aie page mas intentionally ef wank. Chapter 14 ess Combinations (Part 1) Related standards PERS 3 Business Combinations Seen 19 ofthe PFRS for SMES overview onthe topic crememicson on business combination is subdivided info the fotowing enepter: Chapiee Tile Coverage st snes Compnaions Part) Resopnfion and measurement 1S Busmess Combnaios Part 2) Speatc cases 13 Bites Coninaton (Par'2) Specs accountng tis = |. Define @ business combination. 2% Explain briefy the accountng requirements for a business ‘combination 3._ Compute for good eos Fw cama ‘Business combinations are carried out either through: 4. Asset acquisition; or 2. Stock acquisition (which may be the acquirer's own normally ceases to, acquirer recerds the assets acquired {and liabilities assumed in the business combination in its accounting books.cose of the Philippines, a en Ore 00 which shall be the consoha ‘company. For example: A Co. + BCo. = C Co. “stock acquisition - instead of acquiring the assets and the laiites of the acquiree, the the liabilities of the acquires 2. Stock acquisition: The acqurer acquires ownership interest over ‘equity ofthe acqures. 1 -a 3 -a acquires @ bank a ‘The advantages of a business combination may include any or a ‘combination ofthe following: ‘8, Competition is elminated or lessened ~ competition between the ‘combining constituents wit similar businesses is eliminated while the threat of compettion from other market participants. is lessened b. Synergy - synergy occurs when the collaboration of two oF more entities: resuts to greater productivity than the sum of the productivity of each constituent working independently. Synergy is most commonly described as ‘the whole is greater than the ‘sum of ts parts." It can be simplified by the expression "t plus 1 = ae © Increased business opportunities and eamings potential — business opportunity and earnings potential may be increased through: iL an inereased variety of products or services available and ‘decreased dependency on limited number of products. and services; |i. widened dispersion of products or services and better access tonew markets; li. access 10 ener of me acqurers or aoquree’s technological know-hows, research and development, secret processes, ‘and other information; |v. increased investment opportunities due to increased capital; ¥. appreciation in worth due to an established trade name by ether one of the combining constituents, {. Reduction of operating costs - operating costs of the combined entity may be reduced, |. Under @ horizontal combination, operating costs may be Feduced by the elimination of unnecessary duplication of costs (29., cost of information systems, registration and ligenses, some employee benefits and costs of outsourced services). |i, Under vertical combination, operating costs may be Feduced by the elimination of costs of negotiation and ‘coordination between the companies and mark-ups on purchases, ©. Combinations utilize economies of scale - economies of scale ‘refer to the increase in productive efficiency resulting from the imcrease in the scale of production. An entity that achieves economies of scale decreases its average cost per unit as afed costs ae alloca edt i nereased Deca e re mer oF units produces ove Fapany instead of putting up a branch. There may by Sian on 4 sd 3 way moss a a a ‘some business combinations are effected through excha Scary instruments rather than transfer of cash or other resqg Sa usiness combinations also. protect the interes Shareholders because they become ether the shareholders acquitr or the new combined entity ‘9. Favorable tax implications - deferred tax assets may transferred in a business combination. Also, bus} combinations effected without transfers of considerations may, be subjected to taxation. “The disadvantages of a business combination may include any ‘combination ofthe following: 2. Business combination brings monopoly in the market which have a negative impact to the society. This could result impediment to healthy competition between market participants . The identity of one or both of the combining constituents cease leading to loss of sense of identity for existing emy and loss of goodwil Management of the combined entity may become difficult due incompatible internal cultures, systems, and policies. , Business combination may result in over-capitalization which result to diffusion in market price per share and attractiveness the combined entity's equity instruments to potential investors, fe. The combined entity may be subjected to stricter reguiation scrutiny by the goverment, most especially if the business ‘combination poses threat to consumers’ interests Busnes combinations ae accounted for under PFRS 9 Buses ‘Combinations. “4 Objective ‘The objective of PFRS 3 is to improve the relevance, reliably and comparebity of franca repring of an ety flaton ty 4 ‘combination by establishing the recognition and busines: Jes and disclosure requirements for the acquire. measurement princp ‘scope PERG 2 apples to transactions that meet the definition of a business Fomibination. It does not apply tothe following: 2. The formation of a joint venture. F The acquisition of an asset or a group of assets that does not Gonstitute a business. In such cases the acquirer shall identify Sha recognize the individual identifiable assets acquired and tobilties assumed. The cost of the group shall be allocated to the individual identifiable assets and labiities on the basis of their Telative fair values atthe date of purchase. Such transaction does not give rise to goodwil. ‘A combination of entities or businesses under common contro! Definition of business combination PERS 3 defines business combination as “a transaction or other Event in which an acquirer obtains contro! of one or more businesses.” Transactions sometimes referred to as true mergers’ or ‘mergers of equals’ are also business combinations as that term is used in PFRS 3 Essential elements in the definition of a business combination 4. Control 2. Business: Contro! an investor controls an investee when the investor is ‘exposed, of has rights, to variable retums from its involvement with the investee and has the abllty to affect those retums through its power over the investee. ‘An acquirer might obtain control of an acquiree in a variety of ways, for example: 2. By transfering cash, cash equivalents or other assets (including net assets that constitute a business) By incurring labiltes; By issuing equity interests; By providing more than one type of consideration; or Without transferring consideration, inciucing by contract alone, eaes Control is normally presumed to exist when the ownership interest ‘acquired in the voting rights of the acquiree is more than 60% (or '51% of more). However, this is only a presumption because control 5rhout necessarily acquiting MOre than te such as inthe following instances; may stil be obtained wit to appoint or remove the maj cays 2 Re eo en * reno eT ne fe Frat en eo > ec ig Fre hn one che shen ene wt The acquirer has + Morces of the aequiree because ofa law OF an agreement Iustration: Determining the existence of control Example #1 ‘ABC Co. acqui jres 51% ownership interest in XYZ, Inc.'s “Analysis: ABC is presumed to have obtained contol over ‘ocause of the ownership interest acquired in the voting rights gf is more than 50%. | Example #2 ‘ABC Co. acquires 190% of XYZ, Inc's preference shares. “Analysis. ABC does nat obtain control over XYZ because pi Shares do not give the holder voting rights over the financial operating policies of the investee ‘Example #3 | ABC Co. acquires 40% ownership interest in XYZ, Inc. There ig | agreement with the shareholders of XYZ that ABC will contro) appointment of the majority ofthe board of directors of XYZ. Analysis: ABC has control over XYZ because, even though ‘ownership interest is only 40%, ABC has the power to appoint ‘majority ofthe board of directors of XYZ. ‘Example #4 ‘ABC Co. acquires 45% ownership interest in XYZ, Inc. ABC has | agreement witn EFG Co., which owns 10% of XYZ, whereby EFG [always vote in he same way as ABC, ‘naps: ABC has contol over XYZ because i controls more ie voting rights over XYZ (i.e. 45% aa ( plus 10%, per a [Example # Example sures 50% of XYZ, Inc's voting stares. The board of ae Iz consis of 8 mambers. ABC aprons 4of them and | rectors lyse aor 4. When here are deadocks in casting votes | a ere ie deesion always es withthe decors appointed Dy | ss: ABC has control over XYZ because it controls more than is over XYZ in the event ‘here is no majority Analysh '50% of the voting rig decision Business is an integrated set of activities and assets that is capable Er being conducted and managed for the purpose of providing & fatuin in the form of dividends, lower costs or other economic benefits Girecly 1 investors or other owners, members or participants. ‘The three elements of a business are defined as follows 2. Input: Any economic resource that results fo an output when one ‘or more processes are applied to it, e.g., non-current assets, intelectual property, the abilty to obtain access to necessary ‘materials or rights and employees, b. Process: Any system, standard, protocol, convention or rule that when applied to an input or inputs, creates or has the ability 10 ‘create outputs, @.., strategic management processes, ‘operational processes “and resource management processes ‘Accounting, biling, payroll and other administrative systems typically are not processes used to create outputs. ©. Output: The result of inputs and processes applied to those inputs that provide or have the ability to provide a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants, Identifying a business combination ‘An entity shall determine whether a transaction is_a business ‘combination in relation to the definition provided under PFRS 3 It the assets acquired (and related liabilities assumed) do not ‘constitute a business, the reporting entity shall account for the ‘ransaction as an asset acquisition and not as business ‘combinationis accounted for under other ay ‘An asset acquisition 's applied for inventories ‘Standards (e.g, PAS 2 Inventories sansa 09 een ard eupmert 1S apd or tems ql [| her pertinent fats = acquired, et.) 7 | Relative voting rights in | The ‘acquirer is usually | the combined entity after | combining ‘entity, whose owners as @ fjoup,, reais or receives the fargest portion of the voting fights. The existence of any unusual Srspecial voting arrangements and | options, warrants oF convertible Seourites shal also be considered. ‘Accounting for business combination business combination Brsness combinations are accounted for using the Frethod. This method requires the following: 2. Identifying the acquirer, b._ Determining the acquisition date, and O Recognizing and measuring goodwill This requires recog, ‘and measuring te following: ‘Consideration transferred Non-zontroling interest in the acquire Previously held equity interest in the acquire Identifiable assets acquired and liablities assumeq busiress combination. o Z| Enstense of a large |The acquirer” is usually | he ‘rinonty voting interest | combining ently whose single owe? | trithe combined eniy i | or organized group of owners Holds ir cther owner or | the largest minority voting interest organized group _ of | in the combined entity | owners has a significant voting interest Composition of the |The acquirer is usually | the ‘governing body of te | combining ently whose owners have || combined entity the ability to elect or appoint or to | remove a majority of the members ‘of the governing body of tne combined entity. Identifying the acquirer foreach business combination, one of the combining entities shay identifed asthe acquirer. ‘The acquirer is the entity that obtains control of the acquires, Zequiree is te business that the aoquirer obtains contol of business comaination " {Composition of the |The acquirer is usually the PERS 3 provides the following guidance in identifying the acquirer. | Gampostion Ott of | combining. entiy whose ormer) ‘a. Who is the transferor of cash and other resources and |_| the combined entity management dominates the liabilities? | management of the combined entity 4 in.a busiress combination effected primarily by transferring fr other assets or by incurring liabiities, the acquirer is the any tat transfers tha ‘cash or other assets or incurs ibiltes. =| Tams-ofthe exchange of |The acquirer is usually | the | equity interests combining entity that. pays fair value of the equity interests of the olher combining entity or entities. | l | real . Who is the issuer of shares? 4 Ina business combination effected primarily by exchanging interests, the acquirer is usually the entity that issues its interests However, in some business combinations, com called ‘reverse acquisitions," the issuing entity is the acquiree. Who is larger? ‘The acquirer is usually the combining entity whose relative size measured in, for example, assets, revenues or profi) is Significantly greater than that of the other combining entity oF ‘Other perinent-facts and circumstances shall also be consid entities. in identiying the acquirer in a business combination effected exchanging equity interests, including:Who is the initiator of the combination? ‘>The acquirer is usually the one who initiated the comp ‘Substance over form A new entity formed to effect @ business combination necessarily the acquirer. &s {rita new entity is formed to issue equity interests tp pusiness combination, one of the combining entigy existed before the business combination shall be identy the acquirer by applying the guidance provided above, li. In contrast, a new entity that transfers cash or other a incurs liabilities as consideration may be the acquirer Illustration: Identifying the acquirer [Example #7 | KSC Go. and XYZ, Inc, bot sted ents, agreed to combing Dusinesses. The terms ofthe business combinaton that Age fer 5 shares for every share of XYZ. There i no ash consi 28Cs market capitalization i POO milion and XYZ‘ is P00, ‘afer the comionation. the board of eectors of XYZ shall Shy decors for ASC Three months afer the aequsion XYZ is sold. Z ‘Analysis: ABC is the acquirer based on the following indicators: ABC is the issuer of shares and the initiator of the ‘combination. ABC is the larger entity ofthe two combining constituents, The board of directors of XYZ after the combination comy only directors fram ABC. This gives ABC the ability to d the management of XYZ Part of XYZ is sold after the acquisition. This provides addi indicator that ABC is the acquirer. Example #2 ‘ABC Co. and XYZ, Inc. agreed to combine their businesses. A. entity named Alphabets Corporation will be created to acquire ‘Scenario #1: If Alphabets Corporation wil issue equity interests | beth ABC al X72 cho eit Wb conan 10 ‘Answer: Either ABC or XYZ. ‘Scenario #2: If Alphabets Corporation will transfer cash and other ‘considerations and assume liabilities to acquire both ABC and XYZ, ‘itich ofthe entities will be designated as the acquirer? ‘Answer: Alphabets Corporation. Determining the acquisition date ‘The acquirer shall identity the acquiston date, which is the date on hich it obtains control of the acquiree. ‘The date on which the acquirer obtains control