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ADVANCED FINANCIAL ACCOUNTING & REPORTING

BUSINESS COMBINATION
DEFINITIONS:
 Acquiree – The business or businesses that the acquirer obtains control of in a business combination.
 Acquirer – The entity that obtains control of the acquiree.
 Acquisition date – The date on which the acquirer obtains control of the acquiree.
 Business – An integrated set of activities and assets that is capable of being conducted and managed for
the purpose of providing a return in the form of dividends, lower costs or other economic benefits directly
to investors or other owners, members or participants.
 Business combination – A transaction or other event in which an acquirer obtains control of one or more
businesses. Transactions sometimes referred to as ‘true mergers’ or ‘mergers of equals’ are also business
combinations.
 Contingent consideration – Usually, an obligation of the acquirer to transfer additional assets or equity
interests to the former owners of an acquiree as part of the exchange for control of the acquiree if specified
future events occur or conditions are met. However, contingent consideration also may give the acquirer
the right to the return of previously transferred consideration if specified conditions are met.
 Control – The power to govern the financial and operating policies of an entity so as to obtain benefits
from its activities.
 Control of an investee – An investor controls an investee when the investor is exposed, or has rights, to
variable returns from its involvement with the investee and has the ability to affect those returns through
its power over the investee. (new concept of control under PFRS 10)
 Equity interests – For the purposes of this PFRS, equity interests is used broadly to mean ownership
interests of investor-owned entities and owner, member or participant interests of mutual entities.
 Fair value – The amount for which an asset could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm’s length transaction. (old definition)
 Fair value – the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. (new definition under PFRS 13)
 Goodwill – An asset representing the future economic benefits arising from other assets acquired in a
business combination that are not individually identified and separately recognised.
 Identifiable. An asset is identifiable if it either:
a. is separable, ie capable of being separated or divided from the entity and sold, transferred,
licensed, rented or exchanged, either individually or together with a related contract, identifiable
asset or liability, regardless of whether the entity intends to do so; or
b. arises from contractual or other legal rights, regardless of whether those rights are transferable
or separable from the entity or from other rights and obligations.
 Intangible asset – An identifiable non-monetary asset without physical substance.
 Mutual entity – An entity, other than an investor-owned entity, that provides dividends, lower costs or
other economic benefits directly to its owners, members or participants. For example, a mutual insurance
company, a credit union and a co-operative entity are all mutual entities.
 Non-controlling interest – The equity in a subsidiary not attributable, directly or indirectly, to a parent.
 Owners – For the purposes of this PFRS, owners is used broadly to include holders of equity interests of
investor-owned entities and owners or members of, or participants in, mutual entities.

ACCOUNTING METHOD
 An entity shall account for each business combination by applying the acquisition method.
 Applying the acquisition method requires:
a. identifying the acquirer;
b. determining the acquisition date;
c. recognising and measuring the identifiable assets acquired, the liabilities assumed and any non-
controlling interest in the acquiree; and
d. recognising and measuring goodwill or a gain from a bargain purchase.

IDENTIFYING THE ACQUIRER

 Acquirer – The entity that obtains control of the acquiree.
 For each business combination, one of the combining entities shall be identified as the acquirer.
 Control is presumed to exist when the parent owns, directly or indirectly through subsidiaries, more
than half of the voting power of an entity unless, in exceptional circumstances, it can be clearly
demonstrated that such ownership does not constitute control.
 An investor controls an investee if and only if the investor has all the following:
(a) power over the investee;

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(b) exposure, or rights, to variable returns from its involvement with the investee; and
(c) the ability to use its power over the investee to affect the amount of the investor’s returns.

