ABC Module 01: Business
Combinations- v1
 Business Combinations- transaction or
event in which acquirer obtains control of
one or more company.
- Occurs when two or more entity join
into a single accounting entity but
not legal entity.
3 LEGAL FORMS OF BUSINESS
COMBINATIONS
 Statutory Merger
- Usually there is a surviving company
either A or B.
- Example: A+B= A or B. Grab +
Uber = Grab.
 Statutory Consolidation
- There is NO surviving company and
there is another name after the
consolidation.
- Example: A+B=C. BDO Unibank +
Equitable PCI= BDO Equitable PCI.
 Acquisition of Stocks
- There are only changes in its
relationship. It became parent and
subsidiary.
- Example: A+B= A + B. There are no
changes aside from A is now the
parent of B and B is a subsidiary of
A. Jollibee + TCBTL= Jollibee
(parent) + TCBTL (subsidiary).
5 TYPES OF BUSINESS
COMBINATIONS
 Horizontal- competitors.
- Usually, to improve market share
and reach wide range of customers.
- Example: Grab buys Uber.
 Vertical- has customer-supplier
relationship
- Upward Vertical Business
Combination- when customer buys
the supplier.
o Usually in order to improve
the supply chain.
- Downward Vertical Business
Combination- when supplier buys
the customer.
o Usually in order to improve
the supply chain in
downward perspective.
o Example: When Disney buys
Pixar (Animation studio).
 Market-Extension- sells same products in
different markets.
- Example: When Ayala (sells at
malls) buys Zalora (sells online).
- To have different channels of selling
products.
 Product-Extension- sells different but
related products.
- Example: When Pepsico (sells
beverages) buys Pizza hut (sells
foods/snacks).
- To leverage technology and improve
how they produce their products.
 Conglomeration- combination of two
unrelated business.
- Example: SM buys 2Go Travel.
- Usually, to improve diversification
and to have business in other
industries.
MOTIVATIONS FOR BUSINESS
COMBINATIONS
 Staff Reduction
 Economies of scale- reduce cost through
increasing the level of production.
 Access to new technologies and
intangibles
 Improve market reach and visibility.
 OTHERS.
2 MAIN METHODS FOR
ACCOUNTING FOR BUSINESS
COMBINATIONS
 Pool of Interest Method
- uses Historical Book Value to record
net assets of the acquiree.
- Allowed through PIC, Q&A, 2011-
02, when they are under a common
control and there is no commercial
substance.
 Acquisition Method
- The assets acquired and liabilities
assumed are recorded at fair value of
the net assets at the date of
acquisitions.
- This is the ONLY method
ALLOWED by the PRFS 3.
ABC Module 01: Business
Combinations- v2
PFRS 3- Business Combinations
 Objective- to improve the relevance,
reliability, and comparability of
information about business combinations
and its effects.
 Core Principles- the acquirer must
recognize the net assets of the acquiree at
the acquisition date fair value.
 PFRS 3 does not apply to: (JABIN)
- Join Ventures (PFRS 11- Joint
Arrangements)
- Acquisition of Assets not
constituting a business.
- Business combinations under
common control
- Investment entity @FVPL
- Not for Profit Organizations
% OF OWNERSHIP/
RELATIONSHIP/APPLICABLE
STANDARDS
20% and Below
- NA- PAS 32&39, PFRS 9- Financial
Instruments
20% - 50%
- Significant Influence, PAS 28-
Investment on Associates
50%
- Joint Control, PFRS 11- Joint
Arrangements
50% and Above
- PFRS 3- Business Combinations
- PAS 27- Separate FS
- PFRS 10- Consolidated FS
STEPS FOR ACQUISITION METHOD
(IDRR)
 Identify the acquirer.
 Determine the acquisition date.
 Recognize the assets, liabilities, and
any non-controlling interest (NCI)
 Recognize goodwill/gain on bargain
purchase.
STEP 1: Identify the acquirer.
- Acquirer is the entity that usually
transfer cash or other assets, incurs
liabilities.
- Issues its own interest, except for
reverse acquisitions.
- NOTE! The consideration will be
transferred to the previous owners of
the acquiree.
STEP 2: Determine the acquisition date.
- This is when the acquirer obtains
CONTROL over an acquiree.
