Module 1

1. Course Code – Title : C-APrE7 Accounting for Business Combinations

2. Module No – Title :             MO1 – Introduction to Business Combinations
3. Time Frame :             1 week – 3 hours
4. Materials :             Syllabus, Learning Plan, Curriculum Map, Writing
Materials, Accounting Standards and Books.
 

1. Overview
This learning material provides an introduction of PFRS 3 – Business
Combinations. It introduces the learner to the subject, guides the learner through the
official text,  develops the learner’s understanding of the requirements through the use of
examples and indicates significant judgements that are required in accounting for business
combinations. Furthermore, the module includes questions that are designed to test the
learner’s knowledge of the concepts pertaining to business combinations.
 
 
             

2. Desired Learning Outcomes

At the end of the learning session, you should be able to:

1. Define a business combination.

2. Understand why do enterprises resort to business combinations
3. Differentiate a combination by asset acquisition from a stock acquisition.
4. Differentiate a statutory merger from a statutory consolidation.
5. Identify advantages and disadvantages of business combination.
 
 

3. Content/Discussion

A business combination is a transaction in which the acquirer obtains control of

another business (the acquiree). Business combinations are a common way for
companies to grow in size.
 A business is an integrated set of activities and assets that can provide a return
to investors in the form of dividends, reduced costs, or other economic benefits. A
business typically has inputs, processes, and outputs. A development-stage entity may
not yet have outputs, in which case you can substitute other factors, such as having
begun operations and having plans to produce output, and having access
to customers who can purchase the outputs.

A business combination is not the formation of a joint venture, nor does it

involve the acquisition of a set of assets that do not constitute a business.

THE QUESTION IS: WHAT IS THE REASON WHY COMPANIES DO BUSINESS

COMBINATIONS?

The purpose of business to combination is to strengthen to company’s competitive position

in the global market. The other reasons for combining two or more businesses are:

1. To bail out a bankrupt or a financially distressed corporation which has a bright

prospect of recovering and which market, product or expertise will prove
advantageous to the acquiring enterprise. This was the reason behind the PAL
acquisition by the group of Lucio Tan.

2. To achieve profitable growth or expansion with the immediate availability of more

capital, resources and expertise. As Hopkins say “Grow or die”. This has been the
major objective of large firms and of some smaller firms, as well. It may grow slowly
or it may grow rapidly by acquiring existing entities.

3. Access to financial assistance and bigger loans are more possible with the acquiring
company showing a more expanded base of resources coming from the acquired
companies. This was the reason why Duterte crony Dennis Uy continues purchasing
businesses while securing loans from BDO.

4. Operating synergy may be derived from the merger such as: stronger and larger
market position, efficient deliver of service, efficient management of pooled
resources.
 5. Cost savings is possible since start up costs such as costs of hiring and training
workers or employees can be minimized since existing businesses already have the
required expertise, regular suppliers, captured market, programmed productive
facilities and existing distribution channel. Costs may also be reduced when
operation is streamlined and the number of workers and operating divisions are
reduced.

FORMS OF BUSINESS COMBINATION

              A business combination is characterized by acquisition of assets or acquisition of

stocks.

1. Asset Acquisition

2. Statutory Merger – one entity obtains the assets and liabilities of another
entity in exchange for cash or other assets, debt or stock or a combination of
any of these. The acquirer retains its identity while the acquired entity who
transferred its assets and liabilities dissolves its legal entity. The effect is that
the acquiring firm carries its own operation in a larger scale because it has
absorbed the resources and market of the acquired firm. It’s A + B = A or B.

Examples: BDO + E-PCIB = BDO and PNB + Allied Bank = PNB

1. Statutory Consolidation – two or more entities transfer their assets to a

newly formed entity. The combining entities are dissolved, leaving only the
new entity in existence. It’s A + B = C

Example: Daimler-Motoren-Gesellschaft (DMG) +  Benz & Cie = Mercedez-

Benz (Daimler-Benz Corporation)

 
 1. Stock Acquisition

One entity acquires the majority shares of stocks of another entity and in the
process achieve control over it. Although control is present, no dissolution
takes place as each entity remains in existence and continues operating as
legal entities, Each entity continues to maintain its records and prepares its
financial statements. It’s A + B = A and C

Examples: Facebook purchased Instagram for 1billion US Dollars in 2012

and On March 24, 2000, PLDT completed its share-swap acquisition of Smart,
making Smart a 100%-owned PLDT subsidiary.

TYPES OF BUSINESS COMBINATIONS

              There are three types of combining or integrating businesses:

1. Horizontal Integration – combination of two or more enterprises belonging to the

same industry. Examples: Metro Bank acquired Solid Bank and Jollibee Foods
Corporation acquired Mang Inasal

2. Vertical Integration – combination of two or more enterprises having dissimilar

but related stages of operation, production or distribution. Example: A Bulacan
leather maker and a Marikina shoemaker.

 Conglomeration – combination of two or more enterprises of unrelated stages of

operation, production or distribution.

Example: SM Investments Corporation acquiring different businesses.

Advantages of Business Combination

The advantages of a combination are controversial because the creation of
monopoly and elimination of competition both are considered the merits and demerits of
the combination.
 
 Anyway, following are the important merits of combination:

1. Increase in Capital - The volume of capital may be increased by the formation of a

combination. The members combine their resources to conduct large size business.
2. Elimination of Competition - By the formation of combination unnecessary
competition is eliminated and member firms earn monopoly profit.
3. Saving in Expenses - Administrative production and distribution expenses reduce
due to combination.
4. Controls over Production - The combination is very effective to control
overproduction. It helps to adjust the supply according to the demand.
5. Experts Services - A combination can acquire the services of experienced specialists.
It increases the efficiency of the combination.
6. Research Work - A combination can spend money on research work which is very
important for the business. This research work reduces its cost and increases its profit.
7. Use of Modern Technology - A combination is capable to use the latest inventions
and new methods of production as a consequence of a transfer of technology. It will
increase profit.
8. Stability - A combination is a more stable form of business as compared to the
individuals’ units. The chances of dissolution are also less than others.
Disadvantages of Business Combination
Following are important disadvantages of combination:

1. Creation of Monopoly - It creates a monopoly that is harmful to the people in the

long run.
2. The concentration of Wealth - It concentrates the wealth in a few hands and divides
society into few classes, such as rich, middle and poor.
3. Reluctant to be Accepted - The combination is disliked by the people, it is not
acceptable.
4. Changes in Friction - The chances of friction among directors and officers are bright.
They quarrel with, each other for their interest
5. No Personal Contact - It is not possible to maintain direct contact between
employees, creditors, and shareholders, due to this business may suffer a loss.
6. Costly Management - A combination hires costly management, which increases the
cost of production.
7. Over Capitalization - There is always a danger of over-capitalization in the
combination. It is harmful to the combination.
8. Misuse of Funds - The directors of the company enjoy unlimited power and misuse
the capital.
9. National Interest Ignored - Generally, the combinations ignore the national interest
and they involved in such activities that are against the national interest.
 

4. Progress Check
1. What is a business combination?
2. Why do enterprises resort to business combinations?
3. Differentiate a combination by asset acquisition from a stock acquisition.
4. Differentiate a statutory merger from a statutory consolidation.
5. Identify advantages and disadvantages of business combination.
 

5. Assignment
Enumerate and explain businesses which acquired other companies under the three
forms and types of business combinations.
 

