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Reasons

Cost advantage
Lower risk
Fewer operating delays
Avoidance of takeovers
Acquisition of intangible assets
Other: business and other tax advantages, personal reasons

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Business Combination

Business combinations: events and transactions in which two or more business enterprises,
or their net assets, are combined to be under the control of a single business entity

Governed by IFRS 3
3 Elements of Business Combination
Inputs an economic resource that creates outputs when one or more processes are applied
to it
Process a system, standard, protocol, convention or rule that when applied to an input or
inputs, creates outputs
Output the result of inputs and processes applied to those inputs.

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Business Combination

Business combinations: events and transactions in which two or more business enterprises,
or their net assets, are combined to be under the control of a single business entity

Governed by IFRS 3
3 Elements of Business Combination
Inputs an economic resource that creates outputs when one or more processes are applied
to it
Process a system, standard, protocol, convention or rule that when applied to an input or
inputs, creates outputs
Output the result of inputs and processes applied to those inputs.

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Two Legal Forms

I. Merger II. Consolidation

A + B = A/B E + F = D

Occurs when one corporation takes over all Occurs when a new corporation is formed to
the operations of another business entity take over the assets and operations of two or
and that other entity is dissolved. more separate business entities

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Two Legal Forms

I. Merger II. Consolidation

A + B = A/B E + F = D

Occurs when one corporation takes over all Occurs when a new corporation is formed to
the operations of another business entity take over the assets and operations of two or
and that other entity is dissolved. more separate business entities

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4 Types of Business Combination

Merger Consolidation
(1) Statutory Merger (2) Statutory Consolidation

(3) 100% Take over

(4) Less than 100% Take over

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4 Types of Business Combination

Merger Consolidation
(1) Statutory Merger (2) Statutory Consolidation

(3) 100% Take over

(4) Less than 100% Take over

Statutory means DISSOLUTION of ONE ENTITY

while Consolidation means FORMATION OF A
NEW ENTITY

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4 Types of Business Combination

Merger
(1) Statutory Merger
Dissolution of corporation and
survival of the another corporation
Consolidation
(2) Statutory Consolidation
Dissolution of corporation and
formation of new corporation
(3) 100% Take over
(4) Less than 100% Take over

Statutory means DISSOLUTION of ONE ENTITY

while Consolidation means FORMATION OF A
NEW ENTITY

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2 ways of acquiring and entity

1. Purchase of asset 2. Purchase of Shares

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2 ways of acquiring and entity

1. Purchase of asset 2. Purchase of Shares

What happens to the books of the

entities involved?

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2 ways of acquiring and entity

1. Purchase of asset 2. Purchase of Shares

Acquirer: all the assets of the acquired are No books of accounts is to be closed.
transferred to its books Instead, a consolidated FS is to be
Acquired: its books is closed prepared combining the assets of the
acquirer and the acquiree/s.

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PFRS 3: Business Combination

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 Control Business

Important
Acquisition
terminologies date Acquirer
from PFRS 3

Goodwill Consideration

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Determine the fair value of the consideration transferred

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Steps

1. Identify the Acquirer

2. Determine the acquisition date

3. Measure and record the identifiable net

assets

4. Measure and record goodwill or gain

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PFRS 3: Business Combination

Acquirer

Acquired

Date of Acquisition

Consideration

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Accounting for Business Combination

Statutory Merger

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 Cash
Non-Cash Assets
Liabilities
=================================================================
Cash
Non-Cash Assets
Goodwill
Liabilities
=================================================================
Cash
Non-Cash Assets
Liabilities
Gain on acquisition
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Journal Entries in the Books of the ACQUIRER

Cash
Non-Cash Assets
Liabilities
=================================================================
Cash
Non-Cash Assets
Goodwill
Liabilities
=================================================================
Cash
Non-Cash Assets
Liabilities
Gain on acquisition
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Journal Entries in the Books of the ACQUIRER

Cash
Non-Cash Assets
Liabilities
=================================================================
Cash

3 INSTANCES OF
Non-Cash Assets
Goodwill

ASSET ACQUISITION
Liabilities
=================================================================
Cash
Non-Cash Assets
Liabilities
Gain on acquisition
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Journal Entries in the Books of the ACQUIRER

Cash
Non-Cash Assets Purchase at fair value
Liabilities
=================================================================
Cash
Non-Cash Assets
Purchase above fair value
Goodwill
Liabilities
=================================================================
Cash
Non-Cash Assets
Purchase below the fair value
Liabilities
Gain on acquisition
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Example Pee Co. Data
Book Val. Fair Val.
Cash P 50 P 50
Pen Co. acquires the net
Net receivables 150 140
assets of See Co. in a Inventory 200 250
combination Land 50 100
consummated on Buildings, net 300 500
12/27/2008. The assets Equipment, net 250 350
and liabilities of See Co.
on this date, at their
Patents 0 50
book values and fair Total assets P1,000 P1,440
values, are as follows (in Accounts payable P 60 P 60
thousands): Notes payable 150 135
Other liabilities 40 45
Total liabilities P 250 P 240
Net assets P 750 P1,200

