ADVANCE FINANCIAL ACCOUNTING & REPORTING

BUSINESS COMBINATION- ACQUISITION DATE

Tina Llorca

BUSINESS COMBINATIONS
 Occurs when one entity gains control over another entity. Control can be gained when one entity
acquire the assets and liabilities of another entity which constitute a business, or the acquisition
of stocks or through contract alone.

SPECIFIC REQUIREMENTS OF IFRS 3

a. The use of the Acquisition method
b. The measurement of the cost of a combination
c. The allocation of the cost of combination to the acquired assets and assumed liabilities and
contingent liabilities.
d. The assets, liabilities and contingent liabilities to be measured initially at fair value.
e. Goodwill acquired to be recognized
f. That goodwill upon recognition is subsequently accounted for as follows:
ACQUIRER NON-SME SME
AMORTIZATION no yes
IMPAIRMENT TEST yes yes
g. That any excess on combination be accounted for by a reassessment of the assets and liabilities
acquired and, where appropriate, by recognizing any excess immediately in profit and loss. Any such
discount (or premium) accrues only to the acquirer.
h. Disclosures of information that enable users to evaluate the nature and effect of business
combinations effected in the current period and previous periods, as well as post balance-sheet
dates.
i. Disclosure of information that enable users to evaluate changes in the carrying amount of goodwill.

GENERAL STEPS UNDER THE ACQUISITION METHOD OF ACCOUNTING FOR THE BUSINESS
COMBINATION

(a) Identifying the acquirer- the entity that obtains control of the acquiree.
(b) Determining the acquisition date and - The date which the acquirer obtains control of the
acquiree.
(c) Determining the consideration transferred (purchase price)- The acquirer shall measure the
cost of business combination as the aggregate of;
1. The fair values at the date of exchange of assets given, liabilities incurred or
assumed and equity instruments issued by the acquirer in exchange for control of the
acquiree; plus
2. Contingent costs of guarantees made, if measurable and probable at the date of
acquisition on: (1) market value of the shares issued; and/or (2) amount of net
income sustained over a specified period.
3. Direct acquisition costs, if the acquirer is an SME.
(d) Recognizing and measuring the identifiable assets acquired, the liabilities assumed and any
non-controlling interest in the acquiree- As of the acquisition date, the acquirer shall
recognize, separately from goodwill:
1. The identifiable assets acquired
2. The liabilities assumed
3. And- Any NCI in the acquiree.

The acquired assets and liabilities are required to be measured at their acquisition-date fair
values.
Note: There are certain exceptions to the recognition and measurement principles which are
detailed in IFRS 3.21 through 3.31.

(e) Recognizing and measuring goodwill or a gain from a bargain purchase.

Goodwill is required to be measured on the difference between:
1. The aggregate of the consideration transferred, any non-controlling interest in the
acquiree and, in a business combination achieved in stages, the acquisition-date fair
value of the acquirer's previously held equity interest in the acquiree; and
2. The net identifiable assets acquired.

The difference between 1 & 2 will generally be recognized as goodwill.

If the acquirer has made a gain from a bargain purchase that gain is recognized in profit or
loss immediately.

Goodwill vs. Bargain Purchase Element

FMV Given > FMV of Net Assets Goodwill
FMV Given < FMV of Net Assets Bargain Purchase Element
FMV Given = FMV of Net Assets Neither GW nor BPE

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Additional Guidance for Applying the Acquisition Method Step Acquisition

 An acquirer sometimes obtains control of an acquiree in which it held an equity interest
immediately before the acquisition date. This is known as a business combination achieved in
stages or a step acquisition. The acquirer remeasured its previously held equity interest in the
acquiree at its acquisition-date fair value. Any resulting gain/loss is recognized in profit or loss.
Thus, attaining control triggers re-measurement or previous investment.

 No transfer of consideration- If no transfer of consideration the acquisition method of

accounting for a BC still applies. Such circumstances include:
- The acquiree repurchases a sufficient number of its own shares for an existing investor (the
acquirer) to obtain control.
- Minority veto rights lapse that previously kept the acquirer from controlling an acquiree in which
the acquirer held the majority voting rights.
- The acquirer and the acquiree agree to combine their businesses by contract alone.
 Subsequent Measurement and Accounting

In general, an acquirer measures and accounts for assets acquired and liabilities assumed or
incurred in a BC after the BC has been completed in accordance with other applicable IFRSs.
However, the IFRS provides accounting requirements for reacquired rights, contingent liabilities,
and contingent consideration and indemnification assets.