6. Evaluation
Case Study
FACTS: In 2019, Jollibee Foods Corp., the Philippines’ biggest restaurant company, spent
$350 million in acquiring Coffee Bean & Tea Leaf which has nearly 1,200 stores across
more than 25 countries. The brand's cafes serve brewed coffee and sweet blended drinks
like chocolate cookie lattes and frozen mango sunrise ice blended tea. Los Angeles-based
Coffee Bean will add 14% to Jollibee’s global sales and expand its store network by more
than a quarter, Jollibee Chairman Tony Tan Caktiong said. The coffee chain was founded in
1963 and opened its first coffee shop in L.A.'s Brentwood neighborhood in 1968. It has
grown to 1,189 stores, most of which are in Asia, and last year it reported a net loss of $21
million on revenue of $313 million. According to an April auditors report prepared by Ernst
& Young, the coffee company had a senior credit facility that would mature this month,
“which raises substantial doubt about the company’s ability to continue as a going
concern.” The Coffee Bean acquisition is Jollibee’s largest to date, according to Bloomberg
data. It follows Jollibee’s $210.3-million takeover of American fast-food chain Smashburger
last year. Jollibee said the deal will boost contributions from international businesses to
36% of its total sales and closer to its goal of becoming one of the top five restaurant
companies in the world in terms of market capitalization.
 
REQUIREMENTS: If you’re the external advisor of Jollibee Foods Corporation, what can
you say about the recent acquisition of JFC? Is it beneficial for the company? Why?
              
 
 

1. References
 

1. Millan, Z.V. (2019). Accounting for Business Combinations. Baguio City, Philippines:

Bandoline Enterprise
2. Dayag, A.J. (2019). Advanced Accounting Vol. 2. Manila, Philippines: Lajara Publishing
House
Module 2
 

1. Course Code – Title : C-APrE7 Accounting for Business Combinations

2. Module No – Title :             MO2 – Business Combination Legal and Accounting
                                                      Procedures

1. Time Frame :             1 weeks – 3 hours

2. Materials :             Syllabus, Learning Plan, Curriculum Map, Writing
Materials, Accounting Standards and Books.
 

1. Overview
This learning material provides a discussion of legal and accounting procedures of
business combination. It introduces the learner to the subject, guides the learner through
the official text,  develops the learner’s understanding of the requirements through the use
of examples and indicates significant judgements that are required in accounting for
business combinations. Furthermore, the module includes questions that are designed to
test the learner’s knowledge of the concepts pertaining to business combinations.
 
 
             

2. Desired Learning Outcomes

At the end of the learning session, you should be able to:

1. Identify and analyze successful business combinations.

2. Enumerate the legal procedures in business combination.
 3. Enumerate the accounting procedures applied in business combination.
4. Know the accounting method to be used in business combination.
 
 
 

3. Content/Discussion
 
In our previous discussion, I have discussed to you the forms, types, advantages
and disadvantages of a business combination. Now, let’s familiarize ourselves with
some successful acquisitions of all time.

7. Disney buys Pixar. In 2006, Walt Disney Co. took a major step in expanding its
already sizable entertainment footprint, acquiring the Steve Jobs-led Pixar in a
$7.4 billion move. At the time, Pixar had an impressive portfolio of wildly
successful animated films under its belt, including the first two "Toy Story"
installments, "Finding Nemo" and "The Incredibles."
Since then, the hit factory has gone on unperturbed, with 11 movies –
including "Up," "WALL-E," "Inside Out," "Toy Story 3" and "Finding Dory" –
generating billions in box office revenues alone. When you factor in the home
video sales, streaming and merchandising revenues, Disney's Pixar purchase was
a magical move.

1. Disney buys Marvel. Ever the diligent chief executive, Disney's Bob Iger wasn't
content with one blockbuster acquisition. In summer 2009, the House of Mouse
pulled the trigger on Marvel Entertainment, shelling out $4 billion for the iconic
superhero empire.
Since the acquisition, 11 Marvel movies have already grossed more than $3.5
billion, which yet again becomes a more impressive figure when you consider
the usual revenue streams from DVDs, toys, and licensing in general.
The great thing about the Marvel franchise is the strength of its intellectual
property, which will be around forever and can be leveraged into new movies,
series, and merchandise.
 Google buys Android. The return on tech deals can be a little harder to quantify in
tech, but when an acquisition was a smart move, it's pretty clear. That's the
dynamic for Alphabet, which purchased then-unknown mobile software
company Androidfor a rumored $50 million in 2005.
Today, Android is the top mobile operating system in the world, powering 82
percent of all smartphones through mid-2015. Since Android also heavily
 incorporates Google's products and services, it's given Google incredible mobile
search engine share.

1. Facebook buys Instagram. Last but not least, Facebook's decision to buy the
upstart photo-sharing social network Instagram in 2012 for $1 billion was, in
retrospect, a brilliant play. At the time, Instagram had 30 million users and was
just launching on Android.
Today, Instagram has 500 million monthly active users and would be
considered one of the most potent threats to Facebook were it not under its
purview.
 
 
              You have to take note that in acquiring a business, there are many factors and steps
to be considered. It is not also a guarantee that every business combination will become
successful. As an accountant, you have to consider the following things:
 
 
LEGAL PROCEDURES FOR THE PLAN TO COMBINE
       Sections 76 and 79 of the Corporation Code of the Philippines provides this guideline in
effecting a business combination.

1. A plan of merger or consolidation is prepared and approved by the majority of the

Board of Directors.
2. The plan should be approved by two-thirds (2/3) of the common shareholders of
each constituent companies.
3. The articles of incorporation sets forth the merger plan; number of shares, number
of voting for o non-voting for the merger among others.
4. The SEC approves the following documents: approval of the merger, deed of
assignment of transfer of properties, amended articles of incorporation and audited
financial statements of the absorbed entity.
 
*You have to take note that after securing all the legal procedures, the business
combination is still subject to regulatory approval of the Philippine Competition
Commission.
 
ACCOUNTING PROCEDURES:
PFRS 3 - Business Combination
 
 Which are not business combinations within PFRS 3?

1. Formation of jointly controlled entity (PAS 31)

2. Acquisition of group of assets that does not constitute a business (Asset acquisition)
3. Business combination of entities under common control (Lack of transitory control)
 
Method of Accounting – All business combination shall be accounted using the acquisition
method.
 
Applying the acquisition method requires:

1. Identifying the acquirer

2. Determine the acquisition date
3. Recognize and measure the net assets acquired and noncontrolling interest (if any).
4. Recognizing or measuring goodwill or a gain from a bargain purchase
 
Acquirer – the acquirer is the entity that obtains control over the acquire
Control – the power to govern the financial and operating policies of an entity or business
so as to obtained benefits from its activities. Control is manifested by:

1. power over more than one-half of the voting rights of the other entity by virtue of an
agreement with other investors; or
2. power to govern the financial and operating policies of the other entity under a
statute or an agreement; or
3. power to appoint or remove the majority of the members of the board of directors
or equivalent governing body of the other entity; or
4. power to cast the majority of votes at meetings of the board of directors or
equivalent governing body of the other entity
 
Who is the acquirer?
If business combination is affected primarily by

1. transferring cash or other assets or incurring liability – the entity that transfers
asset or incurs liability
2. exchanging equity interest – the entity issuing equity interest (except for reverse
acquisition)
The following also may assist in identifying the acquirer:
 relative voting rights in the combined entity after the business combination
 the existence of a large minority voting interest in the combined entity if no other
owner or organized group of owners has a significant voting interest
 the composition of the governing body of the combined entity
 the composition of the senior management of the combined entity
 the terms of the exchange of equity interests

1. combining of entities – the entity whose relative size is significantly greater than
that of the other combining entity or entities
 If more than two entities are involved, consider also who initiated the combination
 If a new entity formed to effect a business combination, the new entity is not
necessarily the acquirer. If a new entity is formed to issue equity interests to effect a
business combination, one of the combining entities that existed before the business
combination shall be identified as the acquirer. Nevertheless, a new entity that transfers
cash or other assets or incurs liabilities as consideration may be the acquirer.
 
Acquisition date – the date when the acquirer obtains control over the acquire
The acquisition date is normally the date on which the acquirer legally transfers the
consideration, acquires the assets and assumes the liabilities of the acquiree – closing date,
except when fixed by agreement otherwise.
 
