TOPIC :

BUSINESS
COMBINATION (Part
2)
 Learning Objectives
1. Account for business combination (a)
accomplished through share-for-share
exchanges, (b) achieved in stages, and (c)
achieved without transfer of consideration.
2. Explain the “measurement period” in relation
to business combination.
3. Distinguish what is part of a business
combination and what is part of a “separate
transaction”.
4. Account for settlement of pre-existing
relationship between an acquirer and an
acquiree.
 Share-for-share
exchanges
• A business combination may be accomplished
through an exchange of equity interest
between the acquirer and the acquiree (or its
former owners).
• General Principle: Consideration transferred
(shares issued by the acquirer) is measured at
fair value.
• Exception: The fair value of the acquiree’s
equity interest may be more reliably
measurable than the acquirer’s.
 Share-for-share
exchanges
• Example:
XYZ, Inc. an unlisted company, acquires ABC
Co., a publicly listed entity, through an
exchange of equity instruments.
 The FV of ABC’s shares may be more reliably
measurable than XYZ because ABC’s share
are quoted, while XYZ’s are not.
 Illustration 1:
ABC Co. and XYZ, Inc. combined their business
through exchange of equity instruments, which
resulted to ABC obtaining 100% interest in XYZ.
Both entities are publicly listed. At the acquisition
date, ABC’s shares are quoted at P100 per share.
ABC Co. recognized goodwill of P300,000 on the
business combination. Additional information
follows: ABC Co. Combined
entity
Share capital 600,000 700,000
Share premium 300,000 1,200,000
Totals 900,000 1,900,000
Compute the (a) Number of shares issued by ABC Co.,
(b) Par value per share of the shares issued and (c)
Acquisition-date FV of the net identifiable assets of
XYZ.
 Illustration 2:
ABC Co. issued shares in exchange for 100% interest in XYZ,
Inc. Relevant information follows:

ABC Co XYZ, Inc. Combined

(CA) (FV) entity
Identifiable assets 2,400,000 1,600,000 4,000,000
Goodwill - - ?
Total assets 2,400,000 1,600,000 ?

Liabilities 700,000 900,000 1,600,000

Share capital 600,000 300,000 700,000
Share premium 300,000 250,000 1,200,000
Retained earnings 800,000 150,000 ?
Total liab. and equity 2,400,000 1,600,000 ?
 Illustration 2:
Additional information:
• ABC’s share capital consists of 60,000 ordinary shares
with par value of P10 per share.
• XYZ’s share capital consists of 3,000 ordinary shares with
par value of P100 per share.

Requirements: compute for the following:

a. Number of shares issued by ABC Co.
b. Fair value per share of the shares issued
c. Goodwill recognized on acquisition date
d. Retained earnings of the combined entity immediately
after the business combination
 Achieved in stages
• It is when the acquirer obtains
control of an acquiree in more than
one transaction.
• It is also called “step acquisition”.
• For example, Entity A acquires a 20%
interest in Entity B in Year 1. In Year
2, Entity A acquires an additional
40% interest in Entity B, thereby
bringing its interest to a total of 60%.
 Achieved in stages
In accounting for a business combination
achieved in stages, the acquirer:
1. Remeasures the previously held equity
interest in the acquiree at acquisition-date
fair value; and
2. Recognizes the gain or loss on the
remeasurement in:
a. Profit or loss – if the previously held
equity interest was classified as FVPL,
Investment in Associate, or Investment in
JV; or
b. OCI – if the previously held equity interest
was classified as FVOCI.
 Illustration: BC achieved in
stages
On Jan. 1, 2021, ABC Co. acquired 15% ownership interest
in XYZ, Inc. for P100,000. ABC Co. classified the investment
as “held for trading securities” (i.e., FVPL) in accordance
with PFRS 9.
On. Jan. 1, 2024, ABC Co. acquired additional 60%
ownership interest in XYZ, Inc. for P800,000. Relevant
information follows:
a. The previously held 15% interest has a carrying amount
of P170,000 on Dec. 31, 2023 and FV of P180,000 on
Jan. 1, 2024.
b. XYZ’s net identifiable assets have a FV of P1,000,000.
c. ABC elected to measure the NCI at “proportionate
share”.

Compute for the goodwill.

