Business Combination

IFRS 3- Business combination as a transaction or other event in which an acquirer obtains controls of one
or more business (acquire).
 Acquirer- Buyer (Parent).
 Acquiree- Seller/Business acquired (Subsidiary).

Types of acquisition
1. Acquisition of asset- Acquired all companies asset as well as liabilities and the transaction is
referred to as an “acquisition of net asset”.
a. Statutory Consolidation- combining two or more existing business into one new legal
entity.
b. Statutory Merger- absorption of one or more existing entities that continues as the sole
surviving legal entities.
2. Stock acquisition- acquiring controlling interest “more than 50%” on another company’s voting
stock.
*However for external financial reporting purpose, the company will usually combine their
individual Financial Statement into a single set of consolidated statement.

Methods of business combination

1. Purchase method- assets and liabilities are usually recorded in fair value.
2. Pooling of interest- assets and liabilities are acquired in book value.
*IFRS 3 eliminated pool of interest method.

Four steps in purchased method

1. Identify acquirer
2. Determine acquisition date
*IFRS 3- the date on which the acquirer obtains control of the acquiree is critical in fair
value recognition.
3. Determination of consideration given (price paid)
4. Recognized and measure the identifiable asset s acquired, the liabilities assumed and any non-
controlling interests (formerly called minority interest) in the acquiree. Any resulting goodwill or
gain from a bargain purchased should be recognized.

Acquisition related costs

1. Brokers fee, accounting, legal, and other professional fee.
2. Stock issuance cost including SEC registration fee, documentary stamp tax, and newspaper
publication fees treated as deduction from Additional Paid-in Capital. If APIC is zero it will be
deducted to Retained Earnings.

Price paid Fair value

>
New goodwill (SFP)

<
Bargain purchase (IS)

Valuation of Identifiable Assets and Liabilities

General Rule: Assets and Liabilities acquired are recorded at their individually determined values.
Except: Where active market exist, if no active market, independent appraisal, discounted cash flow
analysis, and other types of analysis are used to estimate fair values.
*Measurement period is up to one year is allowed.
** A note to financial statements would explain the use of temporary values.
***Any change in values is adjusted retroactively to the date of acquisition.

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Recording Changes in Contingent Consideration
If it is equity, the original amount is not remeasured. If the additional consideration is cash or
other asserts paid or owed, the change amount is recognized in profit or loss.

Sample Problems
Accounts Receivable P120,000 Current Liabilities P50,000
Inventories P140,000 Common Stocks P200,000
Property Plant and Equipment P 300,000 Retained Earnings P250,000

Books of Acquirer

Accounts receivable 120,000

Inventories 140,000
Property, plant and equipment 300,000
Current liabilities 50,000
Income from acquisition 5,000
Cash 505,000
To record acquisition of net assets of Small.

Computation of Income from Acquisition:

Acquisition cost (P500,000 + P5,000) P505,000
Less: Fair value of net identifiable assets acquired:
Accounts receivable P120,000
Inventories 140,000
Property, plant and equipment 300,000
Current liabilities ( 50,000) 510,000
Income from acquisition P( 5,000)

Books of Acquiree

Cash 500,000
Current liabilities 50,000
Accounts receivable 120,000
Inventories 100,000
Property, plant and equipment 280,000
Retained earnings 50,000
To record sale of net assets to Acquirer.

Common stock 200,000

Retained earnings 300,000
Cash 500,000
To record liquidation of the corporation.

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