DETERMINING THE ACQUISITION DATE

 The acquirer shall identify the acquisition date, which is the date on which it obtains control of the
acquiree.
 The date on which the acquirer obtains control of the acquiree is generally the date on which the
acquirer legally transfers the consideration, acquires the assets and assumes the liabilities of the
acquiree—the closing date. However, the acquirer might obtain control on a date that is either earlier or
later than the closing date. For example, the acquisition date precedes the closing date if a written
agreement provides that the acquirer obtains control of the acquiree on a date before the closing date.
An acquirer shall consider all pertinent facts and circumstances in identifying the acquisition date.

RECOGNISING AND MEASURING THE IDENTIFIABLE ASSETS

ACQUIRED, THE LIABILITIES ASSUMED AND ANY NON-CONTROLLING
INTEREST IN THE ACQUIREE

Recognition principle:
 As of the acquisition date, the acquirer shall recognise, separately from goodwill, the identifiable assets
acquired, the liabilities assumed and any non-controlling interest in the acquiree.
 To qualify for recognition as part of applying the acquisition method, the identifiable assets acquired
and liabilities assumed must meet the definitions of assets and liabilities in the Framework for the
Preparation and Presentation of Financial Statements at the acquisition date.
 In addition, to qualify for recognition as part of applying the acquisition method, the identifiable assets
acquired and liabilities assumed must be part of what the acquirer and the acquiree (or its former
owners) exchanged in the business combination transaction rather than the result of separate
transactions.

Measurement principle:
 The acquirer shall measure the identifiable assets acquired and the liabilities assumed at their
acquisition-date fair values.
 For each business combination, the acquirer shall measure any non-controlling interest in the
acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s
identifiable net assets.

Exception to Measurement Principle:

• Reacquired rights - measured at fair value based on remaining contractual term ignoring the fair value effect
of renewal
• Share-based payment transactions - replacement awards: measured in accordance with IFRS 2
• Assets held for sale - measured in accordance with IFRS 5 (ie fair value less costs to sell)

Exception to both Measurement Principle and Recognition Principle:

• Income taxes - deferred tax assets or liabilities arising from acquired assets or liabilities accounted for using
IAS 12.
• Employee benefits - accounted for using IAS 19
• Indemnification assets - may not be recognised at fair value if it relates to an item not recognised or measured
in accordance with IFRS 3.

RECOGNISING AND MEASURING GOODWILL OR A GAIN FROM A

BARGAIN PURCHASE
 The acquirer shall recognise goodwill as of the acquisition date measured as the excess of (a) over (b)
below:
(a) the aggregate of:
i. the consideration transferred, which generally requires acquisition-date fair value;
ii. the amount of any non-controlling interest in the acquiree;
iii. in a business combination achieved in stages, the acquisition-date fair value of the
acquirer’s previously held equity interest in the acquiree.
(b) the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities
assumed.
 Occasionally, an acquirer will make a bargain purchase, which is a business combination in which the
amount in (b) exceeds the aggregate of the amounts specified in (a).
 Before recognising a gain on a bargain purchase, the acquirer shall reassess whether it has correctly
identified all of the assets acquired and all of the liabilities assumed and shall recognise any additional
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assets or liabilities that are identified in that review. The acquirer shall then review the procedures used
to measure the amounts this PFRS requires to be recognised at the acquisition date for all of the
following:
a. the identifiable assets acquired and liabilities assumed;
b. the non-controlling interest in the acquiree, if any;
c. for a business combination achieved in stages, the acquirer’s previously held equity interest in
the acquiree; and
d. the consideration transferred.
 If excess remains after applying the requirements in a to d, the acquirer shall recognise the resulting
gain in profit or loss on the acquisition date.
 The gain shall be attributed to the acquirer.

CONSIDERATION TRANSFERRED
 The consideration transferred in a business combination shall be measured at fair value, which shall be
calculated as the sum of the acquisition-date fair values of the assets transferred by the acquirer, the
liabilities incurred by the acquirer to former owners of the acquiree and the equity interests issued by
the acquirer.
 The consideration the acquirer transfers in exchange for the acquiree includes any asset or liability
resulting from a contingent consideration arrangement.
 The acquirer shall recognise the acquisition-date fair value of contingent consideration as part of the
consideration transferred in exchange for the acquiree.