Recognition and Measurement of acquiree’s assets, liabilities and non-controlling
interest
Recognition Principle: As of the acquisition date, the acquirer shall recognize, separately
from goodwill, the identifiable assets acquired, the liabilities assumed and any non-
controlling interest in the acquiree.
Recognition conditions:

1. Assets acquired and liabilities assumed must meet the definition of assets and
liabilities in the Framework to the Presentation of Financial statements (future costs,
not present obligations are not recognized)
2. The identifiable assets acquired and liabilities assumed must be part of what the
acquirer and the acquiree exchanged in the business combination transaction rather
than the result of separate transactions
 
Exception: Contingent liabilities of the acquiree assumed by the acquirer that are present
obligations arising from past events with measurable fair value shall be recognized.
 
Measurement Principle: The acquirer shall measure:
  Identifiable assets acquired and the liabilities assumed at their acquisition-date fair
values
 Non-controlling interest – either at:

1. Fair value or
2. Non-controlling interest’s proportionate share in the acquiree’s identifiable net
assets
 
Recognizing Goodwill or Gain on Bargain Purchase
The acquirer shall recognize goodwill as of acquisition date measured as the excess of the
aggregate of the following over the acquisition date net identifiable assets acquired above
liabilities assumed:

1. the consideration transferred measured at acquisition-date fair value

2. the amount of any non-controlling interest in the acquire
3. the acquisition-date fair value of the acquirer’s previously held equity interest in the
acquiree in a business combination achieved in stages
 
Consideration transferred shall be measured at the sum of the acquisition-date fair values
of the:

1. assets transferred by the acquirer

2. liabilities incurred by the acquirer to former owners of the acquiree and
3. equity interests issued by the acquirer
 
 

4. Progress Check
1. Identify and analyze successful business combinations.
2. Enumerate the legal procedures in business combination.
3. Enumerate the accounting procedures applied in business combination.
4. Know the accounting method to be used in business combination.
 

5. Assignment
Identify at least one successful business acquisition in the Philippines and explain.

6. Evaluation
Part 1: Enumerate businesses which acquired other companies under the three forms of
business combinations.
 Part 2: Drill Problems

1. PFRS 3 is not applicable to business combination of the following, except

1. Mutual entities                                         c. Subsidiary acquired with a view to sale

2. Jointly controlled entities                    d. Entities under common control
 

2. The business or businesses that the acquirer obtains control of in a business

combination.

1. Business combination            b. Acquirer                    c. Acquiree                         d. mutual

entity
 

3. An entity that acquires control is

1. Business combination            b. Acquirer                    c. Acquiree                         d. mutual

entity
 

4. The date on which the acquirer obtains control of the acquiree

1. Acquisition date                        b. Settlement date      c. Measurement date     d.

Agreement date
 

5. An integrated set of activities and assets that is capable of being conducted and
managed for the purpose of providing a return in the form of dividends, lower costs or
other economic benefits directly to investors or other owners, members or participants.

1. Segment                         b. business                     c. entity                           d. group of assets

 

6. A transaction or other event in which an acquirer obtains control of one or more

businesses.

1. Purchase                        b. Pooling of interest c. Business combination   d. Merger

 
 7. A business combination in which a new corporation is formed to take over the
assets and operations of two or more separate business entities, with the previous
separate entities being dissolved, is a:
1. Consolidation Merger                       c. Pooling of interest             d. Purchase
 

8. The power to govern the financial and operating policies of an entity so as to obtain
benefits from its activities.

1. Significant influence c. Joint control                            c. Control                             d.

Dominance
 

9. An identifiable non-monetary asset without physical substance.

1. Intangible asset                         b. Identifiable asset   c. Goodwill                        d.

Unrecognized asset
 

10. An asset representing the future economic benefits arising from other assets
acquired in a business combination that are not individually identified and separately
recognized.

1. Intangible asset                         b. Identifiable asset   c. Goodwill                        d.

Unrecognized asset
 

11. An entity, other than an investor-owned entity, that provides dividends, lower costs
or other economic benefits directly to its owners, members or participants.

1. Investment house       b. Cooperatives                          c. Business                         d. Mutual

entity
 

12. The equity in a subsidiary not attributable, directly or indirectly, to a parent.

1. Controlling interest   b. Legal parent c. Economic subsidiary       d. Non-controlling

interest
 

13. This term includes holders of equity interests of investor-owned entities and
owners or members of, or participants in, mutual entities.
 14. Investors Venturers                  c. Owners                       d. Controlling interest
 

14. The elements of a business do not include

1. Input                                b. Process                       d. Output                        d. Throughput

15. Business combination may be structured in variety of ways for legal, taxation or
other reasons and may include the following, except

1. one or more businesses become subsidiaries of an acquirer or the net assets of one
or more businesses are legally merged into the acquirer
2. one combining entity transfers its net assets, or its owners transfer their equity
interests, to another combining entity or its owners
3. all of the combining entities transfer their net assets, or the owners of those entities
transfer their equity interests, to a newly formed entity (sometimes referred to as a roll-up
or put-together transaction)
4. a group of former owners of one of the combining entities obtains control of the
combined entity
5. None of these
 

16. Which is correct regarding business combination?

1. Formation of a joint is considered business combination.

2. The acquisition date is the date the acquiree obtains control of the acquirer
3. Acquisition of an asset or group of asset can be considered business combination.
4. Only those liabilities assumed that are present obligation and can be measured
reliably
 

17. Applying the acquisition method do not require

1. Identifying the acquirer        

2. Determining the acquisition date
3. Recognizing an investment in subsidiary account
4. Recognizing and measuring goodwill or gain from a bargain purchase
 
 
 

1. References
  

1. Millan, Z.V. (2019). Accounting for Business Combinations. Baguio City, Philippines:

Bandoline Enterprise
2. Dayag, A.J. (2019). Advanced Accounting Vol. 2. Manila, Philippines: Lajara Publishing
House
     
Module 3
 

1. Course Code – Title : C-APrE7 Accounting for Business Combinations

2. Module No – Title :             MO 3 – Business Combination Accounting Procedures
Part 1

1. Time Frame :             1 week – 3 hours

2. Materials :             Syllabus, Learning Plan, Curriculum Map, Writing
Materials, Accounting Standards and Books.

1. Overview
This learning material provides a detailed discussion of the acquisition method
prescribed by PFRS 3. It introduces the learner to the subject, guides the learner through
the official text, develops the learner’s understanding of the requirements through the use
of examples and indicates significant judgements that are required in accounting for
business combinations. Furthermore, the module includes questions that are designed to
test the learner’s knowledge of the concepts applied pertaining to business combinations.
             

2. Desired Learning Outcomes

At the end of the learning session, you should be able to:

1. Apply the steps in acquisition method

2. Identify the acquirer and the consideration transferred.
3. Identify the treatment of acquisition costs
4. Determine the acquisition date.
5. Recognize and Measure the fair value of the net assets acquired and the non-
controlling interest (if any).
 

3. Content/Discussion
The Acquisition Method
The four basic steps in the acquisition method are as follows:
 
STEP 1 — Determine the acquirer
The acquirer is the entity that obtains control of the acquiree. Factors that may help
identify the acquirer include:
■ Who pays cash or other assets as part of the acquisition transaction
■ Who has more voting rights in the combined entity following the acquisition
■ Who holds the largest minority voting interest in the combined entity
■ Who is able to elect, appoint or remove members from the governing body of the
combined entity
■ Who takes the lead in managing the combined entity
■ Who is larger (in terms of assets, revenues, earnings or some other measure)
■ Who initiated the acquisition
 
The acquirer often is the party that pays cash or other assets as part of the acquisition
transaction. An acquirer might obtain control, however, without transferring any
consideration. The following table provides examples:

Example Description

An acquiree repurchases a significant number of its own

shares. If the number of shares is large enough, this can
Repurchase of shares
result in an existing investor (the acquirer) obtaining
control of the acquiree.

