BUSINESS COMBINATION ~ STATUTORY MERGER and STATUTORY CONSOLIDATION 4 The amount of goodwill on Acquisition will be recomputed as follows: Consideration transfered: ‘Common shares: 25,000 shares x P25. P 625,000 Notes payable... 150,000 Contingent consideration (cosh contingency): P100,000 x 30% probability .... : 30,000 Contingent consideration stock contingency) . —15,000 Total... P 820,000 Less: Fair valve of identifiable oxtels acquired and ‘abilities assumed (ster to llustrative Problem 14-1) .. 720,000 Positive Excess - Goodwill... piseestensatt ee P.100,000 The journal entries by Peter Corporation to record the Acquisition are as follows: ve 20,000 Receivables -net .. 40,000 Inventories 60,000 Lond 200,000 Buildings —net. 300,000 Equipment-net....... 250,000 in-process research and ‘evelopment. 50,000 Goodwill... a 100,000 | ‘Accounts payable 60.000 Other abilities . 140,000 Notes payable ..... 5 150,000 Estimated Liability for Contingent Consideration 30,000 Pain capital for Contingent Consideration . 15,000 Common stock (P10 par x 25,000 shares) ........ 250,000 | ‘Additional paid-in capital (P25 - P10) x 25,000 shares) . 375,000 | Acquisition of Saul Company. J On January 1, 20x7, the target is met or contingent event happens, i.e., average post- Combination eamings over the next two years amounted to P410,000. Thus, Peter Corporation will make the following entry for the issuance of 1,000 additional shares: Paidsin capital for Contingent Consideration .............. 18000 Common stock (P10 par x 1,000 shares) .......sssesvere 10,000 Paidiin capital in excess of por... sees. 5000 | Settlement of contingent consideration. In case, that there was failure of meeting the contingent event, then, the account “Paid-in capital for Contingent Consideration” will be closed to account, “Paid-in capital from not meeting the contingent event” Illustration 1-8: Stock Contingency based on Future Performance -Earnings Assuming the same information in Illustration 1-2, in addition to the stock issue, Peter Corporation agreed to issue 5,000 additional shares if the average income during the two (2) year period of 20x5-20x6 exceeded P80,000 per year. Thus, the above transaction requires the same entry with Illustration 1-2 on December 31 20x4. Prior to the termination of the contingency, it would be described in a footnote. On January 1, 20x7, the average income amounted to P110,000 (the contingent event Occurs). Thus, the entry record the occurrence of such event to reassign the P625,000CHAPTER r a2 original consideration to 30,000 shares (25,000 original shares issued + 5,000 Odcition,, shares due to contingency] ‘would be: ’ 50,000 Paidin capital in excess of par ao ‘Common stock (P10 par x 5,000 shares) . Settlement of contingent consideration. Mustration 1-9; Stock Contingency based on Future Stock Prices ion i ion 1-2, in addition to the stock issve, Pete re ea ode if two years later, the fair valve o ‘Assuming the same infor Corporation agreed to issue 5,000 additional shares acquirer fell below P25 per share. Thus, the above transaction requires the same entry wil 0x4. Prior to the termination of the contingency, it woul ens and the stock had a fair value f such event to reassign the P625,00) d + 5,000 additiong ith Illustration 1-2 on December 3}, id be described in a footnote, On January 1, 20x7, the contingent event happ* below P25. Thus, the entry record the occurrence Of i original consideration to 30,000 shares (25,000 original shares issue shares due to contingency) would be: Poidtin capital in excess of par Common stock (P10 par x 5,000 shares) Settlement of contingent consideration. 50,000 50,000 Illustration 1-10: Stock Contingency based on Future Performance -Earnings Assuming the same information in illustration 1-2, in addition to the stock issue, Peter Corporation agreed to issue additional shares on January 1, 20x7, equal in value to twice the amount by which average annual earnings of the Saul Corporation exceed 25,000 per year, prior to January 1, 20x7. Net income wass P65,000 in 20x5 and P70,000 in 20x6. Thus, the above transaction requires the same entry with Illustration 1-2 on December 31, 20x4. Prior to the termination of the contingency, it would-be described in a footnote. On January 1, 20x7, the contingent event happens since the average annual earnings for 20x5 and P20xé is in excess of P25,000 and stock had a fair value P20 per share. Thus, the Fe ae rd of such event to reassign the P625,000 original consideration to 29,450 shares (25,000 original shares issued + 4,250* iti due to contingency) would be: Sof ce atc bald Paidin capitalin excess of par ........ | Common stock (P10 par 4.250 shares). {_ Settlement of contingent consideration. “(55000 + P70,000)/2 - P25,000} x 23/ P20 42,500 42,500 Mlustration 1-11: Stock Contingency based on Future Stock Prices Assumin, i fion ir Caporaion es uel in Mlustration 1-2,:in ddition to the stock issue. Pete! any dint sue additional shares on January 1, 20x7, to compensate for be ocuns ena fe common stock below P25 Per share, The settlement would 12007. the nen 'Y By Issuing added shares based on their fair value on Janualy Price of the shares on January 1, 20x7, was P20. “Advanced Foam —— Advanced Pan eso =A Conrohenva Gongs PancgyBUSINESS COMBINATION - STATUTORY MERGER and STATUTORY CONSOLIDATION a es ie oe Rhenere requires the same entry with Illustration 1-2 on December 31 mm Mee 4 pala sdae! of the contingency, it would be described in a footnote. ae aR Hi , the contingent event happens since the fair value per share fall ord sear eo ite occurrence of such event to reassign the P625,000 ,250 shares (25,000 origi is * additi Oe is © CORNER VIDOR ES: ( iginal shares issued + 6,250* additional Paid-in capital in excess of par . Common stock (P10 par x 6,2: Settlement of contingent consideration. "Deficiency: (P25 - P20) x 25,000 shares issued fo acquire. Divide by fair value per share on Jani 1, 20x7. Added number of shares to issue... oa IWustration 1-12: Stock Contingency with Present Value based on Future Stock Prices Assuming, the same information in illustration 1-2, in addition to the stock issue, Peter Corporation agreed to issue sufficient shares of Peter Corporation common stock to ensure a total value of P625,000 if the fair value per share is less than P25 on December 31, 20x5. Peter estimates that there is 62,500 62,500 a 40-percent probability that the 25,000 shares issued will have a market value of P425,000 on December 31, 20x5, and a 60-percent probability that the market value of the 25,000 shores will exceed P625,000. Peter uses an interest rate of 4 percent to incorporate the time value of money. The amount of goodwill on acquisition will be recomputed as follows: Consideration transferred; ‘Common shares: 25,000 shares x P25 P 625,000 Notes payable . 150,000 Contingent consideration (stock contingenc {(P625,000 ~ P425,000) x 40% probably (1/{! + .04)*) 16923 Total. . ceccecnecececcececerseseennn’ e P 851,923, Less: Fair value of identifiable assets acquited and ables assumed (refer tollustrafive Problem 1-2) . 720.000 Positive Excess - Goodwill... -.--szssenennete . 131.923 «present value of PT @ 4% for one The journal entries by Peter Corporation to record the acquisition are as follows: Cash, .-s-++ 2900 Receivables - net oo Inventories . oro Lond .....+- aa Buildings - net. 250.000 Equipment - net "50,000 paar ae 13198 ay ‘Accounts payable 140,000 Other liabilities . . teooo Notes payable ------+-+"* mB pein copital for Contingent Consideration - pas Common stock (P10 par x 25,000 shares) . -- Paid:in capital in excess of Por 375,000 25,000 shares} .---92-50 eee [(P25- P10) x |_scquiion af Saul Company,os a CHAPTER, 31, 20x5, the contingent event occurs, wherein Peter's stock price ae Ge thus requiring Peter tc issue additional shares of stock to the former = of Saul Corporation. The entry for Peter Corporation on December 31, 20x5 to fecorg such occurrence to reassign the P625,000 original consideration to 31,250 shares (2509) original shares issued + 6,250* additional shares due to contingency) would be: Paid-in capital for Contingent Consideration.........++++ 76,923 ‘Common stock, P10 par.....