Tab 1

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UNIT 2 & (3) : BUSINESS COMBINATION AND CONSOLIDATION

AT DATE OF ACQUISITION
●​ Under IFRS 3, a business combination is defined as a transaction where one company acquires
another or when two or more companies merge into one.
●​ It occurs when one company (acquirer) obtains control of another entity (acquiree).
●​ Acquisition of another business happens because the acquirer sees potential in the company of the
acquiree.

1.​ Net Asset Acquisition → involves purchase

of assets and assumption of liabilities
●​ Merger: acquirer survives, acquiree
dissolves and ceases to exist
●​ Consolidation: both acquirer and
acquiree dissolve to form a new
company
2.​ Stock Acquisition → involves purchase of
more than 50% of the acquiree’s outstanding
voting share
●​ Wholly-owned Subsidiary: parent
acquires and holds 100% of the
voting stocks of the subsidiary
Accounting Perspective ●​ Partially-owned Subsidiary: parent
holds less than 100% but more than
50%; remaining interest will be
assigned to non-controlling interest
(50% or less)

2.1 Accounting for Business Combinations

Governed by IFRS 3, business combinations shall be accounted for using the acquisition method.
●​ All identifiable assets and liabilities of the acquired company shall be measured at fair value.
●​ Involves recognition of the following:

Total Value Given Up (TVGU) Amount paid to acquire the business.

Fair Value of the Acquiree’s Net

The true value of the business to be acquired.
Identifiable Assets (FVANIA)

Goodwill or Gain on Bargain Purchase Difference between TVGU and FVANIA.

○​ TVGU > FVANIA → goodwill

■​ TVGU: directly related
■​ FVANIA: inversely related
○​ TVGU < FVANIA → gain on bargain purchase
■​ TVGU: inversely related
■​ FVANIA: directly related
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2.1.1 TVGU Computation

Consideration Transferred xx

Non-controlling Interest xx

Previously Held Interest xx

TVGU xx

2.1.1.1 Consideration Transferred Computation

●​ All components are measured at fair value on the date of acquisition.

Cash Paid to the Acquiree xx

Non-cash Assets Transferred xx

Liabilities Incurred (Contingent Consideration) xx

Shares Issued (@FV of acquirer) xx

Consideration Transferred xx

●​ Contingent consideration pertains to an additional payment to be made by the acquirer to the

acquiree subject to the future events, as long as the conditions are satisfied.
○​ If the fair value is not given:
Implied FV of Contingent Consideration = Contingent Amount * % of Occurrence

2.1.1.2 Non-Controlling Interest Computation

General Rule: At fair value at date of acquisition.
●​ Can be given or not given
○​ If given → as is
○​ If not given → compute for the implied fair value

Consideration Transferred - Control Premium

x NCI %
Parent’s Ownership %

* Control premium distorts the computation; therefore, remove it. However it is still included in
the computation of the consideration transferred.

●​ There are two exceptions in which it is not measured at fair value:

1.​ NCI’s fair value < NCI’s proportionate share in the FVANIA
2.​ Parent opts to measure NCI at its proportionate share in the FVANIA → no need for FV
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○​ Proportionate share in the FVANIA is equal to:

FVANIA x NCI %

2.1.1.3 Previously Held Interest Computation

Previously-held Interest is the ownership over the company before acquiring control.
* Ex. You had 10% interest in a company before and then you acquired an additional 60%, your total ownership is now 70%,
which gives you control over the company. The PHI is 10%.

General Rule: At fair value at date of acquisition.

●​ Can be given or not given
○​ If given → as is
○​ If not given → compute for the implied fair value

Consideration Transferred - Control Premium

x PHI %
Recently Acquired %

2.1.2 FVANIA Computation

Carrying Value of the Acquiree’s Net Assets (CVANA) xx

Pre-existing Goodwill (xx)

Carrying Value of the Acquiree’s Net Identifiable Assets (CVANIA) xx

Change in Fair Value of Assets xx/(xx)

Change in Fair Value of Liabilities xx/(xx)

FVANIA xx

●​ CVANA can be computed by deducting total liabilities (@FV) from the total assets (@FV), or
simply getting the total shareholders’ equity.
●​ Pre-existing goodwill should be removed because goodwill is not identifiable.

