CHAPTER 1: BUSINESS COMBINATION Both parent and subsidiary continue to
exist as separate legal entity
Have own separate books
Occurs when one company obtains
Nature of combining business
control of another entity
“True mergers” or “merger of equals” 1. Horizontal Integration- same business lines
Revised version: June 2008 and markets
Application: on or after July 1, 2009
2. Vertical Integration- different levels in
Early application: on or after June 30,
marketing or production chain. Different
2007
operations but is successive
Objectives:
3. Conglomerate- Unrelated business with
Improve relevance, reliability and dissimilar nature and diverse product or service
comparability of the info that a reporting
The Acquisition method
entity provides in its FS
Principles and requirements for how the 1. Identifying the acquirer
acquirer:
o R and M identifiable assets, 2, determining the acquisition date
liabilities and NCI 3. R and M the identifiable assets acquired,
o R and M goodwill or Bargain liabilities assumes and NCI in the acquire
Purchase
o Info to disclose 4. R and M goodwill or gain from a bargain
purchase.
Scope:
Identifying the acquirer
Does not apply to:
a. Combination of transferring cash or other
Joint ventures asset or incurring liability- the entity that
Acquisition that does not constitute a transfers the cash, other assets or incur liability
business
Combination under common control b. Exchanging equity interests- entity that
issues its equity interest. XPN: Reverse
Forms of Business Combination acquisition
1. Net Asset Acquisition Relative voting rights- receives the
a. Statutory Merger largest portion of voting rights (consider
unusual or special voting arrangements,
b. Statutory Consolidation options, warrants and convertible
securities)
2. Stock Acquisition (Acquisition of Control)
Existence of large minority voting
Net Asset Acquisition interest (in case no other owner that
has significant voting int)- holds the
Purchases assets and liabilities of the largest minority voting interest in the
acquire in exchange for consideration combined entity
Acquired Entity ceases to exist Composition of governing body- ability
Acquirer records A and L acquired on its to elect, appoint or remove a majority of
own book the members
Two classification
Composition of senior management-
o Statutory Merger- X + Y= X or Y
former management dominates the
o Statutory Consolidation- X + Y= management of the combined ent
Z Terms of the exchange of equity
Stock Acquisition interest- pay a premium
Acquirer issue consideration in exchange c. Relative size is greater
of ownership of stocks d. Who intiated and the relative size
Acquirer: parent; acquiree: subsidiary
e. New entity formed is NOT necessarily the CHAPTER 2: CONSOLIDATION DATE OF
acquirer. ACQUISITION
New entity is formed to issue equity Conso FS are more meaningful than
interest- one of the entity that existed separate statements
before Applicable on or after Jan 1, 2013
New entity that transfers cash or
Objectives
other asset or incur liability- new
is the acquirer Establish principles for the presentation
and preparation of Conso FS
Acquisition date
Parents to present FS
Date on which it obtains control Defines control and establishes control as
Closing date- transfer of consideration basis for conso
How to apply control
Note: Acco requirements for preparation of
If they only exchanged equity interests, Conso FS
acquiree’s equity interest may be more Defines investment entity and sets out an
reliable exception
No Consideration is transferred- use Scope
the FV of acquirer’s interest in the
acquiree to determine the goodwill All entities, except:
Goodwill under net asset acquisition-
1. A parent need not to present conso FS if it
TESTED FOR IMPAIRMENT BUT NOT
meets all of the following:
AMORTIZED
Gain under net asset acquisition- recog It is wholly or partially owned subsidiary of
as income in the books of the acquirer another entity (all other owners agrees
FV on NCI is based on consideration that its ok not to present conso FS)
under FV method Debt or equity instruments are not traded
NCI is based on net asset under in public market
proportionate method Did not file or not in the process of filing
Investment in subsidiary is the only one FS with SEC
recorded in the books of acquirer. Ultimate parent produces conso FD
Goodwill is never recognized
Cost if business includes: cash, NCA, 2. Post-employment benefit plan or other long-
liab, equity instruments, contingent term employee benefit plan
consideration 3. If it is required to measure subsidiary @FVPL
Note: If there are no APIC, charge to RE
Changes in contingent consideration Definition of Control
recorded in the income statement as Has control if:
expense (inc in liab) and gain (reduction in
the payment) Power over the investee
Any movement beyond the measurement Exposure or rights to variable returns
period is ignored Ability to use its power over the investee
to affect the amount of return
Note: If two or more collectively controls
(one cannot direct w/o the other) no
investor individually controls the investee
Power
Has rights that gives ability to direct
relevant activities
Relevant activities- those that
significantly affect the investee’s returns
In determining which investor has
power, consider the following:
a. Purpose and design of investee
b. factors that determine the profit margin, Rights from other contractual
revenue and value of the investee arrangements
c. effect on the investee’s returns Investor’s voting rights
d. investor’s exposure to variability of Potential voting rights
returns
Points to remember
Power rises from rights
Protective rights does not have power Investment in subsidiary and BC
over an investee, does not control expenses and SIC are recorded only at
investee the acquirer’s book
Rights that gives power: Working paper elimination entries are not
A. Voting rights recorded in the books of the parent not
B. Appoint, resign or remove members of subsidiary
an investee’s key management Consolidating procedures will not affect
C. Appoint and remove another entity that separate FS
directs relevant activities Resulting goodwill is recognized in the
D. Direct to enter into a transaction elimination entries
E. Other rights Only the parent’s equity is presented in
Conso FS
Substantive rights
NCI is shown as part of SHE in Conso FS
To be substantive, there must be a
practical ability to exercise that right
Things to consider: CHAOTER 3: CONSOLIDATION –
a. whether there are barriers SUBSEQUENT TO DATE OF ACQUISITION
b. when the rights requires agreement of
more than one party in order to be Two methods of accounting Investement
exercise in subsidiary: Cost or financial asset
c. if the parties that hold the rights would Results are the same regardless of the
benefit from the exercise of those rights method used
Usually, it has to be exercisable, but Separate records of the acquire is
there can be rights which are not unaffected since no journal entry is made
currently exercisable there
Process
Protective rights o Add similar items
Fundamental changes to the activities of o Eliminate inv in sub
an investee or apply in exceptional o Eliminate equity of subsidiary
circumstances o Set up goodwill or gain
Protect interest without giving power Take into consideration the following
Examples: items:
o Dividends declared or paid
a. Lender’s right to restrict a borrower o Difference between FV and BV
from undertaking act that change the
o Impairment
credit risk
Accounting for dividends
b. right of a party holding NCI to approve
capital expenditure greater than usual Dividends paid or payable by subsidiary to
the parent is recognized as revenue by
c. right of a lender to seize the assets of a
the parent
borrower if it fails to meet specified loan
For conso FS dividends recognized by
repayment
the parent from subsidiary must be
Voting rights eliminated
Has right to direct relevant activities
Power with a majority of VR
Power without a majority of VR
Majority of VR but no power
Contractual arrangement with other vote
holders
Reminders:
Check If may APIC, kapaga meron
doon icharge share issuance cost.
Kapag wala, sa RE
Check the measurement period (1 yr
lang nagaadjust)
Check mo ilang % nung shares na
inacquire
Higher between FV and proportionate
if hindi nakaindicate
