Chapter 3 BUSINESS COMBINATIONS (Part

3)
REPORTER 1

Learning Objectives
• Apply the methods of estimating goodwill.
• Account for reverse acquisitions.
IS GOODWILL AMORTIZED JUST LIKE ANY
OTHER INTANGIBLE ASSETS?
 IS GOODWILL AMORTIZED JUST LIKE ANY
OTHER INTANGIBLE ASSETS?

NO, It is only tested for Impairment atleast

annually.
REPORTER 1

Methods of estimating goodwill

1. Indirect valuation – this is the method required by PFRS 3 and it is the method
illustrated in the preceding discussions.

2.Direct valuation – under this method, goodwill is measured on the basis of

expected future earnings from the business to be acquired.
 REPORTER 2 Direct valuation method
The direct valuation method may require the determination of one or more of the following
information:
a. Normal rate of return in the industry where the acquiree
belongs (e.g., industry average)
b.Normal earnings = Normal rate of return x Acquiree’s net
assets
c. Estimated future earnings of the acquiree.
• The earnings of the acquiree are “normalized,” i.e., adjusted for non-recurring
income and expenses.
• The excess of the acquiree’s normalized earnings over the average return in the
industry represents the “excess earnings” to which goodwill is attributed.
d. Discount rate to be applied to “excess earnings”
e. Probable duration of “excess earnings”
SOLUTION:

Average earnings P1,000,000

Divide by: Capitalization rate ____12%
Estimated Purchase price P8,333,333
Less: Fair value of Entity B’s net asset (8,000,000)
Goodwill P333,333
SOLUTION:

Average earnings P1,000,000

Normal earnings (8,000,00 X 12% (960,000)
Excess earnings P40,000
Multiply: Probable duration of excess
Earning ______5_
Goodwill P200,000
SOLUTION:

Average earnings P1,000,000

Normal earnings (8,000,00 X 12%) (960,000)
Excess earnings P40,000
Multiply: N of ordinary annuity
@9%, N= 5 3.88965_
Goodwill P155,586
Reverse acquisitions

• In a business combination accomplished through exchange of equity interests, the acquirer

is usually the entity that issues its equity interests. However, the opposite is true for
reverse acquisitions.

• In a reverse acquisition, the entity that issues securities (the legal acquirer) is
identified as the acquiree for accounting purposes while the entity whose equity
interests are acquired (the legal acquiree) is the acquirer for accounting purposes
 Conventional acquisition vs. Reverse acquisition:
Conventional
Reverse acquisition
acquisition
Issuer of shares as The issuer of shares is The issuer of shares is
consideration the accounting the accounting
transferred acquirer. acquiree.

Reference to - Accounting - Accounting

combining acquirer/ Legal acquirer/ Legal
constituents parent subsidiary
- Accounting - Accounting
acquiree/ Legal acquiree/ Legal
subsidiary parent
 Conventional
Reverse acquisition
acquisition
Measurement of Fair value of Fair value of the
consideration consideration notional number of
transferred transferred by the equity instruments
accounting acquirer. that the accounting
acquirer (legal
subsidiary) would
have had to issue to
the accounting
acquiree (legal
parent) to give the
owners of the
accounting acquiree
(legal parent) the
same percentage
ownership in the
combined entity.
THANK YOU!