ACQUISITION-RELATED COSTS
 Acquisition-related costs are costs the acquirer incurs to effect a business combination. Those costs
include finder’s fees; advisory, legal, accounting, valuation and other professional or consulting fees;
general administrative costs, including the costs of maintaining an internal acquisitions department; and
costs of registering and issuing debt and equity securities.
 The acquirer shall account for acquisition-related costs as expenses in the periods in which the costs are
incurred and the services are received, with one exception. The costs to issue debt or equity securities
shall be recognised in accordance with PAS 32/PFRS 7 and PAS 39/PFRS 9.

ACCOUNTING FOR BUSINESS COMBINATION:

FULL IFRS/PFRS VERSUS IFRS/PFRS FOR SMEs

FULL IFRS/PFRS IFRS/PFRS for SMEs

Reference IFRS 3/PFRS 3 (revised) Section 19 of IFRS/PFRS for SMEs
Definition of A transaction or other event in which an acquirer The bringing together of separate entities or
business obtains control of one or more businesses. businesses into one reporting entity.
combination
Other term for ‘true mergers’ or ‘mergers of equals’
business
combination
Accounting Acquisition Method Purchase Method
method
Direct Expense Capitalize (part of acquisition cost)
Acquisition –
related costs
Initial a. At Fair value or a. At proportionate fair value of the acquiree’s net
measurement b. At proportionate fair value of the acquiree’s assets
of net assets
Noncontrolling
Interest
Goodwill to be a. Full goodwill or a. Parent goodwill (partial goodwill)
recognized b. Parent goodwill (partial goodwill)
Cost of Fair value of consideration transferred * xxx Fair value of consideration transferred* xxx
goodwill at Noncontrolling interest xxx Direct acquisition – related cost xxx
Acquisition-date fair value of the acquirer’s Total xxx
initial previously held equity interest in the acquire xxx Less: Fair value of net assets acquired xxx
recognition Total xxx Goodwill xxx
Less: Fair value of acquiree’s net assets xxx
Goodwill xxx *including fair value of contingent consideration
(probable and can be measured reliably)
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*including fair value of contingent consideration
Subsequent Cost less accumulated impairment loss Cost less accumulated amortization and
Measurement accumulated impairment loss.
of goodwill
Amortisation Amortise over the useful life.
period If an entity is unable to make a reliable estimate
of the useful life of goodwill, the life shall be
presumed to be ten years.
Amortisation The entity shall choose an amortisation method that
method reflects the pattern in which it expects to consume
the asset’s future economic benefits. If the entity
cannot determine that pattern reliably, it shall
use the straight-line method.

Test Items:
1. Which of the following types of business combinations is least similar to the others?
a. Merger c. Acquisition of stock
b. Consolidation d. All of the above are equally similar.

2. All business combination shall be accounted for by using:

a. acquisitionmethod c. uniting of interest method
b. pooling-of-interest method d. equity method

3. Application of the acqusition method in accounting for business combination shall start at:
a. acquisition date b. agreement date c. exchange date d. initiation date

4. The combining entity that obtains control of the other combining entities or businesses is the:
a. acquire b. acquirer c. parent d. subsidiary

5. Control over investee is obtained if the investor has all of the following, EXCEPT:
a. power over the investee.
b. exposure, or rights, to variable returns from its involvement with the investee.
c. the ability to use its power over the investee to affect the amount of the investor’s returns.
d. significant influence.

6. Which of the following is not one of the criteria of control?

a. more than one – half of the voting rights is acquired.
b. power over the investee.
c. exposure, or rights, to variable returns from its involvement with the investee.
d. the ability to use its power over the investee to affect the amount of the investor’s returns.

