PFRS 3

BUSINESS COMBINATIONS
BUSINESS COMBINATION
✢ a transaction or other event • occurs when one
in which an acquirer obtains company acquires two
control of one or more or more companies
businesses (PFRS 3) merge into one
 Parties involved in a Business
Combination:

• ACQUIREE (SUBSIDIARY)
✢ ACQUIRER (PARENT)
○ the company that obtains – the other company that
control over the other or is controlled or the
the entity that obtains business that the
control over the acquiree acquirer control of in a
business combination
OBJECTIVE

improve the relevance,

reliability and comparability
of the information that a
reporting entity provides in
its financial statements
 OBJECTIVE
• establishes principles and requirements for b. recognizes and measures the
how the acquirer: goodwill acquired in the business
a. recognizes and measures the combination or a gain from a
bargain purchase
identifiable assets acquired,
liabilities assumed and any non- c. determines what information to
controlling interest in the acquiree disclose to enable users of the
financial statements to evaluate
the nature and financial effects of
the business combination
SCOPE
PRFS 3 does not apply to:

○ The formation of a joint venture

○ The acquisition of an asset or a group of assets and
related liabilities that does not constitute a
business.
○ A combination of entities or businesses under
common control
Essential Elements in the definition of a
Business Combination
• CONTROL
– the power to govern the financial
and operating policies of an
entity so as to obtain benefits
from its activities
- it is normally presumed to exist when
the acquirer holds more than 50%
(51% or more) interest in the
acquiree’s voting rights
 Essential Elements in the definition of a Business
Combination - Control

Can be obtained in some other ways:

 The acquirer has the power to appoint
or remove the majority of the board of
directors of the acquire; or
 The acquirer has the power to cast the
majority of votes at board meetings or
equivalent bodies within the acquire;
or
 The acquirer has the power over more
than half of the voting rights of the
acquire because of an agreement with
other investors; or
 The acquirer controls the acquiree’s
operating and financial policies because
of a law or an agreement
 Essential Elements in the definition of a Business
Combination - CONTROL

 By transferring cash or other assets

An acquirer may
 By incurring liabilities
obtain control of an
acquiree  By issuing equity interests

in a variety of ways:  By providing more than one type of

consideration, without transferring
consideration, including by contract alone
Second Essential Element
in the definition of a
Business Combination
BUSINESS
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 costs or other economic benefits
directly to investors or other owners, members or
participants
.

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 Three Elements of a Business
INPUT PROCESS
Any system, standard, protocol, convention
Any economic resource or rule that when applied to an input, creates
that results to an output or has the ability to create output
when one or more processes
are applied to it.
Examples:
Example: Strategic Management Process
non-current Operational Process
assets
Resource Management Process
Three Elements of a Business
OUTPUT

The result of input and

process that provides
investment returns to the
stakeholders of the
business
Outputs are not required
for an integrated set to
qualify as a business
DEVELOPMENT STAGE

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 ✢ In the development stage, the acquirer should
consider other factors to determine whether
the set is a business. Those factors include,
but are not limited to, whether the set:

a. Has begun planned principal activities;
b. Has employees, intellectual property and
other inputs and processes that could be
applied to those inputs;
c. Is pursuing a plan to produce outputs; and
d. Will be able to obtain access to customers that
will purchase the outputs

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Absence of Factors in the
Development Stage
✢ In the absence of those factors mentioned,
a particular set of assets and activities
in which goodwill is present shall be presumed
to be a business.

✢ However, a business need not have a goodwill.

