ACCOUNTING FOR

BUSINESS
COMBINATIONS
 College Department
College of Accounting Education
College Instructor
Mobile Number: 09099616812
Email: kuanjollyannc@gmail.com
Consultation hour: __________________

August 10, 2020

Dear Student,

Please find enclosed the course materials for the course titled:

ACCOUNTING FOR BUSINESS COMBINATIONS

Google classroom code: _______________

We are pleased that you have chosen to study with us here at the College of Accounting Education of
Assumption College of Nabunturan. It is our hope that we will be able to provide the support and
information you need to succeed in this course.

I am the instructor of this course and will be your primary point of contact in relation to any academic
matters concerning your study in this course. My contact details and our course code in the google
classroom are as shown above. I look forward to communicating with you, particularly by email or text
messages. I also expect your full participation in our incoming discussions in google classroom. If you
have doubts with the concepts presented, feel free to ask for clarification by posting questions in the dialog
box.

I suggest also that you take time to support your classmates by reading their posts and leaving comments
if you agree with their views and ideas on the topic discussed. By then we will be able to build a supportive
learning community in this course which is essential for the completion of this course.

Once again let me welcome you. I look forward to working with you throughout the semester.

Yours sincerely,

Jolly Ann C. Kuan, CPA, MBA

 ACCOUNTING FOR BUSINESS COMBINATIONS
Course Outline

Instructor: JOLLY ANN C. KUAN

Semester: 1st Semester AY 2020-2021
Course Credit: 3 Units

Course Description:
This course covers accounting problems for mergers and acquisitions, consolidations, with
attention to the preparation of consolidated financial statements and foreign operations. This
course reduces the anxiety level by describing all aspects of the associated accounting,
including the identification of goodwill, reverse acquisitions, and related disclosures. The
course also notes how to account for a reduced investment in an investee using the equity
method. It goes on to discuss goodwill impairment, the consolidation of financial statements,
and the steps involved in integrating accounting activities following a business combination.

Discussion may extend to financial reporting and diversified companies, reorganizations, etc.
Selection of topics may vary from year to year.

Contact Hours: 2 hours (face to face / online discussion), 1 hour independent studies.

Course Content
1. Business Combinations
2. Consolidated and Separate Financial Statements (Date of Acquisition)
3. Consolidated and Separate Financial Statements (Subsequent to Date of Acquisition)
4. Consolidated Financial Statements: Intercompany Profits and Losses
5. Accounting for Financially Distressed Corporations
6. Accounting for Financially Distressed Corporations- Trusteeship
7. Statement of Realization and Liquidation
8. Accounting for the Effects of Changes in Foreign Exchange Rates
Lesson 1: BUSINESS COMBINATIONS
Objectives:

At the end of the lesson, you will be able to:

a. Learn about the recognition and measurement in the financial statements of
the identifiable assets acquired, the liabilities assumed and any non-
controlling interest in the acquire for business combinations; and
b. Learn about the recognition and measurement of the goodwill acquired in
the business combination or a gain from a bargain purchase

