CHAPTER 1 – BUSINESS COMBINATIONS (PART1)

PROBLEM 1
1. The two important elements in the definitions of business combination under PFRS 3 are “business” and
“combination”.
FALSE: The two elements are “control” and “business”.

2. PFRS 3 requires the use of the purchase method in accounting for business combinations.
FALSE: The prescribed method is acquisition method. (Purchase method is applicable to PFRS for SMEs)

3. The entity that obtains control in a business combination is called the acquiree.
FALSE: The acquirer is the entity that obtains control of the acquiree. Acquiree is the business that the
acquirer obtains control.

4. The acquisition date in a business combination is normally the closing date.

TRUE: Closing date is the acquisition date on which the acquirer legally transfers the consideration,
acquires the assets, and assumes the liabilities of the acquiree.

5. Non-controlling interests are measured at fair value only.

FALSE: The acquirer measures any non-controlling interest in the acquiree either at (1) fair value or (2) the
NCI’s proportionate share in the acquiree’s net identifiable assets.

6. If the controlling interest is 80%, the non-controlling interest is 20%.

TRUE: Non-controlling interest is the “equity in a subsidiary not attributable, directly or indirectly, to a
parent”. Also called as minority interest.

7. A gain on a bargain purchase (negative goodwill) is recognized as an allocated deduction to the net
identifiable assets acquired in the year of business combination.
FALSE: The acquirer recognizes a resulting gain on a bargain purchase as gain in profit or loss. Goodwill, on
the other hand, is recognized as an asset.

8. An intangible asset that is unrecorded by the acquiree may nevertheless be recognized by the acquirer in a
business combination.
TRUE: The acquirer may recognize an acquired intangible asset, such as a brand name, a patent or a
customer relationship, that the acquiree did not recognize as an asset in its financial statements
because it has developed the intangible asset internally and charged the related costs as expense.
Unidentifiable asset is different from intangible asset.
- The acquirer recognizes the identifiable intangible assets acquired in a business combination if
they meet either the (a) separability criterion or (b) contractual-legal criterion.

9. A noncurrent asset acquired in a business combination that is classified as held for sale is measured at fair
value.
TRUE: Identifiable assets acquired and liabilities assumed are measured at their acquisition-date fair
values.
- They are classified at the acquisition date in accordance with other PFRS that are to be applied
subsequently. In the case of noncurrent asset, if held for sale, PFRS 5 is applicable which is fair
value less cost to sell.

10. If the consideration transferred in a business combination is deferred, the consideration may be measured at
present value.
FALSE: Restructuring provisions is often called as liquidation costs. Restructuring provisions are generally
not recognized as part of business combination unless the acquiree has an existing liability for
restructuring.
- Contingent consideration is the amount of consideration to be paid by an acquirer to the
acquiree in a business combination which is dependent on some future event; is recognized as
either equity (not adjusted) or a liability (at fair value).
 - PAS 12 (Income Taxes) prohibits the recognition of deferred tax liabilities arising from the initial
recognition of goodwill.
PROBLEM 2
1. Entity A acquires 100% interest in the voting shares of Entity B for 100. Entity B’s identifiable assets and
liabilities have fair values of 200 and 120 respectively. The goodwill is 80.
FALSE: Consideration transferred 100
Non-controlling interest in the acquiree 0
Previously held equity interest in the acquiree 0__
Total 100
Less: Fair value of net identifiable assets acquired [200-120] (80)
Goodwill / (Gain on a bargain purchase) 20

Entity A acquires 90% interest in the voting shares of Entity B for 100. Entity B’s identifiable assets and liabilities have
fair value of 200 and 120, respectively.
2. If the NCI is measured at its proportionate share in the acquiree’s net identifiable assets, the goodwill would
be 28.
TRUE: Consideration transferred 100
Non-controlling interest in the acquiree [(200-120) x 10%] 8
Previously held equity interest in the acquiree 0__
Total 108
Less: Fair value of net identifiable assets acquired [200-120] (80)
Goodwill / (Gain on a bargain purchase) 28

3. If the NCI is measured at fair value 10, the goodwill would be 18.
FALSE: Consideration transferred 100
Non-controlling interest in the acquiree 10
Previously held equity interest in the acquiree 0__
Total 110
Less: Fair value of net identifiable assets acquired [200-120] (80)
Goodwill / (Gain on a bargain purchase) 30