An investor may hold a majority of the voting interest in an

investee. If minority veto rights exist, however, these rights
Lapse of minority veto
prevent the investor from having control of the investee. If
rights
the minority veto rights lapse, this can result in the investor
(the acquirer) obtaining control of the investee.

Two parties may agree to enter into a contract to combine

Business combination by their businesses without transferring any consideration,
contract alone such as a stapling arrangement or the formation of a dual-
listed corporation.

 
You have to take note that in some cases, the acquirer identified for accounting purposes is
different from the legal acquirer. This is called a reverse acquisition or reverse merger. For
instance, a reverse acquisition might take place if a private company wants to become
public without having to register its equity shares.
 
STEP 2 — Determine the acquisition date
The acquisition date is the date on which the acquirer obtains control of the
acquiree and the measurement date for recording the assets acquired and liabilities
assumed in the transaction. An acquirer typically obtains control over an acquiree by
exchanging consideration, such as:
■ Transferring cash or other assets
■ Incurring liabilities
■ Issuing equity interests
■ Performing a combination of these
In some cases, an acquirer can obtain control without exchanging any consideration.
For example, an acquirer might gain control through a stapling arrangement or as a result
of a lapse in minority veto rights.
If an acquirer obtains control of the acquiree over time, in stages, the business
combination is referred to as a step acquisition. For instance, an entity might have a 10%
interest in an investee, but no control, and then purchase an additional 50% interest in the
investee, gaining control and resulting in a business combination.
 
OBSERVATION: You should take note that acquisition date usually is the date at which the
acquirer legally transfers consideration to the acquiree. The acquisition date also might be
the closing date for the contract or another date. All pertinent facts and circumstances must
be assessed to identify the acquisition date. An acquirer is encouraged to maintain
documentation supporting its conclusion. Regulators or other users of financial statements
sometimes ask how the acquisition date was identified.
 
Determining the acquisition date is key because it is the date at which the business
combination is measured. It is also the date that starts the measurement period. During the
measurement period, an acquirer may be allowed to adjust its initial accounting for the
business combination, as described later in this special report. The measurement period
exists to give an acquirer enough time to gather the information necessary to account for
the business combination. The measurement period may extend for a maximum of one year
from the acquisition date.
 
STEP 3 — Recognize and measure the net assets acquired and noncontrolling
interest (if any).
              This step is to recognize and measure the assets acquired, liabilities assumed and
any noncontrolling interest.
              All assets acquired and liabilities assumed in a business combination must be
recognized by the acquirer in its financial statements. This might result in the acquirer
recognizing an asset or liability that was not previously recognized in the acquiree’s
financial statements, such as a brand name, patent, customer relationship or other
intangible asset developed internally by the acquiree. The acquirer must recognize 100% of
the acquiree’s net assets, even when other parties retain a noncontrolling interest.
Various items require judgment to determine if they are part of the business
combination. For instance, the acquirer and the acquiree may have a pre-existing
arrangement or relationship in place prior to the acquisition; pre-existing arrangements
are not part of the business combination and must be accounted for according to other
relevant GAAP. An acquirer also must cautiously evaluate transactions to compensate
employees (or former owners) of the acquiree for future services. It also describes various
factors to consider to determine whether a compensation arrangement is part of the
business combination and gives related examples. The factors include the terms of the
continuing employment — such as the duration and level of compensation — how the
compensation relates to amounts paid to selling shareholders who do not become
employees, the number of shares owned by the employees after the acquisition, how the
amount of other consideration transferred in the business combination compares to the
valuation of the acquiree, the formula used to determine the compensation, as well as other
arrangements and issues.
 
 
OBSERVATION:  You have to take note that identifying all of the assets and liabilities
exchanged in a business combination requires careful attention. An acquirer is encouraged
to consider the definitions of assets and liabilities in FASB Concepts Statement No. 6,
Elements of Financial Statements, as part of its analysis. For areas requiring judgment, the
acquirer is encouraged to document thoroughly the basis for its conclusions.
A common pitfall is to overlook one or more of the items exchanged, such as an
intangible asset or a contingency. Failing to identify and measure one of the items
exchanged results in the acquirer recording the wrong amount of goodwill. In addition, it
results in improper accounting for the item in a future period. For example, if an acquirer
overlooks an intangible asset and fails to record it separately, the intangible asset is
recognized as part of goodwill. This results in improper accounting for the intangible asset
in future periods because intangible assets must be amortized, and an overstatement of
goodwill, where an overstated goodwill balance may not be assessed properly for
impairment.
 
Costs of Business Combination
An acquirer might incur various transaction costs related to a business combination.
Examples are finder’s fees, professional or consulting fees (such as advisory, legal,
accounting or valuation costs), general and administrative costs (such as those to run
internal departments dedicated to acquisitions) and costs to register or issue debt and
equity securities. These costs are collectively referred to in the standard as “acquisition-
related costs.” Acquisition-related costs generally must be accounted for separately from
the business combination and expensed as incurred. In other words, they are not
capitalized as part of the business combination transaction. An exception applies to the
costs to issue debt or equity securities; these costs must be treated in accordance with
applicable GAAP and the acquirer must disclose its accounting for these costs in the notes
to its financial statements.
 
General Measurement
The general measurement principle for business combinations is that all assets
acquired and liabilities assumed must be measured at fair value as of the acquisition date.
Fair value is the price an entity would receive to sell an asset — or pay to transfer a liability
— in a transaction that is orderly, takes place between market participants and occurs at
the acquisition date.
 
OBSERVATION: An acquirer may not intend to use certain assets acquired in the
business combination. For instance, an acquirer might buy its competitor for the sole
purpose of acquiring and retiring the competitor’s brand. In this case, an acquirer may be
tempted to assign a low or zero value to the competitor’s brand. The acquirer, however,
must determine the fair value of the brand using assumptions consistent with those that a
market participant would use. This may result in the acquirer assigning a relatively high
value to the brand, and then having to recognize an impairment loss in a later period when
the brand is retired.
 
Determining the fair value of certain assets as of the acquisition date may be
difficult. For example, intangible assets and contingencies may be hard to measure because
management must use judgment and make assumptions about the future. An acquirer often
uses valuation experts to assist in the valuation of assets acquired and liabilities assumed
in a business combination. Ultimately, however, the acquirer is responsible for the
valuation approach and assumptions used.
 
The valuation of a business combination is often highly scrutinized by regulators
and users of the financial statements. An acquirer that thoroughly documents the bases for
its conclusions will be better prepared to address questions from users as they arise.
 
 An acquirer does not record valuation allowances at the acquisition date for assets
deemed uncollectible, such as loans or receivables. This is because the assets are measured
at fair value as of the acquisition date. A fair value measurement already reflects
expectations about uncollectible balances.
Exceptions exist to the general measurement principle for indemnification assets,
income taxes, employee benefits, reacquired rights, share-based payment awards, assets
held for sale and certain assets and liabilities related to contingencies. These items are
measured according to the specific rules provided in the standard, which may result in
some items being recorded at amounts other than fair value as of the acquisition date. For
instance, PFRS 3 requires an indemnification asset to be measured on the same basis as the
indemnified item. If the indemnified item is not measured at fair value, it might be
necessary to establish a valuation allowance for the indemnification asset.
 
Non-controlling Interest
Once an acquirer has identified all of the assets acquired and liabilities assumed in
the business combination, the acquirer also must determine if a noncontrolling interest
exists.
The noncontrolling interest represents the portion of net assets not attributable to
the acquirer. In other words, the portion attributable to other investors. The acquirer must
measure the noncontrolling interest at fair value as of the acquisition date. The fair value of
the noncontrolling interest often is determined based on the number of shares held by the
noncontrolling interest and the quoted market price of a share. If the quoted market price
of a share is not available, the acquirer must use another valuation technique. Often, the
per-share valuation of the acquirer’s interest and the noncontrolling interest differ. This is
generally because the per-share valuation of the acquirer’s interest includes a control
premium. The control premium reflects the fact that market participants typically are
willing to pay more per share for the ability to have control over an investee.
OBSERVATION: You have to take note that it is not uncommon for an acquirer to
pay a control premium between 10–20% of the fair value of the individual shares. The
amount of the control premium can be affected by a number of factors and may depend, in
part, on the particular industry or market.
 
