BUSINESS COMBINATIONS

PFRS 3 provides that business combination is a transaction or other event w/c an acquirer obtains control of one or more
businesses. The transaction is referred to as merger.

Acquisition Method – also known as purchase method is used under business combination. The following are steps in
applying this method:
1. Identify the acquirer
2. Determine the acquisition date
3. Recognize and measure the identifiable assets acquired, the liabilities assumed and any non-controlling interest (NCI)
4. Recognize and measure goodwill or income from acquisition due to bargain purchase

A. KINDS OF ACQUISITION METHOD

 Net Acquisition Method
Parties: Acquirer-Acquired
With dissolution: Yes of Acquired
Goodwill/Income from Acquisition: Consideration Transferred
Less: FV Net Asset of AREE
Goodwill (Income)
Combines Financial Statement:
1. Common Stock 4. Liability
CS-ARER Liability-ARER
CS-Issued Liability-AREE
Combines CS Contingent Liability
Combined Liability
2. APIC
APIC-ARER
APIC-issued
Less: Stock Issue Cost 5. Asset
Combined APIC Asset-ARER
Asset-AREE
3. Retained Earnings Goodwill
RE + ARER Less: All Cash Payment
Income from Acquisition Combined Asset
Less: Related Expenses
Excess of SIC over total APIC
Combined RE

 Stock Acquisition
Parties: Parent-Subsidiary
With dissolution: No
Goodwill/Income from Acquisition: Consideration Transferred
Plus: FV NCINAS
Total Value of Subsidiary
Less: FV Net Asset of Sub
Goodwill (Income)
I. Statement of Determination and Allocation of Excess:
Consideration Transferred xx
Fair Value NCINAS xx
Total Value of Subsidiary xx
Less: Book Value Net Asset of Subsidiary (xx)
Allocated Excess xx
Plus: Decrease in Asset or Increase in Liability xx
Less: Increase in Asset or Decrease in Liability (xx)
Goodwill (Income) xx

II. Fair Value NCINAS Computation:

Is the problem silent as to the Whichever is Higher

method? between

The problem selected Full Goodwill Approach?

A. Fair Value Assessed vs

Apply: Fair Value Assessed if given. B. Proportionate Share Basis
Otherwise compute for implied fair
value w/c is a.k.a Fair Value Assumed

Apply: Proportionate Share Basis w/c is If there is no assessed:

equal to the product of percentage NCI A. Fair Value Implied = [(CT/%CI) x %NCI] vs
and FVNA of Subsidiary= [%NCI x FVNA-S] B. Proportionate Share Basis
FULL PFRS compared to PFRS for SMEs:

PFRS FULL SMEs

1. As to method
2. As to NCI measurement basis
Acquisition method under PFRS 3
At the option of the entities:
1. at Fair Value
2. at Proportionate Share in the Net
Identifiable Asset of the Acquiree
Purchase Method under Section 19
par 6
At proportionate share of the net
asset of the Acquiree

3. As to treatment of Direct Cost
4. As to the treatment of Contingent
Consideration
5. As to the subsequent
measurement of Goodwill
Treated as Expense under PFRS 3.
Hence, not included in the
consideration transferred
The acquirer shall recognize
contingent liability under PFRS 3 if:
1. It is a present obligation arising
from past events
And
2. the fair value of w/c can be
reliably measured
Goodwill is not amortized but
subjected to impairment test. Thus,
PFRS 3 provides that goodwill be
measured subsequently at:
Added in the total consideration
transferred for Goodwill
computation purposes. Hence,
included in the cost of business
combination.
The acquirer shall recognize
contingent liability ONLY if:
1. The FV can be reliably measured
Goodwill is amortized over useful life
NOT exceeding 10 years. Since the
maximum useful life is 10 years, it
shall be used if the problem is silent.

Cost less Accumulated Impairment Thus, goodwill is measured

Loss subsequently at:
Cost less Accumulated Impairment
Loss less Accumulated amortization

Contingent Consideration:

 Measured at FV at the time of business combination

 Additional to consideration transferred w/c is the basis in computing for goodwill or bargain purchase
 It can be classified as Contingent Equity, Contingent Asset or Contingent Liability

Accounting for change in Contingent Consideration

If classified as Equity Instrument or Contingent Equity If classified as Contingent Liability or Contingent

Asset
The original amount is not re-measured Before July 1, 2014:
Measured at FV and gains and losses are recognized
either as Profit or Loss or OCI in accordance w/ PFRS 9
or IAS 39
On or After July 1, 2014:
(amendment)
Measured at FV at each reporting date and changes in
FV are recognized at Profit or Loss w/in the scope of
PFRS 9 or IAS 39 or otherwise
 Note: However, if the change in FV of Contingent
Consideration is DUE to or RESULT of additional
information about facts and circumstances that
EXISTED AT THE ACQUISITION DATE:
 If it arises DURING the measurement period –
change is accounted as measurement period
adjustment, hence, it may affect goodwill or
bargain purchase
 If it arises AFTER the measurement period –
change is accounted as gain or loss in PL

Measurement Perion (MP):

1. One Year
Or
2. Change due to Material or Significant
Fact Existed at the date of acquisition
Therefore:
 Any change after the MP shall be considered as subsequent change w/c is not a measurement period adjustment.
Hence, the change shall be effected in Profit or Loss (PL)
 Any change during MP shall affect the goodwill or bargain purchase and NOT effected in the PL because such
change is a measurement period adjustment.
Measurement Period Adjustment Subsequent to Measurement Period Adjustment
Change in FV that the acquirer recognizes AFTER the Change resulting from events AFTER the acquisition
acquisition date may be result of information that the date that only Existed AFTER the acquisition date.
said acquirer obtained after the date about facts and
circumstances that EXISTED AT the acquisition date The following changes are Subsequent Adjustments:
1. Meeting the target earnings
2. Reaching a specified share price
3. Reaching a milestone in research and development
projects
Affects Goodwill or Income From Acquisition Affects Profit or Loss

STOCK ACQUISITION:
In measuring the NCI, IFRS 3 allows an accounting policy choice EITHER at:
 FAIR VALUE (also known as Full Goodwill Method)
OR
 POPORTIONATE SHARE of NCI in the Net Asset of the Acquiree (also known as Partial Goodwill Method)

Thus, the following shall be observed whether wholly owned (without NCI) so partially owned subsidiary (with NCI):
 Goodwill or bargain purchase resulting from the combination is presented in the consolidated balance sheet and
consolidated income statement, respectively. They are not recorded in the separate book of either the parent or
subsidiary since working paper elimination entry (WPEE) are prepared.
 The investment in Subsidiary Company (ISCo) is recorded in the Parent’s book. However, due to WPEE, the
amount of ISCo shall be zero and no such account is to be presented in the CONSOLIDATED balance sheet.

Non-Controlling Interest (NCI) determination:

If silent as to method: Higher between:
And FV-Assessed given  FV assessed and
 PSB (Proportionate Share Basis)
If silent as to method:
And FV-Assessed NOT given
If method is Given:
And at Full Goodwill Approach
If method is Given:
And at Partial Goodwill Approach
Higher between:
 FV Implied and
 PSB
FV Implied = Consideration Transferred / %CI x %NCI
PSB = FVNA of Subsidiary X %NCI
Recognize FV-NCI at Fair Value
Recognize FV-NCI at PSB