UNIT 2 - BUSINESS COMBINATION (IFRS 3)
● Transaction/event that gives control to the acquirer
● Applied on the POV of the ACQUIRER ONLY
1. Two (2) Legal Ways
1.1 Asset Acquisition
● Buying ALL the assets of the acquiree & assuming ALL of its liabilities
● Always a 100% acquisition
● Non-controlling [minority] interest NEVER exists.
Books (1 set)
● Books of Acquiree (Ae) ⇒ CLOSED
● Books of Acquirer (Ar) ⇒ COMBINED books
○ ONLY set of books - does NOT prepare consolidated FS
Journal Entry
- Transferring the assets and liabilities of the acquiree TO the books of the acquirer
Assets XX
Goodwill XX
Liabilities XX
*Consideration transferred (CT) XX
*Gain on Bargain Purchase (BP) XX
*CANNOT be recognized at the same time - goodwill OR gain
Merger vs. Consolidation
● Merger: A + B = A or B
● Consolidation: A + B = Consolidation
1.2 Stock Acquisition (Q2)
● Buying the voting stocks of the acquiree
● Treated as ”investors”
● Enough to buy MORE THAN HALF and up to 100% [50.0001%] of the
voting stocks of the corp.
○ NOT required to buy all shares
○ Can also buy up to 100% [NOT automatically converted to asset
acquisition]
● Non-controlling interest EXISTS if less than 100%
● Uses BOTH IFRS 10 (Consol FS) & IAS 27 (Separate FS)
Books (2 sets)
● Books of Acquiree (Ae) ⇒ OPEN
● Books of Acquirer (Ar) ≠ Consolidated Books
○ Does NOT prepare consolidated FS
Journal Entry
*Inv. in Subsidiary XX
Consideration transferred (CT) XX
*Initial measurement ⇒ CT
Shares in a Corporation
● Ordinary/Common - ONLY one with voting rights [IFRS 3]
● Preferred - NO voting rights [IFRS 9: Financial Instruments]
How much is the Goodwill in the separate books of the acquirer?
● If asset acquisition ⇒ goodwill debited in JE
● If stock acquisition:
○ Separate FS of Parent = 0 (no goodwill)
○ Only seen in consolidated FS
How much is the Investment in Subsidiary?
● If asset acquisition ⇒ 0
● If stock acquisition:
○ Separate FS of Parent ⇒ inv. in subsidiary debited in JE
○ Consolidated FS ⇒ 0
2. Acquisition Method
● Applied on the POV of the acquirer
Steps:
2.1 Identify the Acquirer
● Acquirer - the entity that obtains CONTROL over the acquiree
Control (IFRS 10)
● Control - you're the one deciding for that other company
● Requisites:
a. Power to direct [participate] the financial and operating policies (F&O) of
the company
b. Rights to Variable Return (RVR) [share in the P/L]
■ Note: dividends = fixed returns
c. Ability to use the power to direct the F&O policies of the company to affect
the RVR
Scenarios of Control
1. Acquirer owns more than half of the voting stocks of the acquiree
2. Acquirer owns less than half but has power:
a. Over more than half by way of agreement with other shareholders
b. To direct the F&O policies of the company by way of statute or agreement
c. To cast majority of votes in BOD meetings
● BOD - people who manages the affairs of the corporation
d. To cast additional vote in case of deadlocks [tie]
e. To appoint or remove majority of BOD
3. Acquirer owns less than half but a significant minority interest exist
2.2 Determine the Acquisition Date
● Acquisition Date - Date acquirer obtains control over acquiree
1/1/2024 10% ⇒ IFRS 9
2/1/2025 15% ⇒ IAS 28 (10%+15%= 25%)
6/30/2026 30% ⇒ IFRS 3 & 10 (25%+30%=55%)
8/31/2027 20%
2.3 Recognize & Measure the Consideration Transferred (CT)
● Measurement: CT ⇒ FV on date of acquisition
● CT = A, L, & E
2.3.1 SoriaNotes:
2.3.1.1 Cash
● General Rule: Cash ⇒ Face Value
● Exemption: Future payment ⇒ Discount to PV
○ Time Value of Money - value of cash current & future are different
2.3.1.2 Non Cash Asset
● Measurement ⇒ FV on date of acquisition
2.3.1.3 Equity
● Measurement ⇒ FV on date of acquisition
2.3.1.4 Future Operating Losses
● IGNORED ☹️
2.3.1.5 Acquisition Related Costs
● IFRS 3 (direct / indirect cost) ⇒ NOT part of CT [Expensed outright]
● IFRS 4 (SMEs):
○ Direct ⇒ part of CT & Investment in Subsidiary (IIS)
○ Indirect ⇒ NOT part of CT [Expensed outright]
2.3.1.6 Cost to Issue and Register Stocks (CTIR - Stocks)
● AKA “Stock Issuance Cost”
● NOT part of CT & NOT Expensed
● CONTRA EQUITY Account
○ Deducted (order of priority):
1. Share Premium
2. Retained Earnings (RE)
2.3.1.7 Cost to Issue and Register Debt (CTIR - Debt)
● AKA “Debt Issuance Cost”
● NOT part of CT & NOT Expensed
● CONTRA LIAB. Account
● Lumped with DISCOUNT / Netted with PREMIUM
2.3.1.8 Contingent Consideration
● Additional consideration dependent on the outcome of a future event
[contingent] ⇒ Acquire may/may not pay
● IFRS 3: Contingent Liability ⇒ recognized; part of CT
○ In contrast with IAS 37: Contingent Liability ⇒ disclosed; NOT recognized
● Measurement ⇒ FV on date of acquisition (estimate)
2.3.1.9 Previously held Interest (PHI)
● Interest held previously from the acquiree before we obtain control
● Only possible through Step Acquisition (“Business combination achieved in
stages”)
● Part of CT
● Measurement ⇒ FV on date of acquisition
1. FV given
2. Implied FV ⇒ Purchase Price/Interest acquired * PHI
Example:
20% ⇒ CA 200K
40% at 600K
Imp FV = 600K/40%*20% = 300k
● CA vs. FV:
○ CA < FV ⇒ Gain
■ OCI - prev class.: Investment in FVOCI
■ P/L - prev class.: NOT Investment in FVOCI
○ CA > FV ⇒ Loss
Example:
FV 300K
CA 200K
Gain 100K ⇒ Prev. Class: Invest. in Associate ⇒ P/L
2.3.1.10 Summary of Step 3 (2.3)
PP xx
● Assets
● Liability
● Equity
Contingent Liability xx
PHI xx
CT (FV on date of acqui.) xx
2.4 Recognize & Measure the Identifiable Assets Acquired & Liabilities
Assumed
● Measurement ⇒ FV on date of acquisition
FV of Asset xx
FV of Liability (xx)
FV of Net Assets xx
● FV vs. CA: [FV - correct amt. | CA - recorded amt.]
○ FV > CA ⇒ Undervaluation (UVA)
○ FV < CA ⇒ Overvaluation (OVA)
● If FV is not given:
BV of Net Assets xx ⇒ BV of Assets - BV of Liab.
UVA Assets xx
UVA Liab. (xx)
OVA Assets (xx)
OVA Liab. xx
FVNA xx
2.5 Recognize & Measure either Goodwill or Gain on Bargain
Purchase
● CT vs. FVNA:
○ CT (100) > FVNA (80) ⇒ Goodwill (Asset)
○ CT (100) < FVNA (130) ⇒ Gain on Bargain Purchase (P/L ⇒ RE)
2.6 Recognize & Measure either Non Controlling Interest (NCI) (Stock
Acquisition ONLY; unit 3)
3. Consolidated FS on the date of Acquisition (Check unit 3)
● Prepares a “Consolidated Statement of Financial Position” (BS)
○ Assets
■ Acquirer ⇒ BV
■ Acquiree ⇒ FV
○ Liability
■ Acquirer ⇒ BV
■ Acquiree ⇒ FV
○ Shareholder’s Equity
■ Acquirer ⇒ BV
4. Provisional Amount (related to Step 4)
● As if Fair Value
Measurement Period (MP)
● Date the additional information is acquired or 1 year [max]; whichever is
earlier/comes first
○ If more than 1 year: beyond the measurement period
● Note: Even if info is acquired make sure that the information exists on the date
of acquisition
○ If subsequent: beyond the measurement period
● If WITHIN the MP ⇒ GW or Gain on BP
● BEYOND the MP ⇒ G/L on remeasurement
Remeasurement
W/in
GW* Gain** Beyond
Assets
● Increase in FV Decrease Increase Gain on remeasure
● Decrease in FV Increase Decrease Loss on remeasure
Liabilities
● Increase in FV Increase Decrease Loss on remeasure
● Decrease in FV Decrease Increase Gain on remeasure
Contingent Liab.