Provisional Amounts and Measurement Period
The accounting for a business combination requires substantial effort and
resources. The initial accounting often is incomplete at the end of the reporting period in
which the business combination happens. This is because the acquirer has been unable to
obtain all pertinent information necessary to evaluate the conditions that existed as of the
acquisition date. As a result, the acquirer may have to record provisional amounts for
certain assets or liabilities — for instance, independent valuations for intangible assets
may not yet be finalized. The acquirer can record adjustments to these provisional
estimates during the measurement period, subject to certain conditions. For example, the
 acquirer must provide disclosures that clearly denote the provisional items outstanding
during the measurement period.
The measurement period is intended to allow an acquirer sufficient time to obtain
the information necessary to evaluate the conditions that existed as of the acquisition date.
When the acquirer receives the necessary information, adjustments may be necessary
either:
■ To revise the amounts recorded for assets and liabilities recognized at the time of
the acquisition.
■ To recognize new assets and liabilities that would have been recognized at the
time of the acquisition if all facts and circumstances had been known at that time when an
acquirer makes a measurement period adjustment, the acquirer usually records a
corresponding debit or credit to goodwill.
 
An acquirer must not record a measurement period adjustment for either of the following:
■ The correction of an error. An acquirer must account for the correction of an error
according to Accounting Changes and Error Corrections. For example, an acquirer might
record the wrong amount in its general ledger for an asset acquired due to a typo. The
adjustment made to record the proper amount is accounted for as the correction of an
error.
■ Events that happened after the acquisition date. These events must be accounted for in
the periods in which they occur following relevant guidance in the Codification. For
instance, the impairment of an available-for-sale debt security occurring after the
acquisition date is accounted for under Investments — Debt and Equity Securities.
 
OBSERVATION: You have to take note that improper application of the guidance on the
measurement period is a common cause of errors and misstatements in an acquirer’s
financial statements. Some frequent pitfalls in applying this guidance are:
 Presuming that the measurement period lasts for a full twelve months. Twelve
months is the maximum time that the measurement period can remain open. The
measurement period ends when the acquirer obtains the information necessary to evaluate
the conditions that existed as of the acquisition date.
 Failing to provide the required disclosures indicating the provisional items
outstanding. If this happens, an acquirer cannot record an adjustment to goodwill. Instead,
the adjustment is recognized through earnings.
 Recording corrections of errors or events happening after the acquisition date as
measurement period adjustments.
 
ILLUSTRATION: The following illustration includes three scenarios. The scenarios show
how slight changes in facts and circumstances might lead to a different conclusion about
 whether an adjustment to an environmental liability is a measurement period adjustment,
the correction of an error or an event happening after the acquisition date. In all three
scenarios, assume the following:
 
 On December 20, 2019, an acquirer buys a small energy infrastructure company
(the acquiree) in a business combination. The acquiree owns and operates pipelines and
terminals that transport and store natural gas, petroleum products and crude oil.
 In the days leading up to the business combination, one of the acquiree’s crude oil
tanks experiences a small leak that is suspected of causing low levels of contamination to
nearby soil and groundwater. The acquirer assumes the acquiree’s environmental liability
to clean up the damage.
 For the December 31, 2019 financial statements, the acquirer records an initial
estimate of the environmental liability, but is awaiting additional information to finalize the
estimate — such as the results of soil and groundwater testing and independent
evaluations by professionals specializing in the remediation of environmental
contamination.
 
SCENARIO 1 – MEASUREMENT PERIOD ADJUSTMENT
In its December 31, 2019 financial statements, the acquirer discloses the business
combination and provides all required disclosures about the measurement period. In
particular, the disclosure indicates that the final valuation of the environmental liability is
pending. In July 2020, the acquirer receives the rest of the information necessary to finalize
its estimate of the environmental liability. The acquirer records the adjustment to the
environmental liability as a measurement period adjustment.
 
SCENARIO 2 – CORRECTION OF AN ERROR
In its December 31, 2019 financial statements, the acquirer discloses the business
combination. The acquirer, however, fails to provide the required disclosures about the
measurement period. In July 2020, the acquirer receives the rest of the information
necessary to finalize its estimate of the environmental liability. The acquirer records the
adjustment to the environmental liability as the correction of an error.
 
SCENARIO 3 – EVENTS HAPPENING AFTER THE ACQUISITION DATE
After the acquisition date, a different crude oil tank on the site springs a small leak.
The acquirer must increase its environmental liability for the cost to remediate the
additional damage. The increase is reflected in current period activity because it was
triggered by an event happening after the acquisition date.
 
  

4. Progress Check
1. Apply the steps in acquisition method
2. Identify the acquirer and the consideration transferred.
3. Identify the treatment of acquisition costs
4. Determine the acquisition date.
5. Recognize and Measure the fair value of the net assets acquired and the non-
controlling interest (if any).
 

5. Assignment
Establish a concept map pertaining to the accounting procedures as prescribed by PFRS 3.
 
 
 
 

6. Evaluation
Theory Questions

1. An entity shall account for each business combination by applying the

1. Acquisition method   b. Pooling of interest method             c. Consolidation method d.

Any of the above
 

2. The acquisition date is normally the

1. Closing date                  b. Agreement date      c. Date of exchange         d. Settlement

date
 

3. Assets and liabilities acquired in a business combination are measured at

1. Agreement date fair value                   c. Settlement date fair value

2. Acquisition date fair value                  d. Any of these.
 

4. LMN’s acquisition date of GHI for cash proceeded as follows:

 Approach made to the management of GHI seeking endorsement of the
January 23, 2009
acquisition

Public offer made for 100% of the equity shares of GHI, conditional on
March 20, 2009 regulatory approval, shareholder approval and receiving acceptances
representing 60% of GHI shares

June 14, 2009 Receipt of regulatory approval

July 1, 2009 Receipt of shareholder approval

July 30, 2009 Acceptances received to date represents 50% of GHI’s share

August 15, 2009 Acceptance received to date represents 95% of GHI’s share

August 25, 2009 Cash paid out to GHI’s accepting shareholder

November 13, Cash paid out to the remaining shareholder under a compulsory share
2009 acquisition scheme

 
The date of acquisition is

1. June 14, 2009               b. July 1, 2009               c. July 30, 2009              d. August 15,
2009
 

5. Non-controlling interest in the acquire is measured at the acquisition date at

1. Fair value                                                                     c. Either A or B

2. Proportional interest in investee’s net assets             d. Both A and B
 

6. Applying the acquisition method do not require

1. Identifying the acquirer        

2. Determining the acquisition date
3. Recognizing an investment in subsidiary account
4. Recognizing and measuring goodwill or gain from a bargain purchase
 
 7. Which is incorrect regarding the recognition conditions for identifiable assets
acquired or liabilities assumed in a business combination?

1. Assets acquired and liabilities assumed must meet the definition of assets and
liabilities in the Framework for the Presentation of Financial Statements at the acquisition
date.
2. The identifiable assets acquired and liabilities assumed must be part of what the
acquirer and the acquire exchange in the business combination rather than the result of
separate transaction.
3. The acquirer must not recognize assets that are not currently recognized in the
books of the acquiree.
4. Contingent liability assumed in a business combination should be recognized if it is
a present obligation that arise from past event and can be measured reliably.
 

