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A company may wish to expand their business by

acquiring another business entity.
This situation is known as business combination.
A business combination is an event when two or
more business entities combine into one reporting
unit.
FRS 3 defines a business combination as a
transaction or other event in which an acquirer
obtains control of one or more business

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It involves:
An acquisition of all net assets or purchase of some
of the net assets of another entity and incorporating
these assets into their operations

An acquisition of control over another entity by
acquiring the issued voting share capital of that entity

3
To enjoy economies of scale
To minimize or reduce competition or becoming
more competitive
To use resources more efficiently
To raise additional finance
To diversify and spread the business risk

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A
m
a
l
g
a
m
a
t
i
o
n

Two or more
companies
combine their
business by selling
their assets and
liabilities to a
newly formed
company. These
old companies are
wound up.
A Bhd + B Bhd =
AB Bhd
A Bhd and B Bhd
become a new
company; known
as AB Bhd. A Bhd
and B Bhd are
liquidated.
A
b
s
o
r
p
t
i
o
n

One dominant
company buys the
net assets of
another company.
The company
being acquired is
wound up and the
buyer becomes a
bigger operation
A Bhd + B Bhd = A
Bhd
A Bhd absorbs B
Bhd. B Bhd will be
wound up. No new
company is formed
to acquire the
existing business.
T
a
k
e
o
v
e
r
s


Takes place when a
company acquires
the right to control
in another
company. This is
done by acquiring
majority of the
voting shares of
the acquired
company
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Mentioned in FRS3 comprise
with:
Cash and cash equivalent payable
Fair value of other
consideration(other than cash given
by the buyer)
Purchase consideration
should equal to the
consideration received
Purchase consideration
could consist of any or a
combination of:
Cash
Shares in purchasing company
Liabilities in the purchasing
company
Other asset

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Consideration paid to acquire the
equity shares of the subsidiary.
The acquiree has to recognize
the CT to acquire the equity
interest in the acquirer.
The CT will b measured at the FV of:
1. Assets transferred by the acquirer.
2. Liabilities incurred by the acquirer
3. Equity instruments issued by the acquirer
4. Contingent consideration
The total of the CT will
be the initial cost of
the investment which
will be recognized in
the FS of the acquirer
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Example 1 in pg 297 (to understand about purchased
consideration)
Example 4 in pg 307( purchased consideration in
amalgamation form)
Example 5 in pg 313( purchased consideration in
absorption form)
See others example to understand well in this topic..


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The power to govern the financial and operating policies of
an entity, so as to obtain benefits from its activities.
Criterion of control:
Own more than one-half of the voting power of the entity
Has options which may give the investor an increase or decrease in
voting power when the options exercised.

To determine whether an entity has the power to control
other entity, the entity should consider all facts and
circumstances

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An investor controls an investee if and only if the investor
has all of the following elements:
Power over investee
Exposure to variability of returns
Ability to use power over investee to affect the amount of investors
returns

10
The acquirer is
the entity that
obtains control
Generally, the entity
giving the purchase
consideration (cash
or other assets) is
likely to be the
acquirer
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The legal acquirer in substance is the subsidiary and
the legal subsidiary is the parent
Large entity allow smaller entity to acquire its entity
interest for stock exchange listing
Smaller entity acquires issued shares by share
exchange
The acquiree becomes the parent and the acquirer
the subsidiary

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A normal feature of commerce and business
Entities frequently carry on parts of their activities
through subsidiaries, joint ventures and associates
The entitys ability to affect the financial and
operating policies of the investee is through the
presence of control, joint control or significant
influence
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Directly, or indirectly
through one or more
intermediaries, the
party:
Controls, is controlled
by, or is under
common control with,
the entity (includes
parents, sub and fellow
sub
Has an interest in the
entity that gives it
significant influence
over the entity
Has joint controlled
over the entity
The
party is
an
associate
of the
entity
The
party is
a joint
venture
in which
the
entity is
a
venturer
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The party is a member of the key management personnel
of the entity or its parent
The party is a close member of the family of any individual
referred to in the key mgt personnel of the entity
The party is an entity that is controlled, jointly controlled
or significantly influenced by such entity resides with
The party has a post-employment benefit plan for the
benefit of employees of the entity
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PC hold majority interest on subsidiary, they must combined the
f/s to single f/s, consolidate f/s
PC might charge the mgt fees to the subsidiary, while subsidiary
might supply products or services to PC.
Transaction between them must be eliminate because revenues &
expenses will be counted twice
Buying products from subsidiary will be expenses to the PC &
revenue to subsidiary. PC will make revenue when sales to
customers.
Revenue will be counted twice if the PC counted revenue to the
subsidiary & again to the customers


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PC hold who hold minority interest of < 50% in subsidiary is
said to have no controlling interest
PC interest in subsidiary represent in the liability and equity
section of f/s
When subsidiary has no minority shareholder, subsidiary must
continue to provide f/s specific to own operation & separate
from the PC
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Relationships between
parents and
subsidiaries.
Name of its parent
and, if different, the
ultimate controlling
party.
Entity's parent nor the
ultimate controlling
party produces
financial statements
available for public
use.
The name of the next
most senior parent.
key management
personnel
Short term employee
benefits
Post employment
benefits
Other long-term
benefits
Share-based payment
Related party
Transactions
The amount of the
transactions
The amount of
outstanding balances
Provision for doubtful
debts related to the
amount of outstanding
balances
The expenses
recognized during the
period, in respect of
bad or doubtful debts
from related parties
Ex : purchases or sales
of goods.

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The tax base of an asset is the amount that will be deductible
for tax purposes in future periods.
Depend on whether the asset is intended to be used or sold.
It is important to establish how an entity will recover the
carrying amount of its assets, because this may affect the tax
base and the tax rate to be applied.
When considering the provision of deferred tax on assets,
consider whether the recovery of the asset will lead to future
economic benefits that are taxable.
Assuming that a group intends to continue to hold the acquired
asset and use it to generate taxable profits in the acquired
subsidiary, it is the tax rate that applies to that subsidiary's
taxable profits that should be used in calculating the relevant
deferred tax provision.

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Example:
Company A acquires Company B . Company A does not pay tax, it is subject
to a nil rate of tax Company .B pays tax at a rate of 28%.

On the acquisition, Company A performs a fair value exercise which identifies
an intangible asset with a fair value of 250,000. This intangible asset has a tax
base of nil, no deductions will be available against taxable profit as this asset is
recovered.

Therefore, as the intangible asset has a carrying value of 250,000 and a tax
base of nil, it has a temporary difference of 250,000. As the intangible asset
relates to the subsidiary, its carrying value will be recovered through that
subsidiary making future taxable profits, which will be taxed at a rate of 28%.

Therefore a deferred tax liability of 70,000 (250,000 28%) should be
provided. The same analysis holds true for other fair value adjustments
recognised in a business combination.



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