+.. . Poid-in capital in excess of par... Settlement of confingent consideration. *Deficienty: (P25 - P20) x 25,000 shores issued fo acquire.P125,000 Divide by fair value per share on December 31, 20x5......P_20 80 ‘Added number of shores fo issve.. In lilustration 1-8 to Iilustration 1-13, it should be observed that if the Contingery consideration is in the form of equity, the acquirer does not remeasure the fair value o the contingency at each reporting date until the contingency is resolved. Illustration 1-13: Contingency Based on Outcome of a Lawsuit Assume that Poor Corporation acquires Standard Corporation on December 31, 20x4 for cash plus contingent consideration depending on the assessment of a lawsuit against Standard Corporation assumed by Poor Corporation. 62.500 14,423 The initial provisional assessment includes an estimated liability for the lawsuit of P50,000, an estimated liability for contingent consideration to the shareholders of P5,000, and goodwill of P64,000. The acquisition contract specifies the following conditions: * So long as the lawsuit is settled for less than P100,000, Standard Corporation shareholders will receive some additional consideration. If the lawsuit results ino settlement of P100,000 or more, then Standard Corporation shareholders wil receive no additional consideration; and «If the settlement is resolved with a smaller (larger) outlay than anticipated (P50,000), the shareholders of Standard Corporation will receive additiond (reduced) consideration accordingly, thus adjusting the contingent liabiity above or below P5,000. On September 1, 20x5, new information reveals: The estimated liability for the lawsuit to be P55,000, and * The estimated liability for contingent consideration to the shareholdes amounted to P4,500. The entry by Poor Corporation on September 1, 20x5 that completed the int recording of the business combination would be: Good. cceeecsees Estimated Liability for Contingent Consideration . Estimated Liability for Lawsuit Adjustment to goodwill due to meas The adjustments affect goodwill because the new information was: a. Obtained during the measurement period (seven months later), and b. Related to circumstances that existed on the acquisition date. 5,000 ee a Advanced Financial Accounting ~ A Comprehensive: Conceptual & Procedural ApproochBUSINESS COMBINATION ~ STATUTORY MERGER and STATUTORY CONSOLIDATION as Illustration 1-14: Bargain Purchase Gain The trial balance below presents the financial position of Sierra Company on January 1 0x4: a Merchandise inventory... # PI. Ta a Accounts receivable. gop.900 Copyrights . siemegvenenan, ‘150000 | Equipment | vecevettteseesvevevseseveseee 1,200,000 Accumulated depreciation... = ; P 150000 ‘Accounts payable .. 250,000 Loan payable . . . reun mexs: . 100,000 | Preferred stock, - 48,000 fully poid shares, PIO por... 480,000 Common stock - 100,000 fully paid shares, P15 par... 1 500,000 Retained COMINGS... eeeeeseeseeeeseee, ‘eon000 Totals. dieses —P92600000 _p3.2800000 Sieta Company included in the notes to its accounts a contingent liability to a guarantee for a loan. Although a present obiigation existed, a liability was not recognized by Sierra Company because of the difficulty of measuring the ultimate amount to be paid. On this date, the business of Siera Company is acquired by Parrot Company with Sierra Company going into liquidation. The terms of the acquisition are as follows: a. Parrot Company is to take over the assets and assumed the liabilities of Sierra Company. Parrot pays P1,500,000 in cash to the previous shareholders of Sierra Corporation. Parrot Company issued 100,000 common shares at P10 par with a fair value of P12. Costs of liquidation of P10,000 are to be paid by Sierra Company with funds supplied by Parrot Company. Supply of a patent relating to the manufacturing business of Parrot Company. This has a fair value of P200,000 but has not been recognized in the records of Parrot Company because it resulted from an internally generated research project. The contingent liability relating to the guarantee was considered to have a fair value of P10,000. Parrot Company was obligated to pay an additional P12,000 to the vendors of Sierra Company is Siera Company maintained existing profitability over the subsequent two years from January 1, 20x (i.e., January 1, 20x4 to December 31 20x5). It was highly likely that Sierra Company would achieve this expectation and the fair value of the contingent consideration was assessed at its expected value of P12,000. Parrot Company assesses the fair values of the identifiable assets and liabilities of Sierra Company to be as follows: os a © ae [Merchandise inventory ......--+ : : 1.200.000 Accounts receivable aoe zane Copyrights — : py Equipment .. : oe I ___ 250,000 ACCOUntS POyODIe ss ssssesessssesessees ‘Advanced Financial Accounting ~ A Comprehensive: Conceptual & Procedural ApproachCHAPTER 46 computation of bargain purchase gain is as follows: acai ss ~ [ee » soon ‘Common shares: 100,000 shares x P12 1,200,000 Costs of iquidation : joa Patent......- ,000 | | Contingent consideration (P10,000 guarantee + P12,000 to vendors) . 7 — 22.000 Total... = 2,932,000 Less: Fair valve of identifiable assets acquired ant liabilities assumed: Merchandise inventory — P1,200,000 | Accounts receivable ... 750,000 | Copyrights . 200,000 | Equipment... 1.150,000 ‘Accounts payabl (_ 250,000) Loon payable... i -2.250,000 Negative Excess - Bargain Purchase Gain. 5 P{_18,000} The journal entries by Parrot Corporation to record the acquisition are as follows: Merchandise inventory = 1,200,000 | ‘Accounts receivable . 750,000 Copyrights... 200,000 | | Equipment...» 1.150,000 ‘Accounts payable .. 250,000 Loan payable 100,000 Cosh... — : 1,510,000 Common stock (P10 par x 100,000 shares) . 1,000,000 Paid. capital in excess of par | {(P12 P10) x 100,000 shores} . : 200,000 Gain on sale of patents... 200,000 Estimated liabilty for contingent consideration 22,000 Bargain purchase gain... 18,000 Acquisition of Sierra Company On November 1, 20x4, the additional payment to vendors of Sierra Company wos reassessed at P18,000 based on the improved information, the estimated liability should be adjusted and since it is stil within the measurement period, bargain purchase gain (otherwise it should be charged to ‘another nominal account which is, in this case i should be “loss on estimated contingent consideration") should also be adjusted accordingly, the entry would be: 6,000 Bargain purchase gain 7a Esjimated labilty for contingent consideration |__ Adjustment fo gain due fo measurement date. 6,000 Therefore, the bargain purchase gain to be recognized retroactively as of the date of acquisition which is January 1, 20x4 amounted to P12,000 (P18,000 - 6,000). illustration 1-15: Comprehensive Problem - Consideration transferred versus Assets acquired and Liabilities assumed. Paretto Company is seeking to expand its share of the market and has negotiated 0 take over the operations of Santa Company on January 1, 20x4, The balance sheets 0! the two companies on December 31, 20x3 were as follows: = = aaBUSINESS COMBINATION - STATUTORY MERGER and STATUTORY CONSOLIDATION a Paretio Co. _ Santa Co. Cash. P 523.000 12,000 Accounts receivable be. 25,000 34,700 35,500 27,600 . 140,000 100,000 seneedeceee 60,000 30,000 65,000 46,000 10,000 - — 25,000 __2,000 Pa83,500 252.300 Accounts payable . 56,000 —-P 43,500 Mortgage loan . 50,000 40,000 Bonds payable . 100,000 50,000 Common stock, 60,000 shores otPl Por. 600,000 s ‘Common stock, 8,000 shares at P7.50 par . - 60,000 Poid-n capital in excess of por . 28,500 26,800 Retained eamings Pareto Company is to acquire alll the assets, except cash, of Santa Company. The assets of Santa Company are all recorded at fair value except: Fair valve Inventory . P 39,000 Lond 130,000 Buildings yi anenwers singe veaney mane hee Ca 70,000 Pont and equipment...............s.. : pees $5,000. In exchange, Paretto Company's terms of acquisition are as follows: «Cash of P40,000, half to be paid on the date of acquisition and half on December 31, 20x4, Paretto Company has an acquisitions department, which incured running costs over the period of completing the business combination amounted to P12,000. © Paretto Company is to provide Santa Company with sufficient cash, additional to that already held, to enable Santa Company to repay all of its outstanding debts. The outstanding bond are to be redeemed at a fair value of P102 per P100 bond (or at a 2% premium). Annual leave entitlement of P14,000 outstanding as of January 1, 20x4 and expected liquidation costs of P16,000 have not been recognized by Santa Company. Costs to transport and install Santa Company's assets at Paretto Company's premises will be 10,000. An investigation by the liquidator of Santa Company reveals that on January 1, 20x4 the following debts were outstanding but had not been recorded: Accounts payable..... P 1,500, Mortgage interest. 