ACCOUNTING TREATMENT ON SOME SPECIFIC COST ITEMS

1. Cash or other monetary assets. The fair value of the cash and cash equivalents dispersed is
usually readily determinable. But if the settlement is deferred to a time subsequent to the exchange
date the fair value of that deferred component shall be the present value at the date of exchange.
2. Non- monetary assets. These consist of assets such as property, plant and equipment, investments,
licenses and patents. The acquirer is effectively selling the non-monetary asset to the acquiree.
Hence it is earning revenue equal to the fair value on the sale of the assets and realizing a gain or
incurring a loss if the carrying amount differs from the fair value.
3. Equity instruments. If an acquirer issues its own shares as consideration it will need to determine
the fair value of those shares at the date of exchange.
4. Liabilities undertaken – the fair value of the liabilities undertaken are best measured by the present
value of future cash flows. Note that expected future losses and cost, as a result of the combination
are not liabilities of the acquirer and therefore not included in the calculation of the fair value of
consideration paid.
5. Contingencies - Where the business combination agreement provides for an adjustment to the cost
of the combination contingent on future events, the acquirer shall include the amount of that
adjustment in the cost of the combination at the acquisition date if the adjustment is probable and can
be measured reliably.
6. Directly attributable costs; it includes costs such as professional fees paid to accountants, legal
advisers, valuers and other consultants to effect the combination. Also included in the cost category
are finder’s fees and brokerage fees. These are recognized as expenses if acquirer is a non-SME.
7. Other cost that are not directly attributable to the business combination are
a. Cost to issue and register the shares issued by the acquirer are treated as a reduction in the total
fair value of the shares issued and are recognized in equity and
b. Indirect acquisition costs are recognized as expenses.

ALLOCATING THE COST OF BUSINESS COMBINATION:

1. Identifiable tangible assets: are recognized if it is probable that any associated future economic
benefits will flow to the acquirer; and its fair value can be measured reliably
2. Intangible assets: are recognized if its fair value can be measured reliably. Note that, unlike tangible
assets there is no probability test only a reliability test.
3. Liabilities – are recognized if it is probable that an outflow of resources embodying economic
benefits will be required to settle the obligation; and its fair value can be measured reliably.
4. Contingent assets and liabilities
Contingent assets – not yet recognized under phase I of IFRS 3
Contingent liabilities – the only test for recognition of contingent liabilities is the reliability test, the
probability test is assumed to be met because the fair value measurement takes the probability
factors into consideration. Hence, contingent liabilities not recognized in the records of the acquiree
may be recognized in the records of the acquirer as a result of the business combination.

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Forms of Business Combinations

 Statutory merger - The acquired company’s assets and liabilities are transferred to the acquiring
company, and the acquired company is dissolved, or liquidated. The operations of the previously
separate companies are carried on in a single legal entity

 Statutory consolidation- Both combining companies are dissolved and the assets and liabilities of
both companies are transferred to a newly created corporation

 Stock acquisition - One company acquires the voting shares of another company and the two
companies continue to operate as separate, but related, legal entities. The acquiring company
accounts for its ownership interest in the other company as an investment.

Parent–subsidiary relationship
For general-purpose financial reporting, a parent company and its subsidiaries present
consolidated financial statements that appear largely as if the companies had actually merged
into one.

Determining the Type of Business Combination

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INSTRUCTION: Give what is asked.

The past three years of V-ABSA CPA Corporation has been a huge success, it has captured 80% of the
market within NCR after dominating the Recto Market (Illegal vendors has been raided) as well as the
Quezon and Makati students. V-ABSA CPA Corporation has been a threat to its competitors namely,
Mutual bookstore, Rex Book store and National Bookstore. During April 2017 board meeting, V-ABSA’s
dream has sprouted into a wider market. This time they are aiming big, they foresee capturing the market
of the known City’s; Cebu, Baguio and Davao. It is the initial strategy before they go over the market of
the whole Country.