- This can be earlier, later, or same as
to “closing date”
 o Closing date- is the date
where the acquirer legally
transfers the consideration,
acquire asset, and assume the
liabilities of the acquiree.
- Measurement Period- 1 year to
adjust the “Provisional amounts.”
STEP 3: Recognize the assets, liabilities,
and any non-controlling interest (NCI)
 Assets Acquired- FAIR VALUE
- /, Intangibles
- X, Previous Goodwill
- X, Prepaid Asset
 Liabilities Assumed- FAIR VALUE
 Non-Controlling Interest
- It is the equity interest not
attributable, direct, or indirect, to a
parent.
- The remaining interest, not acquired
by the acquirer.
- It shall be measured at either:
 FAIR VALUE, Full Goodwill
- Should exclude “Control Premium”
- Formula: NCI@FV
Consideration transferred
% Of Acquirer’s Interest
 PROPORTIONATE SHARE, Partial
Goodwill
- Formula: NCI@ Proportionate
NIA of Acquiree x % of NCI
STEP 4: Recognize goodwill/gain on
bargain purchase. (CNP-N)
- Formula:
Consideration Transferred @FV
+ Contingent Consideration @FV
+ NCI @acquisition date FV
+ Previous Held Equity Interest @ADFV
TOTAL
- NIA acquired by acquirer
GOODWILL- Asset at Balance sheet.
(GAIN ON BARGAIN PURCHASE
OPTION)- Income outrightly in P/L.
Previously Held Equity Interest (PHEI)
- In step acquisition or business
combination achieved in stages.
- All interest acquired before the date
of acquisition of the same company.
Reverse Acquisitions
- Entity that issue its own securities
(Legal Acquirer) is treated as the
Acquiree for Accounting purposes.
- Ex: Backdoor Listing
- It is usually done by private entities
through acquiring publicly listed
companies to have stock listing.
Acquisition Related Cost
- Related cost that acquirer incurred in
effecting a business combination.
- Therefore: (DIDSC)
o Direct Cost- Expense
o Indirect Cost- Expense
o Debt and Equity Interest-
Amortized thru EIM
o Stock Registration and
Issuance Cost- Deduction in
APIC and RE
o Cost of Public Offerings of
Shares- Expense according to
PIC, Q&A, 2011-04
PRFS FOR SMALL AND MEDIUM
ENTITIES (SMEs) – A4N
- Assets, 3M-350M; Liabilities, 3M-
250M
- Not in the process of issuing
instrument in a public market.
- Not required to file FS under SRC,
Rule 68, Part II (for issuers of
instruments in Public)
- Not a holder of secondary license
issued by a regulatory agency.
o Secondary license- given to
corporations to have
authority to operate in
 regulated activities like ment
broker securities, dealer etc. date
IIA can Contra FV can
o Anything that manages
be ctual be
money of other people or in a recogni and measur
“trust position” zed if: Separa ed
- Not a public utility. ble reliably
- NOTE that under these conditions, Conting Presen FV can
ent Liab t be
they are mandated to apply PFRS for can be Obliga measur
SMEs. recogni tion+ ed
zed if: Proba reliably
Exemptions for PFRS for SMEs- PSPP ble
- Under discretion/Can use Full PFRS and
Measu
- Part of a group reporting entity under
red
Full PFRS (ex: Subsidiary, Parent, Reliab
Joint Ventures, Associates, and ly
Branch Office.) Goodwi Consi Consid’
- Subsidiary of a foreign parent ll d’n n
moving towards full IFRS transfe transfer
rred red
- Projected to breach quantitative + NCI - %
threshold. +
- Plan to conduct IPO within 2 years. PHEI (FVNA
- Ax%
Difference vs. Full PFRS- ACRICGGM FVNA acquire
A d)
Goodwi Not Amorti
FULL PFRS ll- amorti zed
PFRS for subsequ zed; over its
SMEs ent tested useful
Accoun Acqui Purchas for life, not
ting sition e impair exceedi
Method Metho Method ment ng 10
d annual years
Conside Acqui Acquisi ly
ration sition tion Measur FV or Proport
Transfe cost+ cost+ ement Propor ionate
rred Contin Conting of NCI tionate Share
gent ent Share ONLY
Consi Consid’
d’n n (if
probabl
e and
measur
ed
reliably
)+
Direct
Cost
Remeas X /
urement Good Goodwi
of IIA will ll
after (must
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