of the acquiree is ‘generally the closing date. The closing date isthe date on which the Scquirer legally transfers the consideration, acquires the assets and assumes the liabilties ofthe acquire. However, the acquirer might obtain control on a date that is either teatier of later than the closing date. For example, the acquisition date precedes the closing date If a written agreement provides that the acquirer obtains control of the acquiree on @ date before the using date, An acqurer chall consider all pertinent facts and ‘circumstances in identifying the acquisition date, Recognizing and measuring goodwill ‘On acguisiton date, the acquirer shall compute and recognize ‘goodwill (or gain on a bargain purchase) using the folowing formula: Consideration transferred ~ 'Non-controling interest in the acquires x Previously held equity interest inthe acquire ~ Tota oo Less: Fair value of net identifiable assets acquired (x) Goodwill /(Gain on a bargain purchase) ox ‘A negative amount resulting from the formula is called “gain on & bargain purchase" (also refered to as “negative goodwil) ‘A bargain purchase may occur, for example, in a business ‘combination that is forced sele in which the acquiee is acting under ‘compulsion, However, a bargain purchase may also occur in other instances such @s when the application of the recognition and "measurement exceptions for particular lems Proved under Tosa ina gain on bargain purchase. ‘on acquisition date, the acquirer recognizes a resulting ‘a. Goodwill as an asset. 8 Gain on a bargain purchase as gain in profit or loss, However, before recognizing @ gain on a bargain pur fRiuirer shall reassess whether it has correctly identified ay aa quired and al f the labilies assumed and shall regal Shy addtional assets of abilities that are identifed in that $F is an application of the concept of conservatism, Consideration transferred ‘The consideration transferred in a business combination is m at fair value, which is the sum of the acquisition-date fair vai the assets transferred by the acquirer, the labile incurred fy ‘aoquiter 10 former owners of the acquiree and the equity i issued by the acquirer. Examples of potential forms of consideration include: Cash, Other assots, AA business or a subsidiary of the acquirer, Contingent consideration, ‘Ordinary or preference equity instruments, options, warrants, ‘member interests of mutual entities. Acquistion seated costs ietuctenoited cose ee costs tne soquer nou 0 ota Sectees convo, Earnie of acquiston-lated costs inte riders es, B.A. loge, accountng, valuation end oer prof consulting fees; ma c. General sdrnistave costs, including the cost of maint Sine scquetions deparimert nd 4. Cass oegistonng and suing det and equity secures Accuistion-elated costs are recognized as expenses in the in which they are incurred, except forthe following: Costs to issue debt securities measured at amortized cost included in the initial measurement of the resulting ff 2 seat, For exarpl, eect costs of sin bonds payable ae ta oe dave coca wha oe ceded when secre crn amount fe Dons costs to sue aquly securities are accounted fr as deduction : from share premium. If share premium is insufficient, the issue (2a are deat om retained earings ‘Non-controlling interest Non-controling interest (NCI) ‘atirbutable, directly or indirectly, fs also called “minority interest.” is the equity in a subsidiary not to a parent. Non-controling interest For example, ABC Co. acquires 80% inlerest in XYZ, Inc. The Coniroling interest is 80% while the non-cantroliing interest is 20% (ABC Co. acquires 100% interest in XYZ, Inc., the non-controling interest is zero. For each business combination, the acquirer measures any non- ‘controlling interest inthe aoquiree either at a. Fair value; or 2. The nonscontroling interes proportinnate share of the acquiree's identifiable net assets. Previously held equity interest in the acquiree Previously held equity interest in the acquiree pertains to any interest held by the acquirer before the business combination. This affects the ‘computation of goodwill only In business combinations achieved in ‘Sages. Ths is discussed in he next chapter. Net identifiable assets acquired Recognition principle ‘On acquisition date, the acquirer shall recognize, separately from ‘goodwil, the identifiable assets acquired, the labiities assumed anc ‘any non-controlling interest in the acquiree. Unidentifiable assets shall not be recognized as separate assets from goodwill Examples of unidentifable assets: a. Goodwill recorded by the acquiree prior to the business ‘combination. . Assembled workforce Potential contracts the acquiree is negotiating with prospective new customers atthe acquisition date 2Recognition conditions Recgmualty for recognition, entiiable assets acquired ang W must meet the definitions of assets ang fables. assume tae es proved under the Conceptual Framework for Financia) Reporting at the acquisition date. For example, costs thatthe acquirer expects But is not obliged to Feu the future t0 effect its plan to exit an activity of an Soquree or to terminate the employment of oF relocate an acquiree’s employees are not lables at the acquisition date, a eafre, the acguiter does not ecogrize hose Costs as part of Applying the acquisition method. Instead, the Acquirer recognizes Fee tosis in. tts postcombination financial statements iy accordance with other applicable Standards. the identifiable assets acquired: and abiities Tr of what the acquirer and the acquiree (or red in the business combination arate transactions, b.In_addition, assumed must be pat its former owners) exchangt transaction rather than the result of Sep 1's application of the recognition principle and Te sons may result in recognizing some assets and liabilities cor rscquiree had not previously recognized as assets ang liabilties in its financial statements For example, the acquirer recognizes the acquired identifiable FFrangile assets, such as a brand name, @ patent ora customer .¢ did not recognize as assets in its relationship, that the acquire Faaneal statements because it developed them intemally ang ‘charged the related costs to expense. ©. The acquirer Classifying identifiable assets acquired and liabilities assumed IGentfiable assets acquired and liabilities assumed shall be classified dat the acquisition date in accordance with olher PFRSs that are to be applied subsequently, For example, property, plant and equipment acquired in a business Combination shall be Classified at acquisition date in accordance with PAS 16 if such assets are to be used as PPE subsequent to acquisition date, However, leases and insurance contracts shall be classified based fon contract terms and other factors atthe inception ofthe contract or, it contract terms have been modified, at the date ofthat modification. 