BUSINESS COMBINATIONS prepared by

based on PFRS 3, PFRS 10 JOHN CARLO F. MANGALINAO

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As defined by PFRS 3 a 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 those terms is used in PFRS 3.

In a business combination, one of the parties can always be identified as the acquirer, being the entity that obtains
control of the other business (the acquiree). The core principle of PFRS 3 sets out that an acquirer of a business
recognizes the asset acquired and liabilities assumed at their acquisition-date fair values and discloses information
that enable users to evaluate the nature and financial effects of the acquisition.

THE SCOPE OF PFRS 3

PFRS 3 applies to a transaction or event that meets the definition of a business combination which requires that the
asset acquired and liabilities assumed constitute a business. However the PFRS does not apply to:
a. Formation of a joint arrangement
b. Combination of entities or business under common control
c. Acquisition of asset or group of assets that does not constitute a business
d. Acquisition of an investment entity of an investment in a subsidiary with that subsidiary not providing
services that relate to the entity’s investment activities. Instead, an investment entity shall measure an
investment in subsidiary at fair value through profit or loss in accordance with PFRS 9. [PFRS 10]

IDENTIFYING A BUSINESS COMBINATION

As defined by PFRS 3 a business is an integrated set of activities and assets that is capable of being conducted and
managed for the purpose of providing a return in the form of dividends, lower cost or other economic benefits
directly to investors or other owners, members or participants.

An entity shall assess whether the group of assets acquired constitute a business. Applying the guidance of PFRS 3 a
business consists of inputs and processes applied to those inputs that have the ability to create outputs. It have to
be noted that output is not necessary for an integrated set to qualify as business but the mere ability to produce
outputs out of the existing processes and inputs. These elements are defined as follows:

Input. Any economic resources that creates, or has the ability to create outputs when one or more processes
are applied to it.
Process. Any system, standard, protocol, convention or rule that when applied to an input or inputs, creates or
has the ability to create outputs.
Output. The result of inputs and processes applied to those inputs that provide or have the ability to provide a
return in the form of dividends, lower cost or other economic benefits directly to investors or other owners,
members or participants.

In evaluating whether a particular set is a business, it is not relevant whether the seller operated the set as a
business or whether the acquirer intends to operate the set as a business. In case that the asset acquired does not
constitute a business as set out by PFRS 3, the entity shall account for the transaction or other event as an asset
acquisition applying other applicable standards.

BUSINESS COMBINATIONS 1
Illustrative Example
JC Inc., a multinational company involved in different industries having operations in the Philippines for several
years had acquired the following during the current year of its operations:
a) On January 23, 2017 a group of assets consisting of machinery and construction equipment from CJ Company,
one of the leading real estate developer in the country. The assets purchased by JC constitute 60% of the
assets owned by CJ as of that date before the transaction.
b) On February 12, 2017 from Mechalagua Tours, a travel agency, land and building that is used as the main office
and where the central business operations are carried out. The acquisition also includes the inventories used
in conducting its operations, the reservations systems, and all necessary business processes. As a result of
acquisition, JC take over the employees of Mechalagua Tours and its management.
c) On February 14, 2017 all the restaurant buildings of Konshu Company located in different locations around
Metro Manila including branches in Taguig, Sta. Mesa, and Quezon City. The assets was sold because of the
continuing losses Amore has been experiencing from the past years and decided to liquidate and sell all its
assets. JC has acquired at a bargain price for P3,000,000 only the buildings and the lot but not including the
inventories, supplies, and workforce.
d) On March 15, 2017 all of the shares of stock from Little Habitat Laboratories Inc., a development stage
company. Under current conditions, it is certain that the company would be able to produce a product that
would address the problems of accountancy students in retaining there knowledge and passing examinations.
Initial studies show that the product helps improve brain function and when taken regularly would increase
the IQ by 30% of its current capacity, particularly the ability of the brain to comprehend complicated problems
and solving numbers without much aid of using calculators. The management of Little Habitat has obtained
the necessary operating licenses and in the process of obtaining patent for the product. Initial market study
conducted shows that the product would be a big success in the market.