4,000 «Holders of 3,000 common stocks of Santa Company are fo receive two fully paid shares of Paretto Company for every three shares held. Shares ised by Paretto Company have a fair value of P32 per share. Because of doubts as to whether or not it could sustain a share price of at least P32, Paretto Company agreed to supply cash to the value of any decrease in the share price below P32 for the shares issued, this guarantee of the share price lasting until August 31, 20x4, Paretto Company believed that there was a 90% chance that the share price would remain at P32 or higher and a 10% chance that it would fall to P30 (not adjusted for any interests’ component). © Holders of 4,000 common stocks of Santa Company elect to receive cash at P35 per share, Payable half on the acquisition date and half on December 31, 20x4. * Pareto Company surrenders his patent to Santa Company with a carrying amount of P4,000 ‘and has a fair value of P5,000. ‘Advanced Financial Accounting ~ A Comprehensive: Conceptual & Procedural Approach —* Paretto Company is aso to give a piece of land in question has a carying amount of P35,000 and * A cash payment of P50,000 to former owners represen! related costs paid by the former owners and a set by Santa Company against Paretto Company. * A severance payment of P50,000 to the CI a fair value of P50,000. combination. * Adefered payment of P20,000 (to be paid a y employees of Poretto company, the payment of ‘employment or affected by their termination, and the amount payal interests. Paretto Company supplied the cash on acquisi amounted to P15,000. On December 31, 20x4 the fair value of Paretto Company's ‘shares was P33. The computation of goodwill is as follows: [ Consideration transfered; Cash: Payable now (P40,000 x '4) . P 20,000 ‘Accounts payaile (P43,500 + PI, 500 45,000 ‘Mortgage loan (P40,000 + P 4,000} 44,000 Bonds and premium (P50,000 x 102%) ...... 51,000 Costs of liquidation........ . 16,000 Annual leave . . 14,000 ‘Common stock: = payable now (4,000 shares x P35 x ¥) 70.000 Total cash required . . Less: Cash akeady held 248,000 | “Consideration payable Cash: Deferred (P40,000 x % x .909091*)...... P 18,182 ‘Cash Deferred to former owners (P20,000 x.909091") ..... eee : 18,182 Cash Payable - later (common stock) ...... {(4.000 shares x P35 x) x.909091"]...... 63636 100,000 Shares: Common stock (2,000 shares x P32 per share 64,000 | Patent... 5,000 | Land . . 50,000 | Guarantee: Contingent consideration ([10% x (32 | 30} x 2,000 shares} . . 400 Total... 7 cae wens th P 467,400 Less Far valve of identifiable assets acquired and Fbilfies assumed: ‘Accounts receivable . P 34,700 Inventory .. 39,000 lond....... 130,000 Buildings ... 70,000 | Plant and equipment Positive Excess ~ Goodwil . a Fe | * present vaive of PI at 10% for one year. 5 ~ “* cash payable in one year's time discounted at 10% per annum. ‘Advanced Financial Accounting ~ A Comprehensive: Conceptual & Procedural Approach CHAPTER ofits own prime land to Santa Company. The piece fing reimbursement of Acquistion, tHlement of P10,000 for an unresolved cloin, EO of Santa, whose employment is terminateg following the suggestion by Paretto Company during the negotiations for the busines; ear after) to two former owners who become f which is not dependent on their continuing ble is adjusted for year ition date as well as surrendering the land. The shares were issued on January 5, and the costs of issuing the shares amounted to P18,000. The incremental borrowing rate for Paretto Company is 10% per annum, Other acquisition-related costs paid by Paretto Company in relation to the acquisitionBUSINESS COMBINATION ~ STATUTORY MERGER and ae STATUTORY CONSOLIDATION a The journal entries by Paretto Com, sti , wine enties npany to record the acquisition are as follows: Accounts receivable . lnventory....... Lond... Buildings . Plant and equipment Goodwill... 248,000 100,000 20,000 payable (P18, , Common stock (P10 par x2,000 shares) Paid-in capital in excess of por {(P32-P10) x 2,000 shores} . 44,000 d 50,000 5,000 Goin on remeasurement of patent Remeasurement fo fair value as part of consideration transfered ‘on business combination. 15,000 Gain on sale of land . Beg 15,000 Remeasurement fo fair value as part of consideration transfered ‘on business combination. ‘Acquisiion-elated expenses (P12,000 + 10,000 + P15,000 + P50,000 + P10,000) Cash... ‘Acquistion eloted-expenses. Paidin capital in excess of par (on Ee : : ‘Acquistion elated coss - costs of suing shores. General expenses Cashes Severance payment. December 31, 20x4 Consideration payable ...... Interest expense (10% x P100,000 Cash {P20,000 + P20,000 + P70,000) Balance of consideration paid. Estimated Liabilty for Contingent Consideration Gain on contingent consideration... Contingency not having to be. ‘paid. The following should be observed in relation to the above solution: 1. The following three components are arrangements that are entered into primarily for the benefit of the acquirer or the combined entity: a. The reimbursement of P50,000 to the former owners for the acquisition-related costs, and b. P10,000 paid as settlement for the unresolved claim are not part of the business combination and shall be recognized as expenses by the acquirer. 97,000 97,000 18,000 18,000 50,000 50,000 100,000 10,000 110,000 “[asancad Financial Necounting ~ A Comprehensive: Concepkucl & Procedural Approach5, CHAPTER Y ice The P50,000 severance payment to the CEO is not part of the exchange in the business combination, and shall be recognized as an expense in the post. combination financial statements. These three components are arrangements oy are entered into primarily for the benefit of the acquirer or the combineg ity. 2. The deferred payment of P20,000 toxtwo former owners is a contingent consideration rather than compensation for future services because the payment is not dependent on their continuing employment affected by their termination. It shall be included in the measurement of the consideration transferred. 3. It should be noted that acauisition-related cost is not the same with liquidation. telated costs even though the consequence of acquisition is liquidation of the acquiree. Any costs of liquidation or of similar item paid or supplied by the acquirer should be part of the consideration transferred for reason that it was intended to complete the process of liquidation. The reason for such inclusion is that the consideration received from the acquirer may be used to pay for liabilities not assumed by the acquirer and for liquidation expenses which is practically the same as to unrecorded liabilities from liquidation point of view. These items should not be confused with acquisition-elated costs which are considered outright expenses. Further, any liquidation costs or similar item which was not of the same situation os mentioned above should be treated as expenses. ‘Accounting in the Records of the Acquiree Where the acquirer purchases the acquiree's net assets and liabilities, the acquiree may continue in existence or may liquidate. The acquire accounts affected by the business combination will differ according to actions of the acquiree. Acquire does not liquidate In the situation where the acquiree dispos the records of the acquiree are shown in Equipment, when an item of property, plant fecognized in the statement of comprehensive inc acquiree recognizes a gain or loss. .es of a business, the journal entries required in Figure 1-1. Under PAS 16 Property, Plant and it and equipment is sold, gains or losses are ome. Similarly, on the sale of the Figure 1-1 (Journal entries of acquiree on sale of business) Journal of Acquiree Receivable from Acquirer. billy X iabitty Y Liability Z. Asset X Asset Y. Asset Ze, Gain on sale of operation {Sale of operation) ‘separate proceeds on sale and canying amounts of assets sold could be recognized investment in Acquirer Cash. Recei m Acquirer (Receipt of consideration ftom acquit) EERE EEEE RE B “Jeanced Financial Accounting ~ A Comprehensive: * Conceplual & Procedural ApproachBUSINESS COMBINATION ~ STATUTORY MERGER and STATUTORY CONSOLIDATION st Acquiree Liquidates The entries required in the fecords of the acquiree when it sells al its net assets to the acquirer are shown in Figure 1-2. The accounts of the acquiree are transferred to two accounts, the Liquidation