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BUSINESS COMBINATION (PART 1)
Business Combination
-

A transaction or other event in which an acquirer obtains control of one or more businesses

Control
-

Has the power to direct the investee’s relevant activities

-

Holds more than 50% (51% or more) interest in the investee’s voting rights

Other Ways of Obtaining Control
a
...


Acquirer has the power to cast majority of votes at board meetings or equivalent bodies

c
...


Acquirer controls the operating and financial policies due to law or agreement

Variety Ways of Obtaining Control
a
...


Incurring liabilities

c
...


More than one type of consideration

e
...

Input- any economic resource that result to an output when one or more processes are
applied to it such as non-current assets, intellectual property, the ability to obtain access to
necessary materials or rights and employees

b
...

c
...
Accordingly, the entity applies other applicable standards
...


Identify the acquirer

b
...


Recognizing and measuring goodwill
...


Consideration transferred

ii
...


Previously held equity interest

iv
...
The acquire is the business that the
acquirer obtains control in the business combination
...


Who is the transferor of cash or other resources or assumes liabilities?

-

the acquirer is usually the entity that transfers cash or other assets or incurs the liabilities

b
...

whose owners, as a group, have the largest portion of the voting
rights of the combined entity
ii
...

whose (former) management dominates the management of the
combined entity
iv
...


Who is larger?

-

The acquirer is usually the larger

d
...


Substance over form

-

If the new entity is formed to effect the business combination, the acquirer is identified as
i
...

acquirer

To transfer cash or other assets or incur liabilities, the new entity is the

Determining the acquisition date
Acquisition date
-

the date on which the acquirer obtains control of the acquire

normally the closing date or the date on which the acquirer legally transfers the
consideration, acquires the assets and assumes the liabilities of the acquiree except when there
is a written agreement to that effect
...


Finder’s fees

b
...

General and administrative costs, including the costs of maintaining an internal
acquisitions department
d
...
Costs to issue debt securities measured at amortized costs included in the initial
measurement of the securities such as bond issue costs are included as deduction in
the carrying amounts of bonds payable
b
...
If share
premium is insufficient, the issue costs are deducted from retained earnings
...


Fair value

b
...


Goodwill recorded by the acquire prior to the business combination

b
...

Potential contracts that the acquire is negotiating with prospective new
customers at the acquisition date
Recognition Principles
a
...

The identifiable assets acquired and liabilities assumed must be part of what the acquirer
and the acquiree (former owners) exchanged in the business combination transaction rather
than the result of separate transactions
c
...


scope of a business undertaken by an entity

b
...


to exit an activity

b
...


to relocate non-continuing employees

Specific recognition principles
PFRS 3 provides the following specific recognition principles:
Operating leases
Acquiree is the lessee
General Rule:
The acquirer does not recognize any assets or liabilities related to an operationg lease in which
the acquiree is the lessee
Exception:
The acquirer determines whether the terms of each operating lease in which the acquiree is the
lessee are favorable and unfavorable
...


favorable - the acquirer recognizes an intangible asset

b
...
An intangible asset is identifiable if it is either separable or arises
from contractual or other legal rights
separability criterion: it can be separated from the acquiree and sold, transferred,
licensed, rented or exchanged either individually or together with a related contract,
identifiable asset or liabilities
-

contractual-legal criterion: arises from contractual or other legal rights

Exception to the recognition principle- contingent liabilities
The acquirer applies PFRS 3, rather than PAS 37, when accounting for contingent liabilities
related to business combinations
...


present obligation that arises from past events

b
...

Income taxes – accounted using PAS 12 Income Taxes
...
Deferred taxes affect the amount of goodwill or
gain on a bargain purchase recognized at acquisition date
...

Employee benefits – accounted using PAS 19 Employee Benefits
...

Indemnification assets – the acquiree agree to reimburse the acquirer for any payments
the acquirer eventually makes upon settlement of a particular liability
Additional Concepts for consideration transferred
-

Includes only those that are transferred to the former owners of the acquire

-

Excludes those that remain within the combined entity

Assets and liabilities transferred to the former owners of the acquiree are remeasured to
acquisition-date fair values
...


Reacquired rights – measured base on the remaining term of the related contract

b
...

5

Assets held for sale- measured at fair values less costs to sell in accordance with PFRS

Relevant Provisions of the PFRS for SMEs
Section 19 Business Combinations and Goodwill
Section 19 of the PFRS for SMEs applies to all business combination, including the accounting
for goodwill
...


Combinations of business under common control (entities having the same parent)

b
...


Acquisition of a group of assets that do not constitute a business

Business Combinations
-

Is bringing together of separate entities or businesses into one reporting entity

-

As a result, one entity (the acquirer) obtains control over the other business (the acquiree)

A business combination may involve the purchase, by the acquirer, of some or all of the
acquire’s assets and liabilities or equity; in exchange for cash, non-cash assets, or the
acquirer’s equity instruments
Accounting
-

Accounted for using the purchase method
...


Identifying the acquirer

b
...

Allocating the cost of the business combination to the assets acquired and
liabilities assumed

The purchase method is applied as at the acquisition date, which is the date on which the
acquirer obtains control over the acquiree
Identifying the acquirer
The acquirer is identified in all business combinations
...


The business with the greater fair value

b
...


The business whose management dominates the management of the combined entity

Cost of a business combination
-

Sum of:

a
...


Any costs directly attributable to the business combination

Adjustments to the cost of a business combination
If the business combination provides for a contingent consideration, such is included in the cost
of the business combination at acquisition date if it is probable and can be measured reliably
...
However, there may be cases where the fair value of the acquiree’s equity interests may

be more reliably measurable than the acquirer
...