Applying the guidance of PFRS 3, which of the following transactions above qualifies to be considered a business
combination or acquisition of a set that constitute a business?
Answer: (b,d)

a) This acquisition does not constitute a business combination simply because the assets purchased cannot be used
alone to produce output having the absence of necessary processes and the required input. This transaction is
accounted for as acquisition of assets applying the provisions of PAS 16 Property, Plant and Equipment.

b) This transaction qualifies to be a business combination following the guidance of par. B7 of PFRS 3, where all the
necessary elements (inputs, processes, outputs) of a business is present.

c) The same rule in item (a) applies in this situation. What JC has acquired is merely a group of assets not
constituting a business although it acquires all the restaurant building of Konshu Company, it cannot be held to be a
business in the absence of the necessary elements laid down by PFRS 3.

d) Under par. B10 of PFRS 3 an integrated set of activities and assets in the development stage might not have
outputs and if not, the acquirer should consider other factors to determine whether the set is a business. Those
factors as stated by the standard include, but are not limited to whether the set; has begun planned principal
activities; has employees, intellectual property and other inputs and processes that could be applied to those inputs;
is pursuing a plan to produce outputs; and will be able to obtain access to customers that will purchase the outputs.
In this case Little Habitat Laboratories Inc., has demonstrated the certainty to produce an output out of the
existing processes. Furthermore, there is an anticipated market for the product and as the study shows it would be a
success for the entity. Therefore, there is a business combination where the acquisition would expect to provide
returns to JC Inc., in the form of economic benefits.

BUSINESS COMBINATIONS 2
THE ACQUISITION METHOD
A transaction or other event that qualifies to be a business combination shall be accounted for using the acquisition
method that requires the following steps:
1) Identifying the acquirer;
2) determining the acquisition date;
3) recognizing and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling
interest in the acquirer; and
4) recognizing and measuring goodwill or gain from a bargain purchase.

Step 1
IDENTIFYING THE ACQUIRER

As defined by PFRS 3 an acquirer is the entity that obtains control of the acquiree. Applying PFRS 10 Consolidated
Financial Statements an investor obtains controls over an investee when it is exposed , or has right to variable
returns from its involvement with the investee has the ability to affect those returns through its power over the
investee. Thus, an investor controls an investee if and only if the investor has all the following:
a) power over the investee;
b) exposure or rights to variable returns from its involvement with the investee; and
c) the ability to use its power over the investee to affect the amount of the investor’s returns.

It has to be noted that when there are two or more investors that collectively control an investee and there are no
investor that can direct the relevant activities without the approval or cooperation of the other investors, no
investor therefore solely control the investee. The individual investors therefore must account the investment using
the relevant accounting standard such as PFRS 11 Joint Arrangements, PAS 28 Investment in Associate and Joint
Ventures, or PFRS 9 Financial Instruments. The figure below would be helpful in determining which accounting
standard may be applicable.

1 - 19% Owned 20% - 50% Owned Owned 51% or more

PFRS 9 PAS 28 PFRS 10

Financial Investment in Associate Consolidated Financial Statements
Instruments and Joint Ventures

FVPL, FVOCI Significant Influence Control over the Investee

PFRS 11 Joint Arrangements

There is an arrangement of which two or more parties have joint control. Joint control is the contractually agreed sharing
of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous
consent of the parties sharing control. There is no single party controls the arrangement on its own. A
party with joint control of an arrangement can prevent any of the other parties, or a group of the parties, from controlling
the arrangement.

How to determine whether an entity has power over the investee?

