Pfrs 3 Business Combination

PFRS 3
BUSINESS
COMBINATION
BUSINESS COMBINATION
PFRS 3 defines business

combination as a
transaction or other event
in which an acquirer
obtains control of one or
more businesses.
REASONS FOR BUSINESS
COMBINATION
CostAdvantage
Lower Risks
Avoidance of Takeovers
Acquisition of Intangible Assets
Other Reasons, such as: Tax
advantage, Eliminating competition
TYPES OF BUSINESS COMBINATION
Horizontal Integration (same industry)

Vertical Integration (same industry
but different level)
Conglomerate Combination
(different industry)
METHODS/LEGAL FORMS OF
Asset Acquisition
Stock Acquisition
BUSINESS COMBINATION THROUGH
ASSET ACQUISITION
Acquisition of Assets
Acquisition should be 100%.
The acquirer is the surviving
entity, while the acquiree is
extinguished.
ASSET ACQUISITION
Two Kinds of Business Combination Through Asset Acquisition
Statutory Merger
A + B = A "A" is the acquirer, while "B" is the acquiree.
A + B = B "B" is the acquirer, while "A" is the acquiree.
Statutory Consolidation
A + B = C "C" is the acquirer, while "A" and "B" are the
acquiree.
STOCK ACQUISITION
Acquisition should be at least more than
50%.
Both the acquirer and the acquiree
survives and operates continually. Neither
entities are dissolved.
Parent - Subsidiary relationship exist
A + B = Consolidated A + B
SCOPE OF BUSINESS COMBINATION
Combinations involving
mutual entities
Combination achieved by
contract alone (dual listing
stapling)
Transactions not included in the
scope of PFRS 3
Where the business combination results in
the formation of all types of joint
arrangements and the scope exception
only applies to the financial statements of
the joint venture or the joint operation itself
and not the accounting for the interest in
a joint arrangement in the financial
statements of a party to the joint
arrangement.
Transactions not included in the
scope of PFRS 3
Where the business combination
involves entities or businesses
under COMMON CONTROL.
Where the acquisition of an asset
or a group of assets DOES NOT
constitute a business.
ACCOUNTING FOR BUSINESS
COMBINATION
ACQUISITION METHOD
The acquisition method is applied on the
acquisition date which is the date the
acquirer obtains control of the acquiree.
This method is in the acquirer's
perspective, not the acquiree.
ACCOUNTING PROCEDURES FOR A
1. Identify the acquirer.
2. Determine the acquisition date.
3. Calculating the Fair Value (at acquisition
date) of the Consideration Transferred
(Payment)
4. Recognition and Measurement of Assets
Acquired and Liabilities Assumed
The Acquirer
1. Identify the acquirer.
Acquirer.
Theparty that obtains control of the
acquiree.
The Acquirer
In a business combination involving the issuance of equity shares as
consideration, the acquirer is usually the entity that issues its equity interests,
except in reverse acquisitions.
The acquirer is usually the entity whose owners as a group retain or receive the largest
portion of the voting rights in the combined entity.
The acquirer is usually the entity whose single owner or organized group of owners
holds the largest minority voting interest in the combined entity.
The acquirer is usually the entity whose owners have the ability to elect/ appoint/
remove a majority of the members of the governing body of the combined entity.
The acquirer is usually the entity whose management dominates the management of
the combined entity.
The acquirer is usually the entity who pays a premium over the pre-combination fair
value of the equity interests of the combining entities.
The Acquirer
In a business combination involving the transfer of cash or
other assets as consideration, the acquirer is usually the
entity that transfers the cash or other assets or incurs the
liabilities.
The acquirer is usually the combining entity whose relative
size is significantly greater than that of the other combining
entity or entities.
More than two combining entities, consideration should
include the entity which initiated the combination, and the
relative size of the entity.
The Acquisition Date
Acquisition date.
The date on which the acquirer
obtains control of the acquiree's
assets or net assets.
The Acquisition Date
Why acquisition date is so important?
The following are determined at the date of acquisition
1. The fair value of the noncash assets, if any, paid for the
business combination.
2. The fair value of the acquiree's net assets acquired by the
acquirer.
3. The fair value of the non-controlling interest (interest not of
the acquirer, if the acquisition is not 100%)
The Consideration
3. Calculating the Fair Value (at acquisition date)
of the Consideration Transferred (Payment)
1. Non-Cash Asset
difference between fair value and carrying
amount is presented as GAIN OR LOSS
2. Deferred payment
3. Equity Instruments
4. Liabilities undertaken by the acquirer
The Consideration
5. Contingent consideration - payments subject to conditions
Asset/Cash contingency
Where the contingent consideration is classified as an asset
or liability, the acquirer measures the fair value of the
contingency at EACH REPORTING DATE until the contingency
is resolved. Changes after the measurement period are
recorded in P&L.
Stock contingency
Where the contingent consideration is classified as equity, no
measurement is required until the contingency is resolved.
The Consideration
Acquisition-related costs
Cost directly attributable to the combination which
includes such as finder's fee, advisory. Legal
accounting, valuation and other professional or
consulting fees. (Expensed)
Indirect,
ongoing costs, general costs including cost
to maintain an internal acquisition department
(mergers and acquisitions department), as well as
other administrative costs. (Expensed)
The Consideration
Stock issuance cost (decrease
in share premium account)
Debt issuance costs, otherwise
known as bond issue cost
(increase in discount or
decrease in premium)
The Consideration
Guidelines in assessing which items are part of the
business combination
Transactionsentered into or any amounts paid that
are designed primarily for the economic benefit of
the acquiree (or its former owners) before the
combination are PART of the consideration.
Transactions entered into or any amounts paid into
by or on behalf of the acquirer or the combined
entity are NOT PART of the business combination.
The Consideration
The acquirer and the acquiree may have a pre-existing relationship or
other arrangement before the negotiations for the business combination
began, in such situation, the acquirer shall identify any amounts that are
not part of what the acquirer and the acquiree exchanged in the
business combination.
The following are examples of transactions that are not to be included in
applying the acquisition method:
A transaction that in effect settles pre-existing relationships between the acquirer and
acquiree;
A transaction that remunerates employees or former owners of the acquiree for future
services; and
A transaction that reimburses the acquiree or its former owners for paying the
acquirers acquisition-related costs.
Assets Acquired and Liabilities Assumed
4. Recognition and Measurement of Assets
Acquired and Liabilities Assumed
Under the acquisition method, the acquirer is
required to:
Recognize IDENTIFIABLE assets and liabilities
separately from goodwill (of acquiree); and
Measure such assets and liabilities at their fair
values on the date of acquisition.
At the acquisition date, the assets and liabilities
recognized by the acquirer must meet the definitions
of assets and liabilities in the Framework, including
UNRECOGNIZED ASSETS AND LIABILITIES.
Expected future costs/post-acquisition reorganization
CANNOT BE INCLUDED in the calculation of assets and
liabilities acquired and liabilities assumed.
The items acquired or assumed must be part of the
business acquired rather than the result of a separate
transaction.
Valuation of Identifiable Assets and Liabilities
Identifiable Tangible Assets
Assets acquired are not recognized with
contra asset account.
Assets Held for Sale fair value less cost to sell
Investment in Equity Instruments fair value of
the shares
Identifiable Intangible Assets
Criteriafor recognition is EITHER of the
following:
Acquirees intangible assets are
recognized whether recorded or not in its
books.
Existing
Liabilities
Contingent Liabilities
Criteria for recognition is if the amount can be
reliably estimated regardless whether it is less
than probable
PFRS 3 recognize contingent liabilities as a
present obligation that arises from past events,
and its fair value can be measured reliably.
Liabilities
associated with restructuring existing at
date of acquisition
Other Assets/Liabilities
Employee benefit plan (Obligation exceeds Plan
Assets)
Indemnification assets
Income Taxes (based on PAS 12)
Employee benefits other than defined benefit plan
(based on PAS 19)
The Excess Goodwill or Purchase Gain
Excess of (i) over (ii) below:
(i) the aggregate of:
a. the consideration transferred measured in accordance
with the Standard, which generally requires acquisition
date fair value;
b. the amount of any non-controlling interest in the acquiree
measured in accordance with the Standard; and
c. in a business combination achieved in stages, the
acquisition date fair value of the acquirer's previously held
equity interest in the acquiree.
thenet of the acquisition date amounts of the
identifiable assets acquired and the liabilities
assumed measured in accordance with the
standard.
Goodwill is computed as the excess of