4 ‘Measurement principle ‘The acquirer shall measure the identifiable assets acquired and the liabilities assumed at their acquisition-date fair values. PERS 3 provides the following specific measurement principles: 4. Assets with uncertain cash flows (valuation allowances) ‘The acquirer shall not recognize a separate valuation allowance ‘as of the acquisition date for assets acquired in @ business Combination that are measured at their acquistion-No allowance is recorded for the acqured receivables because the receivables are recognized at acquistion-date fair value, The acquistion-elated costs are expensed. & The ilustration above is an example of a business combination effected through “asset acquisition.” XYZ, Ino. (the acquiree) shall account for the business combination ‘98a liquidation of a business. Accordingly, al ofthe assets, liabilities, ‘and equily are derecognized and the difference between the ‘carrying amount of the items derecognized and the disposal ‘proceeds (amount received from the business combination) is treated '35 a gain or loss on disposal of business. XYZ shall recognize @ gain on disposal of business of 100,000 (P1.5M proceeds minus P1.4M carrying ampunt of net assets), The teniries in XYZ's books are as follows: [Cash on han 50a a0o ZE, | Alwance fo doubt accounts 30,000 Payables een | ‘Cash in bank - 10,000 Receivables 200.000 Inventory £20,000 Bulcing 1,000,000 Good 400,000 Gain on disposal of business 400,000 te recone aon ofthe boss Tai Shave on ob scan) et -| 7,400,000 SE, | Ganon dsponl of business {00.000 ‘Cash on hand | 1,500,000 ‘o record the settlement of owners’ equity | Case #2: f ABC Co. paid 11,000,000 cash as consideration for the ‘assets and lables of XYZ, Inc., how much is the goodwill (gain on bargain purchase) on the business combination? Solution a1,000,000, ‘Consideration transferred ‘Non-controling interest inthe aoquiree Previously held equity interest in the aoquiree Total Fair value of net identifiable assets acquired Gain on a bargain purchase Before recognizing the gain on bargain purchase in profit or loss in 20x1, ABC Co. should first reassess whether it has correctly identified all of the assets acquired and all of the tiailies assumed. if ‘after the reassessment 2 negative amount stil exists, ABC Co, ig peritted to recognize the resulting negative amount as gain in its Soi statement of profit or loss and other comprehensive income, ‘The pertinent entries are as follows: ani] Cash on hand 3 | Rea ra00 Inventory ao | | Building 1.400,000 Payables 400,000 | cashin bank 1.000000 |___|__Geain on bargain purchase $20,000 | ‘Jan 7, | Professional fees expense i : Cash in bank 100,000 Illustration 2: Non-controlling interests, —— Fact pattern ‘On January 1, 20x1, ABC acquired 80% of XYZ, Inc. in exchange for cash, Because the former owners of XYZ needed to dispose of their investments in XYZ by a specified date, they did not have sufficient | time to marke X¥2to mate potential Buyers (On January 1, 20x1, XYZ's identifiable assets and labilties have fair values of 1,200,000 and 400,000, respectively. Case #1: Non-controlling interest measured at fair value ‘ABC Co. elects the option to measure non-controliing interest at fair value. The independent consultant engaged by ABC Co. determined that the fair value of the 20% non-controling interest in XYZ, Inc, is 155,000. 18 [ABC Co. paid 1,000,000 for the 80% interest in XYZ, Inc. How much is the goodwit (gain on bargain purchase) on the business combination? Solution, Consideration transferred 41,000,000 'Non-controling interest in the acquiree (fair value) 155,000 Previously held equity interest in the acquire Total 4,185,000 Fair value of net identifiable assets acquired (800,000) _ Goodwill [355,000 Notes: ® Because ABC Co. acquired only 80%, the remaining 20% represents the non-controling interest in the acquiree. * Non-controlling interest (NCI) in the acquires is measured either at (a) fair value or (b) the NCI's proportionate share of the acquiree’s identifiable net assets. In this case, ABC Co. chose to measure the NCI at fair valve, “The entry is as follows: Zan 7] Identifiable assole qu 7,200,000) 2 Goodwill 366,000 Liabilties assumed 400,000 Cash in bank 1,000,000 ‘Non-controlling interest in XYZ, Inc. | 185,000 ‘The non-controling interest is presented in the consolidated statement of financial position within equity but separately from the ‘equity ofthe owners of ABC Co. (parent). (Case #2: Non-controlling interest measured at fair value ‘ABC Co. elects the option to measure non-controlling interest at fair value. A value of 250,000 is assigned to the non-controling interest in XYZ, Inc. (P1M + 80%) x 20% = 250,000}, ‘The consideration transferred is 1,000,000. How much is the ‘goodwill (gain on bargain purchase) on the business combination? ‘Solution: Consideration transferred 4,000,000 'Non-controting interest in the acquitee (fair value) 250,000 Previously held equity interest in the acquire 19Total 1,260,000 Fair value of not identifiable assots acquired (800,000) Goodwill 450,000 Case #3: NCI's proportionate share in net assets ‘ABC Co, elects the option to measure the non-controling interest at the non-controling interest's proportionate share of XYZ, Inc's net idontiiable assets ‘ABC Co. pad 1,000,000 for the interest acquired in XYZ, Inc. How much i the goodwill (gain on bargain purchase) on the business ‘combination? Solution, “The non-controling interests proportionate share of XYZ's identifiable not assets is computed as follows: Fair value of identifiable assets acquired 1.200000 Fair value of liabiliies assumed ‘800,000 Fair valve of net identifiable assets aquired Mutply by: Non-controing interest 20%. 'NCI's proportionate share in net identinabte assets __ 160,000 The goodwill (negative goodwill) Is computed as follows: Consideration transferred 1,000,000 ‘Non-controting interest in the acquiree 160,000 Previously hel equity intrest nthe soquiree Tota! 7760000" Fai alue of ntidentabe assets acquired (12m—AooK) _ (200,000) Gooawi 3 { Fact pattern | On January 1, 20x1, ABC acquired all of the identifiable assets and assumed all of the labilties of XYZ, Inc. On this date, the identifiable assets acquired and labiliies assumed have fair values of 'P1,600,000 and P900,000, respectively. ‘ABC incurred the following acquisition-related costs: legal fees, 10,000, due diligence costs, 100,000, and general administrative | osts of maintaining an intemal acquisitions department, P20,000. 20 Caso #1: As consideration for the business combination, ABC Co. transferred 8,000 of its own equity instruments with par value per share of P100 and fair value per share of 125 to XYZ's former owners. Costs of registering the shares amounted to 40,000. How much is the goodwil (gain on bargain purchase) on the business combination? Solution: Consideration transferred (000 eh #125) Non-controling interest in the acquire Previously held equity interest in the acquire Total Fair value of nt identifiable assets acquired (1 6 Goodwill ‘The pertinent entries are as follows: [: 1.” | General and administrative costs 20,000 Jar | Identifiable assets acquired 1. | Goodwill 201 Liabilties assumed Share capital 000x100 pa) ‘Share premium 0 sound the asuarce of shares as | | consideration forthe business combnaton |__| ‘Share premium 40,000 j Cash in bank {0 rcord he cost of equity transaction # Professional fees expense (10K + 100K)| 110,000 | _ Cash in bank Loma gustan ots | ‘The acquisiion-related costs (Le. legal fees, due dligence costs, and general administrative costs) are expensed, except for the costs to ‘sue equity secures which are deducted from equity (ie., deduction from share premium), Case #2: As consideration for the business combination, ABC Co. issued bonds with face amount and fair value of 1,000,000. Transaction costs incured in issuing the bonds amounted 10 ‘50,000. How much is the goodwill (gain on bargain purchase) on the business combination? Solution aConsideration transferred (lair value of bonds) Nor-controling interest in the acquires Previously held equity interest in the acquire 1,000,000, Tota 7,000,000" 72° ue of not dentable assets acquired (16mm) _(700,000) Goodwill 00,000 “The pertinent enries ate:__ jon dentable assess ecqured 7.600.600) | 3k, | Seca 300,000 20x1 Discount on bonds payable 50,000 eee rabiies assumed 900,000 | Bonds payable 1,000,000, | |, caninenk 50,000 | to recod svance of