Accounting for Business Combination

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Intended Learning Outcomes:

i. Define and describe business combination;

ii. Understand the IFRS 3 (Revised) – Business Combination
iii. Identify the methods of accounting for business combination
iv. Understand the application of acquisition method
v. Know and apply the principles of business combination achieved in stages
vi. Identify the different measurement and recognition criteria subsequent to initial recognition
vii. Journalized the required entries in the books of the companies.
viii. Prepare the statement of financial position immediately after the combination

Lecture Notes:

The IFRS 3 : Business Combination

• IFRS 3 defines a business combination as a “transaction or other event in which an acquirer obtains control of
one or more businesses.”
• Transactions sometimes referred to as “true mergers” or merger of equals” are also business combination
• A business combination occurs when one company acquires another or when two or more companies merge into
one. After the combination, one company gains control over the other.

Forms of Business Combination

Business Combination are carried out either through:

1. Net Asset Acquisition

a. Statutory Merger
b. Statutory Consolidation

2. Stock Acquisition (Acquisition of control)

Net Asset Acquisition

 The acquirer purchases the assets and assume the liabilities of the acquiree in exchange for consideration.
After the acquisition, the acquired entity normally ceases to exist as a separate legal or accounting entity. The
acquirer recorded the assets acquired and liabilities assumed in its own books of accounts.

a. Statutory Merger – occurs when two or more companies merge into a single entity which shall be one of
the combining entities.
Example : A Company + B Company = A Company or B Company

b. Statutory Consolidation – occurs when two or more companied combined together into a single entity
which shall be the consolidated company (new company).
Example : A Company + B Company = C Company

Stock Acquisition

 The acquirer issue consideration in exchange for the ownership of stocks (shares) in the acquired company
(acquiree). Normally, the acquirer will own majority of the outstanding shares of the acquiree (more than
50%).
 It is presumed that if an entity owns the majority of shares of another entity, control exist.
 In a stock acquisition, the acquirer is known as the “parent” while the acquiree is known as the “subsidiary”.
 After the business combination, both the parent and subsidiary will continue to exist and operate as a
separate legal entity. They will continue to maintain their own separate books and prepare their separate

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 (unconsolidated) financial statements. There is a need to consolidate the financial reports of the parent and its
subsidiaries at the end of the accounting period. (Consolidated FS – PFRS 10)
A business combination may also be described as:

1. Horizontal combination – a business combination of two or more entities with similar businesses. (i.e. bank
acquires another bank)
2. Vertical combination – a business combination of two or more entities operating at different levels in a marketing
chain (i.e. a manufacturer acquires its supplier of raw materials)
3. Conglomerate – a business combination of two or more entities with dissimilar businesses (i.e. a real estate
developer acquires a bank)

Essential Elements of a Business Combination

1. Control
2. Business

Control
 An investor controls an investee when the investor has the power to direct the investee’s relevant activities,
thereby affecting the variability of the investor’s investment returns from the investee.
 Control is normally presumed to exist when the acquirer more than 50% (51% or more) interest in the
acquiree’s voting rights. However, this is only a presumption because control can be obtained in some other
ways such as when:
a) The acquirer has the power to appoint or remove the majority of the board of directors of acquiree
b) The acquirer has the power to cast majority of votes at board meetings or equivalent bodies within the
acquiree
c) The acquirer has the power over more than half of the voting rights of the acquiree because of an
agreement with other investors
d) The acquirer controls he acquiree’s operating and financial policies because of a law or an agreement.

An acquirer may obtain control of an acquiree in a variety of ways, for example:

I. By transferring cash or other assets

II. By incurring liabilities
III. Issuing equity instruments
IV. Providing more than one type of consideration
V. Without transferring consideration, including by contract alone

Business
 Business is 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.
 A business has three elements such as Input, process and Output.

Accounting for Business Combination

Business combinations are accounted got using the Acquisition Method. This method requires the following:

a. Identifying the Acquirer

b. Determining the Acquisition date; and
c. Recognizing and measuring goodwill or gain from a bargain purchase.

A. Identifying the Acquirer

For each of business combination, one of the combining entities is identified as the acquirer.
 The acquirer is the entity that obtains control of the acquiree. The acquiree is the business that the acquirer
obtains control of in a business combination.

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Guidance in identifying the Acquirer (PFRS 3)

1. In a business combination effected primarily by transferring cash or other assets or by incurring liabilities, the
acquirer is usually the entity that transfers the cash or other assets or incurs the liabilities.
2. In a business combination effected primarily by exchanging equity interests, the acquirer is usually the entity that
issues its equity interests. However, in some business combinations, commonly called as ‘reverse acquisitions’,
the issuing entity is the acquiree.
Other pertinent facts and circumstances shall also be considered in identifying the acquirer in a business
combination effected by exchanging equity interests including:
a. The relative voting rights in the combined entity after the business combination
b. The existence of a large minority voting interest in the combined entity if no other owner or organized
group of owners has a significant voting interest
c. The composition of the governing body of the combined entity
d. The composition of the senior management of the combined entity
e. The terms of the exchange of equity interests
3. The acquirer is usually the combining entity whose relative size (measured in, for example, assets, revenues or
profit) is significantly greater than of the other combining entity or entities.
4. The acquirer is usually the one who initiated the combination.

Illustration – Identifying the Acquirer

Pet Company and Malou Company agreed to combine their businesses. The term of the business combination is that Pet
will pay P10 for every share of Malou acquired. Pet’s market capitalization is P50 million and Malou’s is at P7.5 million.
After the combination, the board of directors of Malou shall be comprise of those coming from Pet.

Question: Who is the Acquirer?

Answer: PET is the acquirer based on the following indicators:

 PET issued consideration (cash) as payment for interest acquired

 PET is larger that MALOU
 PET’s former management dominates the management of the combined entity.

B. Determining the Acquisition Date

 The acquirer shall identify the acquisition date, which is the date on which it obtains control of the acquiree.
 This is normally the closing date (the date on which the acquirer legally transfers the consideration, acquires
the asset and assumes the liabilities of the acquiree.)
 The acquirer might obtain control on a date that is either earlier or later than the closing date. For example,
the acquisition date precedes the closing date if a written agreement provides that the acquirer obtains control
over the acquiree on a date before the closing date.
 Identifying the acquisition date is very important because aside from determining the date on which the
acquirer obtained control over the acquiree, it is also the date used in reference to valuation and
measurement.

Illustration – Determining the Acquisition Date

Roller Company acquired Blades Corporation for cash on 2022. On February 2, Rolly approached the
management of Blades seeking endorsement for acquisition. On March 31, a public offer was made for 100% of the
equity shares of Blades. Received regulatory approval and shareholder approval on April 26. On June 18, received
acceptances that represents 100% of the shares of Blades. On August 5, payment was received and distributed to
shareholders.

Question: Identify the acquisition date and the closing date.

Answers:
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Acquisition Date – June 18 (Date when control was obtained by ROLLER – acceptance was made)

Closing Date – August 5 (Date when the consideration was transferred)

C. Recognizing and measuring goodwill or gain from a bargain purchase (gain from acquisition).

The acquirer shall recognize goodwill/gain on a bargain purchase as of the date of acquisition as the excess of (a) over
(b)

a. The aggregate of:

i. Consideration transferred;
ii. Non-controlling interest
iii. Previously held interest (business combination achieved in stages)
b. The net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed (acquisition
date FAIR VALUE) measured in accordance with PFRS 3

Formula:
Consideration transferred xx
Non-controlling interest (NCI) in the acquiree xx
Previously held interest in the acquiree xx
Total xx
Less: FV of net assets acquired xx
Goodwill / (gain on a bargain purchase) xx

On acquisition date, the acquirer recognizes a resulting:

a. Goodwill as an ASSET
b. Gain or a bargain purchase as gain in PROFIT or LOSS

*However, before recognizing a gain on bargain purchase, the acquirer shall reassess whether it has correctly identified
all of the assets acquired and all of the liabilities assumed an shall recognize any additional assets or liabilities that are
identified in that review. This is an application of conservatism.

Consideration Transferred

The consideration transferred in a business combination is measured at FAIR VALUE, which is the sum of the acquisition-
date fair values of the assets transferred by the acquirer, the liabilities incurred by the acquirer to former owners of the
acquiree and the equity interests issued by the acquirer.

Examples of potential forms of consideration include:

a. Cash
b. Non-cash assets
c. Equity instruments, i.e. shares, warrants and options
d. A business or a subsidiary of the acquirer
e. Contingent consideration

Illustration – Net Asset Acquisition (Goodwill)

On January 1, 2022, HANA Company purchased the net assets of BISHI Company for P2,000,000 cash. The net assets
(assets and liabilities) of BISHI as of the date of acquisition are as follows:

Book
  Value Fair Value
Accounts receivable (net) 600,000 650,000
Merchandise Inventory 400,000 300,000
Property & Equipment 1,250,000 1,500,000
Accounts payable 350,000 350,000
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 Long Term Debt 500,000 500,000