 Solution

Consideration transferred 800,000

Non-controlling interest in the acquiree 250,000
Previously held equity interest in the 180,000
acquiree
Total 1,230,000
Fair value of net identifiable assets (1,000,000
acquired )
Goodwill 230,000
 Journal entries:

1/1/2024 Held for trading securities 10,000

Unrealized gain – P/L 10,000
1/1/2024 Investment in subsidiary 800,00
Cash 0 800,00
0
1/1/2024 Investment in subsidiary 180,00
Held for trading 0 180,00
securities 0
 Without transfer of
consideration
• The acquisition method also applies
to business combination in which the
acquirer obtains control without
transferring any consideration.
• This is why the “purchase method”
was replaced by the “acquisition
method”.
 Without transfer of
consideration
Examples of circumstances where the acquirer
obtains control without transferring
consideration:
1. The acquiree repurchases a sufficient number
of its own shares from other investors so that
the acquirer will be able to obtain control.
2. Minority veto rights that previously kept the
acquirer from controlling the acquiree have
lapsed.
3. The acquirer and acquiree agree to combine
their business by contract alone. The acquirer
neither transfer consideration nor holds equity
interest
in the acquiree.
 Without transfer of
consideration
• Without transfer of consideration, the
acquisition-date fair value is substituted for the
consideration transferred in computing
goodwill.

• By contract alone, the interest held by parties

other than the acquirer is attributed to NCI.
 Illustration: Without transfer of
consideration
ABC Co. owns 36,000 out of the 90,000 outstanding shares
of XYZ, Inc. ABC accounts for the investment under the
equity method. XYZ subsequently reacquires 30,000 shares
from other investors. Information on the acquisition date is
as follows:
a. The previously held 40% interest has a fair value of
P180,000.
b. XYZ’s net identifiable assets have a fair value of
P1,000,000.
c. ABC elects to measure NCI at proportionate share.

Compute for the goodwill.

 Solution

Consideration transferred 600,000

Non-controlling interest in the acquiree 400,000
Previously held equity interest in the -
acquiree
Total 1,000,000
Fair value of net identifiable assets (1,000,000
acquired )
Goodwill -
 Illustration: By contract alone
ABC Co. and XYZ, Inc. enter into a contract whereby ABC
obtains control of XYZ. No consideration is transferred
between the parties. The fair value of XYZ’s net identifiable
assets at the acquisition date is P1,000,000. ABC chose to
measure NCI at ‘proportionate share’.

Compute for the goodwill.

 Solution

Consideration transferred -
Non-controlling interest in the acquiree 1,000,000
Previously held equity interest in the -
acquiree
Total 1,000,000
Fair value of net identifiable assets (1,000,000
acquired )
Goodwill -
 Measurement period
• Initial accounting for the business
combination is incomplete by the
end of the reporting period in which
the combination occurred.
• The acquirer can use provisional
amounts for which the accounting is
incomplete.
 Measurement period
• Within 12 months from the
acquisition date, the acquirer
retrospectively adjusts the
provisional amounts.
• Any adjustment to a provisional
amount is recognized as an
adjustment to goodwill or gain on
a bargain purchase.
• Adjustments beyond the 12-month
measurement period are accounted
for as corrections of errors.
 Illustration: Provisional amounts
– identifiable assets acquired
On Oct. 1, 2024, ABC Co. acquired all the identifiable assets
and assumed all the liabilities of XYZ, Inc. for P1,000,000.
On this date XYZ’s assets and liabilities have fair values of
P1,600,000 and P900,000, respectively.
Case #1: Provisional amounts – identified assets
acquired
The assets acquired include a building which was assigned a
provisional amount of P700,000 because the appraisal was
not yet complete by the time ABC authorized for issuance of
its Dec. 31, 2024 FS. The building was tentatively assigned a
10-year useful life and was depreciated for three months in
2024 using the straight-line method. On July 1, 2025, ABC
received the valuation report for the building. The building’s
FV on Oct. 1, 2024 is P500,000 and its remaining useful life
from the thatRequirements:
date is 5 years. 1.) What is the measurement
period?
2.) How should ABC account for the new
information obtained on July 1, 2025? 3.) How much
 Illustration: Provisional amounts
On Oct. 1, 2024, ABC Co. acquired all the identifiable assets
and assumed all the liabilities of XYZ, Inc. for P1,000,000.
On this date XYZ’s assets and liabilities have fair values of
P1,600,000 and P900,000, respectively.

