ABCO311: Accounting for Business Combinations

09.18.21
W2 Activities

• Class Photo (Start)

• Lessons for the Day:

Chapter 1 BUSINESS COMBINATIONS (Part 1)

• Feedback by Observer

• Class Photo (End)

 ACCOUNTING
FOR BUSINESS
COMBINATIONS
(Advanced
Accounting 2)
 Proposed Topic
Week
1 House Roles/Intro to ABCO
2 Intro to Business Combination
3 Chapter 1 - Intro to Business Combination P1
4 Chapter 2 - Intro to Business Combination P2
5 Chapter 3 - Intro to Business Combination P3
6 PRELIMS
7 Chapter 4 - Consolidated Financial Statements P1
8 Chapter 5 - Consolidated Financial Statements P1
9 Chapter 6 - Consolidated Financial Statements P1
10 Chapter 7 - Consolidated Financial Statements P1
11 Chapter 8 - Separate FS
12 MIDTERMS
13 Chapter 9 - Hyperinflationary Ecomony
14 Chapter 10 - Foreign Currency Transactions
15 Chapter 11& 12 - Derivatives Theory and Problems
16 Chapter 12& 13 - Derivatives Theory and Problems
17 Corporate Liquidation & Reorganization
18 FINALS
Learning Objectives
• Define a business combination.
• Explain briefly the accounting
requirements for a business
combination.
• Compute for goodwill.
A business combination is “a transaction or other event in which an
acquirer obtains control of one or more businesses.” (PFRS 3)
 Control
• An investor controls an investee when the investor is exposed, or
has rights, to variable returns from its involvement with the investee
and has the ability to affect those returns through its power over
the investee.

• Control is normally presumed to exist when the ownership interest

acquired in the voting rights of the acquiree is more than 50% (or
51% or more).

• Control may exist even if the acquirer holds less than 50% interest
in the voting rights of acquiree, such as in the following cases:
 Illustration of Control:
Which of the following do Jon Snow Trading (JST) have CONTROL of?

45%
51% 100% 40% ownership interest in TULLY,
interest in TYRELL, with an
ownership ownership with an agreement with
interest in interest in agreement that with FREY, who
STARK TARGARYEN JST control owns 10% of
appointment of
ordinary preference majority of the
TULLY, that FREY
shares to vote the
shares BOD of TYRELL
same way as
JST.
 Business
Integrated set
of activities and
assets capable
of providing
goods and
services or
generate
income.
Business combinations are accounted for
using the acquisition method. This method
requires the following:
1. Identifying the acquirer;
2. Determining the acquisition date; and
3. Recognizing and measuring goodwill.
 Identifying the acquirer
• The acquirer is the entity that obtains
control of the acquiree. The acquiree is
the business that the acquirer obtains
control of in a business combination.
• The acquirer is normally the entity that:
a. Transfers cash or other assets and incurs
liabilities;
b. Issues its equity interests (except in reverse
acquisitions);
c. Receives the largest portion of the voting
rights;
d. Has the ability to elect or appoint or to
remove a majority ;
e. Dominates the management of the
combined entity;
f. Significantly larger of the combining
entities;
g. Initiated the combination
Universal Robina Corp, founded by tycoon John
Gokongwei, said it was selling the rights to
manufacture and distribute Hunt’s products to
Century Pacific Food’s Corp, the maker of Century
Tuna and Argentina Corned Beef.

SM Investments Corp (SMIC).to take over 34.5%

percent stake in 2GO, for its first foray into the fast-
growing logistics business.
Determining the acquisition date
• The acquisition date is the date on which the
acquirer obtains control of the acquiree.
 Recognizing and measuring GOODWILL
COnsideration transferred xx
Non-controlling interest in the acquiree (NCI) xx
PREviously held equity interest in the acquiree xx
Total xx
Less: FAir value of net identifiable assets acquired (xx)
GOodwill / (Gain on a bargain purchase) xx
On acquisition date, the acquirer recognizes a resulting:
a. Goodwill as an asset.
b. Gain on a bargain purchase as gain in profit or loss.
 COnsideration transferred
• The consideration transferred in a
business combination is measured at
fair value.
• Examples of potential forms of
consideration include:
1. Cash,
2. Other assets,
3. A business or a subsidiary of the acquirer,
4. Contingent consideration,
5. Ordinary or preference equity instruments, options, warrants
and member interests of mutual entities.
 Acquisition-related costs
• Acquisition-related costs are costs the acquirer
incurs to effect a business combination.
• Acquisition-related costs are recognized as
expenses in the periods in which they are incurred,
except for the following:
a. Costs to issue debt securities measured at
amortized cost – included in the initial
measurement of the resulting financial liability.
b. Costs to issue equity securities – are accounted
for as deduction from share premium. If share
premium is insufficient, the issue costs are
deducted from retained earnings.
 Non-controlling interest (NCI)
• Non-controlling interest (NCI) is the equity in a
subsidiary not attributable, directly or indirectly, to a
parent.
• NCI is measured either at:
a. Fair value, or
b. The NCI’s proportionate share of the acquiree’s
identifiable net assets.
 Illustration of NCI:
How much is the NCI of JST’s partners?

51% ownership interest in STARK ordinary

shares

45% interest in TULLY, with an

agreement with an agreement with
FREY, who owns 10% of TULLY, that
FREY to vote the same way as JST.
PREviously held equity interest in the acquiree
Previously held equity interest in the acquiree pertains
to any interest held by the acquirer before the
business combination.
Net identifiable assets acquired
• On acquisition date, the acquirer shall recognize,
separately from goodwill, the identifiable assets
acquired, the liabilities assumed and any non-
controlling interest in the acquiree.
• Any unidentifiable asset of the acquiree (e.g., any
recorded goodwill by the acquiree) shall not be
recognized.
• The identifiable assets acquired and the liabilities
assumed are measured at their acquisition-date fair
values.
 Illustrative Problem
Entity A acquired all the assets and assumed all the liabilities of
Entity B for P1,800,000. Information on Entity B’s assets and liabilities
on the acquisition date are:
• How much is the
consideration transferred?
• How much is the NCI?

• How much is the

previously held equity
interest in the acquiree?
• How much is the FV of net
identifiable assets to be
acquired?
• How much is the goodwill
or bargain on purchase?
Questions?
 Self-Practice
Problem 6. Items 1-5; Pages 59-62
Per Individual : write name
Picture format
Handwritten with solutions

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