Chapter 2

ACCOUNTING FOR BUSINESS COMBINATION

Introduction

A business combination may be accomplished through exchange of equity interests between the
acquirer and the acquiree (or its former owners). The general principle is that the consideration
transferred (the shares issued by the acquirer) is measured at fair value.
Specific Objectives
At the end of the lesson, the students should be able to:
Account for business combinations (a) accomplished through share-for share exchanges
(b) achieved in stages, and (c) achieved without transfer of consideration

Duration: 6 hours (Lecture/Discussion/Problem Solving)

LESSON PROPER
1) The acquisition method applies to all business combinations, including those that do not
involve a purchase transaction. If a business combination is achieved:

a) Without transfer of consideration- the fair value of the acquirer’s interest in the acquiree
is substituted for the consideration transferred in computing for goodwill.

b) By contract alone- all interests not held by the acquirer are attributed to the Non-
controlling interest (NCI) , even if the resulting NCI is 100%.

2) Provisional amounts may be used if accounting is incomplete by the end of the business
combination year. The provisional amounts are adjusted retrospectively for information obtained
during the measurement period (i.e. maximum of 12 months from the acquisition date) that
provides evidence of facts and circumstances that existed as of the acquisition date.

3) The consideration transferred includes only those that are transferred to the previous owners of
the acquiree. It excludes those that are retained by the combined entity after the combination and
those that are in effect used to settle a pre-existing relationship.

4) A reacquired right in a business combination is recognized as an intangible asset measured at

the “at market” value.

5)The gain or loss on settlement of a pre-existing relationship is measured as follows:

a) If contractual- at the lower of: (a) “off-market” value, favorable or unfavorable

determined based on the acquirer’s perspective; or (b) any settlement amount stated in
the contract.
b) If non-contractual- at fair value
6)A contingent consideration is measured at acquisition-date fair value and included in the
consideration transferred.
Illustrative Example: Business combination without transfer of consideration.
ABC Co. owns 40% interest in the 90,000 outstanding shares of XYZ Co. ABC accounts for the
investment under the equity method. XYZ Co. subsequently reacquires 30,000 shares from other
investors. Information on the acquisition date are as follows:
a) The previously held 40% interest has a fair value of P180,000.
b) XYZ’s net identifiable assets have a fair value of P1,000,000.
c) ABC Co. elects to measure NCI at proportionate share.
Requirement: Compute for the goodwill.
Solution:
Consideration transferred (1M x 60%) 600,000
Non controlling interest in the acquiree (40% x1M) 400,000
Previously held equity interest in the acquiree -
________
Total 1,000,000
Fair value of net identifiable assets acquired (1,000,000)
Goodwill 0.00
========

Notes:
a) XYZ’s treasury share transaction increased ABC’s interest to 60% (36,000/60,000).
Consequently, the NCI is 40%.
b) The acquisition-date fair value of ABC’s interest in XYZ is substituted for the
consideration transferred (instead of attributing an amount to the previously held equity
interest) because there is no consideration transferred and there is no change in the number
of shares held by ABC.

Share-for-Share Exchanges
As stated above, the share issued by the acquirer are measured at fair value. However, there may
be cases where the fair value of the acquiree’s interests may be more reliably measurable than the
acquirer’s. In such cases, the acquirer computes for goodwill using the FV of the acquiree’s equity
interest.

Business Combination achieved in stages:

A business combination is “achieved in stages” when the acquirer obtains control of an acquiree
in more than one transaction. F

For example, Entity A acquires 20% interest in Entity B in Year 1. This transaction is not a
business combination because Entity A has not yet obrtained control of Entity B. In year 2, Entity
A acquires additional 40% interest in Entity B, thereby bringing its interest to a total of 60%. The
second acquisition qualifies as a business combination because Entity A has obtained control of
Entity B.

A business combination acquired in stages is also called “step acquisition”.

In accounting for a business combination achieved in stages, the acquirer:
 1. Remeasures the previously held equity interest in the acquiree at acquisition date fair value,
and
2. Recognizes gain or loss on the remeasurement in:
a. Profit or loss- if the previously held equity interest was classified as FVPL, Investment
in Associate or Investment in Joint Venture; or
b. Other Comprehensive Income- if the previously held equity interest was classified as
FVOCI.
c.
Activity:
Students will be required to answer exercises/problems be uploaded in the LMS.