Business Combination achieved in stages
A business combination achieved in stages when the acquirer obtains control pf an acquire in
more than one transaction
...
Remeasure the previously held equity interest in the acquire at the acquisition date fair
value
2
...
Profit or loss – if the previously held equity interest was classified as FVPL,
Investment in Associate, or Investment in joint venture
b
...
The reason why the “purchase method” previously used
for the business combinations has been replaced with the “acquisition method” is to emphasize
that a business combination may occur even when a purchase transaction is not involved
...
The acquire repurchases a sufficient number of its own shares from the other investors so
that the acquirer will be able to obtain control
b
...
The acquirer and the acquire agree to combine their businesses by contract alone
...


In a business combination achieved by contract alone, the interests held by parties other
than the acquirer are attributed to NCI, even if the result is that NCI represents 100 percent in
the acquiree
Measurement period
If the initial accounting for the business combination is incomplete by the end of the reporting
period in which the combination occured, the acquirer can use provisional amounts to measure
any of the following for which the accounting is incomplete:
a
...


NCI

c
...


Identifiable Assets acquired and liabilities assumed

Within the 12 months from the acquisition date, the acquirer retrospectively adjusts the
provisional amounts for any new information obtain that provides evidence of facts and
circumstances that existed as of the acquisition date
...

Determining what is part of the business combination transaction
In applying the acquisition method, the acquirer identifies and excludes amounts that are not
part of the consideration transferred on the business combination and accounts for them using
other relevant PFRS
...
A transaction that is arranged primarily for the benefit of the acquirer or the combined entity
rather than the acquiree or its former owners is likely to be a separate transaction
...
The transaction price
is appropriately included in the consideration transferred
b
...
Contrarily, a transaction initiated by the acquiree or
its former owners is more likely to be a part of the business transaction
...
A transaction between the acquirer and the acquiree during the negotiations of a business
combination is more likely to be part of the business combination
...

Settlement of pre-existing relationship between the acquirer and the
acquire
ii
...

Re-acquired rights
A right that an acquirer has previously granted to the acquiree that is reacquired as a result of a
business combination is recognized as an intangible asset separately from goodwill
...
Right to use the acquirer’s intangible asset such as trade name under a franchise
agreement
b
...
Contractual- as a vendor and customer, licensor and licensee, or franchisor and franchisee
...


Non-contractual – plaintiff and defendant on a pending lawsuit

If the pre-existing relationship is settled due to the business combination, the acquirer
recognizes a settlement gain or loss measured as follows:
a
...
The amount by which the contract is favorable or unfavorable, from the
acquirer’s perspective, when compared to market terms
2
...
If this is less than the amount in 1, the difference is
included as part of the business combination

b
...


“Off market value”

-

Used to determine settlement gain or loss from the acquirer’s perspective

-

Excluded from the consideration transferred and treated as a separate transaction

2
...
However, the following are subsequently accounted under
PFRS 3:
a
...
Indemnification assets – are measured at the same basis as the indemnified item, subject
to assessments of the collectability for the indemnification assets measured at fair value
c
...


The amount that would be recognized by applying PAS 37

2
...
Contingent consideration – additional consideration that the acquirer agrees to provide to
the acquire upon the happening of a contingency
Contingency- an existing, unresolved condition that will be resolved by the occurrence or
non-occurrence of a possible event
Initial recognition and measurement:
Contingent consideration – measured at acquisition date fair value and included in the
consideration transferred
...
A right to recover a previously transferred consideration if specified
conditions are met is classified as an asset

Subsequent measurement

A change in the fair value of a contingent consideration resulting from additional information
obtained during the measurement period is accounted for as retrospective adjustment to the
provisional amount
...

Changes in fair value are not measurement period adjustments accounted for depending on the
classification of the contingent consideration:
a
...
A contingent consideration classified as an asset or as a liability is measured at
fair value at each reporting date
...

Business Combination Part 3
Goodwill- only a goodwill that arises from a business combination recognized as an asset
...
Goodwill measured
and recognized on acquisition date
...

After the initial recognition, goodwill is not amortized but rather tested for
impairment at least annually
...
If the allocation is not
completed by the end of that year, it must be completed before the end of the immediately
following year
...

Goodwill is allocated to the Cash generating unit (CGU) expected to benefit from the synergies
of the business combination using a methodology that is reasonable, supportable and applied in
a consistent manner
...
Goodwill
does not generate cash inflows on its own but contributes on the cash flows of CGU
...
A CGU is
impaired if its recoverable amount is less than its carrying amount included the allocated
goodwill
...
Impairment of goodwill is not reversed on the subsequent period
...

Due Diligence – investigation of all areas of a potential acquiree’s business before an investor
agrees to a business combination transaction
...

-

Service commonly performed by CPAs or external auditing firms
...


Examples of potential risks:
a
...
Overstatement in the consideration for the business combination due to the
acquiree’s overstated assets and understated liabilities
c
...
Unrecorded assets, such as trade secrets, trade name, customer lists and the
like
b
...

Indirect valuation- residual approach wherein goodwill is measured as the excess of the
sum of the consideration transferred, non-controlling interest in the acquiree, and previously
held equity interest in the acquiree over the fair market value of net identifiable assets acquired
...

2
...

Requirements:

a
...
The normal
rate of return may be the average determined from the examination of annual reports
of similar entities or from published statistical data
...


Estimated future earnings of the acquiree
1
...
Excess of the acquiree’s normalized earnings over the average rate of return
in the industry represents “excess earnings or superior earnings” to which the
goodwill is attributed
...


Discount rate to be applied to “excess earnings”

d

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