account and the Shareholders’ Distribution account. Figure 1-2 (Journal entries of acquire after sale of net assets) Teaco Journal of Acquiree. Kato A —- Asset Y Asset Z Transfer of all assets acqui Liobilty A. Liability A Liability A Liquidation e Transfer ofall iabilties assumed by the acquirer. BEE HER Liquidation and other expenses not recognized previous i pid by the acquire. Receivable from Acquirer Consideration for net assets sold. Cash... . Investment in Acquirer Receivable from Acquiter.. Receipt of consideration. Additional paid.in capital Retained Earrings Liquidation... Transfer of reserves. Liquidation . : Shareholders’ Distibution” Transfer of balance of liquidation. Common stock... Shoreholders' Distribution Transfer of common stock. Shareholders’ Distribution cones Investment in Acquirer. . i Distribution of consideration to shareholders. RE BE 0K x To the Liquidation account are transferred: «all assets taken over by the acquirer, including cash if relevant, as well as any assets not taken over and which have a zero valve including goodwill © allliabilifies taken over + the expenses of liquidation if paid by the acquiree additional expenses to be paid by the acquiree but not previously recognized by the acquireeCHAPTER j * consideration from the acquirer as proceeds on sale of net assets © allreserves including retained eamings To the Shareholders’ Distribution account are transferred: * the balance of share capital «the balance of the Liquidation account * the portion of the consideration Teceived from the acquirer that is distributed to the shareholders. Some of the consideration received by the acquiree may be used fo pay for liabilities not assumed by the acquirer and for liquidation expenses Ilustration 1-16: Entries in the Acquiree's Records tration 1-14, the entries in the records of Sierra Company Using the information from Illus! are shown as follows: ‘Journal of Acquiree Liquidation .........00++ 3,130,000 | ‘Accumulated depreciation . . 150,000 Merchandise inventory . 1,130,000 ‘Accounts receivable . Copyrights . Equipment. | assets token over. | accounts payable . : 250,000 100,000 150,000 1,200,000 350,000 abilities token over. Liquidation . 5 5 10,000 Liquidation costs payable . Liquidation costs payable by acquire. Receivable from Parrot Company . 2,932,000 Liquidation . .. we Consideration receivable. Cosh. 5 ’ 1,510,000 Patents. Investment in Acquirer Receivable from Parrot Company . Receipt of consideration. Retoined Eamings 800,000 Liquidation . Transfer of retained earnings. 7 Liquidation .... 942,000 Shareholders’ Distribution Transfer of balance of liquidation. . Preferred stock. . 480,000 ‘Common stock - Shareholders’ Distribution . Transfer of common stock. Liquidation costs payable Cae Payment of liabilities. Shareholders’ Distribution . vee 2,922,000 (Come Investment in Acquirer Patent ....sseseves Receivable from Parrot Company . Distribution of consideration to shareholders. 10,000 2,932,000 2,910,000 800,0000 942,000 1,980,000 10,000 1,500,000 1,200,000 200,000 22,000 ———— ns - neatoBUSINESS COMBINATION ~ STATUTORY MERGER and STATUTORY CONSOLIDATION 53 The liquidation account effectively records th f i purchase consideration, ly e sale of the assets and the receipts of the . a items being sold by the acquiree - whether assets or package of the purchase are rye cat their Carrying amount to the Liquidation account. * All amounts arising during the liquidation process and not previously recorded by the cones are also taken to the Liquidation account. In the Illustration 1-15, only the liquidation Costs. The relevant amounts are debited to the Liquidation account and liabllities are raised in relation to this item. «Any reserves tecognized by the acauiree - in this example it is retained earings - are taken to the Liquidation account. « The purchase consideration is credited to the Liquidation account, with the recognition of assets received, namely cash, patent and investment in acquirer. The balance of the Liquidation account is transferred to the Shareholders’ Distrioution account. Uquidation Merchandise inventory 1,130,000 | Accumulated depreciation 150,000 Accounts receivable 800,000 | Accounts payable 250,000 Copyrights 150,000 | Loan payable 100,000 Equipment 1,200,000 Retained eamings 800,000 Liquidation costs payable 10,000 | Receivable from Parrot Shareholders’ Distribution 942,000] Company 4.232.000 | 4.232.000 The cash received via the purchase consideration and the balance originally held by the acquire is used as the liabilities of the acquiree, including liabilities such as liquidation costs payable raised during the liquidation process. 2,932,000 Uquidator's Cash Opening balance 0 | Liquidation costs payable 480,000 Receivable from Parrot Shareholders’ distribution —_1.500,000 Company 1,510,000 510.000 1 acquire, in this example the capital relating to preferred stock and common stock shares issued by the acquire are taken to the credit side of the Shareholders’ Distribution account. The assets to be distributed to the former shareholders of the acquiree are transferred to the debit side of the account. In this case they consist of the cash. Investment in from the acquirer (Parrot Company) due to estimated Parrot Company, patent and receivable all these having been received as part of the purchase liability on contingent consideration, consideration from the acquirer. The ‘account balances when the balance transfered from the Liquidation account is included. At this stage, all accounts of the acquiree are closed: The capital balances of th Shareholder's Distribution Cash 1,500,000] Preferred stock 480,000 Investment in Acquirer 1 200,000 Common stock 1,500,000 Patent 200,000 | Liquidation 942,000 Receivable from Parrot Company. 22,000 2.922.000 2,222,00054 CHAPTER, Business Combinations with No Transfer of Consideration PERS 3 Paragraph 33 also deals a business combination without the transfer of Consideration by the acquirer. In such cases, PFRS 3 requires an acquirer to be identified, and the acquisition method to be applied. Examples include Such circumstances as: * When the acquire repurchases a sufficient quantity of its shares from other shareholders such that the acquirer, who previously was a minority owner of the Acquire, now is the majority shareholder of the acquire and controls it; when the acquirer owns the majority of the acquiree's voting shares but had Previously been prevented from exercising control by regulation or by contract if that restriction lapses or is removed, the acquirer now gains control over the Acquire; and * bycontract alone |n GQ business combination achieved without the transfer of consideration, goodwill is determined by using the acquisition date fair value of the acquirer's interest in the acquiree (measured using a valuation technique) rather than the acquisition date fair value of the consideration transferred. The acquirer measures the fair value of its interest in the acquiree using one or more valuation techniques that are appropriate in the circumstances and for which sufficient data are available. If more than one valuation technique is used, the acquirer should evaluate the results of the techniques, considering the relevance and reliability of the inputs used and the extent of the available data. Combinations by Contract Alone In a business combination achieved by contract alone, two entities enter into a contractual amangement which covers, for example, operation under a single Management and equalization of voting power and eamings attributable to both entities’ equity investors. Such structures may involve a ‘stapling’ or formation of a dual listed corporation. Accounting for a Combination by Contract PERS 3 requires one of the combining entities to be identified as the acquirer, and one to be identified as the acquiree. In reaching the conclusion that combinations achieved by contract alone should not be excluded from the scope of PFRS 3, the Board noted that: a. such business combinations do not involve the payment of readily measurable consideration and, in rare circumstances, it might be difficult to identify the acquirer; b. difficulties in identifying the acquirer are not a sufficient reason to justify a “ different accounting treatment, and no further guidance is necessary for identifying the acquirer; and ¢. the acquisition method is already, being applied for such combinations in the United States and insurmountable issues have not been encountered. ‘Advanced Financial Accounting - A Comprehensive: Conceptual & Procedural ApproachBUSINESS COMBINATION ~ STATUTORY MERGER and STATUTORY CONSOLIDATION 55 Appendix Deferred Tax Assets and Deferred Tax Liabilities Relating fo the Fair Valve Differentials of Identifiable Assets and Liabilities When fair values of identifiable assets and liabilities are recognized, tax implications follow from recognizing the difference between the fair values and book values of the identifiable net assets. PAS 12 Income Taxes requires the tax effects of the differences between fair values and book values to be accounted for as deferred tax liabiities or deferred tax assets if the basis for taxation does not change with the business combination. In other words, if tax authorities allow deductions based on the original cost of the asset (rather than its fair value), the difference between the carrying amount determined at fair value and the fax base, which is the original cost, gives rise to a taxable temporary difference or deductible temporary difference. A taxable temporary difference is the future taxable income that arises from the recovery of the excess of fair value over book value of identifiable net assets. Conversely, a deductible temporary difference is the reduction in future taxable income that arises from the outflow of undervalued liabilifies or recovery of overvalued assets. These temporary differences give rise to deferred tax liabilities or deferred tax assets. PAS 12 requires the recognition of deferred tox liabilities or defered tax assets on taxable or deductible temporary differences arising from the initial recognition of fair value adjustments of assets or liabilities in a business combination. For example, if the fair value of inventory is P50,000 and the original cost is P30,000, the excess of P20,000 gives rise to future taxable income (refered to as a “taxable temporary difference" in PAS 12). Since fair value is recognized under the acquisition method, the future tox payable (referred to as “deferred tax liability’) should also be recognized. However, no deferred tax liability should be recognized on the goodwill asset. Goodwill is a residual and should not in itself give rise to other effects. «An excess of fair value over book value of an identifiable asset gives rise to a deferred tax liability. «An excess of book value over fair value of an identifiable asset gives rise to a deferred tax asset. : * Conversely, an excess of fair value over book value of an identifiable liability gives rise to a deferred and tax asset, and an excess of book value over fair value of an identifiable liability gives rise to the deferred tax liability. * For simplicity, we can assume a right of set-off between deferred tax assets and deferred tax liabilities and show a net position (i.e. either a deferred tax liability or a deferred tax asset on the net difference between fair values and book values of identifiable net assets) when we allocate the consideration transferred, iets acatae 8a tae36 CHAPTER, liabiliti ized on the * Note that the deferred tax liabilities or deferred tax assets recogniz for value adjustments are adjustments to the defered tox ee or deferred to, ‘assets that are already in existence in the financial statements. iustration 1-17 shows the effect of income tax on business combination. Wustration 1-17: Deferred Tax on Business Combinations - Statutory Consolidation On January 1, 204, the stockholders of Peter Company and Simon Company agreeq fo a consolidation, Because IASB requires that one party be recognized as the acquirer and the other as the acquire, it was agreed that Peter Company was acquiring Simon Company. Peter Company agreed to issue 56,000 shares of its P20 par stock to acquire all the net assets of Simon Company at a time when the fair value of Peters’ Common stock was P25 pef share. The tax effects on fair value differences are recognized in this ilustration on the basis that the tax bases of the identifiable assets acquired ond liabilities assumed are not affected by the business combination. Assume a tax rate of ‘Simon Co. | Fair valve Simon Co. Simon Co. —_—less Book Book valve Fair valve valve P 5000 P 5000 P 0 Accounts receivable 40,000 35,000 5,000 Merchandise inventory . 50,000 65,000 15,000 Other intangible assets . 120,000 250,000 130,000 In-process research and o 1,000,000 -—1,000,000 Plant and equipment 280000 |_ 20000) Total Assets... - 515,000 —P1,635,000 1,120,000 Current and long-term liabilities . P 150,000 P 150,000 P 0 Contingent iabilties . 0 __50000 _ 50,000 Total Liabitties. P_150000 P_200,000 Pp 50.000 Net Assets... Common stock... . Retained eamings Stockholders’ Equity . 365.000 The computation of goodwill with tax effects are as follows: Consideration transferred; Common shares: 50,000 shares XP25.....++..+2++5 P1,400,000 Less: Fair value of identifiable assets acquired and liabilities assumed: P 5,000 Accounts receivable . 35,000 Merchandise inventory . 65,000 | Other intangible assets . . 250,000 | In-process research and development 1,000,000 Plant and equipment... 280,000 Curent and long-term liabilities { 150,000) Contingent liabilities ...... ( 50,000} | Deferred tox liability (P1,070,000 x 30%) 321,000) _1,114,000 Positive Excess - GoodwillBUSINESS COMBINATION ~ STATUTORY MERGER and STATUTORY CONSOLIDATION a The joumal entries by Peter Corporation to record the acquisition are as follows: Cash. 5,000 Accounts: . : 35,000 Merchandise inventory . 65,000 Other intangible assets 250,000 In-process research and development . . 1,000,000 Plant and equipment 280,000 Goodwill : 285,000 Current and long-term liabilities 150,000 Contingent liabilities . 50,000 Deferred tax liability... . 321,000 Common stock (P20 par x 56; res) 1,120,000 Paid-in capital in excess of par : 7 {(P25 - P20) x $6,000 shares]... ec eee 280,000 Acquistion of net assets of Simon Compan) In the event that the fair value of net assets is less than the book value of the net assets of the acquiree, then a deferred tax asset will be recognized. Estimating the Value of Goodwill An acquirer May attempt to forecast the future income of a target company in order fo arive at a logical purchase price. Goodwill is often, at least in part, a payment for above-normal expected future eamings. A forecast of future income may start by projecting recent years’ incomes into the future. When this is done, it is important to factor out ‘one-time’ occurences that will not likely recur in the near future. Examples would include extraordinary items, discontinued operations, or any other unusual event. Expected future income is compared to ‘normal'’ income. Normal income is the product of the appropriate normal rate of return on assets times the fair value of the gross assets (no deduction for liabilities) of the acquired company. Gross assets include specifically identifiable intangible. assets such as patents and copyrights but do not include existing goodwill. Several methods use the expected annual eamings in excess of normal to estimate goodwill. The following are alternatives in estimating the value of goodwill (assumed figures): 1. A common approach is to pay for a given number of years’ excess eamings. Assuming the acquirer paid for four years of excess earnings: Expected average future income... Disses 200,000 Less: Normal return on assets: Foir value of total identiioble assets ............. 1,692,000 Multiplied by: Normal rate of return 10% 69.200 Expected annual earnings in excess of normal . : P 30.800 Muipfed by: Number of eos of exces earings... 5| Good... ssseeees : pean | 2. The most optimistic purchaser might expect the excess earnings to continue forever. If so, the buyer might capitalize the excess eamings as perpetuity at the normal industry) rate of return. Assume the excess earnings will continue indefinitely and are to be capitalized at normal (or industry) rate of retum:fe paneiee. | 1 [Expected average future income... ssvscsecesesvsess~~~*« 200000] Less: Normal retum on assets: Fair valve of total identifiable assets .. c P1,692,,000 Multiplied by: Normal rate of retum . vs WR 169.200 | Expected annual eamings in excess of normal P 3.800 Divided by: Normal rate of return : = Goodwill. 308.009 | 3. Another estimation method views the factors that produce excess earings to be of limited duration. Assume the excess earnings will continue for only for five Years an, should be capitalized at a higher rate of 16%, which reflects the risks applicable to goodwill: Expected average future income . 200,000 Less: Normal retum on assets: Fair valve of total identifiable assets... P1,692,,000 ‘Multiplied by: Normal rate of return . ——% = 169.20 Expected annual eamings in excess of normal........... P 30.800 Multipied by: Present valve of an annuity of PI at 16% | for five years . : : 3.2743 | Goodwill. . P100,848 Other analysts view the normal industry eaming rate to be appropriate ‘only for identifiable assets and not goodwill. Thus, they might capitalize excess earnings at o higher rate of retum to reflect the higher risk inherent in goodwill. All calculations of goodwill are only estimates used to assist in the determination of the price to be oid for a company. Stock Exchange Ratio The price for a business combination consummated for cash or debt generally is expressed in terms of the peso amount of the consideration issued. When common stock is issued by the acquirer in a business combination, the price is expressed as a number of shares of the acquirer's common stock to be exchanged for each share of the acquiree's common stock; this is known as stock exchange ratio, Issuance of a Single Class of Stock in a Business Combination When the earings rates on assets of the constituent parties are approximately the same and a single class‘of stock is to be issued, the parties may agree that such shares shall be issued in relation to the net asset contributions. However, when earnings rates vary and a single class of stock is to be issued, the parties may provide that eamings tegarded as above normal shall be used as a basic for calculating goodwill and that such goodwill shall be added to the other net assets in Measuring a company’s full contribution. To illustrate the foregoing, assume that stockholders of Companies A, B, and C agree to consolidate and form Company D. Net assets at appraised values and average adjusted earings of the past five years, which the Parties believe offer the most reliable estimate of future eamings, follow: _ Gok CoB Co.C Total Net asset contMbUHON se eeeeeeceesee ~ 200,000 300,000 500,000 1,000,000 Percentage of asset contribution to totalassets.. 20% 30% SSO, Eamings contribution... 30,000 P-30,000 P40.000 P 100000 Percentage of eomings contibution to total eamings 30% 30% 40% ‘Advanced Financial Accounting = A Comprehensive: Conceptual & Procedural Approach# Compony D ‘sues c single dos of stock in the net asset ratio, stockholders of Companies A. 8. anc C will receive stock in the ratio of 20:30:50 respectively. Although on equitable Gvision of the interes! in the asse's of P1,000,000 is achieved. earings of PIOD.OOO in the future wil accrue fo stockholders in the asset ratio, resulting in ai loss to ofigha Stocthoides of Company A and gain fo criginal stockholders of Company C. On the offer hand. # c single clos of stock's sued in the earings ratio, stockholdess of Companies A. 8. ond C wil receive stock in the ratio of 30:30:40 respectively. Although om squtabie division of future earings §s achieved. stockholdes wil fall to maintain et olignal eres: in ase’ Stocthoides of Company A wil ocquie an interest that exceed ther invesiment. while stockholders of Company C wil acquire an interest that ies thn er investme. To GvOK the inequities resufing from the distibution of a single class of stock either in fhe net ase! rofo of in the eamings ratio. the pares decide that respective contrbviiors shall be measured by the values assigned to net assets as increased by (000ml. is ogreed that contributions are to be determined as follows: 1. 0 &%retumis to be regarded as c fair retum on identifiable net assets: 2 excess eamings ore to be capitaized ot 20% in arriving at a vaiue for goodwill. When net aset ond eamings factors are considered, contributions are Calcuioted os follows: Gok CoB = Co. Io | Net oset contrintion 7700.00 300.000 P500.000 °1,000.000 | 8 wD w, 8 P 40,000 =EEE EEE E Based on the above calculations, the distribution of shares to stockholders of the Constituent companies would be made in proportion to their relative contributions. Assume, for example, that a total of P25,000 shares of Company D were to be issued. These shares would be distributed as folows: Co. KPI) ZOD EI cee. 6042 shores (Co. 8 P0000) 200.00 » 25.000 sarees 7.500 Co. C: PSNI) ZHI 1500. seeceeee . 1458 Tota " eeseness 25.000 shares A comparison of the relative net asset ond earings contributions by Companies A.B, ‘ond C and the relative claims upon net assets and earings of the new company in each cose is as followrs: SA CoB CoC] We WR SOR wn wn 0 Cioim upon net assets ond earrings of new compan 24 x “| When relative eamings contrioutions differ from relative net asset contributions, original Teitionships in both eamiings and net asset contributions of the individual companies Cannot be preserved by the issuance of a single class of stock. In the example, Company A with above-nornal earings gains on increased share in net assets: Advanced Finandal Accounting - A Comprehensive: Conceptual & Procedural Approachos e CHAPTER, however, it fas to retain its original share in eamings. Company C fails fo maintain iy interest in net assets but gains an increased share in eamings. Company B, whose assay Gnd eamings shores were the same. retains its original relative status in both assets ‘ang eamings. tssuance of Several Classes of Stock in Business Combination it onginal relationships in both net assets and earnings are to be preserved, it will be Necessary to issue more than a single class of stock. The following procedures must be appfed in the allocation of several classes of stock of the new company to the Constituent groups: = |. Eamings contributions of the constituent companies should be capitalized ata Certain rate, but this rate must not exceed the eamings rate of any of the Constituent Companies. This procedure determines the total stock to be issued to each company, 2. Preferred stock should be distributed to constituent companies in Proportion to the net assets that they contribute. Such stock should be prefered as to Assets upon dissolution, with the preferences equal to the value of properties Contributed, The dividend rate should not exceed the rate used in capitalizing Profits. Shares should be fully participating with common. 3. Common stock should be issued to each company for the difference between the company’s total stock as calculated in (1), and the amount it receives in prefered stock as calculated in (2). The issuance of stock that is preferred as to assets results in the Preservation of claims in the new organization that are equal to the net asset contributions, Participating Preferred stock supplemented by common stock so that the total stock issued isin the earings ratio makes possible a distribution of earnings in the earnings ratio. To dlustrate this procedure, assume contributions to company D by companies A,B, and Cas previously indicated: CoA CoB Coc Total New asset contribution... * 200,000 P300,000 500,000 1,000,000 Eomings contribution - P 30,000 P 30,000 P 40,000 P 100,000 Eomings rate on net assets... 1% 10% 10% '"'S agreed that eamings are to be capitalized at 8% in determining the total stock to be issued. Fully participating 6% preferred stock, P100 Par, and preferred as to assets of this por vaiue, is to be issued exchange for net assets transferred. Common stock, P100 ar, is to be issued to each Company for the difference between the total stock to which it is entitied and the prefered stock that it is to receive. The common stock is regarded as Payment f for ‘goodwill. The stock allotment is made as follows: OS Mage Os Tol Toto! stock to be issued (eamings/ 08) ........ Amount of prefered stock to be issued (equal 40 asset contribution) ste eeeeeneees 200,000 300,000 500,000 .000,000 ‘Amount of common stock to be issued (balance “epresentng payment for goodwill .......... PI75000 Pi7500 p__. P_ 250,000 les A, B, and C preserves their a qual to assets contributed. The Provide for a distribution of earnings in the earnings $2.4 CoB Coc Total P375,000 375,000 500,000 1,250,000 The Preferred stock issued of stockholders of compani claims to assets in the new organization in amounts e prefered and common issues contribution ratio,BUSINESS COMBINATION ~ STATUTORY MERGER and STATUTORY CONSOLIDATION Neos ‘covered in PRS 3 me neti iin PERS for SMES include: Subsequent adjustments to assets and liabilties (te-measurement period). Deferred tax recognized ater initial purchase accounting. ‘Non-controliing interests Step acquisitions. Indemnification assets. Re-acquired rights. Shored-based payments, Employee benefits. + Abusiness combination achieved without the transfer of consideration. { PERS for SMEs and PAS 21 share the same principles for accounting and reporting, The key diferences are: Scope This section is appiicable to al business combinations, as defined in the standard. Furthermore, the section ao addresses accounting for goodwil ot the time of the business combination and subsequently This section specifically excludes | combinations of entities or businesses. under common control, the formation of joint ventures and the acquistion of «@ group of assets that does not constitute a business. | The standard appies to al fransactions or other events that meet the definition of a business combination, os defined in the standard. (While not specifically mentioned in the scope of the standard, it also addresses ‘accounting for goodwil) The standard specificaly excludes combinations of entifles or businesses under common control, ‘the formation of joint ventures and the acquisition of an asset or group of assets that does not constitute a business. The scope of the standards is essentially the same except that PFRS 3° specifically excludes acquisitions of single assets. However, such assets would generaly not meet the definition of @ business in PFRS for SMES, ond therefore their acquisition would not constitute a business combination. Definition ‘A business combination is the | bringing together of separate | entities or businesses into one reporting ently. Abbusiness is an integrated set of activities and assets conducted and managed for the purpose of providing a retumn to investors or lower costs or other economic benefits directly and proportionately to policyholders oF participants. Furthermore, a business generally consists of inputs, processes applied to those inputs and resulting outputs that are or will be used to generate revenues. If goodwill is present in transfered set of activities or assets, the transfered set is presumed to be a business A business combination is transaction or other event in which ‘an acquirer obtains control of one ‘or more businesses. The definition aso includes transactions sometimes refered to 4s ‘tue mergers’ or ‘mergers of equat AA business is on integrated set of activiies and assets that is capable of being conducted and managed for the purpose of providing « retum in the form of dividends, lower costs or other economic benefits directly to investors or other owners, ‘members or participants. The definiion of a business combination in PERS for SMEs iffers from that in PFRS. By refering to obtaining control PFRS has @ narrower scope than PERS for SMES,-which refers more broadly to the bringing together of entities or businesses. However, this impact is modified by differences in the definition of a business. The definifion of a business in PERS is similar to that in PFRS for SMES. The major difference is the reference in IFRS to the assets or activities being capable of being conducted or managed for the purpose of providing a retum. Furthermore, PFS for SMES indicates. that a business generally consists of inputs, processes and outputs, while PERS does not require outputs to be present for an integrated set of assets and activities to be a | business, Therefore. PFRS_has_a “Advanced Financial Accounting ~ A Comprehensive: Conceptual & Procedural ApproachCHAPTER, broader definition of @ which, all el% equal, expected to Might bg Cause te De treateg business combinations would be the case under Pag SMES, For instance, an integaiy set of actives afm development stage that has a Commenced could be a busines Under PFRS, but may not und, PERS for SMES. Method of Accounting | AI business combinations ore | accounted for using the purchase method”. | This method involves identifying the acquirer, measuring the cost ‘of the combination ond | allocating that cost to the assets | ocquired ond iabilities ond provisions for contingent | labilities assumed. Al business combinations are accounted for using the ‘acquisition method’*, This method involves identifying the acquirer, determining the ‘acquisition date, recognizing and measuring the identifiable assets acquired, the iobilties assumed ‘and any non-controling interest in the acquiree and recognizing and measuring goodwill or a gain from a bargain purchase, The method applied under iy for SMES uses a cost approach whereby the cos of the -ocquired entity is alocateg fo the “assets acquired ong libiffies (ond provisions fy contingent filles) assumed, in Contrast, PFRS adopts a fair vate ‘approach. Key features of these methods re discussed further below, | | Identtying the acquirer The acquiter is the combining entity thot obtains control of the other combining entities or | businesses. The acquirer is the entity that obtains control of the acquire. Thete is no practical diference between IFRS for SMEs and IFRS, The definitions of control, and the concept upon —tich | identification of the acquirer is based, are the some in IFRS fer SMES and PFRS. Consequently, reverse acquistion accouning may be required under PFRS for SMEs, similar to PFRS. Cost of @ business combination The cost of a business combination is the aggregate | of: | + The foir volues of the assets | given, fabilties incured or assumed, and equity | instruments issued by the acquirer plus + Any costs directly attributable to the business combination. Direct costs - capitalized | indirect costs - expensed Costs to issue - debited to APIC/ | ®ister stock Share Premium The cost of a business combination is not separately defined. However, a component of the measurement of any goodwill or goin from a bargain purchase is the consideration transferred, which is calculated as the sum of the fair values of the assets transfered by the acquirer, the labilties incured by the acquirer to former owners of the acquiree nd the equity interests issued by the acquirer. Direct costs - expensed Indirect costs - expensed Costs fo issue - debited to APIC/ register stock Shore Prerrium PERS for SMES ciffers from IF in| that it includes recy cttributable costs os part of the cost of the combination, which in fun results in these costs being included in the calculation of the amount of any goodwill [or | negative goodwil/discount on) ‘acquistion/gain). | PERS requires that these costs Be ‘accounted for separately fom) the business combination, they do not generaly represet assets of the acquirer woud be ‘expensed in the period they o% incurted and the related services received, As such, under lf these costs do not impact IN amount of goodwil {or neaam=- “Advanced Financial Accoonting ~ A Comprehensive: Conceptual & Procedaral ApproachBUSINESS COMBINATION ~ STATUTORY MERGER and STATUTORY CONSOLIDATION 63 Costs to issue debts - debited to ] Costs tissue debls-debitedto | goodwill) calculated on Bond Issue Costs Bond Issue Costs acquisition date. All else being equal, a higher amount for goodwill would be recorded under PERS for SMES than under PERS ‘consideration When a business combination | The acquirer recognizes the | Subsequent changes in the cogreement provides for an adjustment to the cost of the business ‘combination contingent on future events, the acquirer includes the estimated amount of the adjustment in the cost of the combination at the acquisition date if the adjustment is probable and can be measured reliably. if the potential adjustment is not fecognized at acquisition date, but subsequently becomes probable and can be measured reicbly, the additional consideration is treated as on ‘adjustment to the cost of the combination. ‘acquisition-date fair value of any contingent consideration os part of the consideration transferred in exchange for the acquiree. The Classiication of a contingent consideration obligation as either 4 iabilty or equity is based on the definitions of an equity instrument ‘and a financial labilty in PAS 32 or ‘other applicable accounting standards. After initial recognition, changes in the fair valve of contingent consideration resulting from events after the acquisition date are accounted for a folows: * Contingent consideration clossiied as equity is not subsequently _remeasured (consistent with the accounting for equity instruments generally) and its subsequent settlement is accounted for within equity Contingent consideration Classified os a liability that: ~ Isa financial instrument and within the scope of PFRS 9, is remeasured at fair valve, with