BUSINESS COMBINATION

1. The method required under PFRS 3 to be used in accounting for business combinations
is
a. Purchase method c. Acquisition method
b. Buy method d. Combination method

2. Should the following costs be included in the consideration transferred in a business

combination, according to PFRS 3 Business Combinations?
I. Costs of maintaining an acquisitions department.
II. Fees paid to accountants to effect the combination.
a. No No b. No Yes c. Yes No d. Yes Yes
(Adapted)

3. PFRS 3 requires that the contingent liabilities of the acquired entity should be
recognized in the balance sheet at fair value. The existence of contingent liabilities is often
reflected in a lower purchase price. Recognition of such contingent liabilities will
a. Decrease the value attributed to goodwill, thus decreasing the risk of impairment of
goodwill.
b. Decrease the value attributed to goodwill, thus increasing the risk of impairment of
goodwill.
c. Increase the value attributed to goodwill, thus decreasing the risk of impairment of
goodwill.
d. Increase the value attributed to goodwill, thus increasing the risk of impairment of
goodwill.
(Adapted)

4. Are the following statements about an acquisition true or false, according to PFRS 3
Business combinations?
I. The acquirer should recognize the acquiree's contingent liabilities if certain conditions
are met.
II. The acquirer should recognize the acquiree's contingent assets if certain conditions are
met.
a. False, False b. False, True c. True, False d. True, True
(Adapted)

5. Given the following information, how is goodwill from a business combination

computed under PFRS 3?
A = Consideration transferred
B = Non-controlling interest in net assets of subsidiary
C = Previously held equity interest
D = Fair value of net identifiable assets of subsidiary
% = Percentage of ownership acquired by the parent in the subsidiary

a. A+B+C-D c. (A+C) – (D x %)
b. A – (D x %) d. (A+B) – [(D x %) – B]

6. In a business combination, an acquirer's interest in the fair value of the net assets
acquired exceeds the consideration transferred in the combination. Under PFRS 3 Business
Combinations, the acquirer should
a. recognize the excess immediately in profit or loss
b. recognize the excess immediately in other comprehensive income
c. reassess the recognition and measurement of the net assets acquired and the
consideration transferred, then recognize any excess immediately in profit or loss
d. reassess the recognition and measurement of the net assets acquired and the
consideration transferred, then recognize any excess immediately in other comprehensive
income
(Adapted)

7. Which one of the following reasons would not contribute to the creation of negative
goodwill?
a. Errors in measuring the fair value of the acquiree’s net identifiable assets or the cost of
the business combination.
b. A bargain purchase.
c. A requirement in an IFRS to measure net assets acquired at a value other than fair value.
d. Making acquisitions at the top of a “bull” market for shares.
(Adapted)

8. The “excess of the acquirer’s interest in the net fair value of acquiree’s identifiable assets,
liabilities, and contingent liabilities over cost” (formerly known as negative goodwill) should be
a. Amortized over the life of the assets acquired.
b. Reassessed as to the accuracy of its measurement and then recognized immediately in
profit or loss.
c. Reassessed as to the accuracy of its measurement and then recognized in retained
earnings.
d. Carried as a capital reserve indefinitely.
(Adapted)

9. This type of business combination occurs when, for example, a private entity decides to
have itself “acquired” by a smaller public entity in order to obtain a stock exchange listing.
a. Step acquisition c. Reverse acquisition
b. Rewind acquisition d. Stock acquisition

10. Acquisition accounting requires an acquirer and an acquiree to be identified for every
business combination. Where a new entity (H) is created to acquire two preexisting entities, S
and A, which of these entities will be designated as the acquirer?
a. H. b. S. c. A. d. A or S.
(Adapted)
11. The aggregate cash flows arising from acquisitions and from disposals of subsidiaries or
other business units resulting to loss or obtaining of control are presented separately and
classified as
a. Operating activities c. Financing activities
b. Investing activities d. Disclosed only

