PRACTICAL ACCOUNTING 2
BUSINESS COMBINATION
LECTURE NOTES
BUSINESS COMBINATION (IFRS 3) – a transaction or event in which an acquirer obtains control of one or more businesses.
Types of business combination (legal point of view):
1. Acquisition of assets
a. Merger A + B = A or B
b. Consolidation A+B=C
2. Acquisition of control or common stock
Parent – subsidiary relationship
Consolidated financial statements
All types of business combination must be accounted for using purchase or acquisition method.
Purchase or acquisition method
1. Identify the acquirer
In an asset acquisition, the company transferring cash or other assets and /or assuming liabilities is the
acquiring company.
In a stock acquisition, the acquirer is, in most cases, the company transferring cash or other assets for a
controlling interest in the voting common stock of the acquiree(company being acquired).
2. Determine the acquisition date
Date on which the acquirer obtains control of the acquiree (acquirer legally transfers the consideration, acquires
the assets and assumes liabilities of the acquire.)
3. Determine the consideration given (price paid) by the acquirer
Fair values (at acquisition date) of:
a. The assets transferred by the acquirer
b. The liabilities incurred by the acquirer to former owners of the acquire; and
c. The equity interests issued by the acquirer
Contingent consideration
Acquisition related costs
a. Direct cost and indirect costs = expense
b. Cost to issue and register stock = reduction in APIC
4. Recognize and measure the identifiable assets acquired, the liabilities assumed and any non – controlling interest in the
acquiree. Any resultling goodwill or gain from a bargain purchase should be recognized.
Record identifiable assets and liabilities acquired at fair values.
Price paid > FV of net assets acquired = goodwill
Price paid < FV of net assets acquired = gain or income
Acquisition of Control (parent – subsidiary relationship)
1. Description:
There is a parent – subsidiary relationship when the acquirer (parent) purchases at 50% + 1 of the voting shares of the
acquiree (subsidiary).
Separate parent company and subsidiary financial statements are converted into consolidated financial statements that
reflect the financial position and the results of operations of the combined entity.
2. Identification of subsidiaries
General rule: control is presumed when the parent acquires more than half of the voting rights of the enterprise.
Even when acquisition is less than half of the voting right, control may be evidenced by power;
o Over more than one half of the voting rights by virtue of an agreement with other investors; or
o To govern the financial and operating policies of the other enterprise under a statute or an agreement; or
o To appoint or remove the majority of the members of the board of directors; or
o To cast the majority of votes at a meeting of the board of directors
3. Consolidation Procedures
Financial statements of the parents and its subsidiaries should all be prepared as of the same reporting date.
If it is impracticable to do so, adjustments must be made for the effects of significant transactions or events
that occur between the dates of the subsidiary’s and the parent’s financial statement. As in no case may the
difference be more than three months.
Consolidated financial statements must be prepared using uniform accounting policies for like transactions.
Steps:
1. Calculate cost and fair value adjustments and allocate the latter through over/undervaluation of assets
and liabilities.
2. Elimination
Identify and eliminate all intercompany transactions and balances
Calculate and eliminate any unrealized profits (or loss) relating to the intercompany sale of
inventory and fixed assets in the current period.
Calculate and recognize the profit (or loss) in the current year on the sale of inventory and
fixed assets in previous periods.
3. Amortization
Amortize the FVA to various identifiable assets and liabilities in the current and previous
periods
Write-off any impairment of goodwill and other intangible assets
Find the balance of the allocated FVA remaining unamortized and unimpaired at the end of
the current period.
4. Recognize non-controlling interest’s (NCI) share of earnings.
Recognize NCI share of earnings
Calculate the NCI for balance sheet purposes
Calculate consolidated retained earnings
4. Non controlling interest:
IFRS 3 provides two options of measuring non – controlling interest (NCI) in an acquire:
1. NCI is measured at full fair value. Goodwill recognized in the consolidated financial statements will
include NCI’s share of goodwill (full-goodwill approach)
2. NCI is measured at the proportionate share of the acquiree’s net identifiable assets. NCI’s share of
goodwill is not recognized (partial goodwill method approach).
The NCI in the net income of the subsidiary is presented in the consolidated statement of comprehensive income
and the NCI in net asset of the subsidiary is shown in the consolidated balance sheet (stockholders equity section).