Required:
1. Compute for the goodwill (gain from acquisition) from business combination
2. Journalize the transaction in the books of the acquirer

Solutions:

1. Goodwill – 400,000

Consideration Transferred 2,000,000

Less: FV of net assets of acquiree  
Accounts receivable (net) 650,000  
Merchandise Inventory 300,000  
Property & Equipment 1,500,000  
Accounts payable - 350,000  
Long Term Debt - 500,000 1,600,000
Goodwill   400,000

*Goodwill is not amortized but tested for impairment at least annually in accordance with the provisions of IAS 36
(Impairment of assets)

2. Journal Entries

Accounts receivable (net) 650,000  

Merchandise Inventory 300,000  
Property & Equipment 1,500,000  
Goodwill 400,000  
Accounts payable   350,000
Long Term Debt   500,000
Cash   2,000,000

Note: The assets and liabilities of the acquiree was transferred (recognized) in the books of the acquirer measured at its
acquisition-date fair values. The difference between the consideration and the fair value of net assets acquired was
debited to “goodwill”.

Illustration – Net Asset Acquisition (Gain on Bargain Purchase)

On January 1, 2022, HANA Company purchased the net assets of BISHI Company for P1,500,000 cash. The net assets
(assets and liabilities) of BISHI as of the date of acquisition are as follows:

Book
  Value Fair Value
Accounts receivable (net) 600,000 650,000
Merchandise Inventory 400,000 300,000
Property & Equipment 1,250,000 1,500,000
Accounts payable 350,000 350,000
Long Term Debt 500,000 500,000

Required:
1. Compute for the goodwill (gain from acquisition) from business combination
2. Journalize the transaction in the books of the acquirer

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Solutions:

1. Gain on Bargain Purchase – 100,000

Consideration Transferred   1,500,000

Less: FV of net assets of acquiree    
Accounts receivable (net) 650,000  
Merchandise Inventory 300,000  
Property & Equipment 1,500,000  
Accounts payable - 350,000  
Long Term Debt - 500,000 1,600,000
Gain from Bargain Purchase   (100,000)

*Gain from bargain purchase is recognized as an income on the books of the acquirer. Under PFRS 3, if the combination
resulted to a gain on bargain purchase, a re-assessment must be made prior to recognition of such gain.

2. Journal Entries

Accounts receivable (net) 650,000  

Merchandise Inventory 300,000  
Property & Equipment 1,500,000  
Accounts payable   350,000
Long Term Debt   500,000
Cash   1,500,000
Gain from bargain purchase   100,000

Note: The assets and liabilities of the acquiree was transferred (recognized) in the books of the acquirer measured at its
acquisition-date fair values. The difference between the consideration and the fair value of net assets acquired was
credited to “gain”.

Non-Controlling Interest (NCI) or Minority Interest

NCI is the equity in a subsidiary not attributable, directly or indirectly to a parent. (PFRS 3)

For example, Handy Co. acquires 70% interest in Man Inc. The controlling interest (majority interest) is 70% while the NCI
is 30% (100%-70%). If Handy Co. acquires 100% of Man Inc., the NCI is zero.

Choice in the measurement of non-controlling interest (NCI)

PFRS 3 allows an accounting policy choice, available on a transaction-by-transaction basis, to measure NCI either at

 Fair value (sometimes called the full goodwill method) or

 The NCI’s proportionate share of net assets of the acquiree (sometimes call the partial goodwill method)

Illustration – Stock Acquisition (NCI)

On February 29, FACE acquired 80% of BOOK Inc., in exchange for cash. Because the former owners of BOOK needed
to dispose of their investments in BOOK by a specified date, they did not have sufficient time to market BOOK to multiple
potential buyers.

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On February 29, BOOK’s identifiable assets and liabilities have fair values of P600,000 and P200,000 respectively.

Case # 1 NCI measured at fair value

FACE Co. elects the option to measure NCI at fair value. The independent consultant engaged by FACE Co. determined
that the fair value of the 20% NCI in BOOK Inc. is P77,500
FACE Co. paid P500,000 for the 80% interest in BOOK Inc. How much is the goodwill (gain on bargain purchase) in the
business combination?

Solution:

Consideration Transferred 500,000

NCI in the acquiree (Fair Value) 77,500
Previously held interest in the acquiree -
Total 577,500
Fair Value of Net Assets acquired* 400,000
Goodwill 177,500

*Assets less liabilities (600,000 – 200,000)

The following journal entry is entered in the books of the acquirer on the date of business combination:

Investment in Subsidiary 500,000  

Cash   500,000

Notes:
- The NCI is measured at Fair Value – Assessed (NCI is presented in the consolidated statement of financial
position within equity but separately from the equity owners of the Acquirer)
- The entry to recorded in the books of the acquirer is the entry to record the investment in subsidiary ONLY, the
resulting goodwill (or gain) is never recognized in the books of the acquirer.