7. Consolidation is based on control that one entity (investor) has over another entity (investee) and not
merely based on majority voting rights owned. This concept of consolidation is called:
a. power so as to benefit model
b. fair value model
c. de facto control model
d. cost model

8. Power, in order to have control, arises from rights that give the investor current ability to direct the relevant
activities. Which of the following may give power to the investor?
a. voting rights
b. potential voting rights
c. contractual arrangements
d. all of the above

9. Entity A owns a 60 per cent voting interest in Entity B. Entity B owns a 70 per cent voting interest in Entity
C. How should Entity A account for its investment in Entity C in its consolidated financial statements?
a. consolidate Entity C.
b. account for investment in Entity C using the equity method.
c. account for its investment in Entity C using the policy it has adopted to account for associates

10. The facts are the same as those in Question 9. Determine the appropriate percentage for the attribution of
post-acquisition increases in Entity C’s equity to Entity A.

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a. 70 per cent.
b. 60 per cent.
c. 42 per cent.

11. On 1/1/20X1 A has 100 issued voting shares. On 2/1/20X1 A acquires 100% of B from B’s shareholders in
exchange for 150 A voting shares.
Who is the acquirer in this business combination?
a. A
b. B
c. Neither A nor B

12. A & B transfer their businesses to Z. In return A & B each receive 50% of the voting shares in Z. A & B each
appoint 3 members to Z’s 6 member board of directors. A also appoints the chairman of Z. The chairman
has a casting vote.

Who is the acquirer?

a. A
b. B
c. Neither A nor B

13. In all business combinations to be accounted by using the acquisition method, an acquirer shall be
identified. If an acquirer is difficult to identify, which of the following would give an indication that an
acquirer exists:
a. If the fair value of one of the combining entities is significantly greater than that of the other combining
entity, the entity with the greater fair value is likely to be the acquirer.
b. If the business combination is effected through an exchange of voting ordinary equity instruments for cash
or other assets, the entity giving up cash or other assets is likely to be the acquirer.
c. If the business combination results in the management of one of the combining entities being able to
dominate the selection of the management team of the resulting combined entity, the entity whose
management is able so to dominate is likely to be the acquirer.
d. All of the above.

14. Which of the following would NOT be included as cost of business combination?
a. Legal advisers fee
b. Finders’ fee
c. Accountants fee
d. Cost of registering securities
e. All of the above.

15. Fair value of any obligations of the acquirer to transfer additional assets or equity interests if specified future
events occur or conditions are met.
a. Contingent consideration. c. Gain contingency.
b. Loss contingency. d. Consistent consideration.

16. Subsequent payment to the seller as compensation for a reduction in value of the assets given, equity
instruments issued or liabilities incurred or assumed by the acquirer shall:
a. increase the cost of combination. c. not increase the cost of combination.
b. be recorded as goodwill. d. shall adjust the cost of combination.

17. The acquirer shall, at the acquisition date, recognize the acquiree’s identifiable assets, liabilities and
contingent liabilities at their:
a. Fair Values b. Book Values c. Salvage Values d. Exit Values

18. After the initial recognition of goodwill, it is measured at:

a. Cost less any accumulated impairment loss. c. Its original cost.
b. Cost less accumulated amortization. d. None of the above

19. A business combination is accounted for appropriately as a acquisition. Which of the following should be
deducted in determining the combined corporation’s net income for the current period?
Direct cost General exp. Direct cost General exp.
of acquisition related to acq. of acquisition related to acq.
a. Yes No c. No Yes

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b. Yes Yes d. No No

20. Company B acquired the assets (net of liabilities) of Company S in exchange for cash. The acquisition price
exceeds the fair value of the net assets acquired. How should Company B determine the amounts to be
reported for the plant and equipment, and for long-term debt of the acquired Company S?
Plant and Equipment Long-Term Debt Plant and Equipment Long-Term Debt
a. Fair value S's carrying amount c. S's carrying amount Fair value
b. Fair value Fair value d. S's carrying amount S's carrying amount

21. Which of the following business combination expenses would NOT qualify as a direct acquisition expense for
a purchase?
a. Fees for purchase audit c. Stock issuance fees
b. Outside legal fees d. All are direct acquisition expenses.