Case #2: Unrecorded identified asset acquired

On July 1, 2025, ABC obtained new information that XYZ has
an unrecorded patent which was not known on October 1,
2024. The patent has a fair value of P100,000 and remaining
useful life of 4 years as of October 1, 2024.

Requirement: Compute the adjusted goodwill and provide

the adjusting entries.
 Illustration: Provisional amounts
On Oct. 1, 2024, ABC Co. acquired all the identifiable assets
and assumed all the liabilities of XYZ, Inc. for P1,000,000.
On this date XYZ’s assets and liabilities have fair values of
P1,600,000 and P900,000, respectively.

Case #3: Information obtained beyond the

measurement period
On Nov. 1, 2025, ABC’s auditors discovered that a patent with
a fair value of P100,000 was erroneously omitted from the
valuation listing on Oct. 1, 2024. The patent has a fair value
of P100,000 and a remaining useful life of 4 years as of Oct.
Requirement:
1, 2024.
1. How should ABC account for the new information
obtained on Nov. 1, 2025?
2. Provide correcting entries.
 Illustration: Provisional amounts
– consideration transferred
On Oct. 1, 2024, ABC Co., an unlisted entity, issued 10,000, P5 par
value, shares in exchange for all the identified assets and liabilities of
XYZ, Inc.
Information on acquisition date:
• The shares issued were assigned a provisional amount of P100 per
share.
• The fair value of some of the assets acquired are not readily
determinable. Accordingly, a provisional amount of P700,000 was
assigned to XYZ’s net identifiable assets.
Information after the acquisition date:
• On April 1, 2025, new information was obtained indicating that, on
Oct. 1, 2024, the fair value of the shares issued was P110 per share
and the fair value of XYZ’s net identifiable assets was P900,000.
• On July 1, 2025, two competitors of ABC have also merged. This led
ABC to believe that the merger with XYZ is not as profitable as
expected. ABC estimates that the valuations of the consideration
transferred and XYZ’s net identifiable assets should have been
P900,000 and P400,000, respectively.
Requirement: Compute the adjusted goodwill.
 Determining what is part of the
business combination transaction
• Before the business combination:
– Pre-existing relationship between the
acquirer and acquiree.
– May enter into transactions during
the negotiation period.
• The acquirer identifies and excludes
amounts that are not part of the
consideration transferred in the
business combination.
The acquirer considers the following when
determining whether a transaction is part of
a business combination or a separate
transaction:
a. Separate transaction if it is for the
benefit of the acquirer or the combined
entity. Contrary to that is part of the
business combination.
b. Separate transaction if it is initiated by
the acquirer for the benefit of the acquirer
or the combined entity. Contrarily, a
transaction initiated by the acquiree or its
former owners is part of the business
combination.
The acquirer considers the following when
determining whether a transaction is part of
a business combination or a separate
transaction:
c. A transaction between the acquirer and
acquiree during the negotiations of a
business combination is more likely to be
part of the business combination.
 Determining what is part of the
business combination transaction
The following are separate
transactions that are excluded when
applying the acquisition method:
i. Settlement of pre-existing
relationship between the acquirer
and acquiree;
ii. Remuneration to employees or
former owners of the acquiree for
future services; and
iii. Reimbursement to the acquiree or its
former owners for paying the
acquirer’s acquisition-related costs.
 Illustration:
ABC Co. acquired all the assets and liabilities of XYZ, Inc. for
P1,000,000. XYZ’s assets and liabilities have fair values of
P1,600,000 and P900,000, respectively.
Additional information:
a. XYZ incurred P10,000 legal fees in processing the regulatory
requirements for the combination. ABC agreed to reimburse the
said amount.
b. XYZ will terminate its activities after the business combination.
ABC agreed to reimburse XYZ’s estimated liquidation costs of
P200,000.
c. ABC will retain XYZ’s former key employees. ABC agreed to pay
the key employees P100,000 as signing bonuses.
d. ABC agreed to pay an additional P50,000 directly to Mr. Five-six
Numerix, the previous major shareholder of XYZ, to persuade him
in selling his shareholdings to ABC.
e. Mr. Vital Statistix, a former shareholder of XYZ, will acquire title to
inventories with fair value of P90,000 that were included in the
asset valuation.
Requirement: Compute the goodwill.
 Reacquired rights
• A right that an acquirer has
previously granted to the acquiree
that is reacquired as a result of a
business combination is recognized
as an intangible asset separately
from goodwill.
 Reacquired rights
Example of reacquired rights:
a. Right to use the acquirer’s
intangible asset, such as trade
name under a franchise
agreement.
b. Right to use the acquirer’s
technology under a technology
licensing agreement.
 Settlement of pre-existing
relationship
• Prior to business combination, the
acquirer and acquiree may have pre-
existing relationship.
• Such relationship may be:
a. Contractual
b. Non-contractual
 Settlement of pre-existing
relationship
• If the pre-existing relationship is
settled due to the business
combination, the acquirer recognizes
a settlement gain or loss.
Settlement of pre-existing
relationship
• Settlement gain or loss is measured as
follows:
a. At the lower of (i) and (ii) below
(contractual).
i. The amount by which the contract is
favorable or unfavorable, from the
acquirer’s perspective, when compared
with market terms.
ii. Any settlement amount stated in the contract
that is available to the counterparty to which
the contract is unfavorable. If this is less than
the amount in (i), the difference is included
as part of the business combination
Settlement of pre-existing
relationship
• Settlement gain or loss is measured as
follows:
b. At fair value, if the pre-existing
relationship is non-contractual.