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IDENTIFYING A BUSINESS
COMBINATION

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✢ An entity determines whether a
transaction is a business
combination by applying the
definition under PFRS
3 which requires that the assets
acquired and liabilities assumed
constitute a business.
✢ If assets acquired and related
liabilities assumed do not
constitute a business, the
entity shall account for that
transaction as a regular asset
acquisition and the entity
may apply other applicable
standards for the transaction
that does not constitute a
business
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 ACCOUNTING FOR
BUSINESS COMBINATION

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An entity shall account for each business combination using the
acquisition method which requires the following:
○ Identifying the acquirer;
○ Determining the acquisition date;
○ Recognizing and measuring goodwill which
requires the recognition and measurement of the
following:

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○ Consideration transferred
○ Non-controlling interest in the acquiree
○ Previously held equity interest in the acquiree
○ Identifiable assets acquired and liabilities
assumed on the business combination

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IDENTIFYING THE
ACQUIRER

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The guidance in PFRS 10 Consolidated
Financial Statements shall be used to identify
the acquirer—the entity that obtains control
of the acquiree.

If a business combination has occurred but

applying the guidance in PFRS 10 does not
clearly indicate which of the combining
entities is the acquirer, the following factors
shall be considered in making that
determination.

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Business Combination – Identifying the Acquirer

effected primarily by
effected primarily by
transferring cash or other
exchanging equity
assets or by incurring
interests:
liabilities:
the acquirer is usually the
the acquirer is usually
entity that issues its equity
the entity that transfers
interests (except in
the cash or other assets
Reverse Acquisition)
or incurs the liabilities.

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 Effected primarily by exchanging equity
interests:

the relative voting
rights in the combined
entity after the
business combination
ACQUIRER ACQUIRER
combining entity whose
owners as a group the combining entity whose
retain or receive the composition of owners have the ability to
largest portion of the the governing elect or appoint or to
voting rights in the body of the remove a majority of the
combined entity combined members of the governing
entity body of the combined entity

the existence of a large

the
combining entity whose composition of
minority voting interest in the combining entity whose
single owner or the senior
(former) management
the combined entity if no organised group of management
dominates the management
owners holds the largest of the
other owner or organised of the combined entity.
combined
group of owners has a minority voting interest entity
in the combined entity
significant voting interest

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Effected primarily by exchanging
equity interests:

ACQUIRER
the combining entity that
the terms of the pays a premium over the
pre-combination fair value
exchange of
of the equity interests of
equity interests the other combining entity
or entities.

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REVERSE ACQUISITION
- occurs when the entity that issues securities (the legal
acquirer) is identified as the acquiree

- entity whose equity interests are acquired

(the legal acquiree) must be the acquirer for accounting
purposes for the transaction to be considered a reverse
acquisition.

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MEASURING THE CONSIDERATION
TRANSFERRED OF REVERSE ACQUISITION
- accounting acquirer usually issues no consideration
for the acquiree

- accounting acquiree usually issues its equity

shares to the owners of the accounting acquirer

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 Entity Normal Acquisition Reverse Acquisition

Issuing equity interest Acquirer Acquiree

Equity interest are Acquiree Acquirer

acquired
Consideration Acquirer (sum of Acquiree usually
Transferred assets transferred, issues its equity shares
liability incurred and to the owners of the
equity interest issued) accounting acquirer

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IDENTIFYING ACQUISITION DATE
Acquisition date - date on which the acquirer obtains control. It is
the date on which the prent acquires the subsidiary and applies
acquisition method. Normaly, it is the closing date (Date on which the
acquirer legally transfers the consideration, acquires assets and
assumes liabilities of the acquiree).
However, acquirer may obtain control on a date either earlier or later
than closing date.
Example: If a written agreement provides that the acquirer
obtains control of the acquiree on a date before closing date.
Formula:
Consideration transferred xxx
Non-Controlling Interest in the acquiree xxx
Previously held equity interest in the acquiree (xxx)
Total xxx
Less: Fair Value of the net identifiable assets acquired (xxx)
Goodwill/ (Gain on bargain purchase) xxx

NOTE:
The Standards require disclosure of
(1)the amount of the gain,
(2) the line item where the gain is recognized, and
(3) a description of the reasons why the transaction resulted in a
bargain purchase gain.
GOODWILL AND BARGAIN PURCHASE
Goodwill
(a) recognized as an asset and is not amortised
(b) subject to annual impairment tests, or more frequently, if there is an
indication of impairment.

