Business Combinations SCOPE OF PFRS 3

Business Combination It is applied to a transaction or event that meets the definition of a

• a transaction or event in which one company (acquirer) business combination.
obtains control of the another entity/ies (acquiree). It should not be applied to:
• occurs when two or more separate businesses join into a • formation of a joint venture (joint arrangement);
single accounting entity. • acquisition of an asset or group of assets that does not
constitute a business; and
Forms of Business Combination • combination of entities or businesses under common control.
• Statutory Merger – occurs when two or more companies
merge into a single entity which shall be one of the IDENTIFYING A BUSINESS COMBINATION
combining entities. A + B = A or B • It can occur in various ways such as by transferring cash,
• Statutory Consolidation – occurs when two or more incurring liabilities, and issuing equity instruments;
companies combined into a single entity which shall be the • It can be structured in various ways to satisfy legal, taxation
consolidated company (new entity). A + B = C or other objectives; and
• Acquisition of Stocks – the acquirer issues consideration in • It must involve the acquisition of business.
exchange for the ownership of stocks (shares) in the
acquired company. A + B = AB THE ACQUISITION METHOD
• Identifying the acquirer
Types of Business Combination • Determining the acquisition date
• Horizontal Integration – a business combination of two or • Recognizing and measuring identifiable assets acquired,
more entities with similar businesses or industry liabilities assumed, and any non-controlling interest in the
(competitor). acquiree
• Vertical Integration – a business combination of two or • Recognizing and measuring goodwill or gain on bargain
more entities operating at different levels in marketing or purchase
production chain (customer-supplier).
• Conglomerate – a business combination of two or more STEP 1: Identifying the acquirer
unrelated businesses with dissimilar nature and diverse The acquirer is usually the entity that:
products and services (unrelated) • transfers cash or other assets or incurs liabilities
• issues its equity interests (except for reverse acquisitions)
Reasons of Business Combination • is usually larger in terms of assets or revenues
• Elimination of competition
• Economies of scale STEP 2: Determining the acquisition date
• Staff /Personnel reduction • It is the date when the acquirer obtains control of the
• Acquiring new technology acquiree.
• Improved market reach and visibility • It can be earlier, later or same as the closing date (the date
when the acquirer legally transfers the consideration,
Accounting for Business Combination acquires the assets and assumes the liability).
• Pooling of Interest – it uses historical values of the assets
acquired and liabilities assumed to record the business STEP 3: Recognizing and measuring identifiable assets acquired,
combination (PIC Q&A 2011-02). liabilities assumed, and any non-controlling interest in the
• Acquisition Method – requires the recording of assets acquiree
acquired and liabilities assumed at their fair values at the • Identifiable Assets – it should be measured at fair value.
acquisition date (PFRS 3). • Liabilities Assumed – it should be measured at fair value.
• Non-Controlling Interest – it is the equity in a subsidiary not
PFRS 3: BUSINESS COMBINATION attributable to the parent. It is measured either at fair value
• It was originally published in March 2004. (full goodwill) or proportionate share (partial goodwill).
• A revised version was issued in January 2008. • NCI at Fair Value = Consideration Transferred ÷
• Latest amendment was made in May 2020. Acquirer Interest% x NCI%
• NCI at PS = Fair Value of the Net Asset Acquired x
OBJECTIVE OF PFRS 3 NCI%
To improve the relevance, reliability, and comparability of the • Measurement Period – it is the period when provisional
information that a reporting entity provides in its financial statements amounts can be adjusted (should not exceed one (1) year.
about a business combination and its effects.
It establishes principles and requirements for how the acquirer: STEP 4: Recognizing and measuring goodwill or gain on bargain
• Recognize and measure in its financial statements the purchase
identifiable assets acquired, the liabilities assumed, and any • Proforma Computation:
non-controlling interest in the acquiree;
• Recognize and measure the goodwill acquired in the
business combination or a gain from a bargain purchase;
and
• Determine what information to disclose to enable users of
the financial statements to evaluate the nature and financial
• If positive, the result is goodwill and to be recorded as an
effects of the business combination.
asset in the books of the acquirer. Subsequently, it is tested
for impairment at least annually.
• If negative, the result is gain on bargain purchase and to
be recorded as an income in the books of the acquirer. Note:
 before recording as income, the recognition and Stock Acquisition
measurement should be reassessed.

CONTINGENT CONSIDERATION
• The acquirer may also transfer any asset, liability or equity
resulting from a contingent arrangement.
• It is measured at fair value at the time of the business
combination. REVERSE ACQUISITION
• If the amount of contingent consideration changes as a result • It occurs when the entity that issues shares (the legal
of a post-acquisition event, accounting for the change in acquirer) is identified as the acquiree for accounting
consideration depends on whether the additional purposes (e.g. backdoor listing).
consideration is classified as an equity instrument or an • The legal acquirer becomes the accounting acquiree, and
asset or liability: the legal acquiree becomes the accounting acquirer.
• If it is classified as an equity instrument, the
original amount is not remeasured.
• If it is classified as an asset or liability that is a
financial instrument, it is measured at fair value,
and gains and losses are recognized in either
profit or loss or other comprehensive income
• The accounting acquirer usually issues no consideration for
(IFRS 9 Financial Instruments or IAS 39 Financial
the acquiree, so compute for the “deemed consideration
Instruments: Recognition and Measurement).
transferred”.
• If it is not within the scope of IFRS 9 (or IAS 39),
it is accounted for in accordance with IAS 37
PFRS
Provisions, Contingent Liabilities and Contingent
Assets or other IFRSs as appropriate.

ACQUISITION RELATED COST

• Costs of issuing debt or equity instruments are accounted for
IFRS 9 - Financial Instruments:
• Debt Instrument - will affect the fair value of the PFRS FOR SMES
debt instrument issued or • Total Assets: < 350M or Total Liabilities: < 250M
• Equity Instrument - chargeable to share premium • Not in the process of filing its financial statements for the
(APIC) or retained earnings. purpose of issuing any class of instruments in the public
• All other costs associated with an acquisition must be market
expensed, including reimbursements to the acquiree for • Not a required to file financial statement under SRC Rule 68
bearing some of the acquisition costs: • Not a holder of a secondary license issued by a regulatory
• finder's fees agency (banks, investment house, finance company,
• advisory, legal, accounting, valuation, and other insurance company, mutual fund and securities
professional/consultancy fees broker/dealer)
• general administrative costs including costs of • Not a public utility
maintaining an internal acquisition department
EXEMPTIONS TO PFRS FOR SMES
BUSINESS COMBINATION ACHIEVED IN STAGES • Part of a group reporting under Full PFRS (e.g. subsidiary,
• It is also known as step acquisition. parent, joint venture, associate, branch office)
• Prior to control being obtained, an acquirer accounts for its • Subsidiary of a foreign parent company moving towards
investment in the equity interests of an acquiree in IFRS
accordance with the nature of the investment • Projected to breach/exceed the quantitative threshold
• Plan to conduct an initial public offering within the next two
(2) years

FULL PRFS VS PFRS FOR SMES

• Any previously held interest should be measured at

acquisition date fair value.

PROFORMA ENTRIES – DATE OF ACQUISITION

Net Asset Acquisition: