BUSINESS COMBINATION (PFRS 3)
Providing goods or services
PURPOSE OF BUSINESS Generating investment income
Other income from ordinary activities
/ Involving mutual entities
/ By contract alone (dual listing, stapling)
X PFRS 11: Formation of a joint operation
SCOPE
X Acquisition of an Asset that does not constitute a business (covered by applicable
standard)
X PIC Q&A: Combination of entities/business under a common control (pooling of int)
Assets acquired FV on acquisition date (FV AD)
RECOGNITION
Liabilities assumed FV AD
Horizontal integration Combination of previous competitors
Vertical integration Same industry but different levels
CLASSIFICATION AS TO
STRUCTURE
Conglomerate combination Unrelated industries
Circular combination Entails some diversification
Statutory Merger: A + B = A or B
Acquisition of net assets
CLASSIFICATION AS TO
Statutory Consolidation: A + B = C
METHOD/LEGAL POV
Stock acquisition FS of A + FS of B = Conso FS of A&B
Pooling of interest method at Book Value (PIC Q&A)
ACCOUNTING METHOD Purchase method (SME)
Acquisition method (FULL PFRS - PFRS 3)
1. Identify the acquirer
2. Determine acquisition date
STEPS IN ACQUISITION
METHOD 3. Recognize & measure the identifiable assets acquired and liabilities assumed (less than
100% = NCI)
4. Recognize and measure either goodwill or gain on bargain purchase (GBP)
Recognition of Contingent
Present and measured reliably
Liabilities
PAS 12: Income Tax
PFRS 16: Leases in which the acquiree is the lessee
Recognition and Measurement of I-
LIE
PAS 37: Indemnification Asset
EXCEPTIONS
PAS 19: Employee Benefits
PFRS 2: Share-based payment
PFRS 17: Insurance Contracts
OTHERS Measurement of SIR N
Reacquired rights
PFRS 5: Non-current Asset Held for Sale (NCAHFS)
PRE-EXISTING
Accounted for separately
RELATIONSHIPS
Marketing related e.g. Trademark
Customer related e.g. Customer List
INTANGIBLE ASSETS AT FV
Contract based e.g. License/Franchise
Artistic related e.g. Video and Audio
IDENTIFIABLE ASSET Issues arise when it is intangible (PAS 38)
Within: Adjust GW(GBP)
Measurement Period
Beyond: Not adjust (xpn: error)
PROVISIONAL VALUES
1 year or 12 months from DoA
MP is earlier of
Information is known
CONTINGENT
See Step 3 below
CONSIDERATION
CLASSIFICATION OWNERSHIP PURPOSE STANDARD
Inv in securities Less than 20% Trading or Non-trading PFRS 9
Inv in associate/JV 20% to 50% Significant influence PFRS 28
Inv in subsidiary More than 50% Control PFRS 3
Joint arrangements - Joint control PFRS 11
ACQUISITION OF NET ASSETS ACQUISITION OF STOCKS
Assumption of Liabilities Acquisition of NET assets (If <100%)
Always 100% acquisition (No NCI) 50% - 100% acquisition (NCI exists)
Proforma Journal Entry (Books of Acquirer) Proforma Journal Entry (Books of Parent):
Dr. Assets at FV Dr. Investment in subsidiary
Dr. Goodwill Cr. Consideration Transferred
Cr. Liablity at FV
Cr. GBP (P/L)
Cr. Consideration Transferred
Transfer of assets & liabilities No transfer of assets & liabilities
1 Book only: Book of Acquirer 2 Books - Books of Acquirer and Acquiree
No need to consolidate (already combined) Prepare consolidated FS
Goodwill or gain recorded in: Goodwill or gain recorded in:
/ Combined FS (Date of Acquisition) / Consolidated FS (Date of Acquisition and Subsequent to date)
/ Book of acquirer (both are the same) X Book of acquirer (goodwill is ZERO)
Power over Investee
ELEMENTS OF CONTROL
Exposure, or Rights to variable returns
(PERA)
Ability to use power over investee to affect amt of investor's return
ACQUISITION METHOD Applied on the POV of the acquirer
More than half of voting stocks of acquiree
Less than half but significant minority interest exist
STEP 1 Appoint/remove majority of BOD of
acquiree
Beyond: Not adjust (xpn: error)
SCENARIOS OF CONTROL
Control financial/operating policies
Less than half but has power to because of law/agreement
Over more than half of voting
rights of acquiree
STEP 2 Date which acquirer obtains control over acquiree
CONSIDERATION TRANSFERRED PURCHASE PRICE Assets