An entity have power over an investee when it have existing rights that give it the current ability to direct the
relevant activities, such as operating and financing activities that significantly affects the returns. Examples of rights
that give an investor power include but are not limited to:
a) rights in the form of voting rights (or potential voting rights) of an investee;
b) rights to appoint, reassign or remove members of an investee’s key management personnel who have the
ability to direct the relevant activities;
c) rights to appoint or remove another entity that directs the relevant activities;

BUSINESS COMBINATIONS 3
 d) rights to direct the investee to enter into, or veto any changes to, transactions for the benefit of the investor;
and
e) Other rights (such as decision making rights specified in a management contract) that give the holder the
ability to direct the relevant activities.

Furthermore, there may be other factors other than passive interest in the investee that may indicate power such
as:
a) The investee’s key management personnel who have the ability to direct the relevant activities are current or
previous employees of the investor.
b) The investee’s operations are dependent on the investor, such as in the following situations;
i. The investee depends on the investor to fund a significant portion of its operations.
ii. The investor guarantees a significant portion of the investee’s obligations.
iii. The investee depends on the investor for critical services, technology, supplies or raw materials.
iv. The investor controls assets such as licenses or trademarks that are critical to the investee’s operations.
v. Te investee depends on the investor for key management personnel, such as when the investor’s
personnel have specialized knowledge of the investee’s operations.
c) A significant portion of the investee’s activities either involve or are conducted on behalf of the investor
d) The investor’s exposure, or rights, to returns from its involvement with the investee is disproportionately
greater than its voting or other similar rights. For example, there may be a situation which an investor is
entitled, or exposed, to more than half of the returns of the investee but holds less than half of the voting
rights of the investee.

Generally, an investor has control over an investee when it holds the majority of voting rights of the entity, such as
when it holds 40% interest and the 12 other investors hold 5% and none of the shareholders has contractual
arrangements to consult any of the others to make collective decisions. However, circumstances must be taken into
consideration to determine whether holding majority of the voting rights gives power to the investor. There are
instances that even holding less than majority of the voting rights the investor still obtains control, such as when
there is contractual arrangement that gives the power to direct the relevant activities of the investee.

If a business combination has occurred but applying the guidance of PFRS 10 does not clearly indicate which of the
combining entities is the acquirer, the following factors shall be considered:

a) In a business combination effected primarily by transferring cash or other assets or by incurring liabilities, the
acquirer is usually the entity that transfers the cash or other assets or incurs the liabilities.
b) In a business combination effected primarily by exchanging equity interest, the acquirer is usually the entity
that issues it equity interest except in reverse acquisitions where the issuing entity is the acquiree. Other
pertinent facts and circumstances that may help identify the acquirer includes:
- The acquirer is usually the combining entity whose owners as a group retain or receive the largest portion
of the voting rights in the combined entity
- The combining entity whose owner or organized group of owners holds the largest minority voting
interest in the combined entity.
- The combining entity whose owners have the ability to elect or appoint or remove majority of the
members of the governing body of the combined entity.
- The combining entity whose (former) management dominates the combined entity
- The combining entity that plays a premium over the pre-combination fair value of the equity interests of
the other combining entities
c) The acquire is usually the combining entity whose relative size (measured in, for example, assets, revenues, or
profits) is significantly greater than that of the other combining entity or entities.
d) In a business combination involving more than two entities, determining the acquirer shall include
consideration of among other things, which of the combining entities initiated the combination, as well as the
relative size of the combining entities,

BUSINESS COMBINATIONS 4
 e) If a new entity is formed to issue equity interest to effect a business combination, one of the combining
entities that existed before the business combination shall be identified as the acquirer by applying the above
guidance. In contrast, a new entity that transfers cash or other assets or incurs liabilities as consideration may
be the acquirer.

Step 2
DETERMINING THE ACQUISITION DATE

The acquisition date is the date on which the acquirer obtains control of the acquiree. It is generally the date on
which the acquirer legally transfers the consideration, acquires the assets and assumed the liabilities of the
acquiree--the closing date. However, the acquirer might obtain control on a date that is earlier or later than the
closing date if a written agreement provides that the acquirer obtains control of the acquiree on a date before the
closing date. An acquirer shall consider all pertinent facts and circumstances in identifying the acquisition date.