Business Combination (PFRS/IFRS 3)- a transaction or other event in which an acquirer obtains control
of one or more businesses.
*IFRS 3- applied prospectively- acquisition date on or after the beginning of the first annual
reporting period beginning on or after July 1, 2009.
Two parties in a business combination:
a. Acquirer- the entity that obtains control of the acquiree
b. Acquiree- the business or businesses that the acquirer obtains control of in a business
combination.
Business- an integrated set of activities and assets that is capable 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. A business is a system consisting of three elements:
a. Input
b. Process
c. Output
The identification of business combination may be grouped into:
a. The acquisition of all the net assets of a business enterprise or enterprises where one or more
entities transfer all their net assets to another entity; or,
b. The acquisition by an enterprise of all or a part of the equity shares (capital stock) of another
enterprise or enterprises wherein one or more businesses become subsidiaries of an entity called
parent company.
Reasons for business combination:
a. Cost advantage
b. Lower risk
c. Fewer operating delays
d. Avoidance of takeovers
 e. Acquisition of intangible assets
f. Other reasons
Accounting for Business Combination
A business combination, generally may involve either of the following:
1. Acquisition of net assets (Assets and Liabilities)
2. Acquisition of equity shares (Capital Stock)- resulting in parent-subsidiary relationship.
All business combinations should be accounted for by the acquisition method. The application of the
acquisition method requires the following:
1. Identifying the acquirer
2. Determining the acquisition date (the date on which control passes).
*The acquirer shall account for acquisition-related costs as expenses in the periods in which the
costs are incurred and the services received except the cost to issue debt or equity securities
which shall be deducted from carrying amount of the liability or deducted from the share
premium on the shares.
3. Recognition and measurement of the identifiable (is separable or arises from contractual or other
legal rights) net assets acquired- at their acquisition-date fair value.
Recognition and measurement of non-controlling interest:
a. Fair Value (full goodwill); or,
b. At the present ownership instruments’ proportionate share in the recognized amounts of
the acquiree’s identifiable net assets (partial goodwill).
4. Goodwill and gain from a bargain purchase
The acquirer shall recognize goodwill as of the acquisition date measured as the excess of (A)
over (B) below:
A. The aggregate of:
1. The consideration transferred measured at acquisition-date fair value;
2. The amount of any non-controlling interest in the acquiree; and
3. The acquisition-date fair value of the acquirer’s previously held equity interest in
the acquiree, in a business combination achieved in stages.
B. The net of the acquisition date amounts of identifiable assets acquired and the liabilities
assumed measured in accordance with PFRS 3.
After the initial recognition, goodwill shall be carried in the statement of financial position at cost
less accumulated impairment losses (when the recoverable amount of the goodwill falls below its
current carrying amount).
Gain on bargain purchase (negative goodwill)- the excess of the identifiable net assets
recognized in a business combination over the consideration transferred and the non-controlling
interest in the acquire.
Adjustment for provisional amount- shall be finalized within the measurement period (not to
exceed one year) and adjustments should be made accordingly direct to identifiable net assets,
the consideration transferred and hence to goodwill.
-Retrospectively adjust
 Adjustments that arise after the end of the measurement period should be recognized
revisions of estimates and therefore recognized in profit and loss in the current and future
periods.

Contingent consideration- should be measured at the acquisition date and recognized by

the acquirer if it is probable and can measured reliably.

Determining what is part of the business combination- those that are not shall not to be
included in applying the acquisition method.

Reverse acquisition- the entity that issues securities (the legal acquirer) is identified as the acquiree for
accounting purposes and the entity whose equity interests are acquired (the legal acquiree) must be the
acquirer for accounting purposes.

Share Capital Distribution (Allocation) may be through:

1. Issuance of a single class of share capital
2. Issuance of two classes of share capital

Share capital exchange ratio or stock exchange ratio- ratio of the number of shares of the
acquiring company’s share capital to be exchanged for each share of the acquired company’s share
capital.

ACTIVITY 1

The statements of financial position of Maricon Corp. and Gloria Co., on January 31, 2019, prior to a
business combination are presented below. Assume that all the non-current assets are depreciable assets.
Maricon Corp. Gloria Corp.
Book Value Fair Value Book Value Fair Value
Cash 25,000 5,000
Accounts Receivable 8,000 2,000
Merchandise Inventory 15,000 17,000 8,000 10,000
Plant and Equipment 42,000 50,000 16,000 19,000
Goodwill 5,000 1,000
Total Assets 95,000 32,000

Current Liabilities 17,000 3,000

Long-Term Liabilities 10,000 11,000
Ordinary Share Capital, P 2 par 40,000
Ordinary Share Capital, P1 par 4,000
Paid-in Capital in Excess of Par 10,000 3,000
Retained Earnings 18,000 11,000
Total Liabilities and Shareholders' Equity 95,000 32,000

Assume that on this date, GME Corp. share capital has a par value of P4.00 and a market value of
P5.00 while Maricon Corp. share capital has a market value of P2.50.
Required: Prepare the necessary journal entries on the book of the acquirer to reflect the business
combination using the following INDEPENDENT ASSUMPTIONS.

Acquisition of two entities by a new business enterprise:

1. Cash consideration, no goodwill. GME Corp. paid P 48,000 and P 17,000 respectively for all the
assets and liabilities, except cash of Maricon Corp. and Gloria Co.
2. Cash consideration, goodwill, acquisition-related cost. GME Corp. paid P 50,000 and P 18,000
respectively for all the assets and liabilities, except cash of Maricon Corp and Gloria Corp. GME
Corp. also made payment for accounting and legal fees of P 4,000 and other indirect cost of P
1,000.
3. Cash consideration, gain on bargain purchase, acquisition-related costs. GME Corp. paid P47,000
and P17,000 respectively for all the assets and liabilities, except cash of Maricon Corp. and Gloria
Co. Direct cost of combining including finder’s fee of P 3,000 were incurred.
4. Share capital consideration, no goodwill, share issue cost. GME Corp. issued 14,750 shares to
Maricon Corp. and 4,250 shares to Gloria Co. in exchange for all their assets and liabilities. Cost
of SEC registration including accounting and legal fees is P 2,000 while cost of printing and issuing
stock certificates is P 1,000.
5. Share capital consideration, goodwill, contingent consideration. GME Corp. issued 15,000 shares
to Maricon Corp. and 5,000 shares to Gloria Co. in exchange for all their assets and liabilities.
Professional fees of P 3,000 and general administrative cost of P 1,000 associated with the
acquisition were incurred. GME agreed on a P 50,000 contingent consideration when both Maricon
Corp. and Gloria Co. achieve a profit of P 120,000 each of the succeeding two years. There is a
40% probability that the contingent consideration will occur.
6. Share capital consideration, gain on bargain purchase, stock contingency. GME Corp. issued
14,700 shares to Maricon Corp. and 4,200 shares to Gloria Co. in exchange for all their assets and
liabilities. The issue cost of the shares were P 3,000. GME Corp. agreed to issue 2,100 additional
shares of its stock when Maricon Corp. and Gloria Co. achieve in the next two succeeding years
the profit of P 250,000 and P 200,000 respectively.

Acquisition by a surviving entity of another previously existing entity.

7. Cash consideration, no goodwill, provisional amount. Maricon Corp. paid P 17,000 for all the Gloria
Co. assets and liabilities, except cash. Direct cost of acquisition were P 1,000. The plant and
equipment of Gloria Co. was provisionally determined on this date.
8. Cash consideration, goodwill, provisional amount. Maricon Corp. paid P18,000 for all the Gloria
Co. assets and liabilities, except cash. The plant and equipment provisional amount was finalized
three months after at P 18,000.
9. Cash consideration, gain on bargain purchase, provisional amount. Maricon Corp. paid P 16,000
for all the Gloria Co. assets and liabilities, except cash. The plant and equipment provisional
amount was finalized three months after at P 20,000.
10. Share capital consideration, no goodwill, provisional amount. Maricon Corp. issued 8,800 shares
to Gloria Co. in exchange for all its assets and liabilities. On March 1, 2020 the final value of the
Plant and Equipment was determined at P 18,000.
11. Share capital consideration, goodwill, provisional amount. Maricon Corp. issued 9,000 shares to
Gloria Co. in exchange for all its assets and liabilities. Direct and indirect cost of acquisition were
P 1,000. On March 1, 2020 the final value of the Plant and Equipment was determined at P 20,000.
12. Share capital consideration, gain on bargain purchase. Maricon Corp. issued 8,600 shares to
Gloria Co. in exchange for all its assets and liabilities. Issue cost of the shares were P 1,000.
 Acquisition of share capital:
1. Cash consideration, wholly owned subsidiary. Maricon Corp. paid P 22,000 for all the outstanding
shares of Gloria Co.
2. Share capital consideration, goodwill, wholly owned subsidiary. Maricon Corp. issued 9,000 shares
in exchange for all the outstanding shares of Gloria Co.
3. Cash consideration, gain on bargain purchase, wholly owned subsidiary. Maricon Corp. paid P
15,000 for all the outstanding shares of Gloria Co.
4. Share capital consideration, goodwill, partially owned subsidiary. Maricon Corp. issued 8,200
shares in exchange for the 3,600 shares (90% interest) of the outstanding shares of Gloria Co.
Non-controlling interest is measured at its proportionate share of the acquiree’s net assets (partial
goodwill).
5. Share capital consideration, goodwill, partially owned subsidiary. Maricon Corp. issued 8,200
shares in exchange for 3,600 shares (90% interest) of the outstanding shares of Gloria Co. Non-
controlling interest is measured at fair value (full goodwill).

