BUSINESS COMBINATION Types Business Combination

Business Combination - A transaction or other event in which an A. Acquisition of Net Assets

acquirer obtains control of one or more businesses.
▪ The acquirer purchases the assets and assumes the liabilities of the
Control - An investor controls an investee when the investor has the acquiree.
power to direct the investees relevant activities (operating and
financing policies) thereby affecting the variability of the investors ▪ The acquirer must acquire 100% of the net assets of the acquiree.
investment returns from the investee. ▪ After the acquisition the acquired entity normally ceases to exist a
General Presumption: separate legal or accounting entity.

Control normally exist when the acquirer holds more than Statutory Merger – acquiring company survives, whereas the
50% interest in the acquirer’s voting rights. acquired company ceases to exist as separate legal entity.

Other factors that indicates control Acquirer + Acquiree = Acquirer

▪ Power to appoint or remove the majority of the BOD of acquiree. Statutory Consolidation – results when a new corporation is formed
to acquire two or more other corporations.
▪ Power to cast the majority votes at board meetings.
Acquirer + Acquiree = New Company
▪ Power over more than half of the voting rights of the acquiree
because of an agreement with the investors.

▪ The acquirer controls the acquiree’s operating and financing policies B. Acquisition of Common Stock
because of law or an agreement ▪ The books of the acquirer and the acquiree remain intact and
consolidated financial statement is prepared periodically.

▪ The acquirer obtains control over the acquiree by acquiring majority

ownership interest.

▪ After the business combination, the parent and the subsidiary retain
their separate legal existence.
▪ The parent records the ownership interest acquired as Investment in Acquisition Method – Process in Business Combination
Subsidiary in its separate accounting books.
STEP 1: Identify the Acquirer
Separate F/S Consolidated F/S
Investment in Presented as NCA Not Presented The acquirer is the entity that obtains control of the acquiree. (PFRS 3
Subsidiary par. 7)
Goodwill from Not Presented Presented as NCA
Business ▪ Transfer cash, or other assets or incur liabilities.
Combination
▪ The entity that issues its equity interest (Except Reverse
Acquisition).
Accounting Procedure for a Business Combination
▪ Relative size is significantly greater than that of the other combining
Required Accounting Method: Acquisition Method entity.

Process in Business Combination ▪ The one who initiated the combination.

▪ Identify the Acquirer STEP 2: Determine the Acquisition Date

▪ Determine the Acquisition Date ▪ Date on which the acquirer obtains control of the acquiree.

▪ Recognize and Measure either goodwill or a gain from a bargain ▪ Can be earlier, later or same as “closing date”.
purchase, either exists in the transaction.
Closing Date – the date on which the acquirer legally transfer the
✓ Consideration Transferred consideration, acquires the assets and assumes the liabilities of the
acquiree.
✓ Non-controlling interest in the acquiree
The ff are determined at the acquisition date:
✓ Previously held equity interest in the acquiree
▪ The fair value of the non cash assets, if any, paid for business
✓ Identifiable assets acquired and liabilities assumed on the business combination.
combination
▪ The fair value of the acquirees net assets acquired by the entity.
▪ The fair value of Non-controlling interest (if acquisition is not STEP 3.1 : Acquisition Cost – Fair Value of Consideration
100%).
Cash At Face Value
Measurement period – 1 year to adjust “provisional amount”. Non Cash At Fair Value (Difference between fair and
book value is recognized in profit or loss)
STEP 3: Recognition of Goodwill or Bargain Purchase Gain Deferred payment At fair value upon issuance of bonds or
notes
Goodwill resulting from a business combination is computed as Equity Instruments At far value of the acquirer’s own shares of
follows: stocks
Contingent • Future payment subject to conditions
Indirect Valuation - Residual approach where in goodwill is measured Consideration • At acquisition date fair value with the
as the excess of the sum of consideration transferred, NCI in the subsequent measurement rules as follow:
acquiree, and previously held interest over the fair value of net assets
of the acquiree. Remeasurement Changes
in FV
Consideration Transferred XXX Asset/Cash Each Reporting Profit or
Contingency Date Loss
Non-controlling Interest (NCI) in the acquiree XXX Stock No N/A
Contingency remeasurement
Previously held equity interest in the acquiree XXX