Step 3
RECOGNIZING AND MEASURING THE IDENTIFIABLE ASSETS ACQUIRED,
THE LIABILITIES ASSUMED AND ANY NON-CONTROLLING INTEREST IN THE ACQUIREE

Recognition Principle
To qualify for recognition as part of the business combination applying the acquisition method, the identifiable
assets acquired and liabilities assumed must meet the recognition requirements of the Conceptual Framework for
Financial Reporting, thus:

Identifiable assets acquired is recognized when:

- It is probable that the future economic benefits will flow to the entity; and
- the asset has a cost or value that can be measured reliably

Liabilities assumed therefore is recognized when:

- It is probable that an outflow of resources embodying economic benefits will result from settlement of a
present obligation; and
- the amount at which settlement will take place can be measured reliably

As a result of the business combination the acquirer may identify and recognize assets and liabilities that were not
previously recognized by the acquiree. For example the acquirer may identify intangible assets acquired, such as
brand name, a patent, in-process research and development recognized as an expense in profit or loss by the
acquiree and other internally generated intangible assets.

Measurement Principle
PFRS 3 requires that the acquirer measure the identifiable assets acquired and the liabilities assumed at their
acquisition-date fair values. As defined under PFRS 13 Fair Value Measurement, fair value is the price that would be
received or paid to transfer a liability in an orderly transaction between market participantss at the measurement
date.

Non-Controlling Interest
In business combination where the acquirer acquires less than 100% of ownership interest in the acquiree (i.e. the
acquiree is a partially-owned subsidiary) and it demonstrate control under the requirements of PFRS 10, such as
when an entity is acquired through purchasing equity interest of the acquiree, the acquirer shall measure at the
acquisition date components of non-controlling interest in the acquiree in the through following:
1) fair value (full goodwill) measured using the consideration transferred over the percentage of ownership
interest acquired; or
2) the proportionate share of non-controlling interest in the fair value of the identifiable net assets of the
acquiree at the acquisition date (partial goodwill).

BUSINESS COMBINATIONS 5
Exceptions to the Recognition or Measurement Principle
PFRS 3 provides exceptions to its recognition and measurement principles which will result in some items being
recognized differently by applying the requirement of other PFRS and measured at an amount other than their
acquisition-date fair values.
These exceptions are summarized in the figure shown below.

RECOGNITION RECOGNITION AND MEASUREMENT

MEASUREMENT
1. Contingent 1. Income Taxes (PAS 1. Non-Current Assets
Liabilities (PAS 37) 12) Held for Sale (PFRS 5)
2. Employee Benefits 2. Share-based
(PAS 19) Payments (PFRS 2)
3. Indemnification 3. Reacquired Rights
Assets
4. Leases (PFRS 16)
Exceptions to Recognition Principle
Contingent Liabilities
In a business combination where the acquired entity has contingent liabilities the recognition principle of PAS 37
does not apply. Instead, the acquirer shall recognize contingent liabilities assumed as of the acquisition date if it
arises from past events and it has a fair value that can be measured reliably, regardless of whether it is probable
or not that an outflow of resources embodying economic benefits will be required to settle the obligation.

Exceptions to Recognition and Measurement Principle

Income Taxes
The acquirer shall recognize an measure deferred tax asset or liability arising from the assets acquired and liabilities
assumed as a result of the business combination in accordance with PAS 12 Income Taxes.

Employee Benefits
The acquirer shall recognize and measure a liability (or asset, if any) related to the acquiree’s employee benefit
arrangement in accordance with PAS 19 Employee Benefits.

