CONTIN ONS (Advanced Accounting 2) YA AO bo Mah oh SANE Gh) Ney s 08 Per WhACCOUNTING FOR BUSINESS COMBINATIONS (Advanced Accounting 2) 2020 Edition IN PHILIPPINE FINANCIAL REPORTING STANDARDS (PFRSs) in, Nation’s Foremost cee Review Inc. (NCPAR) 4F Pelizloy Cen mit Leer 1d, Baguio City 2600, Philippines Mobile Nui mber rete 8706962 a Like us Facebook Nation's Foremost CPARALL RIGHTS RESERVED 2020 No part of this work covered by the copyright hereon may be reproduced or used in any form or by any means - electronic or mechanical, including photocopying - without the written permission of the author. ISBN 978-621-8029-11-8 Any copy of this book not bearing the signature of the author shall be considered as proceeding froman illegal source. Perms eee Published and Distributed by: BANDOLIN ENTERPRISE (Publishing and Printing) #21 PARAMOUNT VILL., STO. TOMAS, BAGUIO CITY CONTACT NOS. SMART (0928) 374 7571; GLOBE (0817) 813 6037; AUTHOR: (0917) 870 6962 Fine: Facebook https:/www. facebook.com/bandolin.enterprisDear Reader, This book is intended for students taking up the CHED- required subject “Accounting for Business Combinations” (formerly Advanced Accounting 2). This book is based on current Philippine Financial Reporting Standards (PFRSs). It is a labor of love and it is dedicated to you, my reader. | have written this book with the following goals in mind: completeness, conciseness, simplicity, fun to learn and practical application. Complex accounting concepts are not eliminated simply because they are too difficult to comprehend but rather they are simplified to the highest possible extent. Your thoughts about this book are important to me. If later on you have queries, comments, or suggestions on how I can improve my work, I would be glad if you inform me. Here are my contact details: zeusvernonmillan@gmail.com and (0917) 870 6962. Good luck in your learning and best wishes in your journey through life......thank you for making mea part of it #© Sincerely, Zeus vernon B. MillanAcknowledgementy y sincere gratitude to my family and relatives for their support all throughout the writing of this book; to my wife Eureka, my son Devin Joshua, and my daughter ‘Athena for their sacrifices; to my Dad and Mom for the source of to my in-laws Engr. John L. Socalo, Sr. and Dominga d trust; to my sister Donna Pamela for the extra help; to my college instructors who have taught me most of the techniques I have incorporated in this book; to Mr. Darrell Joe Asuncion, Dean Renante D. Balocating, Mr. Rex B. Banggawan, Mr. Christopher U. Ismael, Mr. John Carlo G. Bandolin, and Mr. Einroul Aljohnza A. Bandolin for the much needed encouragement and support; to my fellow instructors at NCPAR; colleagues in the profession; previous clients; previous students; to the staff of the Bandolin Enterprise; and friends who in one way or another have contributed, directly or indirectly, to the completion of this book. I would like to extend m inspiration, §, Socalo* for the assistance an: BORE IP ID PD NSP About the Author The author is a 6" Placer in the October 2006 CPA board examinations. He is a co-founder of, and a CPA reviewer at, Nation's Foremost CPA Review Inc. (NCPAR), a teacher, and an entrepreneur.Tipy ow using thix book To get the most out of this book, I strongly suggest you do the following: 1. Re-solve the illustrations independently. After reading a chapter, re-solve the _ illustrations independently by covering the suggested solutions with a piece of paper. 2. Read and reread the chapter summaries Be sure to read the summary after reading each chapter. This will reinforce what you have just learned. It is also advisable to reread the chapter summaries from time to time to ensure that you are not forgetting the concepts you have learned as you learn additional concepts. Long-term memory is invaluable in passing the board exams (as well as making professional judgments in the exercise of the profession). However, the human memory is not without limit. The human brain tends to forget information as new information is learned. To avoid this, one will need to recall information previously learned repeatedly as many times as needed. Studies show that when one forgets information previously learned, he will need to spend the same effort in learning that information again! 