BUSINESS COMBINATIONS NOTES

CHAPTER 1-3

GENERAL CONCEPTS

TOPIC OUTLINE

1
2

From Youtube discussions

 Acquisition of net assets :
- Share issuance cost- charged to share
premium

Possible entry
Share premium
Cash (if paid in cash)

 After acquisition J/E

- Record acquisition of net assets
- Record acquisition related expense

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TOPIC 1
Methods or types of combinations
1. Acquisition of net assets: A-L= NA
2. Acquisition of common stock
3. Asset acquisition
 Business combination is-
ACQUISITION OF NET ASSETS
 STATUTORY MERGER- entails that
acquiring company survives, and acquired
company ceases to exist as a separate legal
entity, although it may be continued as a separate
division of the acquiring company.
X Co. + Y Co. = X Co or Y Co.
 STATUTORY CONSOLIDATION – when a
new corporation is formed to acquire two or
more other corporations, the acquired
corporation ceases to exist (dissolve) as separate
legal entities.
X Co + Y Co = Z Co
PFRS 3: BUSINESS COMBINATIONS
 A transaction or event in which the acquirer
obtains control over on or more businesses.
Scope of business combinations
1. Combinations involving mutual agency
- Mutual agency is an entity other than an
investor-owned entity, that provides
dividends, …
2. Combinations achieved by contract alone.
THE ACQUISITION METHOD
 Is applied on the acquisition date which is the
date the acquirer obtains control of the acquiree.
 All assets and liabilities are reported at: FAIR
VALUE
CALCULATING FOR CONSIDERATION
TRANSFERRED :
- Measured at FAIR VALUE on acquisition
date
- Sum of the acquisition date FAIR VALUES
of :
 The assets transferred by acquirer
 The liabilities incurred by the acquirer to former
owners of the acquiree
 The equity interest issued by the acquirer
CONSIDERATION TRANSFERRED INCLUDES:
 Cash or Other Monetary Assets
 Non-monetary assets
 Equity instruments
 Liabilities undertaken.
 Contingent Consideration- an add on to the base
acquisition price that is based on events
occurring or conditions being met some time
after the purchase takes place
ACQUISITION RELATED COST
- Are exclude from the consideration paid
because such costs are not part of the fair
value of the acquiree and are not assets.
- Accounted for as expense in the periods
incurred and the services are received.
1. Cost directly attributable to the combination
 Legal fees
 Finder’s and brokerage fees
 Advisory
 Accounting
 Valuation
 Professional and consulting fees
2. Indirect, ongoing cost, general cost including the
cost to maintain an internal acquisition,
department.
 General and administrative cost
SHARE ISSUANCE COST
Cost of issuing equity instruments (EXCLUDED FROM
CONSIDERATION AND ACCOUNTED
SEPARATELY)
-reduction in share capital (APIC) – If apic is not enough it
shall be debited to SHARE ISSUANCE COST deducted to
the following in order:
1. Share Premium from previous share issuance
2. retained earnings with appropriate disclosure.
pp. 14 book , summary of acquisition related cost
PP. 19 of Book: List of asset and liab included in the
acquisition
-
Goodwill
 Acquirer shall recognize goodwill as of
acquisition date measured as: Consideration
transferred- Net Assets
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 Accounted for as an asset representing future interest in the investment.

economic benefits arising from other assets.

Items include as goodwill PURPOSE OF CONSOLIDATED FS

- Primarily for the benefit of the owners and
 Assembled workforce of the acquire creditors of the parent, the results of the
 Potential contracts operations and the financial position of a
 Contingent assets parent company and all its subsidiaries as if
 Future contracts renewal the consolidated group were a single
economic entity.

Bargain Purchase Gain

 The difference when the acquirer’s interest in
net fair value of the acquiree’s identifiable Allocated excess
assets and liabilities is greater than the  Difference between the fair value of the
consideration transferred. subsidiary and the book value of the acquiree’s
net identifiable assets.
Measurement period
 A period after the initial acquisition date during Economic Entity(Unit) Theory pp. 119
which the acquirer may adjust the “provisional - Non-controlling interest are deemed to be as
amount” important as a stakeholder of the combined entity
 One year period is known as the measurement similar to the majority shareholders.
period. - Requires consistent accounting treatment for
both parent and NCI.
Formula: Consolidated equity
MAIN TOPIC: Consolidated FS (Controlling and NCI) = Consolidated assets- Consolidated
liabilities)
TOPIC OUTLINE Parent theory pp. 120
- Focuses on the information needed by the parent
1 Topic 1: FROM BOOK company shareholders.
2 Topic 2: from yt discussion Proprietary theory
- Parent is seen as having a direct interest in a
TOPIC 1 subsidiary’s assets and liabilities

Consolidation
1. Process of combining the assets, liabilities,
earnings and cash flows of a parent and its
subsidiaries as if they were one economic entity.
Subsidiary
 It is a corporation that is controlled by a
parent that owns, usually of the voting
shares/rights of the subsidiary.

The default presumption

 Presence of control determines a parent-
subsidiary relationship. 50% ABOVE =
control

Separate Financial Statements PAS 27

 Those presented by a parent, an investor in an
associate or 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 investee.
NOTE: Investor’s separate FS reflects the legal

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