Chapter 1 Business Combinations - Part 1

ACCOUNTING FOR BUSINESS
COMBINATIONS
(Advanced Accounting 2)
LECTURE AID
2020
ZEUS VERNON B. MILLAN

BUSINESS COMBINATIONS
Overview on the topic:
Chapter Title Sub-topics___
1 Bus. Com. (Part 1) Recognition and measurement
2 Bus. Com. (Part 2) Specific cases

3 Bus. Com. (Part 3) Special accounting topics
Related standard:
• PFRS 3: Business Combinations

COMBINATIONS (Advanced
Accounting 2) - (by: MILLAN)
Chapter 1 BUSINESS COMBINATIONS (Part 1)
Learning Objectives
• Define a business combination.

• Explain briefly the accounting
requirements for a business combination.
• Compute for goodwill.

Definition of a Business Combination
A business combination is “a transaction or other event in

which an acquirer obtains control of one or more
businesses.” (PFRS 3)

Control
• An investor controls an investee when the investor is
exposed, or has rights, to variable returns from its
involvement with the investee and has the ability to affect
those returns through its power over the investee.
• Control is normally presumed to exist when the ownership

interest acquired in the voting rights of the acquiree is more
than 50% (or 51% or more).

Control - continuation
• Control may exist even if the acquirer holds less than 50% interest in
the voting rights of acquiree, such as in the following cases:
1. The acquirer has the power to appoint or remove the majority
of the board of directors of the acquiree; or
2. The acquirer has the power to cast the majority of votes at
board meetings or equivalent bodies within the acquiree; or
3. The acquirer has power over more than half of the voting rights
of the acquiree because of an agreement with other investors;
or
4. The acquirer has power to control the financial and operating
policies of the acquiree because of a law or an agreement.
Accounting for business combinations
• Business combinations are accounted for using the
acquisition method. This method requires the following:
1. Identifying the acquirer;
2. Determining the acquisition date; and
3. Recognizing and measuring goodwill. This requires
recognizing and measuring the following:
a. Consideration transferred
b. Non-controlling interest in the acquiree
c. Previously held equity interest in the acquiree
d. Identifiable assets acquired and liabilities assumed on
the business combination.
Identifying the acquirer
• The acquirer is the entity that obtains control of the acquiree. The
acquiree is the business that the acquirer obtains control of in a
business combination.
• The acquirer is normally the entity that:
a. Transfers cash or other assets and incurs liabilities;
b. Issues its equity interests (except in reverse acquisitions);
c. Receives the largest portion of the voting rights;
d. Has the ability to elect or appoint or to remove a majority ;
e. Dominates the management of the combined entity;
f. Significantly larger of the combining entities;
g. Initiated the combination

Determining the acquisition date
• The acquisition date is the date on which the acquirer

obtains control of the acquiree.

Recognizing and measuring goodwill
Consideration transferred xx
Non-controlling interest in the acquiree (NCI) xx
Previously held equity interest in the acquiree xx
Total xx
Less: Fair value of net identifiable assets acquired (xx)
Goodwill / (Gain on a bargain purchase) xx
On acquisition date, the acquirer recognizes a resulting:

a. Goodwill as an asset.
b. Gain on a bargain purchase as gain in profit or loss.
Consideration transferred
• The consideration transferred in a business combination is

measured at fair value.
• Examples of potential forms of consideration include:
1. Cash,
2. Other assets,
3. A business or a subsidiary of the acquirer,
4. Contingent consideration,
5. Ordinary or preference equity instruments, options, warrants and
member interests of mutual entities.

Acquisition-related costs
• Acquisition-related costs are costs the acquirer incurs to effect
a business combination.
• Acquisition-related costs are recognized as expenses in the
periods in which they are incurred, except for the following:
a. Costs to issue debt securities measured at amortized cost
– included in the initial measurement of the resulting
financial liability.
b. Costs to issue equity securities – are accounted for as
deduction from share premium. If share premium is
insufficient, the issue costs are deducted from retained
earnings.
Non-controlling interest (NCI)
• Non-controlling interest (NCI) is the equity in a

subsidiary not attributable, directly or indirectly, to a
parent.
• NCI is measured either at:
a. Fair value, or
b. The NCI’s proportionate share of the acquiree’s
identifiable net assets.

Previously held equity interest in the acquiree
• Previously held equity interest in the acquiree pertains to

any interest held by the acquirer before the business
combination.

Net identifiable assets acquired
• On acquisition date, the acquirer shall recognize, separately
from goodwill, the identifiable assets acquired, the
liabilities assumed and any non-controlling interest in the
acquiree.
• Any unidentifiable asset of the acquiree (e.g., any recorded
goodwill by the acquiree) shall not be recognized.
• The identifiable assets acquired and the liabilities assumed are
measured at their acquisition-date fair values.

Restructuring provisions
• Restructuring is a program that is planned and controlled by
management, and materially changes either:
a. the scope of a business undertaken by an entity; or
b. the manner in which that business is conducted.
• Restructuring provisions are generally not recognized as part of
business combination unless the acquiree has at the acquisition
date an existing liability for restructuring that has been
recognized in accordance with PAS 37.
• Such would be the case when he entity has a present obligation
as of the acquisition date evidenced by a detailed formal plan
developed by the acquiree that has been announced publicly on
or before the acquisition date.
Specific recognition principles
1. Operating leases (whereby the acquiree is the lessee) - If the
terms of an operating lease relative to market terms is:
1. Favorable – the acquirer shall recognize an intangible asset.
2. Unfavorable – the acquirer shall recognize a liability.
2. Intangible assets – The acquirer recognizes the identifiable

intangible assets acquired in a business combination if they meet
either the (a) separability criterion or the (b) contractual-legal
criterion.

Exception to the recognition principle –
Contingent liabilities
• A contingent liability assumed in a business combination is

recognized if:
1. it is a present obligation that arises from past events and
2. its fair value can be measured reliably.
• A contingent liability assumed in a business combination is

recognized if the criteria above are met even if the contingent
liability has an improbable outflow.

 full PFRSs vs. the PFRS for SMEs:



END
ACCOUNTING FOR BUSINESS COMBINATIONS (Advanced Accounting 2) - (by:
MILLAN)

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ACCOUNTING FOR BUSINESS

ZEUS VERNON B. MILLAN

2 Bus. Com. (Part 2) Specific cases

ACCOUNTING FOR BUSINESS

• Define a business combination.

ACCOUNTING FOR BUSINESS

A business combination is “a transaction or other event in

ACCOUNTING FOR BUSINESS

• Control is normally presumed to exist when the ownership

ACCOUNTING FOR BUSINESS

ACCOUNTING FOR BUSINESS

• The acquisition date is the date on which the acquirer

ACCOUNTING FOR BUSINESS

On acquisition date, the acquirer recognizes a resulting:

• The consideration transferred in a business combination is

ACCOUNTING FOR BUSINESS

• Non-controlling interest (NCI) is the equity in a

ACCOUNTING FOR BUSINESS

• Previously held equity interest in the acquiree pertains to

ACCOUNTING FOR BUSINESS

ACCOUNTING FOR BUSINESS

2. Intangible assets – The acquirer recognizes the identifiable

ACCOUNTING FOR BUSINESS

• A contingent liability assumed in a business combination is

• A contingent liability assumed in a business combination is

ACCOUNTING FOR BUSINESS

ACCOUNTING FOR BUSINESS

ACCOUNTING FOR BUSINESS

ACCOUNTING FOR BUSINESS

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