any resulting gain or loss recognized either in profit or loss or ~— in other comprehensive income in accordance with PFRS 9 = Is not within the scope of PFRS_9 and is accounted for amount recognized for Contingent consideration are treated os adjustments to the consideration transfered and ore reflected in the canying amount (of goodwill uncer IFRS for SMES. In contrast, under IFRS, any post ‘acquisition changes in the foi vaue of _~—_confingent consideration that is o fabity ore recognized in profit loss or in other comprehensive income, while contingent consideration that is equity is not remeasured subsequent to acquisition date. The acquiree’s identifiable ‘assets and lobiffies ond any contingent labilfies that can be measred refcbly are recognized at their acquisition date fair values. ‘Any difference between the cost ofthe business combination and the acquirer's interest in the net fair value of the identifiable assets, liabiities in accordance with PAS 37 or other standards as ‘appropriate. ‘locating the cost of a business combination The identifiable assets acquired and fibilties assumed of the acquiree ore recognized as of the acquisiion date, separately from goodwill ond measured at fair value as at that date. Both PFRS for SMES and PFRS require recognition of assets and libiities at fair value. However, PRS includes some specific exemptions, for example, defered taxes measured under PASI2. Income Taxes, pension assets ond liabilities measured under PASI? Employee Benefits The impact of differences in the recognition citeria under the two te: Concontual & Procedural Approach64 CHAPTER 1 ‘and contingent tobiifies must requirements is discussed below, be accounted for as goodwill | {or negative goodwill). Recognition of assets and lobiiies The folowing criteria must be | To qualify for recognition, an item | With the two exceptions note | satisfied for the acquirer to acquired orassumed must be: | below, the recognition citeig Tecognize the acquiee's|* An asset or liability at the | under PFRS and PFRS for SMEs org identificble assets and liabilities acquisition date {ie.. meet | substantially the same, ‘ond ony provisions for| the definitions. inthe | * Intangible assets — under Prag contingent fobilfies at the| Framework) there is no requirement to be | ocquisifion date: + Part of the business acquired able to measure reliably the * Assets other than an intangible {the acquire) rather than the fair value of such assets. Thus, asset - the future economic resut of a separate under PFRS intangibles ae benefits must be probable transaction. fecognized whenever they ‘ond the far valve con be can be separately identified measured retiobly: fie, they are either | or arse trom ‘+ Uabilly other than a provision contractual or other legal for contingent fobilty — the rights). outflow of resources must be + Contingent fabilties — under probable ond the fab valve PFRS 3, a contingent lbity | can be measured reflobly must meet the definition of a | llobilty fle. must be a * Intangible asset or provision for “present obligation arising contingent liability — the foir from a past event that can value con be measured be reliably measured) for it to | rellably be recognized. As such, a) | contingent fiabilty that | represents a “***possible the existence of | which will be confimed only by the occurence ot Nonoccumence of one or| more uncertain future events are not recognized under | IFRS. There is no such | restriction on the recognition of contingent liabilities under PERS for SMEs. PFRS for SMEs does not include | guidance for the subsequent | recognition of fax losses not | tecognized at acquisition date._| Contingent Liabilities Recognize only where there is a| Requires recognition of “present obligation that arises obligations ithe from past events and its fair value | fair value con be | can be measured reliably, rellably. __| Provisional accounting Retrospective adjustments to | Retrospective adjustments to | Under PFRS, itis possible that ihe Provisional amounts recognized | provisional amounts recognized in | period during which cagiustments in inifial accounting for a initial accounting for a business.| to provisional accounting may | business combination may be | combination may be made | be made would be less thon !? made up to 12 months after the | during the measurement period, | months if the required ne acquisition date. This time limit | which is a period up to a| information is obtained, or if its does not apply to adjustments | maximum of 12 months after the | determined that ‘frit! to the cost of the combination | acquisition date, where new | information is not ovdiiodl contingent _on_ future events | information is obtained regarding | before the expiration _of ""*-—_— ‘BUSINESS COMBINATION ~ STATUTORY MERGER and STATUTORY CONSOLIDATION which becomes probable and con be ‘reliably measured subsequent fo acquisition date. discussion —_ under Contingent consideration) facts and circumstances that existed at acquisition date. The measurement period ends as soon as the acquirer receives the information it was seeking or leams that further information is not available. maximum 12 months allowed. There is no such limitation under PERS for SMEs ‘of goodwill Goodwill is initially measured at cost, being the excess of the cost Of = the -~— business ‘combination over the acquirer's interest in the net fair value of the identifiable assets, liabilities and contingent —_ liabilities recognized. After initial recognition, goodwill is measured at cost less accumulated amortization and accumulated impairment losses. Goodwill is amortized in accordance with the principles of amortization of intangible ‘assets in Section 18. f a reliable estimate of the useful life of goodwill cannot be made the Ite is presumed to be 10 years. Detailed requirements in relation to impairment testing of goodwill are contained in Section 27. This includes the Tequiement that the acquirer test it for impairment where there isian indication that it may be impaired. Purchased Method® Proportionate share of identifiable net assets (Partial Goodwill) The measurement of goodwill at the acquisition date is computed as the excess of (a) over (b) below: 4) The aggregate of: + The consideration transfered (generally measured at acquisition-date fair value) * The amount of any non- controling interest in the acquiree + The acquisiion-date fair valve of the acquirer's previously held equity interest in the acquires b) The net of the acquisition-date foir values (or other amounts recognized in accordance with the requirements of the standard) of the identifiable assets acquired ond the liabilities assumed. Goodwill acquired in a _ business combination is not amortized. The acquirer measures goodwill acquired in a _ business combination at the amount recognized at the acquisition date less any accumulated impairment losses. Detailed requirements in telation to the subsequent ‘accounting for goodwill are dealt with in PAS 36 Impairment of Assets. This includes the requirement that the acquirer has to test it for impairment annually ‘or more frequently if events or changes in _ circumstances indicate that it might be impaired. ‘Acquisition Method’ ‘Options: (refer to NCI below) 1. Option 1: Full4air Value (Full Goodwill) 2. Option 2: Proportionate share of identifiable net Under both PFRS for SMEs ond PFRS, goodwill is measured as 0 residual, However, the computations differ due to the focus in PFRS on measuring the components of the business combination at their acquisition date fair values, while PFRS for SMEs adopts a cost-bosed ‘approach. % PERS for SMES citflers from PFRS by requifing that goodwill be amortized over its useful fe, or if the useful fe cannot be reficbly measured, over 10 years. In addition, it must be tested for impairment where an indicator of possible impairment exists. In contrast, PFRS-—_ prohibits ‘amortization of goodwill, but requires that it be impairment tested at least annually. Based on these differing requirements, significantly differing _canying ‘amounts for goodwill might be expected to arise under PFRS for SMEs and PFRS in post combination periods. ‘assets (Partial Goodwill Defniion of goodwill Goodwill is defined as ‘future ‘economic benefits arising from other assets that _are_not Goodwill is defined as ‘an asset representing the future economic [benefits arising from other assets There is no practical difference between the definitions of goodwill under PFRS for SMEs and ———__—