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Reviewer PFRS 3 Business Combinations

Accountancy (San Mateo Municipal College )

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PFRS 3 BUSINESS COMBINATIONS

Definition of a Business Combination

A business combination is “a transaction or other event in which an acquirer obtains control

of one or more businesses.” (PFRS 3)

Control
• An investor controls an investee when the investor is exposed, or has rights, to variable
returns from its involvement with the investee and has the ability to affect those returns
through its power over the investee.
• Control is normally presumed to exist when the ownership interest acquired in the voting
rights of the acquiree is more than 50% (or 51% or more).
• Control may exist even if the acquirer holds less than 50% interest in the voting rights of
acquiree, such as in the following cases:
• The acquirer has the power to appoint or remove the majority of the board of
directors of the acquiree; or
• The acquirer has the power to cast the majority of votes at board meetings or
equivalent bodies within the acquiree; or
• The acquirer has power over more than half of the voting rights of the acquiree
because of an agreement with other investors; or
• The acquirer has power to control the financial and operating policies of the
acquiree because of a law or an agreement.

Accounting for business combinations

• Business combinations are accounted for using the acquisition method. This method
requires the following:
• Identifying the acquirer;
• Determining the acquisition date; and
• Recognizing and measuring goodwill. This requires recognizing and measuring
the following:
• Consideration transferred
• Non-controlling interest in the acquiree
• Previously held equity interest in the acquiree
• Identifiable assets acquired and liabilities assumed on the business
combination.

Identifying the acquirer

• The acquirer is the entity that obtains control of the acquiree. The acquiree is the
business that the acquirer obtains control of in a business combination.
• The acquirer is normally the entity that:
• Transfers cash or other assets and incurs liabilities;
• Issues its equity interests (except in reverse acquisitions);
• Receives the largest portion of the voting rights;
• Has the ability to elect or appoint or to remove a majority ;
• Dominates the management of the combined entity;

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• Significantly larger of the combining entities;

• Initiated the combination

Determining the acquisition date

• The acquisition date is the date on which the acquirer obtains control of the acquiree.

Recognizing and measuring goodwill

Consideration transferred xx
Non-controlling interest in the acquiree (NCI) xx
Previously held equity interest in the acquiree xx
Total xx
Less: Fair value of net identifiable assets acquired (xx)
Goodwill / (Gain on a bargain purchase) xx

On acquisition date, the acquirer recognizes a resulting:

a. Goodwill as an asset.
b. Gain on a bargain purchase as gain in profit or loss.

Consideration transferred
• The consideration transferred in a business combination is measured at fair value.
• Examples of potential forms of consideration include:
• Cash,
• Other assets,
• A business or a subsidiary of the acquirer,
• Contingent consideration,
• Ordinary or preference equity instruments, options, warrants and member
interests of mutual entities.

Acquisition-related costs
• Acquisition-related costs are costs the acquirer incurs to effect a business combination.
• Acquisition-related costs are recognized as expenses in the periods in which they are
incurred, except for the following:
• Costs to issue debt securities measured at amortized cost – included in the initial
measurement of the resulting financial liability.
• Costs to issue equity securities – are accounted for as deduction from share
premium. If share premium is insufficient, the issue costs are deducted from
retained earnings.

THE “EXCESS OF THE ACQUIRER’S INTEREST IN THE NET FAIR VALUE OF ACQUIREE’S
IDENTIFIABLE ASSETS, LIABILITIES, AND CONTINGENT LIABILITIES OVER COST”
(FORMERLY KNOWN AS NEGATIVE GOODWILL) SHOULD BE REASSESSED AS TO THE
ACCURACY OF ITS MEASUREMENT AND THEN RECOGNIZED IMMEDIATELY IN PROFIT
OR LOSS.

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Non-controlling interest (NCI)

• Non-controlling interest (NCI) is the equity in a subsidiary not attributable, directly or
indirectly, to a parent.
• NCI is measured either at:
a. Fair value, or
b. The NCI’s proportionate share of the acquiree’s
identifiable net assets.

Previously held equity interest in the acquiree

• Previously held equity interest in the acquiree pertains to any interest held by the
acquirer before the business combination.

Net identifiable assets acquired

 On acquisition date, the acquirer shall recognize, separately from goodwill, the
identifiable assets acquired, the liabilities assumed and any non-controlling interest in
the acquiree.
 ON ACQUISITION DATE, THE DATE ON WHICH THE ACQUIRER OBTAINS
CONTROL OF THE ACQUIREE.
 Any unidentifiable asset of the acquiree (e.g., any recorded goodwill by the acquiree)
shall not be recognized.
 The identifiable assets acquired and the liabilities assumed are measured at their
acquisition-date fair values.

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