12. Cash flows arising from changes in ownership interests in a subsidiary that do not result
in a loss of control are classified as cash flows from
a. Operating activities c. Financing activities
b. Investing activities d. Disclosed only

13. PFRS 3 requires the acquirer in a business combination to measure the acquiree’s
identifiable tangible and intangible assets and liabilities at (with some limited exceptions)
a. cost c. fair value less transaction costs
b. acquisition-date fair value d. some other amount

14. Which of the following accounting methods must be applied to all business
combinations under PFRS 3 Business Combinations?
a. Pooling of interests method. c. Acquisition method.
b. Equity method. d. Purchase method.
(Adapted)

15. PESTER TO ANNOY is involved in a business acquisition on January 1, 20x1. At the

date of acquisition the deferred tax assets were ₱300,000. On January 1, 20x1, the directors
considered that realization of the deferred tax assets were not probable. What effect would this
decision have on the allocation of the purchase price?
a. The unrecognized deferred tax would be allocated to goodwill, which would increase by
₱300,000.
b. The value of goodwill would decrease by ₱300,000.
c. There would be no effect on goodwill.
d. Negative goodwill of ₱300,000 would arise.
(Adapted)

16. A parent entity is acquiring a majority holding in an entity whose shares are dealt in on
a recognized market. Under PFRS 3 Business Combinations, which of the following
measurement bases may be used in measuring the non-controlling interest at the acquisition
date?
I. The nominal value of the shares in the acquiree not acquired
II. The fair value of the shares in the acquiree not acquired
III. The non-controlling interest in the acquiree's assets and liabilities at book value
IV. The non-controlling interest in the acquiree's assets and liabilities at fair value
a. II only b. I, II and III c. II and IV d. IV only
(Adapted)
17. ASININE STUPID Company acquired a 30% equity interest in OBTUSE TORPID
Company many years ago. In the current accounting period it acquired a further 40% equity
interest in OBTUSE. Are the following statements true or false, according to PFRS 3 Business
Combinations?
I. ASININE's pre-existing 30% equity interest in OBTUSE should be remeasured at fair
value at the acquisition date.
II. ASININE's net assets should be remeasured at fair value at the acquisition date.
a. False, False b. False, True c. True, False d. True, True
(Adapted)

18. The SKEWER Company acquired 80% of PIERCE Company for a consideration
transferred of ₱100 million. The consideration was estimated to include a control premium of
₱24 million. PIERCE's net assets were ₱85 million at the acquisition date. Are the following
statements true or false, according to PFRS 3 Business Combinations?
I. Goodwill should be measured at ₱32 million if the non-controlling interest is measured
at its share of PIERCE's net assets.
II. Goodwill should be measured at ₱34 million if the non-controlling interest is measured
at fair value.
a. False, False b. False, True c. True, False d. True, True
(Adapted)

19. PFRS 3 requires all identifiable intangible assets of the acquired business to be recorded
at their fair values. Many intangible assets that may have been subsumed within goodwill must
be now separately valued and identified. Under PFRS 3, when would an intangible asset be
“identifiable”?
a. When it meets the definition of an asset in the Conceptual Framework document only.
b. When it meets the definition of an intangible asset in PAS 38, Intangible Assets, and its
fair value can be measured reliably.
c. If it has been recognized under local generally accepted accounting principles even
though it does not meet the definition in PAS 38.
d. Where it has been acquired in a business combination.
(Adapted)

20. Which of the following examples is unlikely to meet the definition of an intangible asset
for the purpose of PFRS 3?
a. Marketing related, such as trademarks and internet domain names.
b. Customer related, such as customer lists and contracts.
c. Technology based, such as computer software and databases.
d. Pure research based, such as general expenditure on research.
(Adapted)

21. An intangible asset with an indefinite life is one where

a. There is no foreseeable limit on the period over which the asset will generate cash flows.
b. The length of life is over 20 years.
c. The directors feel that the intangible asset will not lose value in the foreseeable future.
d. There is a contractual or legal arrangement that lasts for a period in excess of five years.
(Adapted)