V-ABSA CPA Corporation discovers that one books store in Cebu City is the best Company to capture. V-
ABSA then communicates its intention to buy the net assets of the company named Cebu Bookstore. On
July 1, 2017, after due diligence between both the parties, Cebu bookstores owners’ agreed to sell the
company in exchange of the latter shares of stocks. At that date net assets at fair market value of Cebu
Books store amounts to P348,225, V-ABSA issued 68,000 common shares at P4.5 par value with a
market price of P6 per share.
Out of pockets of the combination were as follows:
Legal fees of the contract of business P17,800
combination
Audit fee for SEC registration of stock 45,000
issue
Printing costs of stock certificates 7,250
Broker’s fee 11,800
Accountants fee for pre-Acquisition audit 40,000
Other direct cost of acquisition 37,500
General and allocated expenses 21,500
Listing fees in issuing new shares 18,000
Included in the agreement is a clause that mandates V-ABSA to pay an additional cash consideration of
P227,500 in the event that Cebu books store net income will be equal or greater than P475,000 for the
period ended December 31, 2017. At acquisition date, there is a high probability of reaching the target net
income fair value of the additional consideration was determined to be P97,500.
Actual net income for the period ended December 31, 2017 amounted to P625,000 The additional cash
consideration was paid.
1. How much is the net increase\ (net decrease) in the additional paid in capital of V ABSA as a result of the
business combination?
a. P31,750 net decrease c. P29,250 net decrease
b. P29,250 net increase d. P31,750 net increase

2. What is the amount of goodwill to be recognized in the statement of financial position as of December 31,
2017?
a. P147,725 c. P157,275
b. P154,250 d. P173,275

3. What is the amount expense to be recognized in the statement of comprehensive income for the year
ended December 31, 2017?
a. P128,600 c. P153,700
b. P258,600 d. P206,250

V-ABSA CPA Corporation is a company that sells books. V-ABSA CPA Corporation has gained control
over the operations of Baguio Book Store by acquiring 90% of its outstanding capital stock for
P2,730,000. This amount includes a control premium of P30,000. Acquisition expenses, direct and
indirect, amounted to P83,000 and P42,000 respectively.
V-ABSA CPA Corp Baguio Bookstore
Book Value Book Value
Cash P3,541,500 P128,000
Accounts receivable 300,000 325,000
Inventories 550,000 360,000
Prepaid Expenses 148,500 125,000
Land 2,350,000 879,000
Building 1,560,000 558,000
Equipment 300,000 185,000
Goodwill 300,000
Accounts payable 675,000 253,000
Notes payable 1,400,000 730,000
Ordinary Shares 50 par 3,400,000 800,000
Share Premium 1,575,000 600,000
Retained earnings 1,700,000 477,000

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The following was ascertained on the date acquisition.

*The value of receivables and equipment was decrease by P25,000 and P14,000 respectively.
*The fair value of inventories is now P436,000 whereas the value of building and land has increased by
P107,000 and 471,000, respectively.
*There was an unrecorded accounts payable amounting to P27,000 and the fair valued of notes is
P738,000.
Compute for the following balances to be represented in the consolidated statement of financial position
at the date of business combination:
4. Total assets
a. P 9,875,000 b. P 10,093,000 c. P 9,943,000 d. P 9,215,000

5. Total shareholder’s equity

a. P 6,975,000 b. P 6,850,000 c. P 6,550,000 d. P 6,725,000

6. How much will be the net increase/(decrease) in goodwill in the working paper elimination entries?
a. P698,000 b. P398,000 c. P998,000 d. P873,000 e. P573,000

On January 2, 2017, the statement of financial position of Kris and Lester Company Prior to the
combination are:
Kris Co. Lester Co.
Book Value Fair Value Book Value Fair Value
Cash P 450,000 P 450,000 P 15,000 P 15,000
Inventories 300,000 315,000 30,000 30,000
Equipment 750,000 790,000 105,000 153,000
Total Assets P1,500,000 P1,555,000 P150,000 P198,000
Accounts payable 90,000 97,500 15,000 15,000
Common stock P100 par 150,000 15,000
Share Premium 450,000 30,000
Retained earnings 810,000 90,000
Total equities P1,500,000 P150,000
7. Assuming Kris Company acquired all of the outstanding stock of Lester Company resulting to a goodwill of
P66,000, contingent consideration is P36,000, how much is the price paid to Lester Company’s stock?
a. P 249,000 c. P 213,000
b. P 315,000 d. P 285,000

8. Assuming Kris Company acquired 90% of the outstanding common stock of Lester company for P243,000
and non-controlling interest is measured at fair value, how much is the total consolidated assets on the
date of acquisition
a. P1,542,000 c. P1,737,000
b. P1,785,000 d. P1,494,000

9. Assuming Kris to Company acquired 70% of the outstanding common stock of Lester Company for
P105,000 and non-controlling interest is measured at fair value of P61,000, how much is the goodwill
(gain on acquisition)?
a. P(17,000) c. P23,100
b. P17,000 d. P(23,100)

10. Assuming Kris Company acquired 70% of the outstanding common stock of Lester Company for P136,800
and non-controlling interest is measured at fair value of P36,000, how much is the goodwill (gain on
acquisition)?
a. P (8,700) c. P 10,200
b. P 8,700 d. P (10,200)

11. Assuming Kris Company acquired 80% of the outstanding common stock of Lester Company for P136,800
and Non-controlling interest is measured at non-controlling interest’s proportionate share of Lester
company’s identifiable net assets, how much is the consolidated stockholder’s equity on the date of
acquisition?
a. P1,140,000 c. P1,446,000
b. P1,419,600 d. P1,456,200

12. Orbit Inc. Purchased Planet Co. on 2009. At that time an existing patent was not recorded as a separately
identified intangible asset. At the end of fiscal year 2010, the patent is valued at 15,000 and goodwill has
a book value of 100,000. How should assets be reported at the beginning of fiscal year 2011?
a. Goodwill, P100,000; Patent, 0
b. Goodwill, P115,000; Patent, 0
c. Goodwill, P100,000; Patent, 15,000
d. Goodwill, P 85,000; Patent, 15,000

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13. Burrough Corporation concluded that the fair value of Heylar Company was 80,000 and paid that amount
to acquire all of its net assets. Heylar reported assets with a book value of 60,000 and fair value of 98,000
and liabilities with a book value and fair value of 23,000 on the date of combination. Burrough also paid
3,000 to a search firm for finder’s fees related to the acquisition. What amount will be recorded as
goodwill by Burrough Corporation?
a. 0
b. 5,000
c. 8,000
d. 13,000

14. On 1 December 2011, Casio Ltd. Acquired all the assets and liabilities of Aurora Ltd. With Casio Ltd.
Issuing 100,000 shares to acquire these net assets. The fair value of AURORA Ltd.’s assets and liabilities
at this date were:
Cash 50,000
Furniture and fittings 20,000
Accounts receivable 5,000
Plant 125,000
Accounts payable 15,000
Current tax liability 8,000
Provision for annual leave 2,000
The financial year for Casio Ltd. is January- December.

The fair value of each Casio Ltd. share at acquisition date is P 1.90. At acquisition date, the acquirer
could only determine a provisional fair value for the plant. On 1 March 2012, Casio Ltd. Received the final
value from the independent appraisal, the fair value at acquisition date being P 131,000. Assuming the
plant had a further five-year life from the acquisition date. The amount of Goodwill arising from the
business combination at December 1, 2011:
a. 15,000
b. 13,000
c. 5,000
d. 0

15. The geek Company acquired 100% of The Okay Company for a consideration transferred of 112 million.
At the acquisition date the carrying amount of Okay’s net assets was 100 million and their fair value was
120 million.
How should the difference between the consideration transferred and the net assets acquired be
presented in Geek’s financial statements, according to PFRS 3 Business Combinations?
a. Gain on bargain purchase of 8 million recognized in other comprehensive income.
b. Gain on bargain purchase of 8 million deducted from other intangibles assets.
c. Gain on bargain purchase of 8 million recognized in profit or loss.
d. Goodwill of 12 million as an intangible asset.

“When the situation though be tougher!”

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