3. Enjoy learning. Nothing is difficult if you have the passion in doing it.TABLE OF CONTENTS | CHAPTER 1 BUSINESS COMBINATIONS (PART 1).... BUSINESS COMBINATION. | ACCOUNTING FOR BUSINESS COMBINATIO! | Identifying the acquirer i Determining the acquisition date. Recognizing and measuring goodwill .. Consideration transferred... Acquisition-related costs. Non-controlling interes Previously held equity interest in the acquiree...... Net identifiable assets acquired RESTRUCTURING PROVISIONS .... ‘SPECIFIC RECOGNITION PRINCIPLES 1. Operating leases...... 2. Intangible assets... EXCEPTION TO THE RECOGNITION PRINCIPLE — CONTINGENT LIABILITIES EXCEPTIONS TO BOTH THE RECOGNITION AND MEASUREMENT PRINCIPLES ... 34 Additional concepts on Consideration transferred....... EXCEPTIONS TO THE MEASUREMENT PRINCIPLE CHAPTER 1: SUMMARY... RELEVANT PROVISIONS OF THE PFRS FOR SMES . Business combination... Accounting... Identifying the acquirer Cost of a business combination ........ Allocating the cost of a business combination Provisional amounts... Goodwill and Negative goodwill PROBLEMSvii CHAPTER 2 BUSINESS COMBINATIONS (PART 2)..... 64 SHARE-FOR-SHARE EXCHANGES 64 68 BUSINESS COMBINATION ACHIEVED IN STAGES . BUSINESS COMBINATION WITHOUT TRANSFER OF CONSIDERATION MEASUREMENT PERIOD .. DETERMINING WHAT IS PART OF THE BUSINESS COMBINATION N-TRANSACTION 78 Reacquired rights....... Settlement of pre- existing palationships ‘SUBSEQUENT MEASUREMENT AND ACCOUNTING Contingent liabilities... Contingent consideration CHAPTER 2: SUMMAR) PROBLEMS: .. CHAPTER 3 BUSINESS COMBINATIONS (PART 3)... SPECIAL ACCOUNTING TOPICS FOR BUSINESS COMBINATION Methods of estimating goodwill REVERSE ACQUISITIONS CHAPTER 3: SUMMARY PROBLEMS: CHAPTER 4 CONSOLIDATED FINANCIAL STATEMENTS (PART 1).........129 Administrative right Unilateral rights Protective rights Substantive rights Voting rights...Potential voting rights... wo 137 Substantive removal and other rights held by other partiesi3g Exposure or rights to variable returns... Ability to use power to affect investor's return: ACCOUNTING REQUIREMENTS . Reporting dates... Uniform accounting policies Consolidation perio Measurement... Income and expenses. Investment in subsidiary .. NON-CONTROLLING INTERESTS (NCI) . PREPARING THE CONSOLIDATED FINANCIAL STATEMENTS. CONSOLIDATION AT DATE OF ACQUISITION ..... CONSOLIDATION SUBSEQUENT TO DATE OF ACQUISITION . Step 1: Analysis of subsidiary’s net asset: Step 2: Goodwill computation... Step 3: Non-controlling interest in net assets ‘Step 4: Consolidated retained earnings.. Step 5: Consolidated profit or loss. SUBSIDIARY’S CUMULATIVE PREFERENCE SHARES . CHAPTER 4: SUMMARY RELEVANT PROVISIONS OF THE PFRS FOR SMES Consolidation procedures. intragroup balances and transactions .. Uniform reporting date. Uniform accounting policies Acquisition and disposal of subsidiarie: PROBLEMS: CHAPTER 5 CONSOLIDATED FINANCIAL STATEMENTS (PART 2)... INTERCOMPANY TRANSACTIONS. intercompany sale of invento intercompany sale of property, plant and equipment intercompany dividends...Intercompany bond transaction CHAPTER S: SUMMARY... PROBLEMS:.. CHAPTER 6 CONSOLIDATED FINANCIAL STATEMENTS (PART 3) IMPAIRMENT OF GOODWILL. INTERCOMPANY ITEMS IN-TRANSIT AND RESTATEMENTS . CHANGES IN OWNERSHIP INTEREST NOT RESULTING TO LOSS OF CONTROL . 258 LOSS OF CONTROL... Derecognition of other comprehensive incom Sale of a subsidiary to an associate or joint venture IMPORTANCE OF CONSOLIDATION THEORIES OF CONSOLIDATION . Historical background... Advantages and disadvantages of the entity theory ADDITIONAL ILLUSTRATIONS: CONSOLIDATION OF A REVERSE ACQUISITION SPECIAL PURPOSE ENTITIES... CHAPTER 6: SUMMARY PROBLEMS: CHAPTER 7 CONSOLIDATED FINANCIAL STATEMENTS (PART 4).........318 INVESTMENT IN SUBSIDIARY MEASURED AT OTHER THAN COST.. COMPLEX GROUP STRUCTURES Identifying the acquisition date Consolidation of a vertical group.. Consolidation of a D-shaped (mixed) group. Complex group structure with Associate... PUSH-DOWN ACCOUNTING. CHAPTER 7: SUMMARY .. PROBLEMS: .CHAPTER 8 SEPARATE FINANCIAL STATEMENTS .... PREPARATION OF SEPARATE FINANCIAL STATEMENTS 372 COST METHOD... FAIR VALUE METHOD .. 372 Equity METHOD 373 DIVIDENDS... 373 RELEVANT PROVISIONS OF THE PFRS FOR SMES .. 375 SECTION 9 CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS 375 Separate financial statements... Accounting policy election... Combined financial statement: PROBLEM: CHAPTER 9 FINANCIAL REPORTING IN HYPERINFLATIONARY ECONOMIES... 