22. An intangible asset with an indefinite life is accounted for as follows:

a. No amortization but annual impairment test.
b. Amortized and impairment tests annually.
c. Amortize and impairment tested if there is a “trigger event.”
d. Amortized and no impairment test.
(Adapted)

23. An acquirer should at the acquisition date recognize goodwill acquired in a business
combination as an asset. Goodwill should be accounted for as follows:
a. Recognize as an intangible asset and amortize over its useful life.
b. Write off against retained earnings.
c. Recognize as an intangible asset and impairment test when a trigger event occurs.
d. Recognize as an intangible asset and annually impairment test (or more frequently if
impairment is indicated).
(Adapted)

24. If the impairment of the value of goodwill is seen to have reversed, then the company
may
a. Reverse the impairment charge and credit income for the period.
b. Reverse the impairment charge and credit retained earnings.
c. Not reverse the impairment charge.
d. Reverse the impairment charge only if the original circumstances that led to the
impairment no longer exist and credit retained earnings.
(Adapted)

25. On acquisition, all identifiable assets and liabilities, including goodwill, will be allocated
to cash-generating units within the business combination. Goodwill impairment is assessed
within the cash-generating units. If the combined organization has cash-generating units
significantly below the level of an operating segment, then the risk of an impairment charge
against goodwill as a result of PFRS 3 is
a. Significantly decreased because goodwill will be spread across many cash-generating
units.
b. Significantly increased because poorly performing units can no longer be supported by
those that are performing well.
c. Likely to be unchanged from previous accounting practice.
d. Likely to be decreased because goodwill will be a smaller amount due to the greater
recognition of other intangible assets.
(Adapted)
26. The management of an entity is unsure how to treat a restructuring provision that they
wish to set up on the acquisition of another entity. Under PFRS 3, the treatment of this provision
will be
a. A charge in the income statement in the postacquisition period.
b. To include the provision in the allocated cost of acquisition.
c. To provide for the amount and, if the provision is overstated, to release the excess to the
income statement in the postacquisition period.
d. To include the provision in the allocated cost of acquisition if the acquired entity
commits itself to a restructuring within a year of acquisition.
(Adapted)

27. MIME TO IMMITATE Co. initially tested its goodwill for impairment on September 30,
20x1. When should MIME perform its second impairment testing on its goodwill?
a. on or before September 30, 20x2
b. on or before December 31, 20x2
c. at any date not earlier than September 30, 20x2
d. at any date during 20x2

28. For purposes of impairment testing, PAS 36

a. requires goodwill acquired in a business combination to be allocated to each of the
acquirer’s cash-generating units in the year of business combination.
b. requires goodwill acquired in a business combination to be allocated to each of the
acquirer’s corporate assets in the year of business combination.
c. requires goodwill acquired in a business combination to be allocated to each of the
acquirer’s cash-generating units 12 months after the date of acquisition.
d. requires goodwill acquired in a business combination to be allocated to each of the
acquirer’s operating segments 3 months after the date of acquisition.

29. On September 1, 20x1, TEPID Co. acquired LUKEWARM Co. in a business combination
that resulted to goodwill. By December 31, 20x1, the initial allocation of goodwill is not yet
completed. According to PAS 36, TEPID should
a. complete the initial allocation before the end of December 31, 20x1.
b. complete the initial allocation before the end of December 31, 20x2.
c. complete the initial allocation before the end of November 30, 20x1.
d. complete the initial allocation before the end of September 1, 20x2.

30. Which of the following is incorrect regarding the accounting for business combinations
in accordance with PFRSs?
a. Any goodwill recognized on acquisition date should be allocated to the acquirer’s CGUs
prior to the end of the year of acquisition. If allocation is incomplete prior to the end of the year
of acquisition, the allocation should be completed prior to the end of the immediately preceding
year.
b. PFRS 3 requires the use of the acquisition method in accounting for business
combination.
c. Goodwill is computed as the difference between the consideration transferred and the
acquisition-date fair value of net identifiable assets acquired.
d. In applying the acquisition method, PFRS 3 requires that the acquirer should be
identified.