ACQUISITION OF TWO ENTITIES BY A NEW BUSINESS ENTERPRISE

#1
Accounts Receivable 10,000
Merchandise Inventory 27,000
Plant and Equipment 69,000
Current Liabilities 20,000
Long-Term Liabilities 21,000
Cash 65,000

Consideration Transferred 65,000

FMV of NA Acquired 65,000
Goodwill -

ENTRIES ON THE BOOKS OF MARICON CORP.

Merchandise Inventory 2,000

Plant and Equipment 8,000
Goodwill 5,000
Retained Earning 5,000

Receivable from Acquirer 48,000

Current Liabilities 17,000
Longterm Liabilities 10,000
Accounts Rec 8,000
M/I 17,000
P and E 50,000
Cash 48,000
Receivable from Acquirer 48,000

Paid-in Capital 10,000

Retained Earnings 23,000
Ordinary Share Capital 40,000
Cash 73,000

#2
Accounts Receivable 10,000
Merchandise Inventory 27,000
Plant and Equipment 69,000
Goodwill 3,000
Current Liabilities 20,000
Long-Term Liabilities 21,000
Cash 68,000

Consideration Transferred 68,000

FMV of NA Acquired 65,000
Goodwill 3,000

Expenses for Business Combination 5,000

Cash 5,000
#3
Accounts Receivable 10,000
Merchandise Inventory 27,000
Plant and Equipment 69,000
Current Liabilities 20,000
Long-Term Liabilities 21,000
Cash 64,000
Gain on Bargain Purchase 1,000

Consideration Transferred 64,000

FMV of NA Acquired 65,000
Negative Goodwill (1,000)

Expenses of Business Combination 3,000

Cash 3,000
#4
Cash 30,000
Accounts Receivable 10,000
Merchandise Inventory 27,000
Plant and Equipment 69,000
Current Liabilities 20,000
Long-Term Liabilities 21,000
Ordinary Share Capital 76,000
Additional Paid-in Capital 19,000

Consideration Transferred 95,000

FMV of NA Acquired 95,000
Negative Goodwill -

APIC 3,000
Cash 3,000

#5
Cash 30,000
Accounts Receivable 10,000
Merchandise Inventory 27,000
Plant and Equipment 69,000
Goodwill 25,000
Current Liabilities 20,000
Contingent Liability 20,000
Long-Term Liabilities 21,000
Ordinary Share Capital 80,000
Additional Paid-in Capital 20,000

Total Consideration 120,000

FMV of NA Acquired 95,000
Goodwill 25,000

#6
Cash 30,000
Accounts Receivable 10,000
Merchandise Inventory 27,000
Plant and Equipment 69,000

Current Liabilities 20,000

Long-Term Liabilities 21,000
Ordinary Share Capital 75,600
APIC 18,900
Gain on Bargain Purchase 500
Consideration Transferred 94,500
Contingent Liab
FMV of NA Acquired 95,000
Negative Goodwill (500)

APIC 3,000
Cash 3,000

ACQUISITION BY A SURVIVING ENTITY OF ANOTHER PREVIOUSLY EXISTING ENTITY

#7
Accts Rev 2,000
Mer Inv 10,000
Plant and Equipt 19,000
Current Liab 3,000
Long-term Liab 11,000
Cash 17,000

Expenses of Business Combination 1,000

Cash 1,000
#8
Accts Rev 2,000
Mer Inv 10,000
Plant and Equipt 19,000
Goodwill 1,000
Current Liab 3,000
Long-term Liab 11,000
Cash 18,000

