. Determination of the 'acquisition date’
3.Determine the consideration given by the
Liabilities P 150,000 acquirer.
4. Recognition and measurement of the
Capital Stock,P10 par 50,000
identifiable assets acquired, the liabilities
assumed and any non-controlling interest
Additional Paid in 100,000
Capital (NCI, formerly called minority interest) in
the acquiree
Retained Earnings 200,000
5. Recognition and measurement of
Total Equities P 500,000 goodwill or a gain from a bargain purchase

On January 1, 2023, ATLAS Company paid P500,000

for the net asset of LYLIA Corporation. How much is
the Goodwill as a result of the merger?
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 COMPUTATION OF GOODWILL:

Consideration Paid Pxx

Fair Value of the Net asset of Acquiree (xx) Fair Value of Assets – Fair Value of Liabilities
Goodwill (Gain on Bargain Purchase) xx/(xx) 225,000 + 400,000 – 150,000

Consideration Paid P500,000

Fair Value of the Net Asset of the Acquiree ( 475,000)
Goodwill 25,000

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Journalizing:

Current Assets 225,000

Plant Assets 400,000
Goodwill 25,000
Liabilities 150,000
Cash 500,000

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THANK YOU
[email protected]
Prepared by:
Rowel Dela Cruz
HTTP://WWW.CONTOSO.COM/
Marc Jomel Navarro