31. For purposes of impairment testing, PAS 36

a. requires goodwill acquired in a business combination to be allocated to each of the
acquirer’s cash-generating units in the year of business combination.
b. requires goodwill acquired in a business combination to be allocated to each of the
acquirer’s corporate assets in the year of business combination.
c. requires goodwill acquired in a business combination to be allocated to each of the
acquirer’s cash-generating units 12 months after the date of acquisition.
d. requires goodwill acquired in a business combination to be allocated to each of the
acquirer’s operating segments 3 months after the date of acquisition.

32. Goodwill must not be amortized under PFRS 3. The transitional rules do not require
restatement of previous balances written off. If an entity is adopting PFRS for the first time, and
it wishes to restate all prior acquisitions in accordance with PFRS 3, then it must apply the PFRS
to
a. Those acquisitions selected by the entity.
b. All acquisitions from the date of the earliest.
c. Only those acquisitions since the issue of the PFRS 3 and PAS 22, Business
Combinations, to the earlier ones.
d. Only past and present acquisitions of entities that have previously and currently
prepared their financial statements using PFRS.
(Adapted)

33. On September 1, 20x1, TEPID Co. acquired LUKEWARM Co. in a business combination
that resulted to goodwill. By December 31, 20x1, the initial allocation of goodwill is not yet
completed. According to PAS 36, TEPID should
a. complete the initial allocation before the end of December 31, 20x1.
b. complete the initial allocation before the end of December 31, 20x2.
c. complete the initial allocation before the end of November 30, 20x1.
d. complete the initial allocation before the end of September 1, 20x2.

34. PFRS 3 is mandatory for all new acquisitions from March 31, 2004. Entities have to cease
the amortization of goodwill arising from previous acquisitions. The balance of goodwill arising
from those acquisitions is
a. Written off against retained earnings.
b. Written off against profit or loss for the year.
c. Tested for impairment from the beginning of the next accounting year.
d. Tested for impairment on March 31, 2004.
(Adapted)
35. Which of the following factors is used as multiplier of super profits in valuation of
goodwill of a business?
a. Average capital employed in the business d. Normal rate of return
b. Simple profits e. Normal profits.
c. Number of years’ purchase
(Adapted)

ANSWER KEY for BUSINESS COMBINATION

1. C 6. C 11. B 16. C 21. A 26. A 31. A

2. A 7. D 12. C 17. C 22. A 27. A 32. B

3. D 8. B 13. B 18. D 23. D 28. A 33. B

4. C 9. C 14. C 19. A 24. C 29. B 34. C

5. A 10. D 15. A 20. D 25. B 30. C 35. C

CONSOLIDATED STATEMENT
1. The accounting for business combinations is currently prescribed under
a. PAS 22 c. PFRS 3 – revised 2008
b. PFRS 3 d. PAS 27 – revised 2011

2. KINK Co. has acquired an investment in a subsidiary, TWIST Co., with the view to
dispose of this investment within six months. The investment in the subsidiary has been
classified as held for sale and is to be accounted for in accordance with PFRS 5. The subsidiary
has never been consolidated. How should the investment in the subsidiary be treated in the
financial statements?
a. Purchase accounting should be used.
b. Equity accounting should be used.
c. The subsidiary should not be consolidated but PFRS 5 should be used.
d. The subsidiary should remain off balance sheet.
(Adapted)

3. The consolidation theory currently applied under PFRSs is

a. Proprietary theory/Proportionate consolidation theory/
b. Parent company theory
c. Entity theory/ Contemporary theory
d. Hybrid theory/ Traditional theory