381 PRICE LEVEL CHANGES AND PURCHASING POWER... HYPERINFLATION... IDENTIFVING HYPERINFLATION .. Indicators of hyperinflation .. CORE PRINCIPLE .. RESTATEMENT OF FINANCIAL STATEMENTS ..... HISTORICAL COST (NOMINAL COST) TO CONSTANT PESO . Non-monetary items carried at cost. Non-monetary items carried at other than cost Non-monetary items carried at NRV or Fair valu Revalued non-monetary items Impairment after restatement Investment in associate Borrowing COStS wees Index-linked assets and liabilities Assets acquired through issuance of noninterest-bearing liabilities... First period application of PAS 2! Statement of profit of loss and other comprehensive income3% asFormula for restatement ......... Gain or loss on net monetary position Statement of cash flows Corresponding figures. Summary of restatement procedures — Historical to Constant peso.. CURRENT COST ACCOUNTING ... CURRENT COST To CONSTANT PESO TAXES «0.0... DEFERRED TAXES CONSOLIDATED FINANCIAL STATEMENTS DIFFERENT ENDS OF REPORTING PERIODS ECONOMIES CEASING TO BE HYPERINFLATIONARY CHAPTER 9: SUMMARY... PROBLEMS. CHAPTER 10 THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES TWO WAYS OF CONDUCTING FOREIGN ACTIVITIES essssoses FUNCTIONAL CURRENCY .. FOREIGN CURRENCY TRANSACTIONS Initial Recognition .. Spot exchange rate vs. Closing rat Direct vs. Indirect quotation Exchange Differences. Items measured at other than historical cost....... Several exchange rates. Exchange differences recognized in OCI. Translation of Financial Statements. FOREIGN OPERATION... Net investment in a foreign operation Disposal or partial disposal of a foreign operation. ‘TRANSLATION PROCEDURES — HYPERINFLATIONARY ECONOMY CHAPTER 10: SUMMARY...» RELEVANT PROVISIONS OF THE PFRS FOR SMES: SECTION 30 FOREIGN CURRENCY TRANSLATION. ,..xii ee Two ways of conducting foreign activities... S18 Functional currency ... 518 Factors in determining: functional currency 518 Reporting foreign currency transactions in the fu netional currency... Initial recognition.. Reporting at the end of the subsequent reporting periods . Net investment ina foreign operation Change in functional currency..... Use of a presentation currency other than the functional currency... Translation to the presentation currency. PROBLEMS: ssssssssssseesevee CHAPTER 11 ACCOUNTING FOR DERIVATIVES AND HEDGING TRANSACTIONS (PART 1).... _ 53! PURPOSE OF DERIVATIVES. RISKS ... DEFINITION OF A DERIVATIVE... COMMON TYPES OF DERIVATIVE [MEASUREMENT OF DERIVATIVES. INO HEDGING DESIGNATION... HEDGING... HEDGING INSTRUMENT HEDGED ITEMS .. HEDGE ACCOUNTING HEDGING RELATIONSHIPS Fair value hedges Cash flow hedges Hedges of a net investment in a foreign operation CuapTER 11: SUMMARY... RELEVANT PROVISIONS OF THE PFRS FOR SMES .... SECTION 12 OTHER FINANCIAL INSTRUMENTS ISSUES Difference in scopes of Sections 11 and 12. Scope of Section 12. Initial recognition of financial assets and liabilitiesxiii Initial measurement... Subsequent measurement Hedge accounting PROBLEMS: CHAPTER 12 ACCOUNTING FOR DERIVATIVES AND HEDGING TRANSACTIONS (PART 2).. ACCOUNTING FOR FORWARD CONTRACTS.... illustration 1: Fair value hedge of a recognized asset . Illustration 2: No hedging designation (Held for speculation). 579 illustration 3: Fair value hedge of a recognized liability 581 Illustration 4: No hedging designation (Held for speculation). 584 FAIR VALUE HEDGE OF AN UNRECOGNIZED FIRM COMMITMENT. 585 Illustration 5: Fair value hedge of a firm sale commitment ....585 Illustration 6: Fair value hedge of a firm purchase commitment Illustration 7: FV hedge - firm purchase commitment (Present value)... 593 Example of formal hedge designation documentation — Fair Value hedge .......s.sssessseear ore insaanceneein OMe Illustration 8: FV hedge - firm purchase commitment (Present value) ... 597 FAIR VALUE HEDGE VS. CASH FLOW HEDG! FIRM COMMITMENT VS. FORECAST TRANSACTION ... CHOICE TO DESIGNATE AS EITHER FAIR VALUE HEDGE OR CASH FLOW HEDGE sussequent ACCOUNTING FOR ACCUMULATED Doc! IN CASH FLOW HEDGE6O2 illustration 9: Cash flow hedge — forecasted purchase transaction J Illustration 10: Cash flow hedge of a forecasted sale transaction — Present value (Indirect quotation) 608 Iustration 11: CF hedge of a recognized liability — Present value 610 + 601 PROBLEM:CHAPTER 13 ACCOUNTING FOR DERIVATIVES AND HEDGING TRANSACTIONS (PART 3)..... ACCOUNTING FOR FUTURES CONTRACT... Illustration 1: No hedging designatiot Illustration 2: FV hedge of a recognized asset measured at fair 629 value... illustration 