• The settlement gain or loss is adjusted for

the derecognition of any related asset or
liability that the acquirer has previously
recognized.
 Subsequent
measurement and
accounting
• Subsequent to acquisition date, the
acquirer accounts for assets acquired,
liabilities assumed and equity instruments
issued in a business combination in
accordance with other PFRS applicable for
those items.
• The following are subsequently accounted
for under PFRS 3:
a. Reacquired rights
b. Indemnification assets
c. Contingent liabilities recognized as of
the acquisition date
 Reacquired rights

• Reacquired rights recognized as

intangible assets are amortized over the
remaining term of the related contract.
 Indemnification assets

• Indemnification assets are measured on

the same basis as the indemnified item
(liability or asset), subject to assessment
of collectability for indemnification assets
not measured at fair value.
 Contingent Liabilities

• Contingent liabilities are measured at the higher

of:
a. The amount that would be recognized by
applying PAS 37; and
b. The amount initially recognized less, if
appropriate, cumulative amount of income
recognized in accordance with PFRS 15
Revenue from Contracts with Customers.
Contingent Consideration
• It is an additional consideration for a
business combination that the
acquirer agrees to provide to the
acquiree upon the happening of a
contingency.
• A contingency is an existing,
unresolved condition that will be
resolved by the occurrence or non-
occurrence of a possible future event.
• Example: An acquirer agrees to issue
additional shares to the acquiree
when specified conditions are met.
Contingent Consideration
Initial recognition and measurement
• It is measured at acquisition-date
fair value and included in the
acquisition transferred.
• The obligation to pay the contingent
consideration is classified either as a
liability or equity.
• A right to recover a previously
transferred consideration if specified
conditions are met is classified as an
asset.
Contingent Consideration
Subsequent measurement
• A change in the fair value of a
contingent consideration during the
measurement period is accounted for
as a retrospective adjustment to the
provisional amount.
• However, changes resulting from
meeting an earnings target, reaching
a specified share price, or reaching a
milestone on an R&D project are not
measurement period adjustments.
Contingent Consideration
Subsequent measurement
• Changes in FV that are not
measurement period adjustments are
accounted for depending on the
classification:
a. If it is classified as equity is not
remeasured, and its subsequent
settlement is accounted for within
equity.
b. If it is classified as an asset or a
liability is measured at FV at each
reporting date. Changes in FV are
recognized in profit or loss.
 Illustration 1: Contingent
consideration classified as
equity
On Jan. 1, 2024, ABC Co. issued 10,000 shares
with a par value of P10 per share and a fair value
of P100 per share in exchange for all the assets
and liabilities of XYZ. XYZ’s assets and liabilities
have fair values of P1,600,000 and P900,000,
respectively.
In addition, ABC agrees to issue an additional
1,000 shares to the former owners of XYZ if the
market price of ABC’s shares increases to P120
per share by Dec. 31, 2024. The fair value of the
contingent consideration as of Jan. 1, 2024 is
P90,000, based on consideration of the vesting
conditions.
 Solution