bonde 0s ‘Seaieatan fr busress comtnton Jan Professional fes expense 10x + 1000] 170,000 4" | General and adminstrative costs 20,000 (20 | ON cash in bank 130,000 Notes: ee The acquisition-rlated costs (‘e., legal fees, due diligence costs, and general auministraive costs) arc expensed, excent for the Costs {0 issue debt securities which are included in the initial Troasurement of the financial liabilty(.e., aS a valuation account or ‘discount on bonds rayable’). = For goodwill computation, the consideration transferred is equal fo the fair value of the debt Securities issued without deduction forthe transaction costs = Inboth cases above, the acquisition-related costs, including costs of issuing debt and equity secumties, do not affect the ‘computation of goodwill Restructuring provisions Restructuring is a program that is planned and controlled by management, and materially changes elther: ‘the scope of a business undertaken by an entity; or ._ the manner in which thai business is conducted Restructuring provisions may include the costs of an entity's plan a, To exit an activity of the acquiree, . To involuntarily terminate employees of the acquiree, or ©. To relocate non-continuing employees of the acquiree. be referred to as “liquidation costs” in The above costs may business after a business combination. liquidating the acquiree’s sion does not include such costs a5 (@) However, a restructuring provi (b) marketing; or (©) Tetraining or relocating continuing staf, investment in new systems and distribution networks. red, Ifthe acquiree’s restructuring plan is conditional on it being acqui te the provision does not represent a present vuligation, nor ie contingent labilty, at acquisition date “of the combined entity when the costs are incurred. ape Iilustration: Restructuring provisions (On January 1, 20x, ABC Co. acquired all of the identifiable assets land assumed all of the liabilities of XYZ, Inc. by paying cash of 'P1,000,000, On this date, the identifiable assets acquired and liabilities assumed have fair values of 1,600,000 and 200,000, respectively, ‘ABC Co. has estimated restructuring provisions of 200,000 Tepresenting costs of exiting the activity of XYZ, oosts of terminating ‘employees of XYZ, and costs of relocating the terminates employees. ‘Requirement: Compute for the goodwil (gain on bargain purchase). ‘SolutionConsideration transferred Non-controing interest in the acquire Previously held equity interest in the acquiree Total Far value of net identifiable assets acquired (1 6M 9h) Goodwill Notice that the restructuring provisions are simply ignored in the Computation of goodwil. Restructuring provisions may form part of a Cusiness combination only if they meet the definition of a liability as of the acquisition date, such as when a detailed formal plan for the festructurng was adopted and announced publicly on or before icturing provisions that do not meet the the acquisition date. Restru Getniton of a labilly as of acquisition date are recognized as post- ‘combination transactions or activites when they are incurred. ‘Specific recognition principles PERS 3 provides the following specific recognition principles: 4. Operating leases Acquiree is the lessee It the terms of an operating lease relative to market terms is: 1 ara cut saenan nang ast 2 For example, an identifiable asset (favorable) may arise when market participants are wiling to pay rent at above-market rates because the leased property is located at a prime spot. Acquiree is the lessor 24 Wn principles ~ Operating leases. ail of the identifable assets paying cash of recogniti Iilustration: Spec! Fact pattern (On January 1, 20x1, ABC Co. acquired ‘and assumed all of the liabilities of XYZ, Inc. by: 71,000,000. On this date, the identifiable assets acquired and frabiltes assumed have fair values of 1,600,000 and 900,000, respectively, Case #4: Acquiree is the lessee - terms are favorable ‘hs of January 1, 20x1, ABC holds a building and a patent which are being rented out to XYZ, Inc. under operating leases. ABC has determined that the terms of the operating lease on the building Compared with market terms are favorable. The fair value of the differential is estimated at P20,000. Requirement: Compute for the goodwill (gain on bargain purchase). Solution ‘An intangible asset shall be recognized because the terms of the ‘operating lease where the acquiree is the lessee is favorable. ‘The fair value of net identifable assets acquired is computed as follows: Fair value of identifiable assets acquired, including intangible asset on the operating lease with favorable 1,620,000 terme (PEM *P20K) Fair value of labities assumed (900,000) Fair value of net identifable assets acquired 720,000. Goodwill (gain on bargain purchase) is computed as follows: Consideration transferred 1,000,000, ‘Non-controliing interest in the acquiree ey Previously held equity interest in the acquire Total 7,000,000 Fair value of net identifiable assets acquired (720,000) Goodwill 220,000 Case #2: Acquiree is the lessee — ferms are unfavorable fs of Jaruny 4, Ze, ABC hols a bldg an pater wich are eng rented out fo XYZ, ine. under operaing leases. ABC hes determined that the terms of the operating lease on the patent 25‘compared with market terms are unfavorable. The fair value of the sifferential is estimated at 20,000, ‘Requirement: Compute for the goodwill (gain on bargain purchase), Solution A liabitity shall be recognized because the terms of the operating lease where the acguiree is the lessee is unfavorable, ‘The fair value of net identifiable assets acquired is computed ag follows: Fair value of identifable assets acquired 1,600,000 Fair value of liabilities assumed, including liability on the ‘operating lease wih unfavorable terms (PS00K + P20K) Fair value of net identifiable assets acquired ‘Goodwill (gain on bargain purchase) is computed as follows: Consideration transferred Non-controling inteest in the acquiree Previously neia equty interest in te acquires Total Fair value of net identifable assets acquired Goodwill Case #3: Acquiree is the lessor AAs of January 1, 20x1, ABC is renting a building and a patent from, XYZ, Ine. under operating leases. ABC has determined thatthe terms, of the operating lease on the building compared with market terms are favorable. The fair value of the differential is estimated at 1P20,000. ‘Requirement: Compute for the goodwil (gain on bargain purchase). Solution: No intangible asset or liability is recognized, regardless of terms of the operating lease, 2ecause the acquiree is the lessor. ‘Goodwill (gain on bargain purchase) is computed as follows: Consideration transferred 1,000,000, ‘Non-controling interest in the acquires - 26 Proviously held equity interest in he acquires Total 000,000 Fair value of net identifiable assets acquired (16M- 9%) _(700,000)._ Goodwill 500,000 “ote thatthe basis fr determining which party the Tosswo or tho lssor in {porating lease i the aoquree I the acquree the lessee. an asset or babity ogres depending on tho tors ofthe lease H he accra i the Tess, | 2. Intangible assets ‘The acquirer recognizes, separately from goodvil, the identifiable intangible assets acquired in a business combinaion. An intangible ‘asset is identifable if t meets either the (a) separability enterion or the (b) contractual-legal cnterion. ‘Separabifity criterion An Furthermore the separabilty oriterion is, n If those transactions are infrequent and regardless of whether the acquirer is involved in them. The For example, the fac that customer and subscriber ists are frequently licensed makes such lists meet the separabilly criterion. However, such