4. The proprietary theory is applied under which of the following standards?

a. PAS 31 b. PAS 36 c. PFRS 3 d. PAS 27

5. What is the basis for consolidation?

a. significant influence c. control
b. joint control d. variable returns

6. FALLACIOUS Co. controls an overseas entity MISLEADING Co. Because of exchange

controls, it is difficult to transfer funds out of the country to the parent entity. FALLACIOUS
Co. owns 100% of the voting power of MISLEADING Co. How should MISLEADING Co. be
accounted for?
a. It should be excluded from consolidation and the equity method should be used.
b. It should be excluded from consolidation and stated at cost.
c. It should be excluded from consolidation and accounted for in accordance with PFRS 9.
d. It is not permitted to be excluded from consolidation because control is not lost.
(Adapted)

7. TIPPLE has control over the composition of DRINK’s board of directors. TIPPLE owns
49% of DRINK and is the largest shareholder. TIPPLE has an agreement with Mr. Bartek, which
owns 10% of DRINK, whereby Mr. Bartek will always vote in the same way as TIPPLE. Can
TIPPLE exercise control over DRINK?
a. TIPPLE cannot exercise control because it owns only 49% of the voting rights.
b. TIPPLE cannot exercise control because it can control only the makeup of the board and
not necessarily the way the directors vote.
c. TIPPLE can exercise control solely because it has an agreement with Mr. Bartek for the
voting rights to be used in whatever manner TIPPLE wishes.
d. TIPPLE can exercise control because it controls more than 50% of the voting power, and
it can govern the financial and operating policies of DRINK through its control of the board of
directors.
(Adapted)

8. On January 1, 20x1, MIME Co. acquired one-third equity interest in IMITATE Co. which
resulted in MIME having significant influence over IMITATE Co. On July 1, 20x4, MIME Co.
acquired a further one-third equity interest in IMITATE Co. which resulted in MIME having a
controlling interest over IMITATE. For financial reporting purposes, which of the following
statements is correct?
a. Goodwill shall be computed on July 1, 20x4 and the one-third equity interest acquired in
20x1 does not affect the goodwill computation.
b. Goodwill shall be computed on July 1, 20x4 and the one-third equity interest acquired in
20x1 affects the goodwill computation.
c. Goodwill shall be computed both on January 1, 20x1 and July 1, 20x4 because the
transactions are considered to constitute a ‘step acquisition.’
d. Goodwill shall be computed only on January 1, 20x1. The subsequent change in
ownership interest which did not result to loss of control is accounted for directly in equity.

9. LASSITUDE Co. owns 50% of WEARINESS Co.’s voting shares. The board of directors
consists of six members; LASSITUDE Co. appoints three of them and WEARINESS Co. appoints
the other three. The casting vote at meetings always lies with the directors appointed by
LASSITUDE Co. Does LASSITUDE Co. have control over WEARINESS Co.?
a. No, control is equally split between LASSITUDE Co. and FATIGUE Co.
b. Yes, LASSITUDE Co. holds 50% of the voting power and has the casting vote at board
meetings in the event that there is not a majority decision.
c. No, LASSITUDE Co. owns only 50% of the entity’s shares and therefore does not have
control.
d. No, control can be exercised only through voting power, not through a casting vote.
(Adapted)

10. VOLUBLE TALKATIVE Co. has sold all of its shares to the public. The company was
formerly a state-owned entity. The national regulator has retained the power to appoint the
board of directors. An overseas entity acquires 55% of the voting shares, but the regulator still
retains its power to appoint the board of directors. Who has control of the entity?
a. The national regulator.
b. The overseas entity.
c. Neither the national regulator nor the overseas entity.
d. The board of directors.
(Adapted)
11. A manufacturing group has just acquired a controlling interest in a football club that is
listed on a stock exchange. The management of the manufacturing group wishes to exclude the
football club from the consolidated financial statements on the grounds that its activities are
dissimilar. How should the football club be accounted for?
a. The entity should be consolidated as there is no exemption from consolidation on the
grounds of dissimilar activities.
b. The entity should not be consolidated using the purchase method but should be
consolidated using equity accounting.
c. The entity should not be consolidated and should appear as an investment in the group
accounts.
d. The entity should not be consolidated; details should be disclosed in the financial
statements.
(Adapted)