Case # 2 NCI measured at fair value

FACE Co. elects the option to measure NCI at fair value. A value of P125,000 is assigned to the NCI interest in BOOK
Co.
(P500,000 / 80%) x 20% = P125,000)

The consideration transferred is P500,000. How much is the goodwill (gain on bargain purchase) in the business
combination?

Solution:

Consideration Transferred 500,000

NCI in the acquiree (Fair Value) 125,000
Previously held interest in the acquiree -
Total 625,000
Fair Value of Net Assets acquired* 400,000
Goodwill 225,000

*Assets less liabilities (600,000 – 200,000)

The following journal entry is entered in the books of the acquirer on the date of business combination:

Investment in Subsidiary 500,000  

Cash   500,000

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Notes:
- The NCI is measured at Fair Value – Implied (NCI is presented in the consolidated statement of financial position
within equity but separately from the equity owners of the Acquirer)
- The entry to recorded in the books of the acquirer is the entry to record the investment in subsidiary ONLY, the
resulting goodwill (or gain) is never recognized in the books of the acquirer.

Case # 3 NCI measured at proportionate share in net assets

FACE Co. elects the option to measure NCI at proportionate share of BOOK Inc.’ net identifiable assets.

The consideration transferred is P500,000. How much is the goodwill (gain on bargain purchase) in the business
combination?

Solution:

Consideration Transferred 500,000

NCI in the acquiree (PSB)* 80,000
Previously held interest in the acquiree -
Total 580,000
Fair Value of Net Assets acquired** 400,000
Goodwill 180,000
   
*400,000 x 20% = 80,000  
**600,000 - 200,000 = 400,000  

Illustration – Stock Acquisition (NCI)

On April 1, 2022, HAPPY Corporation paid P1,800,000 cash for 80% of TOGETHER Company. After the combination,
HAPPY and TOGETHER Company continue to operate as a separate legal entity and prepare their separate financial
statements.

A condensed Statement of Financial Position of TOGETHER Company at April 1, 2022 and related fair values are
presented

  Book Value Fair Value

Current Assets 736,000 809,000
Fixed Assets 1,185,000 1,380,000
Patent (net) 117,000 96,000
Total 2,038,000  
     
Current Liabilities 215,000 215,000
Long-Term Debt 560,000 560,000
Share Capital, P20 par 420,000  
Retained Earnings 843,000  
Total 2,038,000  

Required: Compute the goodwill / gain on bargain purchase and journalize the entry in the books of the acquirer under:

1. Fair value (the full goodwill method) and

2. The NIC’s proportionate share of net assets of the acquiree (the partial goodwill method)

Solutions:

NCI at Fair Value (Full Goodwill method)

Consideration Transferred 1,800,000

NCI at Fair Value* 450,000
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 Previously held interest in the acquiree -
Total 2,250,000
Fair Value of Net Assets acquired** 1,510,000
Goodwill 740,000
   
*(1,800,000 / 80%) x 20% = 450,000
**(P809,000 + 1,380,000 + 96,000 - 215,000 - 560,000)
The following journal entry is entered in the books of the acquirer on the date of business combination:

Investment in Subsidiary 1,800,000  

Cash   1,800,000

NCI at Proportionate share of net assets of acquiree (Partial Goodwill method)

Consideration Transferred 1,800,000  

NCI at PSB* 302,000  
Previously held interest in the acquiree -  
Total 2,102,000  
Fair Value of Net Assets acquired** 1,510,000  
Goodwill 592,000  
     
*1,510,000 x 20% = 60,400    
**(P809,000 + 1,380,000 + 96,000 - 215,000 - 560,000)

The following journal entry is entered in the books of the acquirer on the date of business combination:

Investment in Subsidiary 1,800,000  

Cash   1,800,000

Acquisition related costs

Acquisition related costs are costs the acquirer incurs to effect a business combination – i.e. finders fee, professional fees,
administrative costs, cost of registering and issuing debt and equity securities.

Notes:

a. Cost of issuing debt instrument will affect the fair value of the debt instrument issued
b. Costs of issuing equity instruments are chargeable to share premium account or APIC net of any related income
tax benefit

Illustration – Business Combination with Transaction costs (Acquisition related costs)

On August 5, 2022, EAT acquired all of the identifiable assets and assumed all the liabilities of BULAGA Inc. On this date,
the identifiable assets acquired and liabilities assumed have fair values of P800,000 and P450,000 respectively.