Asset Acquisition - (i) (a) over (ii)
Stock Acquisition - (i) a, b, and c over (ii)
Bargain Purchase Gain
The excess of the acquirer's
interest in the net fair value of the
acquiree's identifiable assets and
liabilities for the consideration
transferred.
PFRS 3 requires that before a bargain purchase gain is
recognized:
An entity should first reassess whether:
It
has correctly identified all the assets acquired and liabilities
assumed;
It
has correctly measured at fair value all the assets acquired
and liabilities assumed; and
It has correctly measured the consideration transferred
Any remaining excess should be recognized
immediately in profit or loss
The gain from a bargain
purchase gain is recognized
by the acquirer in its statement
of comprehensive income or
income statement.
Adjustments after Acquisition Date
USE OF PROVISIONAL VALUES
Amounts used if the initial accounting
for a business combination is
incomplete by the end of the
reporting period in which the
combination occurs.
ADJUSTMENTS TO PROVISIONAL VALUES
PFRS 3 permits adjustments to items
recognized in the original accounting
for business combination as long as it
is within the measurement period,
which is a maximum of one year after
the acquisition date.
Measurement period ends at the
earlier of:
one year from the acquisition date; or
the date when the acquirer receives
needed information about facts and
circumstances
Adjustments within the measurement
period should be made RETROSPECTIVELY,
hence, comparative financial statements
should be re-presented.
Adjustments after the measurement
period should be made PROSPECTIVELY.
Restrospective adjustment
Adjustments to recognized items
Adjustments to unrecognized items
Information to be considered
Revising goodwill or bargain purchase gain
BUSINESS COMBINATION WITH NO
TRANSFER OF CONSIDERATION
When the acquiree repurchases a sufficient quantity of
its shares from other shareholders such that the acquirer,
who previously was a minority owner of the acquiree,
now is the majority shareholder of the acquiree and
controls it;
When the acquirer owns the majority of the acquiree's
voting shares but had previously been prevented from
exercising control by regulation or by contract - if that
restriction lapses or is removed, the acquirer now gains
control over the acquiree
ESTIMATING THE VALUE OF
GOODWILL
Future income is usually considered in
computing for a reasonable purchase
price. Goodwill is often, at least in part, a
payment for above-normal expected
future earnings. A forecast of future
income may start by projecting recent
years' incomes into the future.
ESTIMATING THE VALUE OF
GOODWILL
Expected (average) income is
compared to "normal" income.
Normal income is the product of the
appropriate normal rate of return on
assets times the fair value of the gross
assets, excluding existing goodwill, of
the acquiree.
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Pfrs 3 Business Combination

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Pfrs 3 Business Combination

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PFRS 3

PFRS 3 defines business

Horizontal Integration (same industry)

Goodwill is computed as the excess of

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