Indemnification Assets
The acquirer shall recognize an indemnification asset at the same time that it recognize the indemnified item
measured on the same basis as the indemnified item, subject to the need for a valuation allowance for
uncollectible amounts. Thus, for an indemnification asset measured at fair value, the effects of uncertainty about
future cash flows because of collectibility considerations are included in the fair value measure and a separate
valueation allowance therefore is not necessary.

Leases
The acquirer shall recognize the right-of-use assets and lease liabilities for leases identified in accordance with PFRS
16 Leases in which the acquiree is the lessee. The acquirer shall measure the lease liability at the present value of
the remaining lease payments as if the acquired lease were new lease at the acquisition date adjusted to reflect
favorable or unfavorable terms of the lease when compared with market terms. However, the acquirer is not
required to recognize right-of-use assets and liabilities for:
a) leases for which the lease term ends within 12 months from the acquisition date; or
b) leases for which the underlying assets is of low value. Examples of low-value underlying assets can include
tablet and personal computers, small items of office furniture and telephones.

Exceptions to the Measurement Principle

Non-Current Assets Held for Sale
The acquired non-current asset that is classified as held for sale shall be measured at fair value less cost of disposal
which is the requirement in accordance with PFRS 5 Non-current Assets Held for Sale and Discontinued Operations.

BUSINESS COMBINATIONS 6
Share-based Payment Transactions
The acquirer shall measure a liability or an equity instrument related to share-based payment transactions of the
acquiree or the replacement if an acquiree’s share-based payment transactions with share-based payment of the
acquirer in accordance with the method in PFRS 12 Share-based Payment.

Reacquired Rights
Reacquired rights are rights that the acquirer has previously granted to an acquiree and as a part of business
combination it has reacquired the right, such as franchise or a license to use the acquirer’s technology. The
reacquired rights shall be measured on the basis of the remaining contractual term of the related contract
regardless of whether market participants would consider potential contract renewals when measuring its fair
value.

Step 4
RECOGNIZING AND MEASURING GOODWILL OR GAIN FROM A BARGAIN PURCHASE

The acquirer shall recognise goodwil of gain from bargain purchase as of the acquisition date measured as the
excess of the consideration transferred, the amount of non-controlling interest in the acquiree and the
acquisition-fate fair value of the acquirer’s previously held interest in the acquiree over the acquisition-date fair
value of the identifiable assets acquired and the liabilities assumed. Thus, goodwill or gain from bargain purchase
can be computed as follows:

Consideration transferred
Cash xxxxx
Fair value of non-cash assets transferred xxxxx
Fair value of equity instrument issued xxxxx
Fair value of financial liabilities incured xxxxx
Fair value of the contingent consideration xxxxx xxxxx
Fair value of previously held investment1 xxxxx
Fair value of non-controlling interest2 xxxxx
Total xxxxx
Fair value of net assets of the acquiree (xxxxx)
Goodwill/(Gain from bargain purchase) xxxxx
1
in case of business combination achieved in stages
2
applicable only for business combination through acquisition of control

It has to be noted that before recognizing a gain from burgain purchase, the acquirer shall reassess whether it
has correctly identified all of the assets acquired and all the liabilities assumed and shall recognize any additional
assets or liabilities that are identified in that review. The acquirer shall then review the procedures used to measure
the amounts that PFRS 3 requires to be recognized at the acquisition date for all of the following:

a) the identifiable assets acquired and liabilities assumed;

b) the non-controlling interest in the acquiree, if any;
c) for a business combination achieved in stages, the acquirer’s previously held equity interest in the acquiree;
and
d) the consideration transferred .

Because PFRS 3 belives that bargain purchase would be rare to happen, the objective of the review is to
ensure that the measurements appropriately reflect consideration of all available information as of the acquisition
date. If after the review, the measurement still results to bargain purchase it shall be recognized to profit or less in
the period when the acquistion occured.

BUSINESS COMBINATIONS 7
What is contingent consideration?
Often times when the acquirer and acquiree cannot agree on the total purchase price in a business combination,
the two parties agree to an additional payment termed as ‘contingent consideration,’ based on the outcome of
future events. These payments are typically based on revenue or earnings targets that the acquired company must
meet after the acquisition date.