EAT incurred the following acquisition related costs: legal fees, P5,000; due diligence costs, P50,000 and general
administrative costs of maintaining an internal acquisition department P10,000.

Case #1 As consideration for the business combination, EAT Co. transferred 4,000 of its own equity instruments with par
value per share of P100 and fair value per share of P125 to BULAGA’s former owners. Costs of registering the shares
amounted to P20,000. How much is the goodwill (gain on bargain purchase) on the business combination?

Solution:

Consideration Transferred* 500,000

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 NCI in the acquiree -

Previously held interest in the acquiree -

Total 500,000

Fair Value of Net Assets acquired** 350,000

Goodwill 150,000

   

*4,000 shares x P125 = P500,000  

**P800,000 - P450,000 = P350,000

Journal entries:    
     
Identifiable assets acquired 800,000  
Goodwill 150,000  
Liabilities assumed   450,000
Share Capital (4,000 shares at P100 Par) 400,000
Share Premium   100,000

Share premium 20,000  

Cash in bank   20,000
     
     
Professional fees expense 55,000  
General and admin costs 10,000  
Cash in bank   65,000

The acquisition related costs (legal fees, due diligence and general and admin costs) are expensed, except for the costs
to issue equity securities which are deducted from equity (share premium)

Case #2 As consideration for the business combination, EAT Co. issued bonds with face amount and fair value of
P500,000. Transaction costs incurred in issuing the bonds amounted to P25,000. How much is the goodwill (gain on
bargain purchase) on the business combination?

Solution:

Consideration Transferred (FV of bonds) 500,000  

NCI in the acquiree -  
Previously held interest in the acquiree -  
Total 500,000  
Fair Value of Net Assets acquired* 350,000  
Goodwill 150,000  
     
**P800,000 - P450,000 = P350,000  
     
     
Journal entries:    
     
Identifiable assets acquired 800,000  
Goodwill 150,000  
Discount on bonds payable 25,000  
Liabilities assumed   450,000
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 Bonds payable   500,000
Cash in bank   25,000
     
Professional fees expense 55,000  
General and admin costs 10,000  
Cash in bank   65,000

Notes:

- For goodwill computation, the consideration transferred is equal to the FAIR VALUE of the debt securities issued
without deduction from the transaction costs.
- In both cases above, the acquisition related costs, including costs of issuing debt and equity securities do not
affect the computation of goodwill.

Contingent Consideration

The consideration the acquirer transfers in exchange for the acquiree includes any asset or liability resulting from a
contingent consideration arrangement. The acquirer shall recognize the acquisition-date fair value of contingent
consideration as part of the consideration transferred in exchange for the acquiree.

The acquirer shall classify an obligation to pay contingent consideration as a liability or as equity on the basis of the
definitions of a financial liability and an equity instrument in IFRS 9.

Some changes in the fair value of contingent consideration that the acquirer recognizes after the acquisition date may be
the result of additional information that the acquirer obtained after that date about facts and circumstances that existed at
the acquisition date.

Subsequent measurement

When the change in fair value of a contingent consideration is a result of additional information that the acquirer obtained
during the measurement period, such change is accounted for as a retrospective adjustment to provisional amount.

However, changes resulting from events after the acquisition date, such as meeting an earnings target, reaching a
specified share price or reaching a milestone on a research and development project are not measurement
period adjustments. The acquirer shall account for changes in the fair value of contingent consideration that are not
measurement period adjustments as follows:

Contingent consideration classified as equity shall not be remeasured and its subsequent settlement shall be
accounted for within equity.

Contingent consideration classified as an asset or a liability that:

a. is a financial instrument and is within the scope of IFRS 9 shall be measured at fair value, with any resulting
gain or loss recognized either in profit or loss or in other comprehensive income in accordance with that
IFRS.
b. is not within the scope of IFRS 9 shall be accounted for in accordance with IAS 37 or other IFRSs as
appropriate.

Measurement Period Adjustment Subsequent to Measurement Period Adjustment

Change in FV that the acquirer recognizes AFTER the Change resulting from events AFTER the acquisition date
acquisition date may be result of information that the said that only EXISTED AFTER THE ACQUISITION DATE
acquirer obtained after the date about facts and
circumstances that EXISTED AT THE ACQUISITION The ff: changes are subsequent adjustments:
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 DATE
1. Meeting the target earnings
2. Reaching a specific share price
3. Reaching a milestone in R&D projects
Affects Goodwill or Income from Acquisition Affects Profit or Loss

Illustration – Contingent Consideration

On January 1, 2023, TAHIMIK Co. acquired all of the identifiable assets and assumed all of the liabilities of MAINGAY Co.
by paying cash of P2,000,000. On this date, MAINGAY’s identifiable assets and liabilities have fair values of P3,200,000
and P1,800,000 respectively.

TAHIMIK Co. agrees to pay an additional amount equal to 10% of the 2023’s year end profit that exceeds P800,000.
MAINGAY historically has reported profits of P600,000 to P800,000 each year.

After assessing the expected level of profits for the year based on forecasts and plans as well as industry trends,
TAHIMIK estimated that the fair value of the contingent consideration is P20,000.

Requirement: Compute for goodwill or gain on bargain purchase.

Solution:

Consideration transferred

Cash payment 2,000,000

Fair value of Contingent Consideration 20,000
Consideration Transferred 2,020,000
 
 
Goodwill / Gain on bargain purchase  
   
Consideration Transferred 2,020,000
NCI -
Prev. held interest -
Total 2,020,000
Fair value of net assets 1,400,000
Goodwill 620,000

Journal Entry:    
     
     
3,200,00
Assets acquired 0  
Goodwill 620,000  
1,800,00
Liabilities assumed   0
Liability for Contingent Consideration 20,000
2,000,00
Cash   0

CASE#1

Assuming the actual profit for the year is P1,100,000. The contingent consideration will be settled on January 17, 2024.

12/31/2023 Unrealized Loss on change in FV - PL* 10,000  

  Liability for Contingent Consideration 10,000
       
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   *FV of Contingent Consideration - 1/1/2023 20,000
  FV of Contingent Consideration - 12/31/2023  
  (P1,100,000 - P800,000) x 10%)   30,000
  Increase in FV of liability (loss)   (10,000)
       
       
1/17/2024 Liability for Contingent Consideration 30,000  
  Cash   30,000

The change resulting from meeting the target, not accounted for as measurement period adjustment.

CASE#2

Assuming the actual profit for the year is P600,000. The entry on December 31, 2023 is:

20,00
Liability for Contingent Consideration 0  
Gain on extinguishment of liability - PL 20,000

Since the earnings target is not met, the liability is extinguished. Accordingly, the goodwill recognized shall
remain at P620,000 regardless of the outcome of the contingency.
Illustration – Measurement period (adapted)

On July 1, 2020, MAMI Company acquired all the identifiable assets and assumed all the liabilities of DADI Company
for P500,000. On that date, DADI Company's assets and liabilities have a fair value of P750,000 and P400,000,
respectively. The assets acquired include a building which was assigned a provisional amount of P200,000 because
the fair value is not yet reliably determinable as of July 1, 2020, On January 4, 2021, temporary appraisal for the
building is P210,000. The value of the building was finalized on March 8, 2021 for P225,000.

ANALYSIS:

Date Entries Dr. Cr.

07/01/2020 Assets Acquired 750,000  

  Goodwill 150,000  
  Liabilities assumed   400,000
  Cash   500,000
       
01/04/2021 Assets Acquired 10,000  
  Goodwill   10,000
       
03/08/2021 Assets Acquired 15,000  
  Goodwill   15,000

Note: The measurement period is from July 1, 2020 up to June 30, 2021, any movement of value beyond June 30,
2021 is ignored.

Illustration – Measurement period (adapted)

PADRE Corporation acquired the net assets of DAMASO Company on January 1, 2021. Assets acquired from
Miguel Company at fair value include current assets — P1,150,000; equipment — P1,700,000; land —P600,000;
building — P3,600,000. Liabilities assumed amounted to P640,000. Fair value of ordinary shares issued
(consideration), P7,440,000.

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The agreement further provides that additional cash payments would be made on January 1, 2023, equal to 135%
of the amount by which annual earnings of PADRE Corporation exceed P265,000 per year, prior to January 1,
2023. Net income is P367,500 in 2021 and P462,500 in 2022. Assume that the liabilities recorded in January 1,
2021 exclude an estimated contingent liability recorded at an estimated amount of P320,000.

The amount of the estimated contingent liability was determined to be at P272,500 in November 10, 2021. The
estimated amount of the contingent liability was determined to increase by P85,000 in August 1, 2022 from the
last date of the change in estimate.

Required

1. Compute for the amount of goodwill presented in the separate statement of financial position of PADRE
Corporation on:

a. January 1, 2021
b. January 1, 2022
c. January 1, 2023
2. As a result of additional cash payment made in 2023 (if there is any), how much will be impact in the
profit or loss? Journalized the entry for additional cash payment.

