Business Combination – 09282024

Business combination achieved in stages – when the acquirer obtains

control of an acquiree in more than one transaction. For example,
Entity A acquires 20% interest in Entity B in Year 1. This transaction
is not a business combination because Entity A has not yet obtained
control of Entity B. In year 23, Entity A, acquires additional 40%
interest in Entity B, thereby bringing its interest to a total of 60%. The
second acquisition qualifies as a business combination because entity
A has obtained control of entity B.

Business combination achieved in stages is also called “step

acquisition.”

I accounting for a business combination achieved in stages, the

acquirer:

1. Re-measures the previously held equity interest in the

acquisition-date fair value; and
2. Recognizes the gain or loss on the re-measurement:
a. In profit or loss if the previously held equity interest was
classified as FVPL, Investment in Associate, investment in
joint venture or
b. In other comprehensive income if the previously held
equity interest was classified as FVOCI.

Business combination achieved in stages

On January 1, 2021, ABC Co. acquired 15% ownership interest in DEF
Inc. for P100,000. ABC Co. classified the investment as held for
trading securities (i.e. FVPL) in accordance with PFRS 9.

On January 1, 2024, ABC Co. acquired additional 60% ownership

interest in DEF, Inc. for P800,000. Relevant information follows:
a. The previously held 15% interest has a carrying amount of
P170,000 on December 31, 2023 and a fair value of P180,000
on January 1, 2024.
b. DEF’s net identifiable assets have fair value of P1,000,000
c. ABC elected to measure the NCI at proportionate share
Requirement: Compute for the goodwill.
Notes:

 The business combination is effected through stock acquisition.

Accordingly, the acquisition is recorded in the parent’s separate
accounting records through the investment in subsidiary
account. The carrying amount of this account immediately after
the combination is P980,000.
 When consolidated financial statements are prepared, the
investment in subsidiary is eliminated and the goodwill and NCI
are recognized.
 The same accounting procedures apply if the previously held
equity interest was classified as FVOCI, investment in associate,
or investment in joint venture. However, if the previous
classification was FVOCI, the remeasurement gain or loss is
recognized in other comprehensive income.

Business combination without transfer of consideration

The acquisition method also applies to business combination in which

the acquirer obtains control without transferring any consideration.
The reason why the purchase method previously used for business
combination has been replaced with the acquisition method is to
emphasize that a business combination may occur even when a
purchase transaction is not involved.

Examples of circumstances where the acquirer obtains control

without transferring consideration:

a. The acquirer repurchases a sufficient number of its own shares

from other investors so that the acquirer will be able to obtain
control.
For Example, ABC Co. holds 40,000 shares out of the
100,000 outstanding ordinary shares of XYZ, Inc. Subsequently,
XYZ, repurchases 25, 000 shares from other investors. After the
treasury shares transaction, ABC’s ownership interest increased
from 40% (40,000 / 100,000) to 53.33% (40,000 / 75,000).
b. Minority veto rights that previously kept the acquirer from
controlling the acquiree have lapsed.
 c. The acquirer and acquire agree to combine their business by
contract alone. The acquirer neither transfers consideration nor
holds equity interest in the acquiree.

 In a business combination achieved without transfer of

consideration, the acquisition-date fair value of the acquirer’s
interest in the acquiree is substituted for the consideration
transferred in computing for goodwill.
 In a business combination achieved by contract alone, the
interest held by parties other than the acquirer are attributed to
NCI, even if the result is that NCI represents 100% interest in the
acquiree.

Illustration:

ABC Co. owns 36,000 shares out of 90,000 outstanding shares of

XYZ, Inc. ABC accounts for the investment under the equity method.
XYZ subsequently reacquires 30,000 shares from other investors.
Information on the acquisition date is as follows:
a. The previously held 40% interest has a fair value of P180,000
b. XYZ’s net identifiable assets have fair value of P1,000,000.
c. ABC elects to measure NCI at proportionate share.

Requirement: compute for the goodwill.

Notes:

 XYZ’s treasury share transaction increased ABC’s interest to 60%

(i.e. 36,000 / (90,000-30,000). Consequently, the NCI is 40%.
 The acquisition-date fair value of ABC’s interest in XYZ is
substituted for the consideration transferred (instead of
attributing an amount to the previously held equity interest)
because there is no consideration transferred and there is no
change in the number of shares held by ABC.

Illustration: By contract alone

ABC Co. and XYZ, Inc. enter onto a contract whereby ABC obtains
control of XYZ. No consideration is transferee between the parties.
The fair value of XYZ’s net identifiable assets at acquisition date is
P1,000,000. ABC chose to measure NCI at proportionate share.

Requirement: compute for the goodwill.

Measurement period
If the initial accounting for a business combination is incomplete by
the end of the reporting period in which the combination occurred,
the acquirer can use provisional amounts to measure any of the
following for which the accounting is incomplete:
a. Consideration transferred
b. Non-controlling interest in the acquire
c. Previously held equity interest in the acquire
d. Identifiable assets acquired and liabilities assumed

Within 12 months from the acquisition date (i.e., the measurement

period), the acquirer retrospectively adjusts the provisional amounts
for any new information obtained that provides evidence of facts and
circumstances that existed as of the acquisition date, which if known
would have affected the measurement of the amounts recognized on
that date. Any adjustment to a provisional amount is recognized as
an adjustment to goodwill or a gain on bargain purchase.

Adjustments for new information obtained beyond the 12-month

measurement period are accounted for as corrections of error in
accordance with PAS 8 Accounting policies, changes in accounting
estimates and errors, rather than PFRS 3.

Illustration1: provisional amounts – identifiable assets acquired

On October 1, 2021, ABC Co. acquired all the identifiable assets and
assumed all the liabilities of XYZ, Inc. for P1,000,000. On the date,
XYZ’s assets and liabilities have fair values of P1,600,000 and
P900,000 respectively.

Case 1: Identifiable asset is recognized at provisional amount

The assets acquired include a building which was assigned a
provisional amount of P700,000 because the appraisal is not yet
complete by the time ABC authorized to issue its December31, 2021
financial statements. The building was tentatively assigned a 10-year
useful life and was depreciated for three months in 2021 using the
straight-line method.

On July 1, 2022, ABC received the valuation report for the building.
The building’s fair value on October 1, 2021 is P500,000 and its
remaining useful life from that date is 5 years.

Requirements:
a. What is the measurement period?
b. How should ABC account for the new information obtained on
July 1, 2022?
c. How much is the adjusted goodwill?
d. What are the adjusting entries?

Case 2: Unrecorded identifiable asset acquired

On July 1, 2022 ABC obtained a new information that XYZ has an
unrecorded patent which was not known on October 1, 2021. The
patent has a fair value of P100,000 and remaining useful life of 4
years as of October 1, 2021

Requirement: Compute of the adjusted goodwill and provide for the

adjusting entries.

Case 3: information obtained beyond the measurement period

On November 1, 2022, ABC’s auditors discovered that a patent with
fair value of P100,000 was erroneously omitted from the valuation
listing on October 1, 2021. The patent has a fair value of P100,000
and remaining useful life of 4 years as of October 1, 2021.

Requirement: How should ABC account for the new information

obtained on November 1, 2022?

Illustration 2: provisional amounts – consideration transferred

On October 1, 2021, ABC, Co., an unlisted entity, issued 10,000 P5
par value, shares in exchange for all the identifiable assets and
liabilities of XYZ, Inc.

Information on acquisition date:

  The share issued were assigned a provisional amount of P100
per share
 The fair values of some of the assets acquired are not readily
determinable. Accordingly, a provisional amount of P700,000
was assigned to XYZ’s net identifiable assets.

Information after the acquisition date:

 On April 1, 2022 new information was obtained indicating that
on October 1, 2021:
o The fair value of the share issued was P110 per share; and
o The fair value of XYZ’s net identifiable assets was
P900,000.
 On July 1, 2022, two competitors of ABC have also merged. This
led ABC to believe that the merger with XYZ is not as profitable
as expected. ABC estimates that the valuations of the
consideration transferred and XYZ;s net identifiable assets
should have been P900,000 and P400,000, respectively.

Requirement: Compute for the adjusted goodwill.

The new information obtained on July 1, 2022 is not a measurement

period adjustment because it does not relate to facts and
circumstances that have existed as at the acquisition date. This,
however may indicate an impairment of goodwill.