ACC 113: Accounting for Business Combinations

Student Activity Sheet #2

Name: ______________________________________________________ Class number: ______

Section: ____________ Schedule: ____________ ___________________ Date: _____________

Lesson title: Business Combination (Part 1) Materials:

Lesson Targets: Columnar notebook; calculator;
At the end of the learning session, textbook
1. I can identify a business combination. References:
2. I can explain the essential elements of business Millan, Zeus Vernon B.; Accounting
combinations. for Business Combinations; 2019
3. I can compute goodwill or gain on bargain purchase. Edition; pp. 1-23
Dayag, Antonion J.; Advanced
Financial Accounting and
Reporting, 2016 Edition

Productivity Tip:
Keep away anything that might be a possible source of distraction. You can also go to a quiet and
comfortable place to keep our concentration focused.

A. LESSON PREVIEW/REVIEW
Introduction (5 min.)
Welcome to ACC 113 - Accounting for Business Combinations!

Let’s begin your 2nd day in Accounting for Business Combination by activating your prior knowledge
through answering the What I know Chart, part 1 in Activity 1. Do not worry if you answer the questions
incorrectly that only means you do not have prior knowledge of the subject.

1) Activity 1: What I Know Chart, Part 1

Before proceeding with our main lesson, let us first answer the first column of the chart below:

What I Know Questions: What I Learned (Activity 4)

1. What is a business
combination?

2 How do we account for business

combination?

3 How can a business combination

occur?

This document is the property of PHINMA EDUCATION

 ACC 113: Accounting for Business Combinations
Student Activity Sheet #2

Name: ______________________________________________________ Class number: ______

Section: ____________ Schedule: ____________ ___________________ Date: _____________

This document is the property of PHINMA EDUCATION

 ACC 113: Accounting for Business Combinations
Student Activity Sheet #2

Name: ______________________________________________________ Class number: ______

Section: ____________ Schedule: ____________ ___________________ Date: _____________

B.MAIN LESSON
1) Activity 2: Content Notes (15 mins)

Business Combination
 A transaction or other event in which an acquirer obtains control of one or more businesses
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
 Presumed to exist when ownership interest acquired in the voting rights of the acquiree is more
than 50% (51% or more).
 Ma y still exist even if the acquirer holds less than 50% interest in the voting rights of the acquire
in the following cases:
o The acquirer has the power to appoint or remove the majority of the board of directors of
the acquiree; or
o The acquirer has the power to cast the majority of votes at board meetings or equivalent
bodies within the acquiree; or

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 ACC 113: Accounting for Business Combinations
Student Activity Sheet #2

Name: ______________________________________________________ Class number: ______

Section: ____________ Schedule: ____________ ___________________ Date: _____________

o The acquirer has power over more than half of the voting rights of the acquiree because
of an agreement with other investors; or
o The acquirer has power to control the financial and operating policies of the acquiree
because of a law or an agreement.

Identifying an 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.

Determining the acquisition date

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

Pro-forma computation of Goodwill:

Consideration Transferred xxx
Non-controlling interest in the acquire (NCI) xxx
Previously held equity interest in the acquiree xxx
Total xxx
Less: FV of net identifiable assets acquired xxx
Goodwill/(Gain on bargain purchase) xxx

Consideration transferred
 The consideration transferred in a business combination is measured at fair value.

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:
o Costs to issue debt securities measured at amortized cost – included in the initial
measurement of the resulting financial liability.
o 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.

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:
o Fair value, or
o The NCI’s proportionate share of the acquiree’s identifiable net assets.

This document is the property of PHINMA EDUCATION

 ACC 113: Accounting for Business Combinations
Student Activity Sheet #2

Name: ______________________________________________________ Class number: ______

Section: ____________ Schedule: ____________ ___________________ Date: _____________

2) Activity 3: Skill-building Activities (35 mins)

Solve the following problems:
1. Entity A acquired all the assets and assumed all the liabilities of entity B for P1,800,000. Information
on entity B’s assets and liabilities as at the acquisition date is shown below:
Assets Carrying amounts Fair values
Receivables – net 200,000 100,000
Inventory 600,000 450,000
Building – net 1,200,000 1,800,000
Goodwill 100,000 20,000
Total assets 2,100,000 2,370,000
Liabilities
Payables 900,000 700,000

Requirement: Compute for the goodwill (gain on bargain purchase).