● Increase in FV Increase Decrease Loss on remeasure
● Decrease in FV Decrease Increase Gain on remeasure
*Assets are INVERSELY related to Goodwill
*Liabilities are DIRECTLY related to Goodwill
**Assets are DIRECTLY related to Gain on BP
**Liabilities are INVERSELY related to Gain on BP
Example:
GW Orig Info Case 1 Case 2 Case 3 Case 4
(Inc. in FV of (Dec. in FV of (Inc. in FV of (Dec. in FV of
Asset) Asset) Liab.) Liab.)
Cash 120k 120k 120k 120k 120k
Share 130K 130K 130K 130K 130K
Cont. Liab. 150K 150K 150K 150K 150K
CT 400K 400K 400K 400K 400K
Cash 90k 90k 90k 90k 90k
AR 80k 80k 80k 80k 80k
⬆️ ⬇️
Land 100k 100k 100k 100k 100k
Equip 180k 182k 175k 180K 180K
FV of Asset 450k 452k 445k 450k 450k
⬆️ ⬇️
AP 30K 30K 30K 30K 30K
NP 70K 70K 70K 73K 64K
FV of Liab. 100K 100K 100K 103K 100K
CT 400k 400k 400k 400k 400k
⬇️ ⬆️ ⬆️ ⬇️
FVNA (350K) (352K) (345K) (347K) (356K)
GW 50K 48K 55K 53K 44K
(Dec. in GW) (Inc. in GW) (Inc. in GW) (Dec. in GW)
Gain Orig Info Case 1 Case 2 Case 3 Case 4
(Inc. in FV of (Dec. in FV of (Inc. in FV of (Dec. in FV of
Asset) Asset) Liab.) Liab.)
Cash 120k 120k 120k 120k 120k
Share 130K 130K 130K 130K 130K
Cont. Liab. 50K 150K 150K 150K 150K
CT 300K 400K 400K 400K 400K
Cash 90k 90k 90k 90k 90k
AR 80k 80k 80k 80k 80k
⬆️ ⬇️
Land 100k 100k 100k 100k 100k
Equip 180k 182k 175k 180K 180K
FV of Asset 450k 452k 445k 450k 450k
⬆️ ⬇️
AP 30K 30K 30K 30K 30K
NP 70K 70K 70K 73K 64K
FV of Liab. 100K 100K 100K 103K 100K
CT 300k 300k 300k 300k 300k
⬆️ ⬇️ ⬇️ ⬆️
FVNA (350K) (352K) (345K) (347K) (356K)
GW (50K) (52K) (45K) (47K) (56K)
(Inc. in Gain) (Dec. in Gain) (Dec. in Gain) (Inc. in Gain)
5. Contingent Consideration
● Additional consideration that are dependent on the outcome of a further event
● Estimate
Orig Info Case 1 Case 2
(Inc. in CL) (Dec. in CL)
⬆️ ⬇️
Cash 100k 100k 100k
Cont. Liab. 150K 154K 147K
CT 300K 254K 247K
CT 300k 254k 247k
⬆️ ⬇️
FVNA (190K) (190K) (190K)
GW (Gain) (50K) 64k 57k
(Inc. in GW) (Dec. in GW)
CT 300k 254k 247k
⬇️ ⬆️
FVNA (300K) (300K) (300K)
GW (Gain) (50K) (46k) (53k)
(Inc. in Gain) (Dec. in Gain)