Consideration Transferred 18,000

FMV of the NA Acquired
(31,000-14000) 17,000
Goodwill 1,000

Goodwill 1,000
Plant and Equipment 1,000
#9
Accts Rev 2,000
Mer Inv 10,000
Plant and Equipt 19,000
Current Liab 3,000
Long-term Liab 11,000
Cash 16,000
Gain on Bargain Purchase 1,000
31,000 31,000

Consideration Transferred 16,000

FMV of the NA Acquired
(31,000-14000) 17,000
Negative Goodwill/Gain on Bargain Purchase (1,000)

Plant and Equipment 1,000

Gain on Bargain Purchase 1,000

#10
Cash 5,000
Accts Rev 2,000
Mer Inv 10,000
Plant and Equipt 19,000
Current Liab 3,000
Long-term Liab 11,000
Share Capital 17,600
APIC 4,400

#11
Cash 5,000
Accts Rev 2,000
Mer Inv 10,000
Plant and Equipt 19,000
Goodwill 500
Current Liab 3,000
Long-term Liab 11,000
Cash 18,000
APIC 4,500

Consideration Transferred 22,500

FMV of NA Acquired (17000+5000) 22,000
Goodwill 500
Expenses of Business Combination 1,000
Cash 1,000

#12
Cash 5,000
Accts Rev 2,000
Mer Inv 10,000
Plant and Equipt 19,000
Gain on Bargain Purchase 500
Current Liab 3,000
Long-term Liab 11,000
Share Capital 17,200
APIC 4,300

Consideration Transferred 21,500

FMV of NA Acquired (17000+5000) 22,000
Negative Goodwill (500)

APIC 1,000
Cash 1,000

ACQUISITION OF SHARE CAPITAL

ACTIVITY 2

The following data are available for Palm Co. on July 1, 2019 when it acquired additional interest in Spring
Co.
 10% interest in Spring Co. stock that cost P 200,000;
 50% additional stock acquisition in Spring Co. paying P 1,500,000;
 Book Value of Spring Co. identifiable assets and liabilities at P 2,600,000 and P 900,000,
respectively; and
 Fair value of Spring Co. identifiable assets and liabilities at P 3,200,000 and P 900,000,
respectively.
Required:
1. The non-controlling interest measured proportionate to the share in the acquiree’s identifiable
asset (partial) and the amount of goodwill to be recognized by the acquirer on the acquisition date.
2. The non-controlling interest measured at fair value (full) and the amount of goodwill to be
recognized by the acquirer on the acquisition date.

ACTIVITY 3

The following information for Angeles Co., Bulacan Co., and Cagayan Co. are provided below:
 Estimated
Assets Liabilities Annual Earning
Angeles Co. 1,800,000 800,000 90,000
Bulacan Co. 3,100,000 1,100,000 200,000
Cagayan Co. 2,950,000 950,000 240,000

Required: The share capital distribution using the following independent assumptions.
Assumption 1: Goodwill is recognized. The parties agreed that a single class of share capital with a par
value of P 10 is to be issued by the new enterprise, Davao Corp., in exchange for the net assets plus
goodwill. Goodwill is determined by capitalizing excess earnings at 20%. Normal earnings is 8% of net
assets. All of the companies have 10,000 shares outstanding.

Assumption 2: Goodwill is not recognized. When a single class of share capital is issued for the net asset
contribution only, i.e., without recognition of goodwill. Under this assumption, share capital equal to the
net asset contribution of P 5,000,000 is to be issued by Davao Corp.

Assumption 3: Davao Corp. issues 5% fully participating Preference Share Capital with a par value of P
100, and Ordinary Share Capital with a par value of P 10. Preference Share Capital is to be issued in an
amount equal to the net asset contribution of each company. Earning are capitalized at 8% in determining
the total share capital to be issued. Ordinary share capital is to be issued in an amount equal to the
difference between the total share capital and preference share capital to be issued.

EVALUATION

1. The VV Company had these accounts at the time it was acquired by Bush Co.:

Cash 36,000
Accounts Receivable 457,000
Inventories 120,000
Property, plant and equipment 696,400
Accounts Payable 350,800

Bush Company paid P 1,400,000 for net assets of VV Company. It was determined that fair market
values of inventories and plant, property and equipment were P 133,000 and P 900,000,
respectively.