8. The seller in a business combination may contractually agree to indemnify the

acquirer for the outcome of a contingency or uncertainly related to all or part of a
specific asset or liability. Such arrangement will give rise to a/an

1. Insurance asset   b. Intangible asset     c. Probable asset         d. Indemnification asset

 

9. The consideration transferred in a business combination do not include

1. Fair value of assets transferred                       c. Non-controlling interest in the

acquiree
2. Fair value of liabilities incurred                      d. Equity interest issued by the acquirer
 

10. Should the following costs be included in the consideration transferred in a business
combination, according to PFRS3 Business combinations?
 Costs of maintaining an acquisitions department.
 Fees paid to accountants to effect the combination.
       Cost (1)                           Cost (2)                                             Cost (1)       
Cost (2)

1. No                         No                                   c.  Yes                  No

2.   No                       Yes                                  d.  Yes                  Yes
 

11. Are the following statements about an acquisition true or false, according to
PFRS3Business combinations?
  The acquirer should recognize the acquiree's contingent liabilities if certain
conditions are met.
 The acquirer should recognize the acquiree's contingent assets if certain
conditions are met.
       Statement (1)    Statement (2)                              Statement (1)        Statement
(2)

1. False                  False                                              c.     True               False

2. False                  True                                               d.     True              True
 
 

12. An acquirer in a business combination may acquire control of an acquiree without

transferring consideration. This may occur under the following circumstance, except:

1. The acquiree repurchases a sufficient number of its own shares for an existing
investor (the acquirer) to obtain control.
2. Minority veto rights lapse that previously kept the acquirer from controlling an
acquiree in which the acquirer held the majority voting rights.
3. The acquirer and acquiree agree to combine their businesses by contract alone.
4. None of these.
 
 

1. References
 

1. Millan, Z.V. (2019). Accounting for Business Combinations. Baguio City, Philippines:

Bandoline Enterprise
2. Dayag, A.J. (2019). Advanced Accounting Vol. 2. Manila, Philippines: Lajara Publishing
House
  
Module 4
 

1. Course Code – Title : C-APrE7 Accounting for Business Combinations

2. Module No – Title :             MO 4  – Business Combination Accounting Procedures
Part 2

1. Time Frame :             1 week - 3 hours

2. Materials :             Syllabus, Learning Plan, Curriculum Map, Writing
Materials, Accounting Standards and Books.
 

1. Overview
This learning material provides a detailed discussion of the acquisition method
prescribed by PFRS 3. It introduces the learner to the subject, guides the learner through
the official text, develops the learner’s understanding of the requirements through the use
of examples and indicates significant judgements that are required in accounting for
business combinations. Furthermore, the module includes questions that are designed to
test the learner’s knowledge of the concepts applied pertaining to business combinations.
             

2. Desired Learning Outcomes

At the end of the learning session, you should be able to:

1. Apply the steps in acquisition method

2. Recognize and Measure goodwill or gain on bargain purchase.
3. Identify the journal entries made in the books of the acquirer
4. Identify the elimination entries made
5. Understand the subsequent recognition of goodwill
 

3. Content/Discussion
 
The Acquisition Method
STEP 4 — Recognize and measure any goodwill or gain from a bargain purchase
Goodwill is defined as the future economic benefits arising from the other assets
purchased in a business combination that are not identified and recognized separately. In
essence, goodwill is an extra amount paid by the acquirer above the fair value of the net
assets acquired. For instance, an acquirer might pay extra because of expected synergies or
anticipated future growth of the combined businesses.
As a general rule, the amount of goodwill is determined using the fair value of the
consideration transferred. The basic formula used to calculate goodwill is: Goodwill = FV
of the consideration transferred + Noncontrolling interest – FV of net assets acquired
ILLUSTRATION: In a business combination, an acquirer pays cash consideration of
P400,500, acquires assets with a fair value of P813,400 and assumes liabilities with a fair
value of P478,020. The acquirer does not hold any interest in the acquiree prior to the
business combination. Assume that the fair value of the noncontrolling interest is P27,600.
The acquirer calculates the amount of goodwill as follows:
Goodwill = FV of the consideration transferred + Noncontrolling interest — FV of net assets
acquired
    = P400,500 + P27,600 – (P813,400 - P478,020)
    = P92,720
The acquirer records the following journal entry to reflect the effects of the business
combination in its books:
 
Dr. Investment in Subsidiary              400, 500
              Cr. Cash                                         400, 500
 
Then, the acquirer has to prepare elimination entry to recognize goodwill on its
consolidated financial statements through a working paper:
 
Dr. Identifiable assets acquired        813,400
Dr. Goodwill                                                92,720
Cr. Investment in Subsidiary                            400,500
Cr. Liabilities assumed                          478,020
Cr. Equity—noncontrolling interest              27,600
 
*For simplicity, this illustration shows a single general ledger account for identifiable
assets acquired and liabilities assumed. In practice, however, an acquirer must reflect the
effects of the transaction in the relevant general ledger accounts for each asset acquired
and liability assumed.
OBSERVATION: You have to take note that after calculating the amount of goodwill, an
acquirer is encouraged to compare the amount of goodwill to the overall purchase price for
the acquisition. If the goodwill balance is high relative to the overall purchase price, this
typically indicates that the acquirer neglected to identify one or more of the assets acquired
or liabilities assumed in the business combination. For instance, acquirers frequently fail to
identify intangible assets that were not previously recognized by the acquiree, such as
internally-developed brands or patents. A large goodwill balance may also suggest that the
measurement of the consideration transferred, noncontrolling interest, net assets or a
combination of these items is incorrect.
 
Fair value of the consideration transferred
Calculating goodwill requires measuring the fair value of the consideration
transferred. This section addresses this issue specifically. The consideration transferred in
a business combination may be in various forms, such as cash, other assets, shares of stock,
options, warrants, a business of the acquirer, replacement awards granted to employees of
the acquiree or other instruments. Thus, an acquirer must take care to identify all items
that constitute consideration.
Identifying and measuring some forms of consideration, such as cash, is relatively
straight forward. Others, however, may pose challenges. The following table provides more
information on two of the more complicated forms of consideration: replacement awards
and contingent consideration.

Type of
Accounting treatment
Consideration

Contingent        Contingent consideration exists if the consideration

consideration transferred in the business combination is contingent upon the
occurrence of specific future events or changes in circumstances.
For instance, an acquirer might pay additional cash to the
acquiree (or receive a future reimbursement) depending on the
profits generated by the acquiree’s business or the achievement
of a designated share price after the acquisition date.
       Contingent consideration must be included as part of the
consideration transferred in the business combination. The
contingent consideration is measured at its fair value as of the
acquisition date.
       An acquirer must determine whether it is appropriate to
recognize contingent consideration as an asset, liability or equity.
If the acquirer has a right to a future reimbursement of
consideration already paid, the acquirer records an asset. If the
acquirer has an obligation to pay additional consideration to the
acquiree, the consideration must be classified as a liability or
equity according to applicable GAAP
 
The accounting for contingent consideration after the acquisition
depends on whether a change in the fair value of the contingent
consideration is due to either:
• Additional information obtained about facts that existed at the
acquisition date. This change generally is a measurement period
adjustment, assuming that the acquirer has complied with the
guidance for the measurement period or
 • An event after the acquisition date, such as reaching a milestone
or meeting an earnings target. In this case:
 - Contingent consideration classified as an asset or liability is
remeasured to fair value each period, with changes in the fair
value generally recorded in earnings.
 -  Contingent consideration classified as equity is not
remeasured to fair value each period.

