Accounting for Business Combinations (Book)

Chapter 2: Business Combinations (Part 2)

Share for Share exchanges

- When a business combination is through a mere exchange of equity interests between the
acquiree and the acquirer, the acquisition date fair value of the ACQUIREE’s equity interest is
more reliably measurable.

Business Combination achieved in stages

- Also known as step acquisition.

- Occurs when an investor acquires additional shares from an INVESTEE which it had previously
held equity interest and the additional shares purchased results to the investor obtaining
control over the investee.
A) Controlling interest
- Obtained through 2 or more separate transactions.

Business combination effected through stock acquisition

- Under this type of business, both the acquirer and the acquiree retain their separate legal
existence.
- They shall maintain their separate accounting records.
A) On the acquirer’s accounting records
- The (consideration transferred + the acquisition date fair value of the previously held equity
interest) is debited to an INVESTMENT IN SUBSUDIARY account.

Notes for Consolidated Financial Statements

1) Goodwill computed on acquisition date and non-controlling interests shall be presented when
the group prepares this.
2) The investment in subsidiary shall be eliminated here.

Business Combination achieved without transfer of consideration

- Acquirer shall nevertheless apply the ACQUISITION METHOD here.

Note:

- The reason why PURCHASE METHOD previously used for business combinations is REPLACED
with the acquisition method is to EMPHASIZE that a bus comb may occur when a purchase
transaction is not involved.

Examples of circumstances where the acquirer obtains control without transferring consideration

1) When ACQUIREE repurchases a sufficient number of its own shares from other investors so
that the ACQUIRER will be able to obtain control.

Abraham D. Chin
 Accounting for Business Combinations (Book)

2) Minority Veto Rights Lapse

- That previously kept the acquiRER from controlling an acquiREE in which the acquiRER held the
majority voting rights.

3) When both of them agree to combine their businesses by contract alone.

Ex: bringing the two businesses together in stapling arrangement or forming a dual listed
corporation.
- With no consideration transferred, the ACQUIRER substitutes the acquisition date fair value of
its interest in the acquiree for the acquisition date fair value of the consideration transferred to
measure goodwill or a gain on a bargain purchase.
- By contract alone, ACQUIRER attributes to the owners of the ACQUIREE’s net assets measured
at either fair value or the non-controlling interest’s proportionate share of the ACQUIREE’s net
identifiable assets.

Note:

- The equity interests in the ACQUIREE held by parties other than the ACQUIRER are a non-
controlling interests in the ACQUIRER’s post combination financial statements even if the
results is that ALL of the equity interests in the ACQUIREE are attributed to the non-controlling
interests.

Measurement Period

1) If initial accounting for the bus comb is incomplete by end period in which it occurs, ACQUIRER
shall report provisional amounts for the item s for which the accounting is incomplete.

2) If new info is obtained during measurement period, ACQUIRER shall retrospectively adjust the
provision amounts recognized at the acquisition date.

3) Additional assets and liabilities may also be recognized during the measurement period if new
info about facts and circumstances that existed as of the acquisition date that, if known, would
have resulted in their recognition as of that date.

4) Ends as soon as ACQUIRER receive info it was seeking about facts and circumstances that
existed as of the acquisition date or learns more unobtainable information.

5) Shall not exceed 1 year from acquisition date.

Abraham D. Chin
 Accounting for Business Combinations (Book)

6) Provides the ACQUIRER with a reasonable time to obtain the information necessary to identify
and measure the following as of the acquisition date in accordance with the requirements of
PFRS 3:
A) Consideration transferred
B) Non-controlling interest of ACQUIREE
C) Previously held interest of ACQUIRER in buss comb achieved in stages
D) Identifiable assets acquired in assets and liabilities assumed.
E) Resulting goodwill or gain on bargain purchase.

7) During, ACQUIRER shall recognize adjustments for provisional amounts as if the bus comb was
complete and shall restate comparative information for prior periods presented in the financial
statements as needed.

8) After, any revision on the bus comb shall be treated as a correction of error under PAS 8,
Accounting policies and changes in accounting estimates and errors.

Determining what is part of the business combination transaction

- Transaction arranged primarily for the benefit of the ACQUIRER or the combined entity before
the combination.
- Initiated by the ACQUIREE or its former owners.

Reacquired Rights

- An identifiable asset
- Recognized separately from goodwill
- Right to use ACQUIROR’s intangible assets and technology
- If terms of the contract giving rise to this are favorable or unfavorable, then ACQUIRER shall
recognize a settlement gain or loss.

Settlement of pre-existing relationships between the two

1) Non Contractual
- Plaintiff and defendant on a pending lawsuit.
2) Contractual
- Vendor and customer, licensor and licensee, franchisor and franchisee.

The following items shall be subsequently accounted for under PFRS 3

1) Reacquired rights (over remaining contractual period)

2) Contingent Liabs recognized as of the acquisition date
3) Indemnification assets
4) Contingent Considerations

Abraham D. Chin