What is the proper treatment for contingent consideration?

The acquirer shall recognized the acquisition-date fair value as part of the consideration transferred in exchange
for the acquiree.

Initial Classification and Subsequent Measurement

On the date of acquisition the acquirer classifies the contingent consideration in one of the following:

Classification Nature Subsequent Measurement

Liability The acquirer agrees to pay cash or At fair value, with the changes it fair
transfer other assets to the acquiree, value taken to profit or loss in
after future conditions are met. accordance with PFRS 9

Equity The acquirer agrees to issue its owns Not remeasured

shares of stock to the acquiree, after
future conditions are met.

Special Consideration for Share-based Payments

Although the acquirer may settle the contingent consideration by issuing equity shares, the arrangement is not
necessarily an equity classified contingent consideration for accounting purposes. Instances that will lead the
acquirer classifying such contingent consideration as liability is when there is an arrangement between the parties
that is settled with a variable number of the acquirer’s equity shares and that creates
(i) a fixed obligation known at inception;
(ii) an obligation, the amount of which varies inversely to changes in the fair value
of the acquirer’s equity shares; or
(iii) an obligation, the amount of which varies based on something other than the
fair value of the acquirer’s equity shares.

Example 1 | Equity-Settled (Liability Classified)

Veloce Inc., acquires Push N’ Pull a major line of business from Ayala Corporation by
transferring cash amounting to P500 million and Investment in Equity Securities from
StorePrise Inc., amounting to P200 million. At the acquisition date, Veloce agrees to
issue its own shares to the shareholders of Ayala if Push N’ Pull would meet certain
target earnings. The numbers of shares that will be issued would be equivalent to 30%
of the earnings for the first year of operation. However it was further agreed that if
earnings would not exceed P60 million, Veloce is not under obligation to issue shares
of stock to Ayala.

The arrangement creates an obligation that Veloce Inc., would be required to settle
with a variable number of its own equity shares, the amount of which varies with the
expected outcome of the operations of the business acquired. Therefore, the
arrangement between Veloce and Ayala would require liability classification on the
acquisition date. Further, changes in the fair value of the contingent consideration
classified as liability will be recognized in Veloce’s profit or loss until such time it is
settled or when the obligation to transfer contingent consideration ceases.

BUSINESS COMBINATIONS 8
 Example 2 | Equity-Settled (Equity Classified)
Assume the same facts in Example 1 except that, Veloce Inc., agrees to issue 100,000
shares of stock if the earnings of the business acquired exceeds P100 million

The arrangement creates an obligation that Veloce is required to settle with a fixed
number of Veloce’s equity shares. Therefore, the equity share settled contingent
consideration could be classified as an equity arrangement.

In contrast as illustrated in Example 1, if the performance target was based on

increases of the Push N’ Pull’s earnings, and it would be settled with variable number
of share the arrangement would lead to contingent consideration classified as liability.

What is provisional amounts and measurement period?

The acquirer is required to measure the assets acquired and liabilities assumed in a business combination at its
acquisition-date fair values, however, such information is not always available at that date and the entity measures
identifiable items at provisional amounts. Therefore, PFRS 3 allows a measurement period which is a period after
the acquisition date during which the acquirer may adjust the provisional amounts recognized for a business
combination.

How to identify measurement period adjustments?

Not all adjustments made during the measurement period to amounts recorded in the accounting for a business
combination should be treated as measurement period adjustments. Only an adjustment made during the
measurement period that possesses both of the following characteristics is considered a measurement period
adjustment and, accordingly, is reflected in the accounting for the business combination (adjustment to
goodwill/gain from bargain purchase):

a) Results from the acquirer obtaining additional information about the facts and circumstances that existed as
of the acquisition date
b) Results from the buyer determining that if this additional information had been known, it would have affected
the accounting for the business combination (e.g., recognition or measurement of an acquired asset,
assumed liability or any NCI) as of the acquisition date.