Bargain purchase
(a) profit or gain recognized in profit or loss
(b) Initially identified, the acquirer should reassess whether all of the assets
acquired and liabilities assumed have been identified and recognized,
including any additional assets and liabilities not previously identified or
recognized in the acquisition accounting.
Consideration transferred - measured at acquisition date fair
values, which is the sum of the folowing:
1. assets transferred by the acquirer
2. liabilities incurred by the acquirer to former
owners of the acquiree
3. the equity interests issued by the acquirer
Exception:
1. Share-based payment
Shall be measured in accordance with share-based
Payment at the acquisition date
2. Transferred assets and liabilities which remain in the
entity
Shall be measured at the carrying amount immediately
before the acquisition date

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Examples of Consideration:
a. Cash
b. Non-cash
c. Equity instruments (shares, options, and
warrants)
d. Contingent consideration

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Non-controlling interest (NCI)
is the “equity in a subsidiary not attributable,
directly or indirectly, to a parent.”
Other term: “minority interest”

Measurement either :
a.) fair value; or
b.) proportionate share of the acquiree’s
identifiable net assets.
 J&J Company
Statement of Financial Position
June 30, 2013
Cash P200,000 Current Liabilities P125,000
A/R 300,000 Bonds Payable 500,000
Inventory 500,000 Common Stock 50,000
Land 150,000 APIC 700,000
Building 750,000 Retained Earnings 925,000
Equipment 400,000
TOTAL ASSETS 2,300,000 TOTAL LIABLITY AND EQUITY 2,300,000
J&J Company’s Fair Value for all accounts

Cash P200,000
A/R 525,000
Inventory 550,000
Land 360,000
Building 900,000
Equipment 700,000 P 3,265,000

Curr. Liability 125,000

Bonds Payable 520,000 P 645,000
FV OF Net Asset P 2,620,000

Professional Fees P 50,000

Stock Issuance costs 130,000
 Acquirer, Inc issues 20,000 shares of its 140 par
value common stock with a market value of 145
each of J & J Company’s net asset. Acquirer, Inc.
pays professional fees of P50,000 to accomplish
the acquisition and stock issuance costs of
P130,000.

Computation of Goodwill:
If 100% of the NA:
Price paid 2,900,000
FV of NA (2,620,000)
GW 280,000
 Acquirer,Inc. paid P2,320,000 for 80% J & J Company’s net asset. Acquirer, Inc. pays
professional fees of P50,000 to accomplish the acquisition and stock issuance costs
of P130,000.

Computation of Goodwill:

If 80%of the NA (FV Method) & NCI measured at FV:

Price paid 2,320,000
NCI (20%) 580,000
FV of NA (2,620,000)
GW 280,000
 Acquirer,Inc. paid P2,320,000 for 80% J & J Company’s net asset. Acquirer, Inc.
pays professional fees of P50,000 to accomplish the acquisition and stock issuance
costs of P130,000.

Computation of Goodwill:

If 80%of the NA (FV Method) & NCI measured at Proportionate:

Price paid 2,320,000
NCI (20%) 524,000 (FV of NA x 20%)
FV of NA (2,620,000)
GW 224,000
Acquisition-related costs
are costs the acquirer incurs to effect a
business combination.
Examples:
a.) Finder’s fees
b.) Professional fees, such as advisory, legal, accounting, valuation and
consulting fees
c.) General administrative costs, including the costs of maintaining an
internal acquisitions department
EXCEPTION: d.) Costs of registering and issuing debt and equity securities.
 Acquisition-related costs are recognized as
expenses when they are incurred.
EXCEPTION:
a.) costs to issue debt securities measured at
amortized cost are included in the initial
measurement of the resulting financial
liability.
Example: direct costs of issuing
bonds payable
b.) Costs to issue equity securities:
Deducted from: 1.) APIC; if insufficient
2.) Retained Earnings
Example:
These are the acquisition-related costs incurred
by the entity. Calculate the amounts that must
be debited to a.) expenses b.) APIC
Broker’s Fee P50,000
Pre-acquisition audit fee 40,000
General administrative costs 15,000
Legal fees for the combination 32,000
Audit fee for SEC registration of stock issue 46,000
SEC registration fee for stock issue 5,000
Other acquisition costs 6,000
Broker’s Fee P50,000 (E)
Pre-acquisition audit fee 40,000 (E)
General administrative costs 15,000 (E)
Legal fees for the combination 32,000 (E)
Audit fee for SEC registration of stock issue 46,000 (APIC)
SEC registration fee for stock issue 5,000 (APIC)
Other acquisition costs 6,000 (E)