lists would not meet the separabiity criterion if the terms of confidentiality or other agreements prohibit an entity from seling, leasing or otherwise exchanging information about its customers. ‘An intangible asset that is not individually separable from the ‘acquire or combined entity meets the separabilty criterion if it is separable in combination with a related contract, identifiable asset or liabiity. For example:Cl ease Conclusion — a Manet” paricipants exchange | The acqurer shay deposit abitves and related | recognize the depostay | Gepostor relatonship intangible | relationship intangible assay fssets in observable exchange | separately from goodwi _| transactions. Fe} An acquiee owns a regisiered | Because the unpatentag | Tademack and documented but | technical expertise must be | inate tecnical expertise | | used. to manufacture the | trademarked product To transfer | ifthe related trademark iy | Gamership of @ trademark, the | sold, meets the | | Gumer is aso required to transfer | separability cnterion everyting ese necessary fhe | | new owner to produce a product | cr service indistinguishable from || that produced by the former | owner. Lael separated from the acquir ‘or combined entity and soiq Contractual-egal enterion An For example T Cape ete Conclusion [AN acquires leases a | The amount by which the Tease: ‘manufacturing feciity under | terms are favorable compared {an operating lease that has | with the terms of current market ems. thal” are favorable | transactions for the same or relative to market terms, The | similar items is an_ intangible lease terms explicitly prohibit | asset that meets the contractual. transfer of the lease (through | legal criterion for recognition either sale or sublease), separately from goodwil, even, though the acquirer cannot sell ‘or otherwise transfer the lease contract. B.[An acquiree owns and | The ‘operates @ nuclear power plant Ticense 10 operate that power plant is an intangible asset that meets the contractual. legal criterion for recognition ‘separately from gooxwil, even if the acquirer cannot sell or es transfer it separately from the 28 T acquired power — plant. ~ An Setrer may recognize the fa Satie ot tne operating conse | | ‘and the fair value of the power fant as. a. single ascet_ for | financial reporting purposes fhe | Uefa ves of thowe assets are simi | Both the technology patent and the ‘elated license agreement meet the contractual-legal cterion for. recognition separately from goodwill even if selling or exchanging the patent ‘andthe related license ‘agreement separately from one | ‘another would not be practical technology patent, It has licensed that patent to others for their exclusive use outside market, specified "An acqui ‘owns: the domestic | [receiving a percentage of future foreign Baas “The following are examples of identifable intangible assets acquired in's business combination that normally meet either the separability fr contractual-legal enterion and, depending on their substance, are recognized separately from goodwill whether they were previously Fecognized by the acquirer as assets or had charged them to expense because they were intemally developed: (The examples are ‘ot intended tobe al-nclusive.) a. Marketing-related intangible assets ~ trademarks, trade names service marks, collective marks, certification marks, trade dress, newspaper mastheads, inlemet domain names, and non- ‘competition agreements) b. Customer‘elated intangible assets ~ customer lists, order or production backlog, custmer contracts and related customer relationships, and non-contractual customer relationships. ©. Atistic-related intangible assets ~ plays; books and other Iterary ‘works; musical works; and pictures,” video and audiovisual materials 4. Contract-based intangible assets - licensing, royalty and standstil agreements, advertising, construction, management, service or supply contracts; construction permits; tranchise agreements; operating and broadcast rights; servicing contracts, ‘such as mortgage servicing contracts; employment contracts; and use rights, such as driling, water, air, timber cutting and route authorities. 29inusrtoe angie esas -sepabiy and contracutiogy criteria ial re 1, 20x, ABC Co, pk cath P5000 in excha Oe ota of RV, Ie. As oft ct In cane 12th ves of toasts and aes ot YE sega Oy ABC ve shown bol Assets Carrying amounts Fair va Cash Tocco eCtaluee Recavabes wooo aera coubtd accounts (100000 Fropory pat and eqwpment 11500000 Comps sotware 100900 Pater ° Gooawa 100000. Tota sss {00.00 Liabiies ase Boncspayble (at fae amount) 0,566 tn applying the recognition and measurement principles under PFRS 3, ABC Co. has identified the following unrecorded intangible assets: ‘Type of intangible asset Fair value Research and development projects 50,000 Customer list 40,000 Customer contract #7 30,000 Customer contract #2 20,000 ‘Order (production) backlog 10,000 Internet domain name 415,000. Trademark zon~ Trade secret processes 5: Mask works 45,000 Total 270, ‘Additional information: ‘+The computer software is considered obsolete. TB=TTDorFbT! (Refer to Financial Accounting and Reporing Pat 2 or detaled cscusion on deter ‘The deferred taxes are computed as follows: Previous Taxable? Fairvalues Carrying (Deduct) (CA for amounts Temporary financial, (TB tor ‘difference reporting) axa A> Tiff Cashin bank 7000 10,000 7 Recewanies—net 120,000 170,000, (0,000) inventory 350,000 520,000 (170,000) Buiding net 4,100,000 1,000,000 100,000 Patent 30,000 ei 30,000 Payables 400,000 400,000 - Contingent lability 20,000, : (20,000) 130,000 ‘Total taxable temporary diflerence (FI>T) (100k + 30k) ‘Matiply by: Tax rate 30% Deferred tax liability 33.000 Total deductible temporary diference (50K + 170K + 20%) 240,000 ‘Multiply by: Tax rate 30% Deferred tax asset 2.000 The fair value of the net identifiable assets of the aoquiree is computed as follows: Fair value of identfiable assets acquired excluding ‘recorded goodwill (16M 20K good + 20K unrecorded 1,682,000 alent +72K doferred tax asset Fair value of liabilities assumed (400K + 20K contingent (459,000) 7labity +39K deterred tax tail) Fair value of net identifatle assets acquired Goodwill is computed as follows: Consideration transferred Non-controling interest in the acquire Previously held equity interest in the acquiree Total Fair value of net identiatle assets acquired Goodwill ‘The entry is as follows: [san Cash in-bank 0,000 1. | Receivables 120,000 2081 | Inventory 350,000 | Building 4,100,000, Patent 30,000 | Deferred tax asset 72,000 | Goodwill 27,000 | Payables | Provision Dererred tax lability (Cash in bark. Deferred tax asset ard deferred tax liability are recognized Separately, PAS 12 protibits the offsetting of deferred taxes, except in limited cases. ‘Additional concepts on Consideration transferred Spas sani ners ese ‘Assets and liabilties transferred to the former owners of the acquiree ‘are remeasured to acquistion-date fair values. Any difference between their carrying amounts and fair values is recognized as gain or loss in profit or loss. ‘Assets and liabilties that remain within the combined entity (for example, because the assets oF labilties were: transferred 10 the ‘acquiree rather than to its former owners) are not remeaspred but rather ignored when applying the acquisition method, 38 itustration 2: Indemnification asset and Consideration transferred (On January 1, 20x1, ABC Co. acquired all of the identifiable assets ‘and assumed all of the liabiites of XYZ, Inc. by paying cash of 'P1,000.000. On this date, the identifiable assets acquired and liabiltes assumed have fair