An assumed contingent liability arising from past events with a fair value amounting to P 10,000
and such amount is considered a reliable measurement.

Required: Journal entry in the books of Bush Company to reflect the business combination.

2. Jolly paid finder’s fee of P 40,000, legal fees of P 13,000, audit fees related to the stock issuance
of P 10,000, stock registration fees of P 5,000, and stock listing application fees of P 4,000.
 Based on the preceding information, under the acquisition method, what amount relating to the
business combination would be expensed? What will be the presentation of the items not
recognized as expense?

3. Shareholders of Companies Lemon, Mango, and Orange are considering alternative arrangements
for a combination. Statements of financial position reflecting uniform accounting procedures, as
well as fair values, that are to be used as a basis for the combination are prepared on September
1, 2019 and are represented below.

Lemon Co. Mango Co. Orange Co.

Assets 4,000,000 5,500,000 500,000

Liabilities 2,850,000 1,500,000 175,000

Ordinary Share Capital (all P 10 par) 1,500,000 1,000,000 250,000
Additional Paid-in Capital 400,000 125,000
Retained Earnings (deficit) (350,000) 2,600,000 (50,000)
Total Liabilities and Equity 4,000,000 5,500,000 500,000

Lemon Company shares have a market value of P 15. A market price is not available for shares of Mango
Company and Orange Company since share capital of these companies are closely-held.

Required: Prepare the necessary entries for the combination, giving effect to each of the following
assumptions.
1. Lemon Company acquires all of the assets and assumes all of the liabilities of Mango Company
and Orange Company by issuing in exchange 300,000 shares of its share capital to Mango
Company and 25,000 shares of its share capital to Orange Company.
2. A new corporation, Lemonade Company, is formed to take over the assets and to assume the
liabilities of Lemon, Mango and Orange Companies. The new company issues no-par share capital
with a stated value of P 5 and market value of P 12 in payment of acquisition as follows: to Lemon
Company, 150,000 shares; to Mango Company, 300,000 shares; to Orange Company, 25,000
shares.
Lesson 2: BUSINESS COMBINATIONS
Objectives:

At the end of the lesson, you will be able to:

a. Know the instances when to recognize control;
b. Learn how to prepare the consolidated and separate financial statements; and
c. Identify how to account for reverse acquisition.

Separate financial statements (PAS 27)- as those presented by a parent, an investor in an associate or a
venturer in a joint venture in which the investments are accounted for on the basis of the direct equity
interest rather than on the basis of the reported results and net assets of the investees.
 Financial statements of the parent company
 Financial statements of the subsidiary companies
o Separate legal entities

Consolidated financial statements- present the financial statements of a group as those of a single
economic entity.

IFRS 10 Consolidated Financial Statements (issued by IASB on May 12, 2011 and is effective for annual
periods beginning on or after January 1, 2013)- introduces new approach to determining which investees
should be consolidated.

IFRS 10 sets up the principles for the presentation and preparation of consolidated financial statements
when there is control of one or more entities by another entity.
Requires a parent company that controls one or more subsidiaries to present consolidated financial
statements.

Assessing control

Before the adoption of PFRS 10 (PAS 27 and SIC 12), an ownership of a majority, means at least 50%
plus one share interest up to a 100% interest, it is an indication of control. On the other hand, ownership
of more than 20% up to 50% interest denoted significant influence.

With PFRS 10, an investor controls an investee when the investor, through its power over the investee, is
exposed, or has rights, to variable returns from its involvement with the investee and has the ability to
affect its returns.

Purpose and Design of an Investee

When an investee is controlled by equity instruments with voting rights such as ordinary shares, the
investor that holds a majority of those voting rights controls the investee in the absence of any other
arrangements that alter decision-making. When voting rights are not relevant, consider as well the
contractual arrangements for the relevant activities of the investee.
Power of PFRS 10

Power arises from rights, whether an investor’s rights are sufficient to give it power, consideration is given
on the evidence.

The rights must be substantive and not protective rights.

 For a right to be substantive, the holder must have the practical ability to exercise the rights. Rights
need to be exercisable, to be substantive, when decisions about the direction of the relevant activities
need to be made.