12. On January 1, 20x1, TRICE Co. obtained control of INSTANT Co. Subsequently, there
have changes in the ownership interests over INSTANT; however, the TRICE’s control over
INSTANT was unaffected. Which of the following statements is incorrect?
a. Once control has been achieved, further transactions whereby the parent entity acquires
further equity interests from non-controlling interests, or disposes of equity interests but
without losing control, are accounted for as equity transactions
b. The carrying amounts of the controlling and non-controlling interests are adjusted to
reflect the changes in their relative interests in the subsidiary.
c. Any difference between the amount by which the non-controlling interests is adjusted
and the fair value of the consideration paid or received is recognized directly in equity and
attributed to the owners of the parent.
d. The carrying amount of any goodwill should be adjusted and gain or loss is recognized
in profit or loss.

13. Which of the following exemplifies the application of the ‘entity theory’ of
consolidation?
a. Consolidated profit = Parent’s separate profit + Share of Parent in Subsidiary’s profit
b. Consolidated profit = Profit of the group
c. Consolidated profit = Profit of the group – NCI profit
d. Consolidated profit = Parent’s separate profit + NCI profit

14. Under the ‘entity theory’ of consolidation, the consolidated profit equals
a. Parent’s separate profit + Share of Parent in Subsidiary’s profit
b. Profit of the group – NCI profit
c. Parent’s separate profit + NCI profit
d. Profit attributable to owners of the parent + Profit attributable to NCI
15. During the year, COMITY Co. sold equipment to its subsidiary, MUTUAL COURTESY
Co., at a gain. The equipment has a remaining useful life of 5 years. Which of the following
statements is true in the preparation of the consolidated financial statements?
a. The gain is recognized immediately.
b. The gain is deferred and recognized only in the period the equipment is sold to an
unrelated party.
c. The carrying amount of the asset and the related depreciation are adjusted downwards.
d. The carrying amount of the asset and the related depreciation are adjusted upwards.

16. During the year, BAFFLE Co. sold part of its controlling interest in TO COFUSE Co. The
sale did not affect BAFFLE’s control over TO CONFUSE. Which of the following statements is
true?
a. The equity adjustment would be larger if BAFFLE measures NCI at the NCI’s
proportionate share in the subsidiary’s net identifiable assets rather than at fair value.
b. The equity adjustment would be larger if BAFFLE measures NCI at fair value rather
than at the NCI’s proportionate share in the subsidiary’s net identifiable assets.
c. There would be no equity adjustment if the net disposal proceeds equal the original cost
of the interest sold.
d. c and d

17. Which of the following terms best describes the financial statements of a parent in which
the investments are accounted for on the basis of the direct equity interest?
a. Single financial statements
b. Combined financial statements
c. Separate financial statements
d. Consolidated financial statements

18. Are the following statements true or false?

1. Consolidated financial statements must be prepared using uniform accounting policies.
2. The non-controlling interest in the net assets of subsidiaries may be shown by way of
note to the consolidated statement of financial position.
a. False, False b. False, True c. True, False d. True True

19. Which of the following is not a valid condition that will exempt an entity from preparing
consolidated financial statements?
a. The parent entity is a wholly owned subsidiary of another entity.
b. The parent entity’s debt or equity capital is not traded on the stock exchange.
c. The ultimate parent entity produces consolidated financial statements available for
public use that comply with PFRS.
d. The parent entity is in the process of filing its financial statements with a securities
commission.
(Adapted)

20. Where should non-controlling interests be presented in the consolidated balance sheet?
a. Within long-term liabilities.
b. In between long-term liabilities and current liabilities.
c. Within the parent shareholders’ equity.
d. Within equity but separate from the parent shareholders’ equity.
(Adapted)

ANSWER KEY for CONSOLIDATED STATEMENT

1. C 6. D 11. A 16. A
2. C 7. D 12. D 17. C
3. C 8. B 13. B 18. C
4. A 9. B 14. D 19. D
5. C 10. C 15. C 20. D