values of 1,600,000 and 900,000, respectively “The terms of the business combination agreement are shown below: «Half of the 1,000,000 agreed consideration shall be paid on January 1, 20x1 and the other half on December 31, 20x5. The prevailing market rate as of January 1, 20xt is 10%. ‘+ In.addition, ABC agrees on the folowing: ‘a. A piece of land with a carrying amount of $00,000 and fair ‘value of 300,000 shall be transferred to the former owners. Of XYZ, . After the combination, XYZ's activities shall be continued by ‘ABC. ABC agrees to provide a patented technology for use in the activites of XYZ. The patented technology has a carrying ‘amount of 60,000 in the books of ABC and a fair value of 180,000. “+ Included in the lablities assumed is an estimated liabilty on a pending lawsuit filed against XYZ by a third party with an Ecquistlon-oate far value of 100,000. The carrying amount of the liability in XYZ's books immediately before the business ‘combination is 120,000. XYZ guarantees to indemnity ABC for ‘any settlement amount ofthe iailty in excess of 120,000. Requirement: Compute forthe goodwill (gain on bargain purchase). ‘Solution: “The far value of the consideration transferred is determined as follows: Cash payment ett x50%) ‘500,000 Present value of fulure cash payment (Note payable) a (PIM x S08 xPV of PI GION, nes) Land transferred to former owners of XYZ.~ at fair value _ 300,000, Fair value of consideration transferred q10.4 Notes: ‘= The pieoe of land transferred to.XYZ's former owners is valued at the acausition-date fair value. The ‘oss resulting from the remeasurement shall be recognized in profit or loss. = The patented technology Is not accounted for because it remains within the combined entity after the business ‘combination, ABC shall continue to measure the patented 39technology st carrying amount immediately before ‘acquisition date and shall not recognize a gain or loss in prof, foes before and after the business combination. q The fair valve of the net identifiable assets acquired is computed follows: 5 Fair value of assets Indemnification asset" (120,00 - 100,000) Total Fair value of liabilities Fair value of net identifiable assets acquired *Since the related liability on the indemnification asset is measured at _acquisition-date fair value, the indemnification asset is also measureq ‘on the same basis. The indemnification asset is measured as the ‘excess of the guaranteed amount over the acquisition-date amount Of the liabilty assumed (.e., 120,000 guaranteed amount minug {100,000 acquisition-date fair value). ‘Goodwill (gain on bargain purchase) is computed as follows: Consideration transferred Non-controlling interest in the acquiree Previously held equity interest inthe acquires Total Fas value of net identifiable assets acquired Goodwill /(Gain on a bargain purchase) ‘The pertinent entries areas follows: Sin mpaiment Jos (500K 3204) * Land 2059 | ty romeasure the lend transferred in acs cominaton fo eoqusn-date forte “Tan | identifiable assets acquired 1. | indemnification asset 201 | Discount on note payable (50-3104) | Good Cash in bank 200,000 (600,000 20,000 189,599 390,461 | Note payable (1x 50%) Land Liabilities assumed to record the business combination illustration 3: Consideration transferred ~ Dividends on ‘On January 1, 20x1, ABC Co. acquired all te assets and assumed al the liabies of XYZ, Inc. for P1.6M, Information of the assets and Tabilties of XYZ on acquistton date are as follows: i? Sarno Fair values Assets 1,800,000 7,600,000 abies 500,000 500,000 ‘The assets of XYZ include goodwil with a carrying amount of 1P100,000. This was assigned a fair value of 20,000 on acquisiton Fate. The liabilties include 100,000 cash dividends declared by XYZ, Inc. on December 28, 20x0, to shareholders of record on ‘January 15, 20x1, and for distribution on January 31, 20x1 Requirement: Compute for the goodwill (gain on bargain purchase) Solution: ‘The consideration transferred is adjusted for the dlvidends purchased as follows: Fair value of consideration transferred 4,800,000 DDividends-or (Dividends purchased) ___ 100,000) ‘Adjusted consideration transfered 1,500,000. Goodwill is computed as follows: Consideration ransterred 4,800,000, 'Non-contolng interest in the acquire Previously held equiy interest in the acquire - Total 7,500,000 FV of net identifiable assets acquired (tau 20K) _(1,080,000 Goodwill 420,000, Exceptions to the measurement principle creel jonni mame Wioeonnes rights are discussed in detail in the next chapter. assnipame ene 2 et an oy eet ag ea scene 2m oe Sere oes oe et recta ietene oa es Se ca tee ‘Among other things, PFRS 2 requires the identification of the counter. party as either non-employee of employee and others pro ‘Similar services and the consideration of certain vesting conditions ‘when measuring share-based payment transactions. The accountng fay nurebesea payment wansactons 1 dscussed in deta in Franca! Accounting “g Repocing Pat 2 c. Assets held for sale The acquirer shall measure an acquired non-current asset (or disposal group) that is classified as held for sale at the acquisition date at fair value less costs to sell in accordance with PFRS §, Non-current Assets Held for Sale and Discontinued Operations, (rather than at fair value under PFRS 3) Iilustration: Held for sale assets (On January 1, 20x1, ABC Co. acquired all of the identifiable assets ‘and assumed al of ine lablities of XYZ, Inc. by paying cash of 1,000,000. On this date, the identifiable assets acquired a liablities assumed have fair values of 1,600,000 and 900,000, respectively ‘Additional information: 2 ABC intends to sell immediately a factory plant included in the identifiable assets of XYZ. All of the “held for sale” classification titeria under PFRS 5 are met. As of January 1, 20xt, the fact plant has a fair value of 300,000 and a carrying amount of $250,000 inthe books of XYZ. Costs to soll the factory plant £20,000. Not included in the identifiable asset of XYZ is a research and) Govelopment intangible asset that ABC does not intend to use, ‘The fair valu ofthis asset is P50, 000. list, with an estimated value of 10,000, in the form of a datat where the nature of the information is subject to national Requirement: Compute for the goodwill (gain on bargain purchase). 42 General recognition and measurement principle | Framework and measured at acquisition-date fair values in Solution. ‘The fair value of net identifiable assets is computed 28 follows: Fair value of identifiable assets 1,600,000 Costs to sel ofthe “held for sale asset (20,000) Fair value of unrecognized research and development ___ 50,000. ‘Adjusted value of identifiable assets 7,630,000 value of liabliies assumed (900,000) Fair value of net identifiable assets acquired 730.000 Notes: 2 The “held for sale" factory plant is measured al fair value less ‘costs fo sell. Since its fair value is already included inthe total fair value, the costs to sel ae simply deducted. 