22. In acquisition method business combination, the direct acquisition, indirect acquisition and security issuance
costs are accounted for as follows:
Direct Acquisition Indirect Acquisition Security Issuance
a. Added to price paid Added to price paid Added to price paid
b. Added to price paid Expensed Deducted from value of security issued
c. Expensed Expensed Deducted from value of security issued
d. Expensed Expensed Expensed

23. When one company acquires a company in the same industry, what type of business combination has
occurred?
a. horizontal combination c. conglomerate combination
b. vertical combination d. pooling combination

24. Which of the following may management be trying to accomplish when a conglomerate form of business
combination is undertaken?
a. increase efficiency c. capitalize on market synergies
b. guarantee supply of raw materials d. diversify risk across business industries

25. Which of the following combinations would be considered horizontal?

a. The two entities are unrelated.
b. The two entities are competitor in the same industry.
c. The two entities have a potential buyer-seller relationship.
d. None of the above describes a horizontal combination.

26. If the initial accounting for a business combination can be determined only provisionally, the acquirer shall
account for the combination using the provisional values. Adjustments to those provisional values shall be
recognized by the acquirer within:
a. 3 months of the acquisition date. c. 9 months of the acquisition date.
b. 6 months of the acquisition date. d. 12 months of the acquisition date.

27. Which of the following forms of combination would necessitate the preparation of consolidated financial
statements for the group?
a. merger c. stock acquisition
b. consolidation d. all of the above.

28. In reverse acquisition, the acquirer for accounting purposes is:

a. the legal subsidiary b. the legal parent c. the issuing entity (of d. no acquirer can be identified
shares)

29. In stock acquisition form of business combination, the PFRS 3 shall be applied in:
a. the separate financial statements of the c. the separate and consolidated financial statements.
acquirer.
b. the consolidated financial statements. d. either the separate or consolidated financial
statements.

30. The cost of the business combination involving issuance of bonds payable by the acquirer does not include:
a. Bond issue costs
b. Contingent consideration determinable on the consummation date of the combination
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c. Present value of the bonds payable issued in the combination
d. Finder's fee
e. Both a and d.

31. Using the acquisition method, when a bargain purchase occurs and the net amount of the fair values of the
separately identified assets acquired and liabilities exceed the fair value of the consideration transferred.,
a. assets are recorded at amounts below their assessed fair values.
b. a gain on bargain purchase is recognized at the acquisition date.
c. a loss on bargain purchase is recognized at the acquisition date.
d. a contingent liability is recognized.
e. Goodwill is recognized and tested for impairment on an annual basis.

32. Which of the following statements is not correct regarding SME accounting for business combination?
a. Goodwill arising from business combination is amortised over its useful life and in case the SME is
unable to make a reliable estimate of the useful life of goodwill, the life shall be presumed to be ten
years.
b. Noncontrolling interest is measured initially at proportionate fair value of the acquiree’s net assets.
c. Acquisition – related costs that are considered direct costs are expensed outright.
d. Only the parent’s goodwill is recognized.

29. On April 1, 2014, Dart Co. paid P620,000 for all the issued and outstanding ordinary shares of Wall Corp. in a
transaction properly accounted for as a purchase. The recorded assets and liabilities of Wall Corp. on April 1,
2014 as follows:
Cash P 60,000
Inventory 180,000
Property and equipment (net of accumulated
depreciation of P220,000) 320,000
Goodwill (net of accumulated amortization
of P50,000) 100,000
Liabilities (120,000)
Net assets P540,000
On April 1, 2014, Wall’s inventory had a fair value of P150,000 and the property and equipment (net) had a
fair value of P380,000. What is the amount of goodwill resulting from the business combination?
a. P150,000 b. P120,000 c. P50,000 d. P20,000