Entity A acquires all the identifiable assets and assumes all the liabilities of Entity B for 100. Entity B’s identifiable
assets and liabilities have fair values of 200 and 120 respectively. (p.23)
4. Entity A incurred legal fees of 20 in negotiating the business combination. The goodwill is 40.
FALSE: Consideration transferred 100
Non-controlling interest in the acquiree 0
Previously held equity interest in the acquiree 0__
Total 100
Less: Fair value of net identifiable assets acquired [200-120] (80)
Goodwill / (Gain on a bargain purchase) 20
*legal fees (acquisition-related costs) are expensed

5. Entity A estimates liquidation costs of 10 in existing the business activities of Entity B. the goodwill is 20
TRUE: Consideration transferred 100
Non-controlling interest in the acquiree 0
Previously held equity interest in the acquiree 0__
Total 100
Less: Fair value of net identifiable assets acquired [200-120] (80)
Goodwill / (Gain on a bargain purchase) 20
*liquidation costs (acquisition-related costs) are expensed

6. Entity A is renting out a license to Entity B under an operating lease. The terms of the lease compared with
market terms are favorable. The fair value of the differential is 5. The goodwill is 25. (p.27)
FALSE: Consideration transferred 100
Non-controlling interest in the acquiree 0
Previously held equity interest in the acquiree 0__
Total 100
 Less: Fair value of net identifiable assets acquired [(200+5)-120] (85)
Goodwill / (Gain on a bargain purchase) 15

7. Entity B has an unrecorded patent with fair value of 30. The gain on bargain purchase is 10. (p.30)
FALSE: Consideration transferred 100
Non-controlling interest in the acquiree 0
Previously held equity interest in the acquiree 0__
Total 100
Less: Fair value of net identifiable assets acquired [(200+30)-120] (110)
Goodwill / (Gain on a bargain purchase) (10)
*Acquirer recognized Patent even if the acquiree already expensed the related costs

8. Entity B has an unrecognized contingent liability with fair value of 30. The contingent liability is a present
obligation but has an improbable outflow of economic resources. The goodwill is 50. (p.33)
TRUE: Consideration transferred 100
Non-controlling interest in the acquiree 0
Previously held equity interest in the acquiree 0__
Total 100
Less: Fair value of net identifiable assets acquired [200-(30+120)] (50)
Goodwill / (Gain on a bargain purchase) 50
*contingent liability is recognized even if it is improbable because it (a) represents a present
obligation and (b) has a fair value.

9. Entity B’s assets and liabilities have carrying amounts of 150 and 120, respectively. Fair value adjustments to
the acquired assets and liabilities have deferred tax consequences but do not affect their tax bases. The
income tax rate is 30%. The goodwill is 53. (p.35)
FALSE: Consideration transferred 100
Non-controlling interest in the acquiree 0
Previously held equity interest in the acquiree 0__
Total 100
Less: Fair value of net identifiable assets acquired (59)*
Goodwill / (Gain on a bargain purchase) 41

* Fair value of assets acquired [200+((200-150) x30%)] 215**

Fair value of liabilities assumed [120+(120x30%)] (156)***
Fair value of net identifiable assets 59

** Asset fair value 200

Asset carrying amount (150)
Deductible Temporary Difference 50
Tax rate 30%
Deferred tax asset 15
Asset fair value 200
Fair value of asset acquired 215

*** No difference from liability’s fair value and carrying amount

10. Entity A agreed to share its trade secret process with entity B after the business combination. The trade
secret process has a fair value of 25. The goodwill is 20. (p.31)
FALSE: Consideration transferred 100
Non-controlling interest in the acquiree 0
Previously held equity interest in the acquiree 0__
Total 100
Less: Fair value of net identifiable assets acquired [(200+25)-120] (105)
Goodwill / (Gain on a bargain purchase) (5)
*trademarks, trade secret process, and mask works acquired in a business combination
normally meet the contractual-legal criterion
PROBLEM 3
1. In which of the following instances is a business combination least likely to occur?
a. Entity A acquires all the assets and assumes all the liabilities of Entity B in exchange for Entity A’s
shares of stocks. (p.1-2)
b. Entity A purchases 80% of Entity B’s outstanding voting shares. (p.1-2)
c. Entity A acquires 30% interest in Entity B’s voting shares. All other shares of Entity B are held by
various shareholders in very small denominations. Accordingly, Entity A has the power to appoint
the majority of the board of directors of Entity B. (p. 6 – Control)
d. Entity A acquires a group of assets from Entity B that does not constitute a business.