3: FV hedge of a recognized asset measured at LOCON.. Ulustration 4: Fair value hedge of a firm sale commitment ....633 CASH FLOW HEDGE — SPECIFIC ACCOUNTING.. Illustration 5: CF hedge — Assessment of Hedge effectiveness637 ACCOUNTING FOR OPTIONS «ssssesssessessesssserssesrsnsssererssesenietecessecessesseness 642 Illustration 1: Fair value hedge of a recognized asset — ~Put option. Illustration 2: No hedging designation ~ Call option .. Ilustration 3: CF hedge - forecasted transaction (Indirect quotation)... ACCOUNTING FOR SWAPS... Illustration 1: CF hedge - variable-rate debt (Payment at maturity)... Illustration arene +650 : CF hedge - variable-rate debt (Periodic payments) 653 657 658 664 FAIR VALUE HEDGE — HEDGED ITEM IS MEASURED AT AMORTIZED CO! Illustration 3: Fair value hedge of a fixed-rate debt PROBLEMS... CHAPTER 14 ACCOUNTING FOR DERIVATIVES AND HEDGING TRANSACTIONS (PART 4)... 2675 ACCOUNTING FOR NET INVESTMENT HEDGES .... 675, Illustration: Hedge of a net investment in foreign operation..675 Case#1: No hedging instrument ... 676 Case #2: With hedging instrument 679 EMBEDDED DERIVATIVES ... 681 Hybrid contracts with financial asset hosts , 682XV Separation of embedded derivative from host contract... Inability to measure fair value of embedded derivativ ADDITIONAL ILLUSTRATIONS: CHAPTER 14: Summary ..Business Combinations (Part 1) 1 Chapter 1 Business Combinations (Part 1) Related standards: PERS 3 Business Combinations Section 19 of the PFRS for SMEs Overview on the topic Our discussion on business combination is subdivided into the following chapters: Chapter Title Coverage 1 Business Combinations (Part 1) Recognition & measurement 2 Business Combinations (Part 2) Specific cases 3 Business Combinations (Part 3) Special accounting topics Learning Objectives L._ Define a business combination. 2. Explain briefly the accounting requirements for a business combination. 3. Compute for goodwill. Introduction A business combination occurs when one company acquires another or when two or more companies merge into one. After the combination, one company gains control over the other. The company that obtains control over the other is referred to as the parent or acquirer. The other company that is controlled is the subsidiary or acquiree. Business combinations are carried out either through: 1. Asset acquisition; or 2. Stock acquisitionChapter | > Asset acquisition - the acquirer purchases the assets assumes the liabilities of the acquiree in exchange for cast other non-cash consideration (which may be the acquire own shares). After the acquisition, the acquired normally ceases to exist as a separate legal or accou entity. The acquirer records the assets acquired and liabiliti assumed in the business combination in its books of accour Under the Corporation Code of the Philippines, business combination effected through asset acquisition may be either: a. Merger - occurs when two or more companies merge into a single entity which shall be one of the combining companies. For example: A Co. + BCo. =A Co. or B Co. b. Consolidation - occurs when two or more companies consolidate into a single entity which shall be the consolidated company. For example: A Co. + B Co. = C Co. Stock acquisition - instead of acquiring the assets and assuming the liabilities of the acquiree, the acquirer obtains control over the acquiree by acquiring a majority ownership interest (e.g, more than 50%) in the voting rights of the acquiree. In a stock acquisition, the acquirer is known as the parent while the acquiree is known as the subsidiary. After the business combination, the parent and the subsidiary retain their separate legal existence. However, for financial reporting purposes, both the parent and the subsidiary are viewed as a single reporting entity. After the business combination, the parent and subsidiary continue to maintain their own separate accounting books, recording separately their assets, liabilities and the transactions they enter into. The parent records the ownership interest acquired as “investment in subsidiary” in its separate accounting books. However, the investment is eliminated when the group Prepares consolidated financial statements.Business Combinations (Part 1) 3 A business combination may also be described as: 1 Horizontal combination — a business combination of two or more entities with similar businesses, e.g., a bank acquires another bank. Vertical