(Not applicable for Acquisition Method) Liabilities
Equity
Cash Face value
Deferred payment with EIR Present value including CC
Deferred payment without EIR Face value including CC
Non-cash assets FV DA
Equity instruments FV DA including CC
Share premium - issuance
CTIR - Stocks
RE (if SP not sufficient)
Part of initial CA of bond
CTIR - Debts
issued
Future losses/cost Ignored
Date of acquisition (FV):
Equity: Credit to Share
Prem on CC
Cash: Credit to Estimated
MEASUREMENT Liab on CC
Contingent Consideration (CC) Subsequent to DOA:
Equity: Not remeasured
Cash 1 year or less:
Charge to GW/GBP
Cash more than 1 year:
Charge to P/L
Added to CT at FV DA
Arises from:
Step acquisition; or
Buscom achieved in
Previously-held Interest (PHI) stages
Gain: CA < FV - charged to
P&L/OCI -> RE
Loss: CA > FV - charge to
PL
Consideration Transferred (CT) xxx 60%
10% (Does not exist for acquisition of net
Previously-held Interest (PHI) xxx
assets)
30% (Does not exist for acquisition of net
NCI (stock acquisition only) (xxx)
assets)
FV of Subsidiary xxx 100%
FVINA (xxx)
GW (GBP) xxx
FV of Assets xxx
FV of Liabilities (xxx)
FVNA xxx
IDENTIFIABLE Separable
UNIDENTIFIABLE Goodwill of acquiree is not part of FVNA
STEP 3
EQUITY Equal to Net Assets
MEASUREMENT FV DoA
Appears in SFP
GOODWILL Part of NCA
(CT + FVOPHEI + NCI) > FVNA
Appears in SCI
Added to Conso net income (RE)
STEP 4 GBP (CT + FVOPHEI + NCI) < FVNA
Reassess identification and measurement of net assets, liabilities and contingent liabilities
Recognize immediately in profit or loss any excess
Acquirer - BV
CONSO FS ON DATE OF Assets & Liab
Acquiree - FV
ACQUISITION
Equity Acquirer only
ACQUISITION-RELATED COSTS PURCHASE METHOD ACQUISITION METHOD
APPLICABILITY PFRS for SME Full PFRS
Acq. Of assets; Expensed
DACs Capitalized Stocks (Conso) - Expensed
Stocks (Separate); Capitalized
IDACs Expensed Expensed
1. SP from issuance 1. SP from issuance
STOCK ISSUANCE COSTS (SIC) 2. SP from prev issuance 2. SP from prev issuance
3. RE 3. RE
DEBT/BOND IC Deduct to PV/FV of debt issued Deduct to PV/FV of debt issued
NCI Partial only Partial or full
Subject to impairment
GOODWILL Subject to impairment
Amortized (presumed 10yrs)
FV; if none
NCI
= (CT excl of control prem / CI%) x NCI%
FULL GOODWILL
Allocated to acquirer & NCI
Goodwill
GBP only for acquirer
Proportionate, computed as:
NCI
= FVNA x NCI %
PARTIAL GOODWILL
Allocated only to acquirer
Goodwill
GBP only for acquirer
FV; and
FV of NCI
Greater of
(Full GW Method only)
Proportionate share
Addl consideration paid to acquire business
CONTROL PREMIUM (CP)
Part of CT
Public entity as acquiree for accounting purposes
REVERSE ACQUISITION
Private entity as the acquirer for accounting purposes
No loss of control Goodwill/GBP not remeasured
Derecognize at CA on date control is lost:
STOCK ACQUISITION
Assets
Liabilities
Goodwill
NCI
Loss of control Recognize:
FV of consideration received
CHANGE IN OWNERSHIP Distribution of shares of former subsidiary
INTEREST
Investment retained in former subsidiary at FV
Reclassify to PL the amts needed to recognize OCI
Recognize difference in PL attributable to CI
/ Liquidation, receivership & administration
/ Seizure of assets or operation
Examples of loss of control X Short-term restrictions on CF from subsidiary
X Severe long-term restriction impairing ability to
transfer funds to the parent entity
ACQUISITION OF NET ASSETS
Acquirer at BV xxx
Acquiree at FV xxx
Goodwill xxx
Items not yet reflected xxx/(xxx)
TOTAL ASSETS xxx
Acquirer at BV xxx
Acquiree at FV xxx
Estimated Liab on CC (ELCC) xxx
Other items xxx/(xxx)
TOTAL LIABILITIES xxx
Share Capital xxx
APIC/Share Premium xxx
Retained Earnings xxx
TOTAL EQUITY xxx
Acquirer share capital xxx
Shares Issued at Par xxx
SHARE CAPITAL xxx
Acquirer APIC/SP xxx
SP on Issuance xxx
Stock Issuance Costs (SIC) (xxx)
SP on CC xxx
APIC/SP xxx
Acquirer RE xxx
Gain on Bargain Purchase (GBP) xxx
DACS (xxx)
IDACS (xxx)
SIC not absorbed by APIC/SP (xxx)
RETAINED EARNINGS xxx