Analysis

Requirement 1-a

Shares Issued 7,440,000

Contingent Consideration - Liability 320,000

Total 7,760,000

Less: Fair value of net assets acquired (6,410,000)

Goodwill, January 1, 2021 1,350,000

Contingent consideration is included in the total consideration at its estimated fair market value at acquisition date.

Requirement 1-b

Shares Issued 7,440,000

Contingent Consideration - Liability 272,500

Total 7,712,500

Less: Fair value of net assets acquired (6,410,000)

Goodwill, January 1, 2022 1,302,500

The change in the value of contingent consideration is within the me a su re me n t pe rio d (No ve mbe r 10 ,
2 02 1 ). I t will b e a d ju st ed retrospectively.

Requirement 1-c
Goodwill, January 1, 2023 1,302,500

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 The change in the value of contingent consideration is outside the measurement period (August 1,2022). It will
be charge to profit or loss.

Requirement 2        
         
Liability for Contingent Consideration* 357,500  
Loss on Contingent Consideration 47,500  
Cash**       405,000
         
*(272,500 + 85,000)        
**((367,500 - 265,000) + (462,500 - 265,000)) x 135%

Control Premium

The consideration transferred by the acquirer to the acquiree may include "control premium", an amount in excess of
the actual fair value of interest purchased. Control premium will be accounted for as follows:

 It must be included in the purchase price

 It is excluded in computing the non-controlling interest
 It affects goodwill or gain

Illustration: Control Premium (adapted)

On January 5, 2021, CHACHA Company purchased 80% of the outstanding voting shares of VUVU Corporation for
P600,000. The payment includes a control premium amounting to P30,000. The fair value of net assets of VUVU
Corporation on that date is P550,000.

How much is the goodwill on combination?

Analysis

Consideration 600,000
Non-Controlling Interest (20%) * 142,500
Total 742,500
Less: Fair value of net assets acquired (550,000)
Goodwill on combination 192,500
*((600,000 — 30,000) / (80%)) x 20%

Note: The fair value of NCI is computed based on the consideration after deducting the control premium. The
control premium will not affect the NCI computation under the proportionate method.

Business Combination Achieved in Stages (Step Acquisition)

Prior to a business combination, the acquirer may already own an equity interest in the acquiree (which may have been
accounted for under PAS 28 – Interests in Associates, PAS 31 or PFRS 9). When the acquirer obtains control over the
acquiree, this existing investment is viewed as part of what is given up to obtain control.

The acquiree shall account a business combination achieved in stages as follows:

1. Remeasure the previously held equity interest in the acquiree at its acquisition-date fair values
2. Recognize the gain or loss on the remeasurement in:
a. Profit or loss – if the previously held equity interest was classified as FVPL, Investment in Associate or
Investment in Joint Venture
b. Other Comprehensive Income – if the previously held equity interest was classified as FVOCI.
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 3. The existing investment is derecognized as if the acquirer disposed of it at fair value.

Illustration – Step Acquisition

On January 1, 2022, GINEBRA Company acquired 50% interest in SMB Company for P30,000,000. GINEBRA already
held 20% interest (classified as Equity Instrument at FVTPL) which had been acquired for P10,000,000 a year ago but
which was valued at P12,000,000 at January 1, 2022. The fair value of identifiable net assets of SMB Company on this
date was P57,500,000. GINEBRA Company opted to measure NCI at fair value. After the acquisition, GINEBRA and SMB
Company will continue to operate as a separate legal entity.

Required:

1. How much is the goodwill (gain on bargain purchase) on business combination?

2. Entries to record the step acquisition in the book of the acquirer

Solution:

Requirement 1:

Consideration Transferred 30,000,000 50%

NCI at Fair Value* 18,000,000 30%
Previously held interest in the acquiree (Fair Value) 12,000,000 20%
Total 60,000,000  
Fair Value of Net Assets acquired* 57,500,000  
Goodwill 2,500,000  
     
*(P30,000,000 / 50%) x 30% = P18,000,000    

Requirement 2:

Financial Assets @ FVTPL 2,000,000  

Unrealized Gains (P/L)   2,000,000
     
Investment in Subsidiary (P30M + P12M) 42,000,000  
Financial Assets @ FVTPL   12,000,000
Cash (Consideration paid)   30,000,000

Note: The previous interest (FA@FVTPL) is derecognized at its current fair value, with resulting gain/loss recycled in the
profit or loss.

