PFRS 3

Business Combination
MODULE GOALS/LEARNING
OBJECTIVES:
• Apply the provisions of PFRS 3 in accounting for business combination
• Identify the forms of business combination
• Apply the acquisition method following full PFRS
• Compute for the consideration transferred, account for any control premium
• Compute noncontrolling interest under fair value or proportionate to the fair
value of the net assets of the acquiree
• Determine the amount of goodwill or gain on bargain purchase for each
business combination
• Journalize business combination transactions
PFRS 3 Objectives
a. recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed and any non-controlling interest in the
acquiree;

b. recognizes and measures the goodwill acquired in the business combination

or a gain from a bargain purchase; and

c. determines what information to disclose to enable users of the financial

statements to evaluate the nature and financial effects of the business
combination.
PFRS 3 Scope
PFRS 3 does not apply to:

a. the accounting for the formation of a joint arrangement

b. the acquisition of an asset or a group of assets that does not constitute a
business.
c. combination of entities or businesses under common control
Forms of Business Combination

1. Merger (A + B = A / B)
2. Consolidation (A + B = C)
3. Stock Acquisition
Merger
Merger is a form of business combination wherein
two existing entities voluntarily enter into a contract of
uniting businesses. The surviving entity, which is one of
the combining entities, acquires all of the net assets
(assets acquired, and liabilities assumed) of the other
entity.
Consolidation
Unlike merger where one entity is retained and
another entity is dissolved, both entities ceases in
consolidation. All of the combining entities transfers
their net assets to form a new entity or sometimes
referred as roll-up or put-together transaction.
Stock Acquisition
Accounting for Business Combination:
ACQUISITION METHOD
An entity shall account for each business combination by applying the
acquisition method. Applying the acquisition method requires:

(1) identifying the acquirer;

(2) determining the acquisition date;
(3) recognizing and measuring the identifiable assets acquired, the
liabilities assumed and any non-controlling interest in the acquiree; and
(4) recognizing and measuring goodwill or a gain from a bargain purchase.
1. Identifying the acquirer.
The acquirer is the entity that obtains control over
the other entity which is the acquiree.
2. Determining the acquisition date.
The acquisition date is the date when the acquirer
obtains control over the acquiree.
 3. Recognizing and measuring the identifiable assets acquired, the
liabilities assumed and any non-controlling interest in the acquiree.

At the date of business combination, the acquirer

shall recognize:
(A) identifiable assets acquired;
(B) liabilities assumed; and
(C) any non-controlling interest.
A. Identifiable assets acquired.
The acquirer shall recognize and measure the
identifiable assets acquired at their acquisition-date
fair values. The identifiable assets include all current
and noncurrent assets except any goodwill in the
books of the acquiree.
B. Liabilities assumed.
The acquirer shall also recognize and measure the
liabilities assumed at their acquisition-date fair values.
C. Non-controlling interest.
Non-controlling interest is defined as the equity in
subsidiary not attributable, directly or indirectly, to a
parent.
For each business combination, the acquirer shall measure at the
acquisition date components of non-controlling interests in the
acquiree at either:
(a) fair value; or
(b) the present ownership instruments’ proportionate share in the
recognized amounts of the acquiree’s identifiable net assets.
a. Fair Value
The fair value of the noncontrolling interest can be
reliably assessed or measured at the date of business
combination. In rare cases, the fair value of the non-
controlling interest is computed in reference with the
consideration transferred by the acquirer (implied fair
value) if its fair value at acquisition date cannot be
determinably measured.
b. Proportionate share in the recognized amounts of the
acquiree’s identifiable net assets

The noncontrolling interest can also be measured

proportionate to the fair value of the acquiree’s net
assets at acquisition date.
 Consideration transferred
The consideration transferred in a business combination shall be measured at fair
value, which shall be calculated as the sum of:
(a) the acquisition-date fair values of the assets transferred by the acquirer;
(b) the liabilities incurred by the acquirer to former owners of the acquiree;
(c) the equity interests issued by the acquirer.
Pointers:
• Contingent consideration is an obligation of the acquirer to transfer additional assets
or equity interests to the former owners of an acquiree as part of the exchange for
control of the acquiree if specified future events occur or conditions are met. The
acquirer shall recognize the acquisition-date fair value of contingent consideration as
part of the consideration transferred in exchange for the acquiree.

• A control premium is the amount that the acquirer is willing to pay in excess of the fair
value of the identifiable net assets of the acquiree in order to obtain control over the
acquiree. Since the control premium is paid in excess of the fair value of the
identifiable net assets of the acquiree to obtain control, it is deducted from the
purchase price in computing the fair value of the noncontrolling interest.
4. Recognizing and measuring goodwill or a gain from a
bargain purchase.
The acquirer shall recognize goodwill as of the acquisition date measured as the excess of (a) over (b) below:
(a) the aggregate of:
(i) the consideration transferred
(ii) the amount of any non-controlling interest in the acquiree measured using fair value or
proportionate to the acquiree’s identifiable net assets at acquisition date
(iii) in a business combination achieved in stages, the acquisition-date fair value of the acquirer’s
previously held equity interest in the acquiree.
(b) the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities
assumed.
If the amount in (b) exceeds the aggregate of the amounts in (a), the acquirer shall recognize the resulting
gain in profit or loss on the acquisition date. The gain shall be attributed to the acquirer.
Business Combination Achieved in Stages
An acquirer sometimes obtains control of an acquiree in
which it held an equity interest immediately before the
acquisition date. This means that before obtaining control, the
acquirer has previously held equity interest in the form of
Equity Investment at Fair Value through Profit or Loss or Other
Comprehensive Income or Investment in Associate (Refer to
Figure I in Slide 8). Business combination achieved in stages is
also referred as step acquisition.
 In a business combination achieved in stages, the acquirer
shall remeasure its previously held equity interest in the acquiree
at its acquisition-date fair value and recognize the resulting gain
or loss, if any, in profit or loss or other comprehensive income,
as appropriate.
 Acquisition-related costs
Acquisition-related costs are costs the acquirer incurs to effect a
business combination. Those costs include finder’s fees; advisory, legal,
accounting, valuation and other professional or consulting fees; general
administrative costs, including the costs of maintaining an internal
acquisitions department; and costs of registering and issuing debt and
equity securities.
Generally, business combination expenses are grouped and divided into:
(1) direct costs, which are incurred necessary to effect the business combination;
(2) indirect costs, costs other than direct costs; and
(3) share-issue costs; expenses incurred in issuing and registering shares
 Measurement Period
The measurement period is the period after the acquisition date
during which the acquirer may adjust the provisional amounts
recognized for a business combination.
The measurement period provides the acquirer with a reasonable time to obtain the information
necessary to identify and measure the following as of the acquisition date in accordance with the
requirements of PFRS 3:

(a)the identifiable assets acquired, liabilities assumed and any non-controlling interest in
the acquiree;
(b) the consideration transferred for the acquiree (or the other amount used in measuring
goodwill);
(c) in a business combination achieved in stages, the equity interest in the acquiree
previously held by the acquirer; and
(d) the resulting goodwill or gain on a bargain purchase.
 During the measurement period, the acquirer shall retrospectively adjust
the provisional amounts recognized at the acquisition date to reflect new
information obtained about facts and circumstances that existed as of the
acquisition date and, if known, would have affected the measurement of the
amounts recognized as of that date. The measurement period ends as soon
as the acquirer receives the information it was seeking about facts and
circumstances that existed as of the acquisition date or learns that more
information is not obtainable. However, the measurement period shall not
exceed one year from the acquisition date.
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