 
OBSERVATION:
Measuring the fair value of contingent consideration can be difficult. In practice, an
acquirer often uses an income approach that can factor in the uncertainty associated with
the amount and timing of the contingent consideration.
For instance, an acquirer might use a discounted cash flow methodology. This might
be suitable for contingent consideration that will be paid in cash. In this case, selecting an
appropriate discount rate is critical to the valuation. The discount rate must reflect the
risks associated with the arrangement, such as credit risk and the risk that the contingent
event will not occur. An acquirer might apply the discount rate to its best estimate of the
contingent payout. Alternatively, an acquirer might apply the discount rate to a probability-
weighted payout. A probability-weighted payout can be derived by listing the potential
payouts, assigning each one a probability, and then calculating the probability-weighted
payout. For example, assume that an acquirer might pay either P50,000, P25,000 or P0 of
additional consideration. The acquirer determines that the likelihood of paying P50,000 is
55%, P25,000 is 30%, and P0 is 15%. The probability-weighted payout is computed as
follows:
Payout              Probability      Total
(A)                           (B)                 (A) * (B)
         P50,000                      55%              P27,500
           25,000                   30%             7,500
 0                          15%               0
Probability-weighted payout Php35,000
 
An acquirer then applies the discount rate to calculate the present value of the
probability-weighted payout. An acquirer also might use an option pricing model, such as a
lattice model, to measure the fair value of contingent consideration. An option pricing
model generally is appropriate for contingent consideration that will be paid in stock
options or shares. Various assumptions typically are necessary to use an option pricing
model, such as a stock option’s exercise price, the expected volatility of the share price,
expected dividends and the risk-free interest rate. The expected volatility often is the most
difficult to estimate. Determining the appropriate assumptions requires significant
judgment and an acquirer may wish to engage actuarial valuation specialists to assist in the
valuation.
 
Complexities can arise in a business combination if the owners of the acquiree will
be employees of the combined entity. In this case, it may be difficult to determine whether
amounts paid to the owners are consideration for the business, included in the fair value of
consideration transferred in the business combination, or compensation for future service
(accounted for separately from the business combination). For example, assume the
owners of the acquiree will serve as officers of the combined entity. In addition, they are
entitled to stock options based on the future performance of the acquiree’s business. The
acquirer must evaluate whether the stock options are part of the consideration for the
business combination or compensation for future service.
 
It is important to appropriately identify and measure the consideration
transferred in the business combination. This exercise ultimately affects the amount
of goodwill calculated.
 
The basic formula to calculate goodwill is adjusted if a business combination has no
consideration or if the business combination is achieved in stages. Specifically:
 
■ For business combinations with no consideration, the fair value of the acquirer’s interest
in the acquiree is used instead of the fair value of consideration transferred, as
follows: Goodwill = FV of the acquirer’s interest in the acquiree + Noncontrolling interest –
FV of net assets acquired
■ For business combinations achieved in stages, the fair value of the acquirer’s previously-
held equity interest in the acquiree is added to the total before subtracting the fair value of
net assets acquired, as follows: Goodwill = FV of the consideration transferred +
Noncontrolling interest + FV of the acquirer’s previously-held equity interest – FV of net
assets acquired
 
Remeasurement of previously held equity interest
The standard does not address how to remeasure the fair value of a previously held
equity interest. But please take note that the fair value measurement is supposed to include
a control premium.
 
Recognition of Gain on Bargain Purchase
 If the calculation of goodwill results in a negative balance, the transaction might be a
bargain purchase. In a bargain purchase, the acquirer essentially buys the net assets of the
acquiree at a discount. Bargain purchases are rare. They do, however, arise occasionally.
For instance, a bargain purchase might happen if the acquiree is under financial distress
and must sell its business to survive.
Before concluding that a bargain purchase has occurred, an acquirer is required to
revisit steps 3 and 4 of the acquisition method. Specifically, the acquirer must reassess:
■ Whether it properly identified all assets acquired and liabilities assumed in the
business combination.
■ Whether these assets and liabilities were measured appropriately.
■ Whether the other amounts used to compute goodwill, such as the fair value of the
consideration transferred and noncontrolling interest, were determined correctly
 
*If, after this reassessment, the acquirer concludes that a bargain purchase has
taken place, the acquirer recognizes a gain on the bargain purchase.
 
Subsequent measurement of Goodwill
The subsequent measurement of goodwill must comply with Intangible Assets. Goodwill
generally must be tested for impairment and must not be amortized.
 
Disclosure
Each business combination is unique, and therefore, a reporting entity’s overall
objective is to provide disclosures about the nature and financial effects of business
combinations. Disclosures are required for business combinations that happen both during
the reporting period and after the end of the reporting period, but before the financial
statements are issued or available to be issued. All material business combinations must be
disclosed separately. If business combinations are immaterial on an individual basis, but
material on a collective basis, disclosures may be provided in the aggregate. An acquirer
also must provide disclosures about adjustments recognized during the period that relate
to business combinations that happened either in the current or prior reporting period,
such as measurement period adjustments.
 
 
Key points to remember:
Acquisition Method (You have to master this)
 Use market values.
  Direct and Indirect costs are expensed and costs of stock issuance are
reduction of additional paid in capital.
 If acquisition cost is greater than market value of the net assets
acquired, the difference is goodwill.
 If acquisition cost is less than the market value of the net assets
acquired, the difference is accounted as gain or income from
acquisition. The same is included in the income determination during
the year the combination is consummated. (if books were closed, the
same is added to the Retained Earnings account of the acquirer.)
However, PFRS 3 requires reassessment of the fair value of cost of
investment. (if non-cash asset or debt/equity securities are issued)
and fair value of the net assets acquired before such negative excess is
treated income.
 
 Goodwill is no longer amortized but is tested for possible impairment
in accordance with PAS 36.
 
 Contingent considerations – accrue on date of acquisition if reliable
measurable otherwise disclose. If not accrued and becomes
demandable in the future:
1. Charge to expense, if conditions are met
such as meeting income level.
2. Charge to APIC, if due to change in market
values of the securities issued.
3. Retroactively change the cost of
investment if it could be proven that it
was due to an error existing at the date of
acquisition.
 

4. Progress Check
1. Apply the steps in acquisition method
2. Recognize and Measure goodwill or gain on bargain purchase.
3. Identify the journal entries made in the books of the acquirer
4. Identify the elimination entries made
5. Understand the subsequent recognition of goodwill
 

5. Assignment
Establish a concept map pertaining to the accounting procedures as prescribed by PFRS 3.
  
 
 
 

6. Evaluation
Problem Solving

1. The balance sheet of San Bartolome Company as of December 31, 2008 is as follows
 
                                                                                                     Liabilities and
                      Assets                                             Stockholders’ Equity
Cash                                        P   175,000           Current Liabilities                  P   250,000
Accounts receivable              250,000           Mortgage payable                         450,000
Inventories                                725,000          Common stock                                      200,000
PPE                                               950,000           Additional paid-in capital    400,000
                                                                    --           Retained earnings             800,000
                                                 P2,100,000                                 P2,100,000
 
On December 31, 2008, the Sta. Clara, Inc. bought all the outstanding stock of San
Bartolome Company for P1,800,000 cash. On the date of purchase, the fair (market)
value of San Bartolome inventories was P675,000, while the fair value of San
Bartolome’s property, plant and equipment was P1,100,000. The fair values of all other
assets and liabilities of San Bartolome Company were equal to their book values.
 
Compute the amount of goodwill in the book of Sta. Clara and in the consolidated
balance sheet, respectively.

1. P 300,000; P 300,000              b. P 300,000; P 0         c. P 0; P 0              d. P 0; P 300,000

 
 

2. 100% of the equity share capital of The Raukatau Company was acquired by The
Sweet Company on 30 June 20X7. Sweet issued 500,000 new P1 ordinary shares
which had a fair value of P8 each at the acquisition date. In addition the acquisition
 resulted in Sweet incurring fees payable to external advisers of P200,000 and share
issue costs of P180,000. In accordance with PFRS3Business combinations, goodwill at
the acquisition date is measured by subtracting the identifiable assets acquired and
the liabilities assumed from

1. P4.00 million                b. P4.18 million           c. P4.20 million              d. P4.38 million

 

3. In a business combination, an acquirer's interest in the fair value of the net assets
acquired exceeds the consideration transferred in the combination. Under
PFRS3Business combinations, the acquirer should

1. recognize the excess immediately in profit or loss

2. recognize the excess immediately in other comprehensive income
3. reassess the recognition and measurement of the net assets acquired and the
consideration transferred, then recognize any excess immediately in profit or loss
4. re-assess the recognition and measurement of the net assets acquired and the
consideration transferred, then recognize any excess immediately in other comprehensive
income
 

4. The Gebbies Company acquired 100% of The Okalua Company for a consideration
transferred of P112 million. At the acquisition date the carrying amount of Okalua's
net assets was P100 million and their fair value was P120 million. How should the
difference between the consideration transferred and the net assets acquired be
presented in Gebbies's financial statements, according to PFRS3 Business
combinations?