 When there are two or more investors with current liability to direct relevant activities and the activities
occur in different times, the investor shall determine which investor is able to direct the activities that
most significantly affect returns consistently with the treatment of concurrent decision-making rights.

Protective Rights (PFRS 10)- rights designed to protect the interest of the party holding those rights without
giving that party power over the entity to which those rights relate. Therefore, an investor that holds only
protective rights cannot have power or prevent another party from having power over an investee.

An investor often has the current ability to direct the relevant activities of an investee through voting or
similar rights under PFRS 10.

Potential Voting rights

 PFRS 10 provides than an investor considers its potential voting rights as well as potential voting
rights held by other parties in determining whether it has power.
o Such as those arising from convertible instruments or options including forward contracts.
The potential voting rights are considered only if the rights are substantive.

Exposure, or Rights, to Variable Returns from an Investee under PFRS 10

When assessing whether an investor has control of an investee, the investor determines whether it is
exposed, or has rights, to variable returns from its involvement with the investee.

Link Between Power and Returns Under PFRS 10

When assessing whether an investor has control of an investee, the investor determines whether there
exist link between power and returns from its involvement with the investee.

Delegated Power

In assessing control, an investor shall determine whether it is a principal or an agent. Holding other
interests in an investee indicates that the decision maker may be a principal.
 Identify the investee (legal entity or silo)

Identify the relevant activities of the investee

Identify how decisions about the relevant activities are made

Assess whether the investor has power over the relevant activities

Consider only substantive rights

Voting rights are Other rights are

relevant relevant

Consider
Majority of voting Less than majority of
Purpose and design
rights voting rights Assess
whether
there is a
Consider Consider link
Agreements with other Evidence of pratical between
Rights held by others power
vote holders ability to direct
and
Other contractual returns
Special Relationships
agreements

Exposure to variability
Potential voting rights of returns

De facto factor

Assess whether the investor is exposed to variability in returns

Figure 2.1 The Single Control Model

Source: KPMG

Control is assessed on a continuous basis, i.e, it is reassessed as facts and circumstances change.

CONSOLIDATED FINANCIAL STATEMENTS

Users of financial statements of a parent are usually concerned with and need to be informed about the
financial position, results of operations and changes in financial position of the group as a whole. This
need is served by consolidated financial statements which present financial information about the group
as that of a single enterprise without regard for the legal boundaries of the separate legal entities. Thus,
a parent has to present consolidated financial statements.

The consolidated statement is a statement that eliminates the separation of the different units and reflects
the existence of only one economic entity as manifested by the ownership of a controlling interest. Assets,
liabilities, revenues and expenses of the parent company and its subsidiaries are combined after
intercompany balances are eliminated.

Consolidation Procedure

1. Combine
2. Eliminate the carrying amount of the parent’s investment
3. Eliminate in full intragroup assets and liabilities, equity, income, expenses and cash flows relating
to transactions between entities of the group.

The acquisition method of accounting provides that the consideration transferred of each subsidiary are
eliminated; non-controlling interest, if any, is thereby recognized.

Illustration 1. On January 1, 2019, XYZ Corp. acquired all the outstanding shares of ABC Co. for P
2,000,000. At the date, the fair value of the net assets of ABC Co. is equal to book value while the equity
comprise of Ordinary Share Capital of P 500,000 and Retained Earnings of P 600,000.

Required: Amount of Goodwill and the elimination entry to be prepared.

Illustration 2. P Company acquired an 80% interest in S Company at a cost of P 960,000. S Company had
at that time equity comprised of Ordinary share capital of P 500,000 and Retained Earnings of P 300,000;
assets and liabilities of P 1,000,000 and P 200,000, respectively. Assume that the fair value of the assets
of S Company is P 1,300,000. P Company elected to measure non-controlling interest at its proportionate
share on the identifiable net assets.

Required: Amount of Goodwill and the elimination entry to be prepared.

Illustration 3. Assume the use of the information in Illustration 2 except that the parent elects to measure
non-controlling interest at fair value. Assume also that the consideration transferred of P 960,000 includes
a control premium of P 60,000.