Use the following information for the next two items:

Entity A acquired 75% of the outstanding voting shares of Entity Bfor P2,000,000. On acquisition date,
Entity B’s identifiable assets and liabilities have fair values of P4.000,000 and P1,600,000, respectively.

2. How much is the goodwill if Entity A opts to measure the controlling interest at the NCI’s
proportionate share in Entity B’s net identifiable assets?

This document is the property of PHINMA EDUCATION

 ACC 113: Accounting for Business Combinations
Student Activity Sheet #2

Name: ______________________________________________________ Class number: ______

Section: ____________ Schedule: ____________ ___________________ Date: _____________

3. Entity A opts to measure the non-controlling interest at fair value. An independent valuer assessed
the NVI’s fair value to be P540,000. How much is the goodwill?

3) Activity 4: What I Know Chart, Part 2

This time, let us go back to Activity 1 and fill out the third column for what we now know about the
lesson.

4) Activity 5: Check for Understanding (Summative Test, 5 mins)

To measure our understanding of today’s lesson, let us try answering the questions that follow. Write T
for if the statement if true. If not, write, F.
____1. The two important elements in the definition of business combination under PFRS 3 are
“business” and “combination”.
____2. PFRS 3 requires the use of the purchase method in accounting for business combination.
____3. The entity that obtains control in a business combination is called the acquiree.
____4. The acquisition date in a business combination is normally the closing date.
____5. Non-controlling interests are measured at fair value only.
____6. If the controlling interest is 80%, the non-controlling interest is 20%.
____7. A gain on bargain purchase (negative goodwill) is recognized as an allocated deduction to the
net identifiable assets acquired in the year of business combination.
____8. An intangible asset that is unrecorded by the acquiree may nevertheless be recognized by the
acquirer in a business combination.
____9. A noncurrent asset acquired in a business combination that is classified as held for sale is
measured at fair value.
____10. If the consideration transferred in a business combination is deferred, the consideration may
be measured at present value.

This document is the property of PHINMA EDUCATION

 ACC 113: Accounting for Business Combinations
Student Activity Sheet #2

Name: ______________________________________________________ Class number: ______

Section: ____________ Schedule: ____________ ___________________ Date: _____________

C. LESSON WRAP-UP

1) Activity 6: Thinking about Learning

Congratulations for finishing this module! You can now tract your progress by shading the number of
the module that you finished. It’s just the start but by being consistent, you’ll be shading Day 31 as
scheduled.

Did you have challenges learning the concepts in this module? If none, which parts of the module
helped you learn the concepts?

__________________________________________________________________________________
__________________________________________________________________________________

FAQs
1. What are common reasons for entering business combination?
There are various reasons for combining businesses. Such may include elimination of cutthroat
competition, economies of large-scale production, control of market, or technological factors.
2. How does goodwill increase company value?
Goodwill is the premium that is paid when a business is acquired. If a business is acquired for
more than its book value, the acquiring business is paying for intangible items such as
intellectual property, brand recognition, skilled labor, and customer loyalty.

KEY TO CORRECTIONS
Activity 3
1. Solution:
Consideration transferred 1,800,000
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 1,800,000
Fair value of net identifiable assets acquired
(2.37M – 20K goodwill – 700K liabilities) (1,650,000)
Goodwill 150,000

2. Solution:
Consideration transferred 2,000,000
NCI [(4M –1.6M) x 25%] 600,000
Previously held equity interest in the acquiree -
Total 2,600,000

This document is the property of PHINMA EDUCATION

 ACC 113: Accounting for Business Combinations
Student Activity Sheet #2

Name: ______________________________________________________ Class number: ______

Section: ____________ Schedule: ____________ ___________________ Date: _____________

Fair value of net identifiable assets acquired (4M –1.6M) (2,400,000)

Goodwill 200,000

3. Solution:
Consideration transferred 2,000,000
NCI 540,000
Previously held equity interest in the acquiree -
Total 2,540,000
Fair value of net identifiable assets acquired (4M –1.6M) (2,400,000)
Goodwill 140,000

This document is the property of PHINMA EDUCATION