1. Gain on bargain purchase of P8 million recognized in other comprehensive income

2. Gain on bargain purchase of P8 million deducted from other intangibles assets
3. Gain on bargain purchase of P8 million recognized in profit or loss
4. Goodwill of P12 million as an intangible asset
 

5. The Mooneye Company acquired a 70% interest in The Swain Company for
P1,420,000 when the fair value of Swain's identifiable assets and liabilities was
P1,200,000. Mooneye acquired a 65% interest in The Hadji Company for P300,000
when the fair value of Hadji's identifiable assets and liabilities was P640,000.
Mooneye measures non-controlling interests at the relevant share of the identifiable
net assets at the acquisition date. Neither Swain nor Hadji had any contingent
liabilities at the acquisition date and the above fair values were the same as the
carrying amounts in their financial statements. Annual impairment reviews have not
resulted in any impairment losses being recognized. Under PFRS3Business
 combinations, what figures in respect of goodwill and of gains on bargain purchases
should be included in Mooneye's consolidated statement of financial position?

1. Goodwill: P580,000 Gains on the bargain purchases: P116,000

2. Goodwill: Nil Gains on the bargain purchases: P116,000
3. Goodwill: Nil Gains on the bargain purchases: Nil
4. Goodwill: P580,000 Gains on the bargain purchases: Nil
 

6. A parent entity is acquiring a majority holding in an entity whose shares are dealt in
on a recognized market.
Under PFRS3Business combinations, which TWO of the following measurement bases
may be used in measuring the non-controlling interest at the acquisition date?

1. The nominal value of the shares in the acquiree not acquired

2. The fair value of the shares in the acquiree not acquired
3. The non-controlling interest in the acquiree's assets and liabilities at book value
4. The non-controlling interest in the acquiree's assets and liabilities at fair value
 

7. ABC acquired an 80% interest in DEF for P900,000. The carrying amounts and fair
values of DEF’s identifiable assets and liabilities at the acquisition date were as
follows (amounts in thousands):
                                                          Carrying     Fair
                                                  Amounts          value
    Tangible non-current assets P 375       P  350
    Intangible non-current assets     0              200
    Current assets                               400              350
    Liabilities                                  (  300)       (   300)
    Contingent liabilities                       0       (     30)
                                                            P 475         P  570
 
Compute the goodwill and prepare journal entry to record the acquisition assuming the
acquirer recognize the non-controlling interest

1. at fair value (non-controlling interest was valued at P120)

1. P450 P444                            c. P440                      d. P350

  

1. on the basis of proportionate interest in the identifiable net assets of the acquiree

1. P450 P444                            c. P440                      d. P350

 
On January 1, 2018, G&G Corporation issued 6,000 shares of its P 10 par value common
stock to acquire the assets and liabilities of Ford Company. G&G Corporation shares were
selling at P 90 on that date. Historical cost and fair value balance sheet data for Ford
Company at the time of acquisition were as follows:
                             Balance Sheet Item                              Historical Cost                             Fair
Value
                             Cash and Receivables                            P 50,000                         P 50,000
                             Inventory                                                    120,000                          
200,000                                                     Building & Equipment                             
400,000                             300,000         
                             Less: Accumulate Depreciation         (150,000)                                -
                             Total Assets                                               P 420,000                      P 550,000
                             Accounts Payable                                    P 50,000                         P 50,000
                             Common Stock (P 20 par value)       200,000
                             Retained Earnings                                  170,000
                             Total Liabilities and Equities             420,000
 

8. G&G Corporation incurred but not paid listing fees of P 10,000 and audit fees of P
5,000 in issuing the new shares and paid a finder’s fee of P 25,000 in locating the
merger candidate. Under the purchase of interest combination, how much goodwill
must be recognized in the books?
9. P 40,000 B.          P 55,000           C.                         P 65,000       D.          P 80,000
 
 
On January 1, 2018. Masunurin Products Corp. issues 12,000 shares of its P 10 par value to
acquire the net assets of Pasaway Steel Company. Underlying book value and fair value
information for the balance sheet items of Pasaway Steel Company at the time of
acquisition are as follows:
                      Balance Sheet Item                Book Value           Fair Value
                      Cash                                                P 60,000                         P 60,000
                       Accounts Receivable               100,000                          100,000
                      Inventory                                        60,000                          115,000    
                      Land                                                  50,000                             70,000
                      Buildings and Equipment      400,000                          350,000
                      Less Accumulated Depreciation(150,000)                        -
                      Total Assets                                 P 520,000                       P 695,000
                      Accounts Payable                     P 10,000                         P 10,000
Bonds Payable                           200,000                 
180,000                                                       Common Stock (P 5 par
value)150,000                 
Additional Paid in Capital          70,000                              
Retained Earnings                         90,000
Total Liabilities and Equities   P520,000
 
Pasaway Steel shares were selling at P 18 and Masunurin Products shares were selling at P
50 just before the merger announcement. Additional cash payments made by Masunurin
Corporation in completing the acquisition were:
              Finder’s fee paid to firm that located Pasaway Steel                         P 10,000
              Audit fee for stock issued by Masunurin Products                                       3,000
              Stock registration fee for new shares of Masunurin Products               5,000
              Legal fees paid to assist in transfer of net assets                                     9,000
              Cost of SEC registration of Masunurin Products shares                        1,000
 

9. How much is the increase in the total net assets recorded by Masunurin Products?
10. P 310,000 B.          P 572,000        C.           P 591,000        D.       P 487,000
 
Saming Company acquired the assets (except for cash) and assumed the liabilities of
Moshie Company on January 2, 2018 and Moshie Company is dissolved. As compensation,
Saming Company gave 24,000 shares of its common stock, 12,000 shares of its 8%
preferred stock, and cash of P 240,000 to the stockholders of Moshie Company. On the date
of acquisition, Saming Company had the following characteristics:
              Common, par value P 5; fair value, P 20 Preferred, par value P 100; fair value, P 100
              Immediately prior to acquisition, Moshie Company’s balance sheet was as follows:
                              Cash                                 P 132,000       Current Liabilities                       P 228,000
                             Accounts receivable                               Bonds payable, 10%                      400,000
(net of P 4,000 allowance) 170,000 Common stock, P 5 par value  600,000
Inventory – LIFO cost     200,000      Additional paid-in capital             380,000
Land                                      384,000       Retained earnings                        
310,000
Buildings and equipt. (net) 1,032,000
                                                    P 1,918,000                                                     P
1,918,000
An appraisal of Moshie company showed that the fair values of its assets and liabilities
were equal to their book values except for the following, which had fair values as indicated:
                             Accounts receivable  P 158,000        Land                   P 540,000
                             Inventory                          412,000         Bonds payable                 448,000
 

10. How much must be he goodwill recognized as a result of this business combination?
11. P 322,000 B.          P 454,000        C.           P 94,000           D.              P 0
 

1. References
 

1. Millan, Z.V. (2019). Accounting for Business Combinations. Baguio City, Philippines:

Bandoline Enterprise
2. Dayag, A.J. (2019). Advanced Accounting Vol. 2. Manila, Philippines: Lajara Publishing
House