Consideration transferred 1,090,000

Non-controlling interest in the acquiree -
Previously held equity interest in the -
acquiree
Total 1,090,000
Fair value of net identifiable assets (700,000)
acquired
Goodwill 390,000
 Journal entry:

1/1/24 Identifiable assets acquired 1,600,00

Goodwill 0
Liabilities assumed 390,000 900,000
Share capital 100,000
Share premium 900,000
Share premium – 90,000
contingent
consideration
 Illustration 1: Contingent
consideration classified as
equity
Continuation – Subsequent measurement:

Case #1:
The market price of ABC’s shares on Dec. 31,
2024 is P120. The contingent consideration is
settled on Jan. 15, 2025.

Requirement: Provide the journal entries

 Journal entry:

12/31/24 No Entry

1/15/25 SP – contingent consideration 90,000

Share capital 10,00
Share Premium 0
80,00
0
 Illustration 1: Contingent
consideration classified as
equity
Continuation – Subsequent measurement:

Case #2:
The market price of ABC’s shares on Dec. 31,
2024 is P90.

Requirement: Provide the journal entries

 Journal entry:

12/31/24 SP – contingent consideration 90,000

Share Premium 90,00
0
 Illustration 2: Contingent
consideration classified as
liability
On Jan. 1, 2024, ABC Co. acquired all the assets
and liabilities of XYZ, Inc. for P1,000,000. XYZ’s
assets and liabilities have fair values of
P1,600,000 and P900,000, respectively.
ABC agrees to pay additional cash equal to 10%
of the 2024 year-end profit that exceeds
P400,000. XYZ historically has reported profits of
P300,000 to P400,000 each year. The fair value of
the contingent consideration as of Jan. 1, 2024 is
P10,000, based on assessments of the expected
level of profits for the year, as well as, forecasts,
plans and industry trends.

Requirement: Compute for the goodwill.

 Solution

Consideration transferred 1,010,000

Non-controlling interest in the acquiree -
Previously held equity interest in the -
acquiree
Total 1,010,000
Fair value of net identifiable assets (700,000)
acquired
Goodwill 310,000
 Journal entry:

1/1/24 Identifiable assets acquired 1,600,000

Goodwill 310,000
Liabilities assumed 900,000
Liability for 10,000
contingent
consideration 1,000,000
Cash
 Illustration 2: Contingent
consideration classified as
liability
Continuation – Subsequent measurement:

Case #1:
The profit for the year is P550,000. The
contingent consideration is settled on January 15,
2025.

Requirement: Provide the journal entries

 Journal entry:

12/31/24 Unrealized loss – P/L 5,000

Liab. for contingent 5,000
consideration
1/15/25 Liab. for contingent consideration 15,000
Cash 15,00
0
 Illustration 2: Contingent
consideration classified as
liability
Continuation – Subsequent measurement:

Case #2:
The profit for the year is P300,000.

Requirement: Provide the journal entry.

 Journal entry:

12/31/24 Liability for contingent 10,000

consideration 10,00
Gain on exting. of liability – P/L 0
 Illustration 3: Contingent
payments to employees
ABC Co. acquired 90% interest in XYZ, Inc. for
P1,000,000. XYZ’s assets and liabilities have fair
values of P1,600,000 and P900,000, respectively.
ABC measured the NCI at a fair value of P80,000.
Five years ago, XYZ appointed Mr. Boss as the
CEO under a ten-year contract which requires XYZ
to pay Mr. Boss P100,000 if XYZ is acquired before
the contract expires. ABC assumes the obligation
to pay Mr. Boss the contracted amount.

Requirement: Compute for the goodwill.

 Solution

Consideration transferred 1,000,000

Non-controlling interest in the acquiree 80,000
Previously held equity interest in the -
acquiree
Total 1,080,000
Fair value of net identifiable assets (600,000)
acquired
Goodwill 480,000
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