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BUSINESS COMBINATION
BUSINESS defined:
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- transaction or event where acquirer obtains control of one or more business
OLD: there should be an IPO
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- also called as TRUE MERGER or MERGER OF EQUALS
NEW: there should be IPO
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INDICATORS OF CONTROL
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1. Power over the investee - obtained through voting rights or contract
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2. Exposure or Rights to variable returns
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3. Ability to use power over investee to affect amount of onvestor's returns
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CLASSIFICATION
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A. As to Structure
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i. Horizontal - same industry (takeover competitiors)
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ii. Vertical - same industry, different levels (takeover suppliers/customers)
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iii. Conglomerate - between companies of unrelated industries
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iv. Circular - with diversification
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B. As to Methods of Acquisition
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i. Net Assets (Assets & Liabilities) Acquisition
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- Always 100% acquisition. Hence, there is NO NCI involved.
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- Categorized as:
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a. Statutory Merger
A + B = A [Combined FS]
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b. Statutory Condolidation
A + B = C [Combined FS]
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ii. Stock Acquisition
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- May be 100% or less acquisition. There is NCI if < 100%.
Note: NCI is ONLY present in Stock Acquisition.
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eg. Radleigh 80% - CI because >50%
Zari, Ares, etc. 20% - NCI
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- Companies involved will not be dissolved (parent-subsidiary relationship)
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A (parent) + B (subsidiary) = One enity in purpose of external reporting [Consolidated FS]
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- If stocks obtained are:
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a. Preferred Stock - no control (due to having no power)
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b. Common Stock - depends on the percentage acquired
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1. <20% - little to NO influence
XPN: If you have 1% but you have control over the company
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2. 20-50% - significant influence
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3. >50% - there is control
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C. As to Accounting Method Used
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i. Acquisition Method
- under Full PFRS
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ii. Purchase Method
- PFRS for SMEs
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iii. Pooling Interest Method
- for entities under common control
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ACQUISITION METHOD
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STEP 1: Identify the Acquirer
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If acquirer cannot be identified, indicators state that he is:
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- the one who has greater FV than the other
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- the entity who pays
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- the entity who is dominant
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STEP 2: Determine the Acquisition Date
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- When control is obtained
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- When NA and consideration are transferred
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STEP 3: Calculate the FV of Consideration Transferred
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FV of purchase consideratipn = FV at the date of acquisition
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GR: Shall be measured at FV
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XPN: Not measured at FV
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1. Income Taxes
5. NCA Held for Sale
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2. Employee Benefits
6. Share-based Payment Transactions
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3. Indemnification Assets
7. Insurance Contracts
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4. Leases
8. Contingent Liability
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ISSUE 1: Identifiable Intangible Asset
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PAS 38 (FAR)PFRS 3
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I. Internally Developed Intangible Assets
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A. Allowed to be recognized as IA
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Research
Always expensedRecognized, when there is In-Process R&D in acquiree books
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Development
Maybe capitalized
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B. Not allowed to be recognzied
(eg. customer list, brands)		NOT recognizedRecognized at FV
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II. Employee Skills and Workforce
NOT recognizedNOT recognized
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III. Potentially Profitable Future Contracts
NOT recognizedNOT recognized
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Note: Ang nire-recognize lang na Goodwill ay Goodwill from Business Combination.
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Therefore, if may Goodwill na agad sa books ni acquiree, hindi siya ire-recognize.
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ISSUE 2: FV at acquisition is NOT AVAILABLE
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1. Set Provisional (temporary) FV
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Eg. FV of land is NOT available, you set it to 5M. But nagkaroon ng FV na 7M afterwards.
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5M → 7MLand 2,000,000 Subject to Re-Measurement Period of 1 year from Acquisition Date
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Goodwill/Gain on BP
 2,000,000
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Land 2,000,000 XPN: If beyond 1 year, sa P/L na
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P/L 2,000,000
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*See Problem 10-14 [RESA Hos]
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STEP 4: Recognize and Measure Goodwill or Gain from BP, if either exist
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Note: NO GW/Gain from BP under Net Asset Acquisition
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Consideration Transferred (CT) → FV
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FV of Previously Held Equity Interest
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Non-Controlling Interest (NCI)
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TOTALXX
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Less: FV of Identifiable Net Assets (FVINA)
(XX)
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Goodwill/(Gain on BP)
XX(XX)
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FV of Consideration Transferred
> FV of Net Assets = Goodwill (part of NON-CURRENT asset)
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FV of NCI
 Aggregate
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FV of Previously Held Shares
< FV of Net Assets = Gain on BP (added to RE)
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Ang contingent consideration ay naka-base pa if matutupad ba ang condition or hindi.