Required: Amount of Goodwill and the elimination entry to be prepared.

WORKING PAPER FOR CONSOLIDATED STATEMENT OF FINANCIAL POSITION

For the below enumerated cases, identify the goodwill (gain on bargain purchase), prepare the elimination
entry and the consolidated financial position.

The statements of financial position of Maricon Corp. and Gloria Co., on January 31, 2019, prior to a
business combination are presented below. Assume that all the non-current assets are depreciable assets.
 Maricon Corp. Gloria Corp.
Book Value Fair Value Book Value Fair Value
Cash 25,000 5,000
Accounts Receivable 8,000 2,000
Merchandise Inventory 15,000 17,000 8,000 10,000
Plant and Equipment 42,000 50,000 16,000 19,000
Goodwill 5,000 1,000
Total Assets 95,000 32,000

Current Liabilities 17,000 3,000

Long-Term Liabilities 10,000 11,000
Ordinary Share Capital, P 2 par 40,000
Ordinary Share Capital, P1 par 4,000
Paid-in Capital in Excess of Par 10,000 3,000
Retained Earnings 18,000 11,000
Total Liabilities and Shareholders' Equity 95,000 32,000

Assume that on this date, GME Corp. share capital has a par value of P4.00 and a market value of
P5.00 while Maricon Corp. share capital has a market value of P2.50.

Assumption 1. Maricon Corp. paid P 22,000 for all the outstanding shares of Gloria Co.

Assumption 2. Maricon Corp. paid P 23,000 for all the outstanding shares of Gloria Co.

Assumption 3. Maricon Corp. paid P 21,000 for all the outstanding shares of Gloria Co.

Assumption 4. Maricon Corp. paid P 15,000 for all the outstanding shares of Gloria Co.

Assumption 5. Maricon Corp. issued 8,800 shares in exchange for all the outstanding shares of Gloria Co.

Assumption 6. Maricon Corp. issued 7,920 shares in exchange for 3,600 shares (90% interest) of the
outstanding shares of Gloria Co.

Assumption 7. Maricon Corp. issued 8,200 shares in exchange of 3,600 shares (90% interst) of the
outstanding shares of Gloria Co.

Assumption 8. Maricon Corp. issued 7,720 shares in exchange for 3,600 shares (90% interest) of the
outstanding shares of Gloria Co.

Assumption 9. Maricon Corp. issued 5,640 shares in exchange for 3,600 shares (90% interest) of the
outstanding shares of Gloria Co.

Assumption 10. Maricon Corp. paid P 10,000 in exchange for 1,600 shares (40% interest) of the
outstanding shares of Gloria Co. Maricon Corp. has an option to acquire half of the remaining voting rights.
Reverse Acquisition

The entity that issues securities (the legal acquirer) is identified as the acquiree for accounting purposes
and the entity whose equity interests are acquired (the legal acquiree) must be the acquirer for accounting
purposes.

Illustration. On April 30, 2020 XYZ Co., the legal subsidiary but accounting acquirer, acquires ABC Corp.,
the legal parent but accounting acquiree. Information relating to the acquisition follows:
 Assets before the combination were P 3,600,000 and P 7,400,000 for ABC Corp. and XYZ Co.,
respectively while liabilities were P 1,400,000 and P 3,400,000, respectively and Retained
Earnings were P 1,600,000 and P 2,400,000, respectively.
 Before combination, ABC Corp. has 200,000 ordinary shares par P 3 while XYZ Co. has 120,000
ordinary shares par P 10.
 ABC Corp. issues equity instruments for all the outstanding shares of XYZ Co. on a 2.5 to 1 basis.
ABC Corp. issued a total of 300,000 ordinary shares in the combination.
 XYZ Co. shares have a fair value of P40 per share on April 30, 2020 while the quoted market price
of ABC Co. shares at this date is P 16.
 Fair value of net assets of ABC Corp. exceed carrying value by P 400,000 on April 30, 2020.

Required: Calculate the fair value of the consideration transferred and the amount of goodwill.

Reference:
Advanced Accounting Part 2, 2014 Edition
Gloria Tolentino-Baysa
Ma. Concepcion Y. Lupisan