30. On August 31, 2014, Wood Corp. issued 100,000 shares of its P20 par value stock for the net assets of Pine,
Inc., in a business combination accounted for by the acquisition method. The market value of Wood’s ordinary
shares on August 31 was P36 per share. Wood paid a fee of P160,000 to the consultant who arranged this
acquisition. Cost of registering and issuing securities amounted to P80,000. No goodwill was involved in the
purchase. What amount should Wood capitalize as the cost of acquiring Pine’s net assets?
a. P3,600,000 b. P3,680,000 c. P3,760,000 d. P3,840,000

31. On December 31, 2013, Saxe Corporation was merged into Poe Corporation. In the business combination,
Poe issued 200,000 ordinary shares P10 par, with a market price of P18 a share, for all of Saxe’s ordinary
shares. The shareholders’ equity section of each company’s balance sheet immediately before the
combination was:
Poe Saxe
Ordinary Share Capital P3,000,000 P1,500,000
Share Premium 1,300,000 150,000
Retained earnings 2,500,000 850,000
P6,800,000 P2,500,000
In the December 31, 2013, consolidated balance sheet, share premium should be reported at:
a. P950,000 b. P1,300,000 c. P1,450,000 d. P2,900,000

32. On January 1, 2014, Neal Co. issued 100,000 shares of its P10 par value ordinary shares in exchange for all of
Frey Inc.’s outstanding shares. The fair value of Neal’s ordinary shares on December 31, 2013 was P19 per
share. The carrying amounts and fair values of Frey’s assets and liabilities on December 31, 2013, were as
follows:
Carrying Amount Fair Value
Cash P 240,000 P 240,000
Receivables 270,000 270,000
Inventory 435,000 405,000

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Property, plant and equipment 1,305,000 1,440,000
Liabilities (525,000) (525,000)
Net assets P1,725,000 P1,830,000
What is the amount of goodwill resulting from the business combination?
a. P175,000 b. P105,000 c. P 70,000 d. P0

33. Fast Corporation paid P50,000 cash for the assets of Agge company, which consisted of the following:
Book Value Fair Value
Current Assets P 10,000 P 14,000
Plant and Equipment 40,000 55,000
Liabilities assumed ( 10,000) ( 9,000)
P 40,000 P 60,000
The plant and equipment acquired in this business combination should be recorded at:
a. P55,000 b. P50,000 c. P45,833 d. P45,000

34. Carrier Corporation issued 100,000 shares of P20 par ordinary shares for all the outstanding shares of Homer
Corporation in a business combination consummated on July 1, 2014. Carrier’s ordinary shares was selling at
P30 per share at the time the business combination was consummated. Out of pocket costs of the business
combination were as follows:
Finder’s fee P 50,000
Accountant’s fee (advisory) 10,000
Legal fees (advisory) 20,000
Printing costs of share certificates 5,000
SEC registration costs and fees 12,000
Total P 97,000
The acquisition cost of the combination will be:
a. P3,097,000 b. P3,080,000 c. P3,017,000 d. P3,000,000

35. Patter Corporations issues 500,000 shares of its own P10 par ordinary for all the outstanding stock of
Simpson Corporation in a merger consummated on July 1, 2014. On this date Patter stock is quoted at P20
per share. Summary balance sheet data for the two companies at July 1, 2014, just before combination, are as
follows:
Patter Simpson
Current assets P18,000,000 P1,500,000
Plant assets 22,000,000 6,500,000
Total assets P40,000,000 P8,000,000
Liabilities P12,000,000 P2,000,000
Share Capital, P10 par 20,000,000 3,000,000
Share Premium 3,000,000 1,000,000
Retained earnings 5,000,000 2,000,000
Total equities P40,000,000 P8,000,000
If the business combination is treated as a purchase and Simpson’s identifiable net assets have a fair value of
P9,000,000, Patter’s balance sheet immediately after the combination will show goodwill of:
a. P1,000,000 b. P2,000,000 c. P3,000,000 d. P4,000,000