Business Combinations It should not be applied to:

Business Combination  formation of a joint venture (joint arrangement);

 a transaction or event in which one company (acquirer)  acquisition of an asset or group of assets that does not
obtains control of the another entity/ies (acquiree). constitute a business; and
 occurs when two or more separate businesses join into a  combination of entities or businesses under common control.
single accounting entity.
IDENTIFYING A BUSINESS COMBINATION
Forms of Business Combination  It can occur in various ways such as by transferring cash,
 Statutory Merger – occurs when two or more companies incurring liabilities, and issuing equity instruments;
merge into a single entity which shall be one of the  It can be structured in various ways to satisfy legal, taxation
combining entities. A + B = A or B or other objectives; and
 Statutory Consolidation – occurs when two or more  It must involve the acquisition of business.
companies combined into a single entity which shall be the
consolidated company (new entity). A + B = C THE ACQUISITION METHOD
 Acquisition of Stocks – the acquirer issues consideration in  Identifying the acquirer
exchange for the ownership of stocks (shares) in the  Determining the acquisition date
acquired company. A + B = AB  Recognizing and measuring identifiable assets acquired,
liabilities assumed, and any non-controlling interest in the
Types of Business Combination acquiree
 Horizontal Integration – a business combination of two or  Recognizing and measuring goodwill or gain on bargain
more entities with similar businesses or industry purchase
(competitor).
 Vertical Integration – a business combination of two or STEP 1: Identifying the acquirer
more entities operating at different levels in marketing or The acquirer is usually the entity that:
production chain (customer-supplier).  transfers cash or other assets or incurs liabilities
 Conglomerate – a business combination of two or more  issues its equity interests (except for reverse acquisitions)
unrelated businesses with dissimilar nature and diverse  is usually larger in terms of assets or revenues
products and services (unrelated)
STEP 2: Determining the acquisition date
Reasons of Business Combination
 It is the date when the acquirer obtains control of the
 Elimination of competition acquiree.
 Economies of scale  It can be earlier, later or same as the closing date (the date
 Staff /Personnel reduction when the acquirer legally transfers the consideration,
 Acquiring new technology acquires the assets and assumes the liability).
 Improved market reach and visibility
STEP 3: Recognizing and measuring identifiable assets acquired,
Accounting for Business Combination liabilities assumed, and any non-controlling interest in the
 Pooling of Interest – it uses historical values of the assets acquiree
acquired and liabilities assumed to record the business  Identifiable Assets – it should be measured at fair value.
combination (PIC Q&A 2011-02).  Liabilities Assumed – it should be measured at fair value.
 Acquisition Method – requires the recording of assets  Non-Controlling Interest – it is the equity in a subsidiary not
acquired and liabilities assumed at their fair values at the attributable to the parent. It is measured either at fair value
acquisition date (PFRS 3). (full goodwill) or proportionate share (partial goodwill).
 NCI at Fair Value = Consideration Transferred ÷
PFRS 3: BUSINESS COMBINATION Acquirer Interest% x NCI%
 It was originally published in March 2004.  NCI at PS = Fair Value of the Net Asset Acquired x
 A revised version was issued in January 2008. NCI%
 Latest amendment was made in May 2020.  Measurement Period – it is the period when provisional
amounts can be adjusted (should not exceed one (1) year.
OBJECTIVE OF PFRS 3
To improve the relevance, reliability, and comparability of the STEP 4: Recognizing and measuring goodwill or gain on bargain
information that a reporting entity provides in its financial statements purchase
about a business combination and its effects.  Proforma Computation:
It establishes principles and requirements for how the acquirer:
 Recognize and measure in its financial statements the
identifiable assets acquired, the liabilities assumed, and any
non-controlling interest in the acquiree;
 Recognize and measure the goodwill acquired in the
business combination or a gain from a bargain purchase;
and  If positive, the result is goodwill and to be recorded as an
 Determine what information to disclose to enable users of asset in the books of the acquirer. Subsequently, it is tested
the financial statements to evaluate the nature and financial for impairment at least annually.
effects of the business combination.  If negative, the result is gain on bargain purchase and to
be recorded as an income in the books of the acquirer. Note:
SCOPE OF PFRS 3 before recording as income, the recognition and
It is applied to a transaction or event that meets the definition of a measurement should be reassessed.
business combination.
CONTINGENT CONSIDERATION
 The acquirer may also transfer any asset, liability or equity
resulting from a contingent arrangement.
 It is measured at fair value at the time of the business
combination.
 If the amount of contingent consideration changes as a result
of a post-acquisition event, accounting for the change in REVERSE ACQUISITION
consideration depends on whether the additional  It occurs when the entity that issues shares (the legal
consideration is classified as an equity instrument or an acquirer) is identified as the acquiree for accounting
asset or liability: purposes (e.g. backdoor listing).
 If it is classified as an equity instrument, the  The legal acquirer becomes the accounting acquiree, and
original amount is not remeasured. the legal acquiree becomes the accounting acquirer.
 If it is classified as an asset or liability that is a
financial instrument, it is measured at fair value,
and gains and losses are recognized in either
profit or loss or other comprehensive income
(IFRS 9 Financial Instruments or IAS 39 Financial
Instruments: Recognition and Measurement).
 If it is not within the scope of IFRS 9 (or IAS 39),  The accounting acquirer usually issues no consideration for
it is accounted for in accordance with IAS 37 the acquiree, so compute for the “deemed consideration
Provisions, Contingent Liabilities and Contingent transferred”.
Assets or other IFRSs as appropriate.
PFRS
ACQUISITION RELATED COST
 Costs of issuing debt or equity instruments are accounted for
IFRS 9 - Financial Instruments:
 Debt Instrument - will affect the fair value of the
debt instrument issued or
 Equity Instrument - chargeable to share premium PFRS FOR SMES
(APIC) or retained earnings.  Total Assets: < 350M or Total Liabilities: < 250M
 All other costs associated with an acquisition must be  Not in the process of filing its financial statements for the
expensed, including reimbursements to the acquiree for purpose of issuing any class of instruments in the public
bearing some of the acquisition costs: market
 finder's fees  Not a required to file financial statement under SRC Rule 68
 advisory, legal, accounting, valuation, and other  Not a holder of a secondary license issued by a regulatory
professional/consultancy fees agency (banks, investment house, finance company,
 general administrative costs including costs of insurance company, mutual fund and securities
maintaining an internal acquisition department broker/dealer)
 Not a public utility
BUSINESS COMBINATION ACHIEVED IN STAGES
 It is also known as step acquisition. EXEMPTIONS TO PFRS FOR SMES
 Prior to control being obtained, an acquirer accounts for its  Part of a group reporting under Full PFRS (e.g. subsidiary,
investment in the equity interests of an acquiree in parent, joint venture, associate, branch office)
accordance with the nature of the investment  Subsidiary of a foreign parent company moving towards
IFRS
 Projected to breach/exceed the quantitative threshold
 Plan to conduct an initial public offering within the next two
(2) years

FULL PRFS VS PFRS FOR SMES

 Any previously held interest should be measured at
acquisition date fair value.

PROFORMA ENTRIES – DATE OF ACQUISITION

Net Asset Acquisition:

Stock Acquisition