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What is Business Combination? The fusion of two or more enterprises commonly called as business combination.

Combining two separate enterprises into a single economic entity as a result of one enterprise uniting with or obtaining control over the net assets and operations of another enterprise is called business combination. What is Goodwill? Objective of Consolidated Financial Statements Goodwill can be thought of as a "premium" for buying a business. When one company buys another, the amount it pays is called the purchase price. Accountants take the purchase price and subtract it by a company's book value. The difference is called Goodwill. According to the Philippine Financial Reporting Standards (PFRS 3) A business combination may be structured in a variety of ways which are determined for legal, taxation or other reasons. It may involve the purchase by an enterprise or the purchase of the net assets of a business enterprise. It may be achieved by the issue of shares or by the transfer of cash or cash equivalents or other assets. The transaction may be between the shareholders of the combining enterprises or between one enterprise and the shareholders of the other enterprise. The business combination may involve the establishment of a new enterprise to have control over the combining enterprises, the transfer of net assets of one or more of the combining enterprises to another or the dissolution of one or more of the combining enterprises The objective of this Statement is to lay down principles and procedures for preparation and presentation of consolidated financial statements. Consolidated financial statements are presented by a parent (also known as holding enterprise) to provide financial information about the economic activities of its group. These statements are intended to present financial information about a parent and its subsidiary(ies) as a single economic entity to show the economic resources controlled by the group, the obligations of the group and results the group achieves with its resources. We can distinguish between partnership and Business Combination by the following ways: Consolidated Financial Statements It is a combined financial statement of parent company and its subsidiaries.

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Formation: Partnership: It is formed by a written agreement. Business Combination: It is formed under the company ordinance. Members: Partnership: Minimum 2 and maximum 20 members in the partnership. Business Combination: It has shareholders. Liability: Partnership: The liability of each partner is unlimited if it is not specified in the agreement. Business Combination: Shareholders liability is limited only to the value of the shares. Financing: Partnership: Generally partners contribute the fund. Business Combination: It issues ordinary paid up shares to collect the capital. It can also borrow from banks. Tax: Partnership: Each partner of the registered firm will pay tax individually. Business Combination: The Company is subject to double taxation. Management: Partnership: In this case managerial functions are shared by partners according their mutual agreement. Business Combination: Shareholders elect the board of directors and board appoints the experts for each department. Control: Partnership: All the decisions are made with the consultation of all the members. Business Combination: The board of directors controls the affairs of the business. Dissolution: Partnership: It can be dissolved with the mutual consent of the partners. It may be dissolved if any partner dies retires or become insolvent. Business Combination: 1. 2. 3. 4. It can be dissolved by court. With the approval of majority shareholders. If corporate charter expires. It can be dissolved by the state due to misuse of powers.

Common Business Combination Forms 1. 2. 3. Merger A merger is effected when an existing company acquires all the assets and assumes all the liabilities of another firm resulting in the dissolution of the latter. 4. Consolidation It is the fusion of two or more companies into a new business entity, thereby dissolving the absorbed existing companies. 5. Mergers Consolidations Acquisitions 2.

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Type of Business Combination

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1. Horizontal Combination - Two companies that are in direct competition and share similar product lines and markets, join together it is known as a horizontal merger. The idea behind this type of merger is to avoid competition between the units 2. Vertical Combination - A customer and company or a supplier and company. A. Vertical Backward B. Vertical Forward 3. Market-Extension Combination - Two companies that sell the same products in different markets 4. Product-Extension Combination - Two companies selling different but related products in the same market 5. Conglomeration/Diversified Business Combination - Two companies that have no common business areas where two merging firms are in the same general industry, but they have no mutual buyer/customer or supplier relationship, such as a merger between a bank and a leasing company Acquisition It is a business combination in which one of the enterprise, the acquirer, obtains control over the net assets and operations of another enterprise, the acquiree, in exchange for the transfer of assets, incurrence of liability or issue of equity. In this case, the acquiree is not dissolved. It will co-exist with the acquirer, the two being separate legal entities. Acquisition Cost are costs incurred to effect a business combination which are included in the cost of business combination and therefore impact goodwill even if they are expensed at the time they are incurred. Terminologies: 1. Contingent Considerations is initially recognized as part of consideration transfer recognized as part of cost of business combination provide it meets the probability reliability measurement criteria. 2. Control is the power to govern the financial and operating policies of an enterprise to obtain benefits from its activities. 3. Date of acquisition is the date on which control of the net assets and operations of acquiree is effectively transferred to the acquirer. 4. Parent is an entity that has one or more subsidiaries 5. Subsidiary is an entity controlled by another entity known as parent 6. Holding Company is when a corporation is organized for the sole purpose of holding the stock of others and supervising their activities.

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References: 1. 2. 3.

Advanced Accounting 2 by Maria Violeta V. Vicente http://www.mbaknol.com/management-concepts/external-expansion-or-business-combination-and-its-types/ http://220.227.161.86/265accounting_standards_as21new.pdf