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Steps

1. Identify the Acquirer

2. Determine the acquisition date

3. Measure and record the identifiable net

assets

4. Measure and record goodwill or gain

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 Purchase at fair value

Pee Co. pays P200 cash and issues 50,000 shares of Pee
Co. P10 par common stock with a market value of $20 per
share for the net assets of See Co.
Total consideration at fair value (in thousands):
P200 + (50 shares x P20) P1,400
Fair value of net assets acquired: 1,200
Goodwill P 200

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 The entry to record the acquisition of the net assets:

Investment in SeeCo. 1200

Cash 200
Common stock, P 10 par 500
Additional paid-in-capital 500

The entry to record Seeds assets directly on Pees books:

Cash 50
Net receivables 140
Inventories 250
Land 100
Buildings 500
Equipment 350
Patents 50
Accounts payable 60
Notes payable 135
Other liabilities 45
Investment in See Co. 1,200

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Journal Entries in the Books of the ACQUIRER

Cash
Non-Cash Assets Purchase at fair value
Liabilities
=================================================================
Cash
Non-Cash Assets
Goodwill
Liabilities
=================================================================
Cash
Non-Cash Assets
Liabilities
Gain on acquisition
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Journal Entries in the Books of the ACQUIRER

Net receivables 140

Inventories 250 Purchase at fair value

Land 100
Buildings 500
Equipment 350
Patents 50
Cash 150
Accounts payable 60
Notes payable 135
Other liabilities 45
Common stock, P10 par 500
Additional paid-in-capital 500
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Acquisition with Goodwill

Pee Co. pays P400 cash and issues 50,000 shares of Pee Co. $10 par common stock with a
market value of $20 per share for the net assets of See Co.
Total consideration at fair value (in thousands):
P400 + (50 shares x $20) P1,400
Fair value of net assets acquired: 1,200
Goodwill P 200

Purchase above fair value

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The entry to record the acquisition of the net assets:

Investment in See Co. 1,400

Cash 400
Common stock, P10 par 500
Additional paid-in-capital 500

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The entry to record Sees assets directly on Pees books:

Cash 50
Net receivables 140
Inventories 250
Land 100
Buildings 500
Equipment 350
Patents 50
Goodwill 200
Accounts payable 60
Notes payable 135
Other liabilities 45
PwC Investment in See Co. 1,400
Journal Entries in the Books of the ACQUIRER

Cash
Non-Cash Assets
Liabilities
=================================================================
Cash
Non-Cash Assets
Purchase above fair value
Goodwill
Liabilities
=================================================================
Cash
Non-Cash Assets
Liabilities
Gain on acquisition
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Journal Entries in the Books of the ACQUIRER

Net receivables 140

Inventories 250 Purchase above fair value

Land 100
Buildings 500
Equipment 350
Patents 50
Goodwill 200
Cash 350
Accounts payable 60
Notes payable 135
Other liabilities 45
Common stock, P 10 par 500
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Acquisition with Bargain Purchase

Pee Co. issues 40,000 shares of its P10 par common stock with a market value of P 20per share,
and it also gives a 10%, five-year note payable for P200 for the net assets of See Co.
Fair value of net assets acquired (in thousands): P 1,200
Total consideration at fair value:
(40 shares x P20) + P200 1,000
Gain from bargain purchase P 200

Purchase below the fair value

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The entry to record the acquisition of the net assets:

Investment in Seed Co. 1,000

10% Note payable 200
Common stock, P10 par 400
Additional paid-in-capital 400

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The entry to record Sees assets directly on Pitts books:
Cash 50
Net receivables 140
Inventories 250
Land 100
Buildings 500
Equipment 350
Patents 50
Accounts payable 60
Notes payable 135
Other liabilities 45
Investment in See Co. 1,000
Gain from bargain purchase 200
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Journal Entries in the Books of the ACQUIRER

Cash
Non-Cash Assets
Liabilities
=================================================================
Cash
Non-Cash Assets
Goodwill
Liabilities
=================================================================
Cash
Non-Cash Assets
Purchase below the fair value
Liabilities
Gain on acquisition
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Journal Entries in the Books of the ACQUIRER

Cash 50
Net receivables 140 Purchase at fair value
Inventories 250
Land 100
Buildings 500
Equipment 350
Patents 50
Accounts Payable 60
Notes payable 135
Other liabilities 45
Common stock, P10 par 500
Additional paid-in-capital 500

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Gain on bargain purchase 200
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