Business Combination - I: "Your Online Partner To Get Your Title"
Business Combination - I: "Your Online Partner To Get Your Title"
Business Combination - I: "Your Online Partner To Get Your Title"
July 4, 2020
Business
Combination - I
Module Chapters:
1. Chapter 11 Business Combination
2. Chapter 12 Separate and Consolidated FS
Page 1 of 8
Advanced Financial Accounting & Reporting
TOPIC 1 | Accounting for Business Combination
Step 1 Notes:
Acquirer - entity that obtains control of the acquiree.
Acquiree - business or businesses the acquirer obtains control of.
Fair value
Step 3 Notes: or
Non-controlling Interest Measurement
NCI’s proportionate share of
Contingent Liability the acquiree’s identifiable net
o Recognition assets acquired
present obligation that arises from past events
fair value can be measured reliably
This rule is different from PAS 37 which requires that CL shall be recognized when it is both probable and
measurable. In business combinations, recognition is required even if the outflow of resources is not
probable. For contingent assets, they do not meet the definition of an asset and therefore, not recognized.
Note: After the measurement period ends, the acquirer shall revise the accounting for
a business combination only for the purpose of correcting any error made.
Mich acquires assets and liabilities of Ton Company on January 20. To obtain these
shares, Mich pays P400,000 and issues 10,000 shares of P20 par value ordinary shares
on this date. Mich's stock had a fair value of P36 per share on that date. Mich also pays
P15,000 to a local investment firm for arranging the transaction. An additional P10,000
was paid by Mich in share issuance costs.
The book values for both Mich and Ton as of January 20, 2020 are presented below. The
fair value of each of Mich and Ton accounts is also included. In addition, Ton holds a
fully amortized trademark that still retains a P40,000 value.
Ton Company
Mich, Inc. Book Value Fair Value
Cash P 900,000 P 80,000 P 80,000
Receivables 480,000 180,000 160,000
Inventory 660,000 260,000 300,000
Land 300,000 120,000 130,000
Buildings (net) 1,200,000 220,000 280,000
Equipment (net) 360,000 100,000 75,000
Accounts payable 480,000 60,000 60,000
Long-term liabilities 1,140,000 340,000 300,000
Ordinary shares 1,200,000 80,000
Retained earnings 1,080 480,000
Important:
What Mich acquired were the ASSETS and LIABILITIES of Ton.
Rule:
Direct and indirect costs incurred in the acquisition are charged
to profit or loss (expense) and eventually to retained earnings.
Rule:
Share issuance costs are charged to equity. In this case, deducted from the related share premium.
However, costs of listing, if any, shall be expensed outright.
9. What amount will be reported for cash after the purchase transaction?
On January 1, 2020, Carl Co. acquired the identifiable net assets of Danny, Inc. On this
date, the identifiable assets acquired and liabilities assumed have fair values of
P7,680,000 and P4,320,000 respectively.
As consideration, Carl Co. transferred 9,600 of its own shares with par value and fair
value per share of P400 and P500, respectively, to Danny’s former owners. Costs of
registering the shares (previously issued and newly issued) amounted to P192,000
(P24,000 pertains to listing fees of previously issued shares).
1. How much is the goodwill (gain on bargain purchase) on the business combination?
Consideration transferred
Ordinary shares: 9,600 shares x P500 P4,800,000
Less: FV at identifiable assets acquired and liabilities assumed
(P7,680,000 – P4,320,000) 3,360,000
Positive excess – goodwill P1,440,000
2. How much is the total amount charged to profit or loss in relation to the
transaction above?
3. Ignoring the consideration and issue costs above, but instead, Carl Co. issued
bonds with face value and fair value of P4,800,000. How much is the goodwill
(gain on bargain purchase) on the business combination.
Consideration transferred
PV/FV of Bonds P4,800,000
Less: FV at identifiable assets acquired and liabilities assumed
(P7,680,000 – P4,320,000) 3,360,000
Positive excess – goodwill P1,440,000
Reacquired rights;
Contingent liabilities recognized as of the acquisition date;
Indemnification assets; and,
Contingent consideration.
Measurement rules
Reacquired Rights
Initial measurement
The acquirer shall measure the value of of a reacquired right recognized as
an intangible asset on the basis of the remaining contractual term of the
related contract.
Subsequent measurement
o subsequently amortized - over the remaining contractual period of
the contract in which the right was granted.
o subsequent sale - the carrying amount of the intangible asset
should be included in determining the gain or loss on sale
Contingent Liabilities
Note: This requirement does NOT apply to contracts accounted for in accordance with PFRS 9.
Indemnification assets
o Measured on the same basis as the indemnified liability or asset
o Shall be derecognized when:
The acquirer collects the asset;
The acquirer sells the asset; or,
Loses the right to the asset.
Initial measurement
At the acquisition date FV of the contingent consideration.
Subsequent measurement:
Rule - Changes are considered as measurement period adjustments.
If the contingent consideration has been classified as equity, it shall not be
remeasured.