combination — a business combination of two or more entities operating at different levels in a marketing chain, eg., a manufacturer acquires its supplier of raw materials. Conglomerate — a business combination of two or more entities with dissimilar businesses, e.g., a real estate developer acquires a bank. Advantages of a business combination a. iti, Competition is eliminated or lessened — competition between the combining constituents with similar businesses is eliminated while the threat of competition from other market participants is lessened. Synergy — synergy occurs when the collaboration of two or more entities results to greater productivity than the sum of the productivity of each constituent working independently. Synergy is most commonly described as “the whole is greater than the sum of its parts.” It can be simplified by the expression “I plus 1=3.” Increased business opportunities and earnings potential — business opportunity and earnings potential may be increased through: an increased variety of products or services available and a decreased dependency on limited number of products and services; widened dispersion of products or services and better access to new markets; access to either of the acquirer's or acquiree’s technological know-hows, research and development, secret processes, and other information;4 Chapter 1 iv. increased investment opportunities due to increased capital; or Vv. appreciation in worth due to an established trade name by either one of the combining constituents. d. Reduction of operating costs - operating costs of the combined entity may be reduced. i, Under a horizontal combination, operating costs may be reduced by the elimination of unnecessary duplication of costs (e.g., cost of information systems, registration and licenses, some employee benefits and costs of outsourced services). ii, Under a vertical combination, operating costs may be reduced by the elimination of costs of negotiation and coordination between the companies and mark-ups on purchases. e. Combinations utilize economies of scale - economies of scale refer to the increase in productive efficiency resulting from the increase in the scale of production. An entity that achieves economies of scale decreases its average cost per unit as production is increased because fixed costs are allocated over an increased number of units produced. f. Cost savings on business expansion - by acquiring another company rather that creating a new one, an entity can save on start-up costs, research and development costs, cost of regulation and licenses, and other similar costs. Moreover, a business combination may be effected through exchange of equity instruments rather than the transfer of cash or other Fesources. g- Favorable tax implications - deferred tax assets may be transferred in a business combination. Also, business combinations effected without transfers of considerations may not be subjected to taxation.w Business Combinations (Part 1) Disadvantages of a business combination a. Business combination brings monopoly in the market which may have a negative impact to the society. This could result to impediment to healthy competition between market participants. b. The identity of one or both of the combining constituents may cease, leading to loss of sense of identity for existing employees and loss of goodwill. c. Management of the combined entity may become difficult due to incompatible internal cultures, systems, and policies. d. Business combination may result in overcapitalization, which, in turn, may result to diffusion in market price per share and attractiveness of the combined entity’s equity instruments to potential investors. e. The combined entity may be subjected to stricter regulation and scrutiny by the government, most especially if the business combination poses threat to consumers’ interests. Business combinations are accounted for under PFRS 3 Business Combinations. Business Combination A business combination is “a transaction or other event in which an acquirer obtains control of one or more businesses.” Transactions referred to as ‘true mergers’ or ‘mergers of equals’ are also business combinations under PFRS 3. (prrs3.Appendix 4) Essential elements in the definition of a business combination 1. Control 2, Business Control An investor controls an investee when the investor has the power to direct the investee’s relevant activities (i.e., operating and