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MERGER
MERGER
MERGER
Combinations-
Statutory Merger
Business Combination
➢ PFRS 3 defines “business combination” as 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”
also are business combinations.
● Friendly Combination
● Unfriendly (Hostile) Combination -
● Tender offers
● Resistance
Defensive tactics for unfriendly takeover
Reasons for Business Combination
➢ Cost Advantage
➢ Lower Risk
➢ Avoidance of Takeovers
➢ Acquisition of Intangible Assets
➢ Other reasons
4 basic kinds of market integration
➢ Horizontal Integration-Combination of firms with the same business lines
and market.
➢ Vertical Integration- Combination of f irms with different but successive,
stages of production.
➢ Conglomerate Combination-Combination of f irms with unrelated and
diverse products and/or service functions.
➢ Circular combination- entails some diversif ication, but does not have a
drastic change in operation as a conglomerate.
The acquisition of control
❖ Models of carrying out business combination
● Acquisition of assets- the acquirer purchases the assets and assume the liabilities
of the acquiree in exchange for cash or other non-cash consideration
➔ Statutory Merger
Ex: X company + Y company= X or Y company
➔ Statutory Consolidation
Ex: X company + Y company= Z company
● Stock Acquisitions - acquirer obtains control over the acquiree by acquiring a majority
ownership interest in the voting rights of the acquiree(i.e. More than 50%)
❖ Inputs
❖ Process
❖ Output
Method of Business Combinations
● Acquisition Method
● Pooling of interest method
The acquirer shall recognize the acquisition-date fair values of contingent consideration as part of the
consideration transferred.
VALUATION OF IDENTIFIABLE ASSETS AND
LIABILITIES
The identifiable assets acquired and liabilities assumed in a business combination are measured in
accordance with the general measurement principle in IFRS 3 which states they should be
measured at their acquisition-date fair values.
FVNA (Fair Value of the Net assests acquired)
= Fair value of the assets acquired at the acquisition date - (minus) Fair Value of the liabilities assumed at the
acquisition date
Assets with Uncertain Cash Flows
(valuation allowances)
An acquirer is not permitted to recognize a separate valuation allowance
as of the acquisition date for assets acquired in a business combination
that are measured at their acquisition-date fair values because the
effects of uncertainty about future cash flows are included in the fair
value measured.
The acquirer may recognize some assets and liabilities that the
acquiree had not previously recognized in its financial statements.
APPLYING THE ACQUISITION METHOD
ACQUISITION OF NET ASSETS
Fair values for all accounts have been measured as of June 30, 2017 as follows:
Case 1: Price paid exceeds fair value of the net identifiable assets acquired.
Acquirer, Inc., issues 80, 000 shares of its P10 par value common stock with a
market value of P40 each for J&J Company’s net assets. Acquirer, Inc. pays
professional fees of P50,000 to accomplish the acquisition and stock issuance
costs of P30,000.
Recording Changes in Contingent Consideration
Changes that are the result of the Changes resulting from events after the
a cqu i rer obta i n i n g a ddi ti on a l acquisition date (e.g. meeting an earnings
t a r g et ) a r e n ot mea su r emen t p er iod
inf orma tion a bout f a cts a nd
adjustments. Accounting for such change
circumstances that existed at the d ep en d s o n w h et h er t h e a d d it io n a l
acquisition date, and that occur within consideration is an equity instrument or
the measurement period (which may cash or other assets paid or owed. If it is
be a maximum of one year from the e q u i t y, t h e o r i g i n a l a m o u n t i s n o t
remeasured. If the additional consideration
acquisition date), are recognized as
is cash or other assets paid or owed, the
adjustments against the original changed amount is recognized in prof it or
accounting for the acquisition (and so loss.
may affect goodwill).
If during the measurement period, the contingent consideration was revalued based on additional
information, the estimated liability and the goodwill (or gain on acquisition) would be adjusted. For
example, if within the measurement period, the estimate was revised to P160,000, the P60,000 increased
would be adjusted as follows:
Goodwill 60,
000
If the estimate is again revised after the measurement period, the adjustment is included in profit
or loss of the later period. For example, if the estimate was revised to P200,000 after the measurement
period, the P40,000 increase would be recorded as follows:
Using the example of the acquisition of J & J Company for P3,200,000, assume that there was an
agreement to issue 20,000 additional shares if the average income during the 2-year period of 2016 and
2017 exceeded P160,000 per year. There would be no change in the entry in Case 1 to record the
acquisition on June 30, 2017.
Assuming the contingent event occurs, the following entry would be made after December 2019, to
issue the additional 20,000 shares.
ILLUSTRATION 13-5
On January 1, 2017, PP Inc acquires a 75% equity interest in SS Inc, paying cash consideration of P50
million and issuing 50 million new ordinary shares of PP Inc valued at P2 each to the former owners of SS Inc.
On this date, the net fair value of the identifiable assets and liabilities of SS Inc is P100 million.
The issued share capital of SS Inc consists of 50 million ordinary shares of P1 each. On acquisition date, the
shares are quoted on the stock exchange at P4 per share. Both PP Inc and SS Inc agree that the market value is
representative of the fair value of SS Inc as a whole.
Required:
Compute the goodwill on combination and the non-controlling interest in accordance with
(2) the revised IFRS 3 with (a) non-controlling interest measured at fair value and (b) non-controlling interest
measured at its proportionate share of net assets.
(1) Original IFRS 3
Cost of Combination:
Cash consideration
50M
Ordinary Shares issued 50M X P2 100M
Fair value of considered transferred 150M
Share of net assets acquired 75% X P100M 75M
Goodwill on combination
75M
Non-controlling interest at acquisition date: 25% X P100M 25M
Illustration 13-6
On January 1, 2017, Papa Ltd acquires a 75% interest in the equity capital of Anak Ltd. On this date, the
identifiable assets and liabilities of Anak Ltd are valued at P200 million. The maintainable profits of Anak Ltd are
estimated at P 40 million per year. On the basis of a price-earnings ratio of 10 times, the fair value of the ordinary
shares of Anak Ltd. is estimated at P400 million.
(1) an initial payment of P100 million on January 1, 2017; (11) an amount of P110 million payable on January 1,
2018 contingent on the achievement of the maintainable profit of P40 million in the first year; and (ii) an amount
of 121 million payable on January 1, 2019 contingent on the achievement of the maintainable profit of P40
million in the second year.
Anak Ltd's maintainable profits have been averaging about P40 million per year in the past five years and it is
probable that this level of profits would be maintaned in the foreseeable future. At the acquisition date, Papa
Ltd's borrowing cost is 10% per year.
The computation of the cost of combination on January 1, 2017 and the goodwill on combination are as follows:
Cost of combination:
P’M
Initial payment
100
Contingent consideration payable 110(1.10) 1
100
Contingent consideration payable 121 (1.10) 2
100
Cost of Combination
300