Accounting For Business Combination
Accounting For Business Combination
Accounting For Business Combination
Step 1 Notes:
✓ Acquirer - entity that obtains control of the acquiree.
✓ Acquiree - business or businesses the acquirer obtains control of.
Date when acquirer:
Legally transfers the consideration
Step 2 Notes: Acquires the assets, and
Assumes the liabilities of the acquiree
✓ Also called the “closing date”
Fair Value
Step 3 Notes:
✓ Non-controlling Interest Measurement or
NCI’s proportionate share of
the acquiree’s identifiable net
✓ Contingent Liability assets acquired
o Recognition
• 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 recognize 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.
Step 4 Notes:
✓ Goodwill Generally, acquisition-date FV
o Measurement (excess of A over B)
✓ A. The aggregate of
• Consideration transferred (measured in
accordance with PFRS 3);
• Amount of any NCI in the acquire
• In case of business combination achieved in stages, the
acquisition date fair value of the acquirer’s previously held
equity interest in the acquiree.
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
7. What amount will be reported for 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 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
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.
no systematic
Goodwill Carried at cost and subject to annual impairment testing amortization of
goodwill
Complementary - see Chapter 12 Module for notes on the following:
Combine 1. Combine like items of assets, liabilities, equity, income, expenses and cash
flows of the parent with those of its subsidiaries.
2. Offset/eliminate the carrying amount of the parent’s investment in each
subsidiary and the parent’s portion of equity of each subsidiary.
Eliminate
3. Elimination in full of intragroup balances, transactions and
unrealized profits and losses.
Separate 4. Separate presentation of NCI in profit or loss and net assets of group (NCI
classified as equity).