The accounting for an adjustment made during the measurement period that does not possess both of these
characteristics depends on the facts and circumstances; however, such accounting will often affect the buyer’s
operating income

When does measurement period ends?

The measurement periods ends when the entity obtains facts and information regarding circumstances that exist at
the acquisition-date or but such period must not exceed 12 months from the acquisition-date.

BUSINESS COMBINATIONS 9
Appendix A
ADDITIONAL GUIDELINES FOR SPECIFIC TRANSACTIONS

Business Combinations Achieved in Stages

The acquirer shall re-measure its previously held equity interest in the acquiree at its acquisition-date fair
value and recognize the resulting gain or loss, if any, in profit or loss or other comprehensive income, as
appropriate. This amount is considered in measuring goodwill or gain from bargain purchase as discussed
earlier.

Acquisition Costs
Costs Treatment
Direct and Indirect Expensed during the period incurred, such cost
Cost include but are not limited to:
- finder’s fee
- advisory, legal, accounting, valuation, and other
professional or consulting fees
- general and administrative cost, such as cost of
maintaining an internal acquisition departments

Share Issue Cost Deduction from the share premium that pertains to
(PAS 32, PFRS 9) that issue. If there is no resulting share premium
pertaining to that issue, share issue costs are
recorded as expense. These costs includes but are not
limited to:
- registration and other regulatory fees
- legal and printing costs
- stamp duties

Bond Issue Cost Deduction from the carrying value of the financial
(PAS 32, PFRS 9) liability. These costs includes but are not limited to:
- legal fees
- printing and engraving of bond certificates
- taxes
- commissions and similar charges

BUSINESS COMBINATIONS 10
Appendix B
FULL PFRS vs. PFRS FOR SMEs
Full PFRS PFRS for SMEs
Direct Costs Expensed in the period incurred Treated as part of the consideration
Indirect Costs Expensed in the period incurred Expensed in the period incurred
Share Issue Deducion from Share Premium Deducion from Share Premium
Costs
Bond Issue Deducion from Carrying Value of Deducion from Carrying Value of
Costs Financial Liability Financial Liability
Non-Controlling Can be measured using Measured ONLY using the proprotionate
Interest 1) Fair Value share in the net assets of the acquiree
2) Proportionate share in net assets of
acquiree
Goodwill Tested for impairment at least annually Amortize over the estimated life but not
or when there is indication for to exceed 10 years or when it cannot be
impairment estimated.
Contingent Recognized at acquisition-date fair value Must meet the conditions of PAS 37:
Liabilities even if not probable (exception to PAS  probable
37)  measureable

BUSINESS COMBINATIONS 11
Appendix C
USEFUL COMPUTATIONAL FORMULAS

Set A
DATE OF ACQUISITION

Non-Controlling Interest
At Fair Value
1) Given in the problem
2) Not given, then estimate the Fair Value

The consideration paid includes premium

Acquistion cost xxx
Less: Control premium % (xxx)
Consideration paid, excluding control premium xxx
Divided by: Controlling interest x%
Total fair value of business xxx
Multiply by: Non-controlling interest % x%
Fair value of Non-controlling interest xxx

The consideration paid includes no premium

Acquistion cost xxx
Divided by: Controlling interest % x%
Total fair value of business xxx
Multiply by: Non-controlling interest % x%
Fair value of Non-controlling interest xxx

At Proportionate Share in Identifaible Net Assets of the Subsidiary

Subsidiary net assets at Fair Value xxx

Multiply by: Noncontrolling interest x%
Fair value of NCI proportionate share in subsidiary
identifiable net assets xxx