EXPENSES:143,000
APIC :51,000
To record the acquisition of net assets:

Cash P200,000
A/R 525,000
Inventory 550,000
Land 360,000
Building 900,000
Equipment 700,000
Goodwill 280,000
Current Liabilities 125,000
Bonds Payable 520,000
Common Stock 2,800,000
APIC 100,000
To record acquisition-related costs:

Acquisition Expense 50,000

Additional Paid In Capital 100,000
Stock issuance cost 30,000
Cash 180,000
PREVIOUSLY HELD EQUITY INTEREST
IN THE ACQUIREE

pertains to any interest held by the acquirer before

the business combination. This affects the
computation of goodwill only in business
combination.
 On January 1, 20x1, ABC Co. acquired 15% ownership
interest in XYZ,Inc for P100,000. The investment was accounted
for under PFRS 9. From 20x1 to the end of 20x3, ABC
recognized net fair value of P50,000.
On January 1, 20x4, ABC acquired additional 60%
ownership interest in XYZ, Inc. for P800,000. As of this date,
ABC has identified the following:
a. The previously held 15% interest has a fair value of
P180,000
b. XYZ’s net identifiable asset have a fair value of P1,000,000
c. ABC elected to measure NCI at proportionate share of XYZ’s
identifiable net assets.
 Computation:

CONSIDERATION TRANSFFERED 800,000

Non-controlling Interest 250,000
Previously held equity interest 180,000
Fair value of the net assets (1,000,000)
Goodwill 230,000
NET IDENTIFIABLE ASSETS

Acquired:
On acquisition date, the
acquirer recognizes the identifiable
assets acquired, the liabilities and any
NCI in the acquiree separately from
good will.
UNIDENTIFIABLE ASSETS
Unidentifiable assets are not recognized.

Examples:

• Goodwill recorded by the acquiree prior to the

business combination.
• Assembled workforce
• Potential contracts that the acquiree is
negotiating with the prospective new customers
at the acquisition date
RECOGNITION CONDITIONS
A. To qualify for B. The identifiable
recognition, identifiable assets acquired and
assets acquired and liabilities assumed must be
liabilities assumed must part of what the acquirer
meet the definitions of and the acquiree (or its
assets and liabilities former owners) exchanged
provided by the in the business combination
Conceptual Framework transaction rather than the
at the acquisition date. result of separate
transactions.
RECOGNITION CONDITIONS

C. Applying the recognition principle may

result to the acquirer recognizing the assets
and the liabilities that the acquiree had not
previously recognized in its financial
statements.
CLASSIFYING IDENTIFIABLE ASSETS
AQUIRED AND LIABILITIES ASSUMED

Identifiable assets acquired and liabilities

assumed are classified at the acquisition date
in accordance with other PFRS that are to be
applied subsequently.
 MEASUREMENT

Identifiable assets Separate valuation

acquired and liabilities
assumed are measured
at their acquisition-date
fair values.
allowances are not
recognized at the acquisition
date because the effects of
uncertainty about the future
cash flow are included in the
fair value measurement.

All acquired assets are

recognized regardless of
whether the acquirer
intends to use them
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The acquisition-date fair value of identifiable net assets acquired
(computation)

Fair value of identifiable assets acquired (1,600,000-20,000) 1,580,000

Less: Fair value of liabilities assumed (400,000)

Fair value of identifiable net assets acquired 1,180,000

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 Thanks!
Ardonia, Kristian
Gozo, Erwin
Nogalada, Kimberly May
Sabio, Jeannelle
Villarin, Gene Joy

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