ACCOUNTING FOR BUSINESS COMBINATION
PFRS 3 Revised and PFRS 10 (Consolidation)
A business combination is a transaction or other
event in which an acquirer obtains control of one or
more businesses.
Types of Business Combination
1. Asset Acquisition – the acquirer owns 100% of
the assets of the acquiree.
(a) Statutory Merger – A Co. + B Co. = A Co.
or B Co. (BDO and Equitable PCI, Digitel
and PLDT)
(b) Statutory Consolidation – A Co. + B Co.
= C Co.
2. Stocks Acquisition – the acquirer/parent
purchase share of stocks to the
acquiree/subsidiary to obtain control.
(a) Fully Owned Subsidiary – 100%
ownership (Jollibee Food Corp. and Red
Ribbon)
(b)Partially Owned Subsidiary – 50%-
99.99% (Jollibee Food Corp and Mang
Inasal)
- Non-Controlling Interest
Example: JFC bought 70% Mang Inasal.
Parent-JFC, Subsidiary-Mang Inasal.
70%-owned by JFC, 30% owned by NCI
- A Co. + B Co. = AB Co.
Control
 An inventor 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 the following cases:
(a) The acquirer has the power to appoint or
remove the majority of the board of
directors of the acquiree;
(b)The acquirer has the power to cast the
majority of votes at board meetings or
equivalent bodies within the acquirer;
(c) The acquirer has power over more than
half of the voting rights of the acquiree
because of an agreement with other
investors;
(d)The acquirer has power to control the
financial and operating policies of the
acquiree because of a law or an
agreement.
Accounting for Business Combination (c) Receives the largest portion of the
voting rights
 Business combinations are accounted for
(d) Has the ability to elect or appoint or to
using the acquisition method. This method
remove a majority
requires the following:
(e) Dominate the management of the
1. Identifying the acquirer
combined entity
2. Determining the acquisition date
(f) Significantly larger of the combining
3. Recognizing and measuring identifiable assets
entities
acquired, and liabilities assumed, and any NCI in
(g) Initiated the combination
the acquiree
4. Recognizing and measuring goodwill. This
2. Determining the acquisition date
requires recognizing and measuring the
 The acquisition date is the date on which
following:
the acquirer obtains control of the
(a) Consideration transferred
acquiree.
(b)Non-controlling interest in the acquiree
 A.d = measurement date
(c) Previously held equity interest in the
acquiree  The net assets and contingent
(d)Identifiable assets acquired and liabilities considerations can be adjusted within 1
assumed on the business combination year from the date of business combination
or within the measurement.
1. Identifying the acquirer  Retrospective application shall be applied
 The acquirer is the entity that obtains control
of the acquiree. The acquirer is the business 3. Recognizing and measuring identifiable
that the acquirer obtains control of in a assets acquired, liabilities assumed, and any
business combination. NCI in the acquiree
 The acquirer is normally the entity that:
(a) Transfers cash or other assets and
incurs liabilities
(b) Issues its equity interests (except in
reverse acquisitions)
 1. Direct Cost – expense
4. Recognizing and measuring goodwill 2. Indirect cost – expense
3. Cost to issue and to register (CITR)
Consideration transferred/Purchase Price (PP) xx Key terms: share, stocks, SEC, documentary stamp tax
Non-controlling interest in the acquiree (NCI) xx
Previously held equity interest in the acquiree xx
(a) Share premium issuance/business combi
Total xx (b)Share premium on original issuance
Less: Fair value of the net identifiable assets acquired (xx) (c) Stock issuance cost (contra equity)
Goodwill/ (Gain on a bargain purchase) xx
Note: Listing fees is not a CITR according to Phil.
On acquisition date, the acquirer recognizes a Interpretations Committee
resulting:
(a) Goodwill as an asset
(b)Gain on a bargain purchase as gain in
profit or loss
Note: The goodwill of the acquiree is ignored
Acquisition-related costs
 Acquisition-related costs are costs that acquirer
incurs to effect a business combination
 Acquisition-related costs are recognized as
expenses in the periods in which they are
incurred, except for the following:
(a) Cost to issue debt securities measured at
amortized cost – included in the initial
measurement of the resulting financial
liability.
(b)Cost 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.