Illustration – Step Acquisition

On January 2, 2023, CHEESE acquired a 60% interest in CAKE Company for P4,000,000. CHEESE already held a 10%
interest of CAKE (designated as Equity Instrument at FVTOCI) which had been acquired for P600,000 on June 12, 2022
and has a far value of P750,000 at January 2, 2023. The fair value of the non-controlling interest at January 2, 2023 is
P2,350,000 and the fair value of identifiable net assets of CAKE Company is P6,000,000.

Required:

1. How much is the gain/loss on revaluation of previously acquired interest?

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 2. How much is the goodwill (gain from bargain purchase) on business combination as of date of acquisition?
3. Journalized the transaction as of January 2, 2023.

Solutions:

Requirement 1

Fair value of previous interest 750,000

Previously acquired interest 600,000
Gain on re-measurement of previously held interest 150,000

Requirement 2

Consideration Transferred 4,000,000 60%

NCI at Fair Value (given) 2,350,000 20%
Previously held interest in the acquiree (Fair Value) 750,000 30%
Total 7,100,000  
Fair Value of Net Assets acquired* 6,000,000  
Goodwill 1,100,000  

Requirement 3

Financial Assets @ FVTOCI 150,000  

Unrealized Gains (OCI)   150,000
     
Investment in Subsidiary (P4M + P0.75M) 4,750,000  
Financial Assets @ FVTOCI   750,000
Cash (Consideration paid)   4,000,000

Note: The previous interest (FA@FVTOCI) is derecognized at its current fair value, with resulting gain/loss recycled in the
Other Comprehensive Income. The NCI and resulting goodwill is never recognized in the separate book of the acquirer.

Illustration – Comprehensive — Business Combination

The following Statement of Financial Position were prepared for BEEDEEYOW and YUNYUN BANK Company on
January 1, 2023 just before they entered into business combination:

  BEEDEEYOW Company   YUNYUN Bank Company

Cash and Receivables 450,000 500,000   225,000 250,000
Inventory 900,000 1,000,000   150,000 250,000
Building and Equipment 1,687,500 1,500,000   450,000 525,000
Accounts Payable 225,000 200,000   60,000 45,000
Bonds Payable 675,000 450,000   75,000 105,000
Common stock          
P20 par value 1,200,000        
P10 par value       300,000  
Additional Paid in Capital 225,000     75,000  
Retained Earnings 712,500     315,000  
           

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BEEDEEYOW Company acquired YUNYUN Bank Company by issuing 15,000 shares of common stocks and paying cash
amounting to P450,000. In addition, the following were incurred: Legal fees, Costs of SEC registration, Cost of issuing
stock certificates and General and administrative costs were incurred and paid costing the BEEDEEYOW Company of
P37,500; P37,500, P15,000 and P22,500 respectively.

If the market price of BEEDEEYOW Company and YUNYUN Bank Company are P25 and P14 respectively at the time of
acquisition,

1. How much is the Goodwill (Gain from acquisition)

2. How much is the Combined Common Stock after the acquisition?
3. How much is the Combined APIC after the acquisition?
4. How much is the retained earnings after the acquisition?
5. How much is the total liabilities after the acquisition?
6. How much is the total assets after the acquisition?

Solutions:

Consideration Transferred  
Cash 450,000
Stocks (@ MV) 15,000 x 25/share 375,000
Total 825,000
Fair value of net assets 875,000
Gain from Acquisition (50,000)

Balance Sheet
Account Format or Components Total Combined Balance
Common stock of AcquiRER at
Common Stock BV 1,200,000 + (15,000 x 20) = 1,500,000
+ Common stock issued at PAR

225,000 + (15,000 x (25-20) - 52,500 =

APIC APIC of AcquiRER at BV 247,500
+ APIC issued
- Stock issue cost

Retained Earnings RE of AcquiRER at BV 712,500 + 50,000 - 60,000 - 0 = 702,500

+ Income from acquisition
- Related expenses
- Excess of SIC over TOTAL
APIC

Liability Liability of AcquiRERat BV 900,000 + 150,000 + 0 = 1,050,000

+ Liability of AcquirEE at FV
+ Contingent Liability

Combined SHE + Combined

Asset Liability 2,450,000 + 1,050,000 = 3,500,000

OR Asset of the AcquiRER at BV 3,037,500 + 1,025,000 + 0 - 450,000

+Asset of the AcquirEE at FV -60,000 - 52,500 = 3,500,000
+ Goodwill
- Total cash payment : CT
Related expenses
Stock issue cost

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Therefore, I tell you, whatever you ask for in prayer, believe that you have received it, and it will be yours.
Mark 11:24

You are blessed!

Sir P 😊

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