Total XXX

Book Value of Net Asset (XXX) Acquisition Related Cost

Excess XXX Expense

Undervaluation of Net Assets (XXX) • Cost directly attributable to the combination which includes such as
finder’s fee, advisory, legal accounting, valuation and other
Overvaluation of Net Assets XXX
professional or consulting fees.
Goodwill (Gain on bargain purchase) XXX
• Indirect, ongoing costs, general costs including costs to maintain an
internal acquisition department (mergers and acquisition department).
Issuance Cost ▪ Acquirer (combined FS) – measured at fair value even if it is not
probable.
• Stock Issuance costs - decrease in share premium account
Identifiable Intangible Assets
• Debt Issuance costs - increase in discount or decrease in premium
PFRS 3 requires the acquirer to recognize identifiable assets acquired
STEP 3.1: Identifiable assets acquired and liabilities assumed on regardless of the degree of probability of inflow of economic benefits.
the business combination identifiable if:
As of acquisition date the acquirer should recognize identifiable assets ▪ Can be separated; or
acquired, the liabilities assumed and any Noncontrolling Interest.
▪ Arises from contractual or legal rights.
Conditions for Recognition
Intangible Assets recognized in Business Combination:
▪ Must be part of the business acquired (Substance over form).
▪ Existing intangible Assets
▪ Must meet the definitions of Assets and Liabilities in the Framework
(including unrecognized asset & liabilities). ▪ Intangible assets not recorded by acquiree (e.g. In process R&D,
Internally generated intangibles, internally generated brands)
Expected future costs are not included in the assets & liabilities (e.g.
post acquisition reorganization costs) Items not recognized as Identifiable Assets/Liability

Contingent Liability ▪ Assembled workforce of the acquiree.

Recognized by the acquirer if: ▪ Potential Contracts.

▪ It is a present obligation that arises from past events; and ▪ Contingent Assets.

▪ It’s fair value can be measured reliably. ▪ Future Contract Renewal.

Requirement for recognition: ▪ Post acquisition reorganization cost

▪ Acquiree (separate FS) – probable.

STEP 3.1: Identifiable assets acquired and liabilities assumed on ▪ The date when the acquirer receives the need information about the
the business combination facts and circumstances.

General Rule: Identifiable Assets Acquired and Liabilities assumed A. Measurement period adjustments.
are measured at their acquisition date Fair Value.
▪ Additional information obtained during the measurement period
Asset/Liability Measurement which provide evidence of facts that existed as of acquisition date.
Non Current Asset Held for Sale Fair Value less Cost to sell
Intangible Assets Not Currently Fair Value ▪ Retrospective adjustment to provisional amount (adjustment to
Recorded by Goodwill)
Acquiree (In process R&D,
Internally generated Increase in Net Identifiable Asset Decrease in Goodwill
brands) Decrease in Net Identifiable Asset Increase in Goodwill
Contingent Liability (Recognized Fair Value
as liability even
if it is not probable) B. Not Measurement period adjustments.

▪ Changes in value is a result of events occurring subsequent to date

Use Provisional Values of acquisition.

Financial Statements should be prepared using provisional amounts ▪ Accounted as Prior Period Adjustments under PAS 8.
for items which the accounting is incomplete.
Contingent Consideration
Adjustments to Provisional Values
Refers to the additional consideration for the business combination to
PFRS 3 permits adjustments to items recognized in the original be given to acquire upon the happening of a contingency which is pre-
accounting for business combination as long as it is with in the agreed at the date of acquisition.
measurement period.
Initial Measurement
Measurement period
Fair value of the contingent consideration.
▪ One year from the date of acquisition; or
Subsequent Measurement Investment in Subsidiary XX

A. Measurement period adjustments. Liability/Share Capital XX

Increase in FV of CC Increase in Goodwill

Decrease in FV of CC Decrease in Goodwill
Consolidated Financial Statements

B. Not Measurement period adjustments. The financial statements of a group in which the assets, liabilities,
equity, income, expenses and cash flows of the parent and its
Meeting of earning target, reaching specified share price, reaching subsidiaries are presented as those of a single economic entity.
milestone in R&D project.
Exemptions from Preparing Consolidated Financial Statements
Increase in FV of CC Loss in P&L
Decrease in FV of CC Gain in P&L a. The parent is a subsidiary of another entity and its other owners do
not object to the parent not presenting consolidated financial
statements;