2.1.3 Other Considerations

●​ Costs incurred related to business

combinations such as:
○​ Professional fees
1.​ Acquisition Related Costs ○​ Finder’s fees
○​ Broker’s fees
○​ Administrative costs
●​ These costs are expensed immediately.
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●​ Costs incurred related to the issuance of shares

in relation to business combinations.
○​ Cost of printing share certificates
○​ SEC registration fees for stock issue
○​ Documentary stamp tax on stock
issuance
●​ These costs are charged to the share premium
2.​ Share Issuance Costs arising from business combination.
○​ If SP is insufficient, the excess SIC
shall be debited to “SIC” account →
contra-SHE account deducted from
the following in order of priority
■​ SP from previous issuances
■​ Retained earnings

2.1.4 Other Computations

Share Capital of Acquirer + Par Value of Shares Issued in Bus.
1.​ Combined Share Capital Comb

Share Premium of Acquirer + Share Premium from Bus. Comb

2.​ Combined Share Premium - Share Issuance Costs

Retained Earnings of Acquirer + Gain on BP - Acquisition

3.​ Combined Retained Earnings Related Costs - Excess SIC

4.​ Combined Shareholders’ Equity Add all combined equity accounts

Total Liabilities - Acquirer (@CV) + Total Liabilities -

5.​ Combined Liabilities Acquiree (@FV) + Contingent Consideration + Unpaid
Acquisition Related Costs + Unpaid SIC

Total Assets - Acquirer (@CV) + Total Assets - Acquiree

6.​ Combined Assets (@FV) + Goodwill - Cash Paid to Acquiree - Cash Paid for
Acquisition Related Costs - Cash Paid for SIC

7.​ Combined Individual Accounts Account - Acquirer (@CV) + Account- Acquiree (@FV)

●​ Total Assets - Acquiree (@FV) does not include pre-existing goodwill.

●​ If the acquirer goes in more than one business transaction, there can be both a goodwill and a gain
on BP because we will simply account for each transaction separately → can’t offset

If Stock Acquisition
Total Assets - Parent (@CV) + Total Assets - Subsidiary
(@CV) - Pre-existing Goodwill + FV Adjustments for Assets
1.​ Combined Assets of Subsidiary + Goodwill - Cash Paid to Subsidiary - Cash
Paid for Acquisition Related Costs - Cash Paid for SIC

2.​ Consolidated SHE to NCI The actual NCI

3.​ Consolidated SHE to Parent Conso. Share Capital + Share Premium + Retained Earnings
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2.1.5 Working Paper Eliminating Entries

These are not recorded in neither the books of the parent nor the subsidiary; instead, it is in a working
paper separate from the books of parent and subsidiary → not part of accounting records
●​ After the three working paper eliminating entries, the Investment in Subsidiary account will be
totally eliminated since it is an intercompany account, while the NCI account is fully recognized.

1.​ Elimination of the Subsidiary’s Shareholder Equity

The total SHE is allocated to the

Investment in Subsidiary and NCI
accounts based on their share in
ownership interest.

2.​ Fair Value Adjustments

The placement of the Investment in
Subsidiary and NCI accounts will
depend on which side is lower, then will
be allocated based on their share in
ownership interest.

3.​ Recognition of Goodwill or Gain on BP

a.​ Goodwill
The goodwill is allocated based on a
goodwill allocation schedule.
●​ If the NCI is measured at
proportional share then it has no
share in goodwill.

Parent NCI

TVGU xx CT + PHI NCI

FVANIA xx Ownership % Ownership %

Goodwill xx xx xx
Goodwill Allocation Schedule

b.​ Gain on BP
Gain on BP is 100% attributable to the
parent. NCI has no share because it
arises if the acquirer buys the business
lower than the FVANIA, which is only
attributable to the party obtaining control.
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2.2 Accounting for Provisional Values

Provisional values are temporary because in practice, fair values of the acquiree are not always finalized
immediately; it takes some time.
●​ If initial accounting for business combination is not complete, you can adjust or assign a
temporary value on the date of acquisition for one year from that date [measurement period]
●​ There are two types of adjustments after date of acquisition:
○​ Measurement Period Adjustment → retroactive adjustment to the result
○​ Non-Measurement Period Adjustment → reported in profit or loss

2.2.1 Guide in Identifying Adjustment

Case 1 Case 2

Are the facts and circumstances warranting the

adjustment already existing as of the acquisition Yes Yes/No
date?

Will the adjustment occur within the measurement

Yes Yes/No
period of 1 year from date of acquisition?

Measurement Period Non-Measurement

Type of Adjustment
Adjustment Period Adjustment

●​ If one of the questions’ answer is no, it will automatically be a non-measurement period

adjustment.
●​ If the problem is silent, facts and circumstances already exist at the date of acquisition.
○​ ↑ CC, ↑ GW, ↓ GBP
○​ ↓ CC, ↓ GW, ↑ GBP