financing policies), thereby affecting the variability of the investor's investment returns from the investee.ae __ Chapter 1 Control is normally presumed to exist when the acquire; holds more than 50% (or 51% or more) interest in the acquiree’, voting rights. However, this is only a presumption because can be obtained in some other ways, such as when: a. the acquirer has the power to appoint or remove of the board of directors of the acquiree; or contro] the majority b. the acquirer has the power to cast the Majority of votes at board meetings or equivalent bodies within the acquiree; or c. the acquirer has power over more than half of the voting Tights of the acquiree because of an agreement with other investors; or d. the acquirer controls the acquiree’s operating and financial policies because of a law or an agreement. An acquirer ma of ways, for example: by transferring cash or other assets; by incurring liabilities; by issuing equity interests; - . by providing more than one type of consideration; or without transferring consideration, including by contract alone. y obtain control of an acquiree in a variety pao Illustration: Determining the existence of control Example #1 ABC Co. acquires 51% ownership interest in XYZ, Inc's ordinary shares. Analysis: ABC is presumed to have obtained control over XYZ because of the ownership interest acquired in the voting rights of XYZis more than 50%. Example #2 | ABC Co. acquires 100% of XYZ, Inc.’s preference shares.Business Combinations (Part 1) a Analysis: ABC does not obtain control over XYZ because preference shares do not give the holder voting rights over the financial and operating policies of the investee. Example #3 ABC Co. acquires 40% ownership interest in XYZ, Inc. There is an agreement with the shareholders of XYZ that ABC will control the appointment of the majority of the board of directors of XYZ. Analysis: ABC has control over XYZ because, even though the ownership interest is only 40%, ABC has the power to appoint the majority of the board of directors of XYZ. Example t4 ABC Co. acquires 45% ownership interest in XYZ, Inc. ABC has an agreement with EFG Co., which owns 10% of XYZ, whereby EFG will always vote in the same way as ABC. Analysis: ABC has control over XYZ because it controls more than 50% of the voting rights over XYZ (Le, 45% plus 10%, per agreement with EFG). Example #5 ABC Co. acquires 50% of XYZ, Inc.’s voting shares. The board of directors of XYZ consists of 8 members. ABC appoints 4 of them and XYZ appoints the other 4. When there are deadlocks in casting votes at meetings, the decision always lies with the directors appointed by ABC. Analysis: ABC has control over XYZ because it controls more than 50% of the voting rights over XYZ in the event there is no majority decision.Chapter | Business Business is “an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing goods or services to customers, generating investment income (such as dividends or interest) or generating other income from ordinary activities.” (PERS 3.Appendix A) A business has the following three elements: 1. Input - any economic resource that results to an output when one or more processes are applied to it, e.g, nom-current assets, intellectual property, the ability to obtain access to necessary materials or rights and employees. 2. Process - any system, standard, protocol, convention or rule that when applied to an input, creates an output, e.g., strategic management processes, operational processes and. resource management processes. Administrative systems, e.g, accounting, billing, payroll, and the like, are not processes used to create outputs. 3. Output — the result of 1 and 2 above that provides goods or services to customers, investment income or other income from ordinary activities. Identifying a business combination An entity determines whether a transaction is a business combination in relation to the definition provided under PFRS 3. If the assets acquired (and related liabilities assumed) do not constitute a business, the entity accounts for the transaction as a regular asset acquisition and not a business combination. Accordingly, the entity applies other applicable Standards (e.g., PAS 2 for inventories acquired, PAS 16 for PPE acquired, etc.) Accounting for business combination Business combinations are accounted for using the acquisition method. This method requires the following: a. Identifying the acquirer;