b. The parent’s debt or equity instruments are not traded in a public

CONSOLIDATION AT THE DATE OF ACQUISITION market (or being processed for such purpose); and
Separate Financial Statements c. The parent’s ultimate or any intermediate parent produces
consolidated financial statements that are available for public use and
Those presented by a parent, an investor in an associate or a joint
comply with PFRSs.
venture in which investments are accounted for on the basis of the
direct equity interest rather than on the basis of the reported results Accounting Requirements
and net assets of the investees.
▪ Consolidated financial statements shall be prepared using uniform
Journal Entries at Acquisition Date (Stock Acquisition) accounting policies.
The parent makes an entry debiting Investment in subsidiary and ▪ The financial statements of the parent and its subsidiaries used in
crediting either cash, debt, or stock. preparing consolidated financial statements shall have the same
reporting dates. (The maximum difference in reporting dates is 3
months.
▪ Consolidation begins from the date the investor obtains control of Goodwill
the investee and ceases when the investor loses control of the
investee. Measurement of Goodwill

Non-Controlling Interest Consideration Transferred XXX

Non-controlling interest is the equity (net assets) in a subsidiary not Non-controlling Interest (NCI) in the acquiree XXX
attributable to a parent. Previously held equity interest in the acquiree XXX
Presentation of NCI Total XXX
▪ reported as part of equity of the consolidated group, Book Value of Net Asset (XXX)
▪ recorded separately from the parent’s interests , and Excess XXX
▪ clearly identified and labelled (e.g., non-controlling interest in Undervaluation of Net Assets (XXX)
subsidiaries) to distinguish it from other components of the parent’s
equity. Overvaluation of Net Assets XXX

Measurement of NCI Goodwill (Gain on bargain purchase) XXX

Fair Value Basis (Full Proportionate Basis Partial

Goodwill). Goodwill
▪ Share of book value of NIA of ▪ Share of book value of NIA of Illustrative Example
Subsidiary Subsidiary
▪ Share of fair value ▪ Share of fair value On January 1, 2022 Space X acquires 75% (750,000 ordinary shares)
adjustments at acquisition adjustments at acquisition date of Converge company for P7,500,000. when Converge’s shares are
date; and trading at P8 per share at the stock market. Assuming that the net
▪ Share of goodwill in identifiable assets with a carrying value of P6,000,000 has a fair value
subsidiary at
of P8,000,000, determine the following:
acquisition date.
a. Non-controlling Interest and Goodwill/gain if the non-controlling
interest is to be valued at the proportionate allocation of acquiree’s net
assets.
b. Non-controlling Interest and Goodwill/Gain if the non-controlling investment previously held to fair value and consolidates the investee
interest is to be valued at the fair value of shares held by NCI. going forward.

Accounting Requirements

Control Premium ▪ The identifiable net assets of the acquiree are remeasured to their
fair value on the date of acquisition.
A control premium is an amount that a buyer is usually willing to pay
over the current market price of a publicly traded company. ▪ Non-controlling interests are measured on the date of acquisition
under fair basis or proportionate basis.

Accounting for Previously Held Investment

Change in ownership leading to a change in the nature of an

investment is reported as deemed sale of the existing investment at
fair value, and as deemed purchase of new investment at fair value.

Previous Investment Remeasurement Gain or Loss

FVTOCI Other Comprehensive Income
FVTPL Profit & Loss
Associate Profit & Loss

Reverse Acquisition

The entity that issues securities (legal acquirer) is identifies as the

acquiree for accounting purposes while the entity whose equity
interests are acquired (legal acquiree) is the acquirer for accounting
Step Acquisition – Business Combination Achieved in Stages purposes.

A step acquisition is a business combination in which an investor Conventional Reverse Acquisition

obtains control over an investee through multiple transactions. When Acquisitions
the investor obtains control of the investee, it remeasures any Issuer of shares as The issuer of shares The issuer of shares
consideration is the is the accounting
 accounting acquirer. acquiree.
Reference to •Accounting acquirer •Accounting
combining – Legal Parent acquirer/Legal
constituents •Accounting acquiree Subsidiary
– Legal Subsidiary •Accounting
acquirer/Legal Parent
Measurement of Fair value of Fair value of the
Consideration consideration notional number of
Transferred transferred by the equity instruments
acquirer. that the accounting
acquirer (legal
subsidiary) would
have had to issue to
the accounting
acquire (legal parent)
to give the owners of
accounting acquiree
(legal parent) the
same percentage
ownership in the
combined entity.