Goodwill or Gain from Bargain Purchase

Consideration transferred
Cash xxx
Fair value of non-cash assets transferred xxx
Fair value of equity instrument issued xxx
Fair value of financial liabilities incured xxx
Fair value of the contingent consideration xxx xxx
Fair value of previously held investment xxx
Fair value of non-controlling interest xxx
Total xxx
Fair value of net assets of the acquiree (xxx)
Goodwill/(Gain from bargain purchase) xxx/(xxx)

BUSINESS COMBINATIONS 12
Consolidated Total Assets
Parent total assets (book value) xxx
Subsidairy total assets (fair value) exclusive of goodwill, if any xxx
Goodwill - result from acquisition xxx
Payments - made for expenses incurred in the acquisition by the acquirer (xxx)
Payments - made to the acquiree (xxx)
Consolidated total assets xxxx

Consolidated Total Liabilities

Parent total liabilities (book value) xxx
Subsidairy total liabilities (fair value) xxx
Contingent consideration - classified as liability xxx
Unpaid costs for effecting business combinations xxx
Financial Liability as Consideration (net of bond issue costs) xxx
Consolidated total liabilities xxxx

Consolidated Retained Earnings

Parent retained earnings before acquisition xxx
Gain from acquistion, if any xxx
Expenses (Direct and indirect cost, share issue costs in excess of premium) (xxx)
Consolidated retained earnings xxx

Consolidated Shareholders’ Equity

Parent common shares, before acquisition xxx
Newly issued shares at fair value (net of share issue costs) xxx
Additional paid in capital, before acquisition xxx
Consolidated retained earnings xxx
Non-controlling interest xxx
Consolidated stockholders' equity xxx

BUSINESS COMBINATIONS 13
Set B
SUBSEQUENT TO DATE OF ACQUISITION

Consolidated Net Income

Assume that the parent owns 80% ownership while the NCI is 20%

Parent NCI Consolidate

NI
Net income of parent from own 100% -- 100%
operations
Net income of subsidiary 80% 20% 100%
Dividend income from subsidiary 80% - 100%
Amortization of Excess:
Inventories - Sold1 (80%)/80% (20%)/20% (100%)/100%
Inventories - Unsold - - -
PPE/Intangible Assets2 (80%)/80% (20%)/20% (100%)/100%
Impairment of Goodwill3 (80%) (20%) (100%)
Gain on Bargain Purchase 100% - 100%
Allicated Net Income/Consolidated NI xxx xxx xxx

Notes:
1. If fair value > book value = (deduct), add otherwise. If not indicated whether sold or unsold assume SOLD.
2. If fair value > book value = (deduct), add otherwise. Establish the amount of excess in your computation of
goodwill
3. Based on PAS 36 impairment loss is always based on full goodwill (fair value).

Net Income from Subsidiary

Subsidiary reported net income xxx
+/- Amortization of Excess xxx
- impairment loss on goodwill, if any xxx
Subsidiary adjusted net income xxx
Multiply: Controlling interest x%
Net Income from subsidiary xxx

Consolidated Retained Earnings

Parent retained earnings - beg., current year xxx
Gain from bargain purchase, if any xxx
Consolidated net income attributable to parent xxx
Dividends declared - parent only (xxx)
Consolidated retained earnings - end., current year xxx

Non-Controlling Interest
Noncontrolling interest, date of acquisition xxx
Consolidated net income attributable to NCI (NCINIS) xxx
Dividends declared attributable to NCI (xxx)
Noncontrolling interest - December 31 current year xxx

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REFERENCES:

PFRS 3 Business Combinations.Financial Reporting Standards Council

PFRS 10 Consolidated Financial Statements. Financial Reporting Standards Council

Conceptual Framework For Financial Reporting. Financial Reporting Standards Council

Marshall, Brian H., Dimattia, Teresit, (2016). A Guide to Accounting For Business Combinations(Third Edition).
Financial Accounting Foundation.

Accounting for Contingent Consideration — Don’t let Earnouts Lead to Earnings Surprises (October 1, 2015).
PwC.

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