2. PFRS 3 requires the use of the acquisition method in accounting for all business combinations. Which of the
following is not an application of the acquisition method?
a. Identifying the acquirer which is the entity that obtains control over another business in a business
combination.
b. Determining the acquisition date which is the date the acquirer obtains control over the acquiree.
c. Measuring the consideration transferred at fair value.
d. Measuring the NCI at the NCI’s proportionate share in the acquiree’s net identifiable assets or fair
value, whichever is higher.

3. Entity A acquired all the assets and assumed all the liabilities of Entity B for 1,800,000. Information on Entity
B’s assets and liabilities as at the acquisition date is shown below:
Assets Carrying Amounts Fair Values
Receivables – net 200,00 100,000
Inventory 600,00 450,000
Building – net 1,200,000 1,800,000
Goodwill 100,000 20,000
Total Assets 2,100,000 2,370,000
Payables – Liabilities 900,000 700,000
Requirement: Compute for the goodwill / (gain on bargain purchase). (p.16)

Consideration transferred 1,800,000

Non-controlling interest in the acquiree 0
Previously held equity interest in the acquiree 0________
Total 1,800,000
Less: Fair value of net identifiable assets acquired (1,650,000)*
Goodwill / (Gain on a bargain purchase) 150,000

* Assets acquired at fair value 2,370,000

Less: Goodwill at fair value (20,000)_
Fair value of identifiable assets acquired 2,350,000
Fair value of liabilities assumed (700,000)
Fair value of net identifiable assets acquired 1,650,000

Entity A acquired 75% of the outstanding voting shares of Entity B for 2,000,000. On acquisition date, Entity B’s
identifiable assets and liabilities have fair values of 4,000,000 and 1,600,000 respectively. (For 4 and 5 only)
4. How much is the goodwill if Entity A opts to measure the non-controlling interest at the NCI’s proportionate
share in the Entity B’s net identifiable assets? (p.21)

Consideration transferred 2,000,000

Non-controlling interest in the acquiree [(4M-1.6M)x25%] 600,000
Previously held equity interest in the acquiree 0________
Total 2,600,000
Less: Fair value of net identifiable assets acquired [4M-1.6M] (2,400,000)
Goodwill / (Gain on a bargain purchase) 200,000
5. Entity A opts to measure the non-controlling interest at fair value. An independent valuer assessed the NCI’s
fair value to be 540,000. How much is the goodwill? (p.20)

Consideration transferred 2,000,000

Non-controlling interest in the acquiree 540,000
Previously held equity interest in the ac quiree 0________
Total 2,540,000
Less: Fair value of net identifiable assets acquired [4M-1.6M] (2,400,000)
Goodwill / (Gain on a bargain purchase) 140,000

6. Entity A acquired all the assets and liabilities of Entity B by issuing 18,000 shares with par value of 10 per
share and fair value of 100 per share. On acquisition date, Entity B’s identifiable assets and liabilities have
fair values of 3,800,000 and 1,900,000 respectively.
- Entity A incurred stock issuance costs of 36,000 and finder’s fees related to the business combination of
60,000. Moreover, Entity A expects to incur liquidation costs of 280,000 in terminating Entity B’s
activities.
Requirement: Compute for the goodwill / (gain on bargain purchase). (p.22)

Consideration transferred [18,000 shares x 100 FV] 1,800,000

Non-controlling interest in the acquiree 0
Previously held equity interest in the acquiree 0________
Total 1,800,000
Less: Fair value of net identifiable assets acquired (1,900,000)
Goodwill / (Gain on a bargain purchase) (100,000)

* Transaction entry:
Identifiable assets acquired 3,800,000
Goodwill 100,000
Liabilities assumed 1,900,000
Share capital 180,000
(18,000 shares x 10 par value)
Share premium 1,820,000

* Liquidation costs of 280,000 are expensed on the period incurred

Liquidation Expense 280,000
Cash in Bank 280,000

* Stock issuance costs are deducted from share premium

Share Premium 36,000
Cash in Bank 36,000