7 Anidentiable asset acquired is recognized regardless of whether the acquirer intends to use it or not. ‘The customer lst is not recognized because it does not mieet the definition of an intangible asset. The laws regarding confidentiality prevent ABC from disseminating the information about its customers. ‘Goodwill (gain on bargain purchase) is computed as follows: Consideration transferred 1,000,000 ‘Non-controling interest in the acquiree : Previously held equity interest in the acquire Total 7,000,000 Fair value of net identifiable assets acquired (730,000) Goodwill 770,000 {1 A. summary of the exceptions to the recognition and ‘measurement principles under PFRS 3 is provided below: “The net identifable assets acquired in a business combinalion are recognized when they meet the recognition ciiteria under the accordance with PFRS 3. Exception tothe | Exceptions to both | Exceptions to the recognition the recognition and | méasurement principle ‘measurement principle |___principles. z 7. Contingent 7. Deferred tax 7, Reaoquired |” fiabitties- | assets and rights — recognizedeven_| _labiliies (PAs 12 _| measured on the 43[Chapter 14: Summary ‘acquired and labilties assumed in the business combination, aiopheay basis ofthe ‘emaring 2. Employee benetts | Smack ern ay = (PAS 191 apples) | Sewer onde gee = | 5. Indemnification 2. Share-based | assets recopnized |“ payment indmeesuedonthe | wards = (PF Same beat a Fieappied) ‘naorntd tern | 9. Assets held for sale ~ measure | atfarvalve fees costs tose! ’A business combination is a transaction or other event in which ‘an acquirer obtains control of one or more businesses. Control is presumed to exist when the ownership interest ‘acquired in the voting rights of the acquiree is more than 50%. Business combinations are accounted for using the acquisition method. This method requires: (a) Identifying We acyuirer, (B) Determining the acquisition date; (c) Recognizing and measuring ‘goodwill (or negative goodwill) - this requires accounting for the. following: (i) Consideration transferred, (i) Non-controling interest, (ii) Previously held equity interest, and (\v) Identifiable assets acquired and liabilities assumed. The acquirer is the entity that obtains control after the business combination, ‘The acquisition date is the date on which the acquirer obtains ‘control aver the acquiree (e.g, the closing date). ‘Goodwill oF gain from bargain purchase is measured as the difference between: The sum of (@) Consideration transferred (measured at far value), (0) Non-controling interest (measured either at far value or atthe 'NCre proportionate share in the acquiree's net assets) and (©) Previously held equity interest (measured at fair value); and ‘The acquisition-date fair value of net identifiable assets acquired. ‘A “gain dn a bargain purchase” is recognized in profit or 1oss in the year of acquisition only after reassessment of the assets 44 ‘Only identifiable assets acquired a ‘assels are not recognized Identifiable intangible assets acquired are recognized regardless of whether they have been recorded by the acquitee or not; provided they meet either the (a) separability erterion ar the (D) | ‘contractual-legal onterton, + Acquisition-related costs ate expensed, except for costs of issuing equity and debt instruments. Costs of issuing equity securities are recognized as direct reduction in equity, while costs of issuing debt securities are included in the initial | ‘measurement of the debt securities issued, Whether expensed ‘or not, acquisitionrelated costs do not effect goodwill ‘computation 1+ Restructuring provisions are generally not recognized as part ‘of business combination but rather as post-combination expenses, of the combined entity when the costs are incurred. = A contingent lability assumed in @ business combination is recognized if it is a present obligation and its fair value can be ‘measured reliably even ifthe cash outflow is improbable. ‘A non-current asset (or disposal group) acquired in a business L ‘combination that is classified as held for sale is measured at fair value less costs to sell Relevant provisions of the PFRS for SMEs ‘Section 19 Business Combinations and Goodwill ‘Scope This. section applies to accounting for business combinations. It provides guidance on identitying the acquirer, measuring the cost of the business combination, and allocating that cost to he assets acquired and liabilities and’ provisions for contingent liabilties assumed, It also addresses accounting for goodwill both at the time ‘of a business combination and subsequently. ‘Tis section specifies the accounting for all business combinations except. ‘a. Combinations of entities or businesses under common control ‘Common control means that all of the combining entties or businesses are ultimately controlled by the same party or parties both before and after the business combination, and that contro! is not transitory . The formation of ajoint venture, 45scan Seaton sar oacine Neee me eoae vices combnaton may be swe 2 YAH Of way Ae trata ears, may Hwee on fhe ving, a. The purchase by an entity of the equity of anott hota a The puctase yan gat asels Of SOT ery, Te urcase of a as or ana erty, ot pithans assumption of abies Se ey hat ogee orm on more businesses, may be effected by the issue of egy aoa fe amen te nano ft a bee shavcoers fant en baa ee ae he Fy in aad eo ‘The transaction may be entities of between one et ‘Accounting ‘All business combination purchase method. ‘Applying the purchase method involves the folowing steps: isenng an ate. oer ie cas of te business combination 5 Measi0 OP fhe aoquston date, the cost of the bus locating, oe assets aouured afd Helles and prov fereoningent labites assumed 5 shall be acoounted for by applying Ideniying th acquirer Icey ented oral business combinations A se zamoinng ey tht obains contro of te ‘combining entities or businesses. = Controls the power to govern the financial and operating policies ‘an entity or business so as to obtain benefits from its activities. 46 ‘Although it may sometines be difficult to identify an acquirer, there fare usually indications ‘hat one exists, For example ‘Ifthe fair value of one of the combining entities is significantly ‘greater than that of the other combining entily, the entity withthe ‘greater fair value is likely tobe the acquirer bb. Ithe business corrbination is effected through an exchange of voting ordinary equity instruments for cash or other assets, the ently giving up cash or other assets is ike to be the acquirer. c._ Ifthe business combination results in the management of one of ‘the combining entities being able to dominate the selection of the ‘management team of the resulting combined entity, the entity whose managemen: is able so to dominate is likely to be the acquirer Cost of a business combination ‘The aoquirer shall measure the cost of a business combination as the aggregate ot. a. The fair values, al the date of acquisition, of assets given, liabilities incurred or assumed, and equity instruments issued by the acquirer, in exchange for control ofthe acquitee, plus . Any costs directly atributable to the business combination, Adjustments to the cost of a business combination contingent fon future events, \When a business combination agreement provides for an adjustment to the cost of the combination contingent on future events, the acquirer shall include the estimated amount of that adjustment in the cost of the combination at the acquisition date if the adjustment is probable and can be measured reliably However, if the ‘potertial adjustment is not recognized at the ‘acquisition date but subsequently becomes probable and can be measured reliably, the additional consideration shall be treated as an adjustment to the costo the combination. Allocating the cost of a business combination ‘The acquirer shall, at the acquisition date, allocate the cost of a business combination by recognizing the acquiree’s identifiable assets and liabilities and a provision for those contingent iabilties that satisfy the recognition criteria at their fair values at that cate except forthe folowing: a. Deferred tax asset or lability arising from the assets acquired ‘and liabilities assumed — recognized and measured in ‘accordance with Section 29 Income Tax. 47