This notes is a summary for the topic business combination for Financial Accounting and Reporting which concludes the computation of goodwill and a gain on bargain purchases, the fair value of the assets at the acquisition date and among others
- A transaction or other event in which an acquirer obtains control of one or more businesses
Control
- Has the power to direct the investee’s relevant activities
- Holds more than 50% (51% or more) interest in the investee’s voting rights
Other Ways of Obtaining Control
a. Acquirer has the power to appoint or remove majority of the BOD
b. Acquirer has the power to cast majority of votes at board meetings or equivalent bodies
c. Acquirer has the power over more than half of the voting rights because of an agreement
with other investors
d. Acquirer controls the operating and financial policies due to law or agreement
Variety Ways of Obtaining Control
a. Cash or other assets
b. Incurring liabilities
c. Issuing equity interest
d. More than one type of consideration
e. Without transferring consideration including contract alone
Business
- an integrated set of activities and assets that is capable of being conducted and managed
for the purpose of providing goods or services to customers, generating investment income or
generating other income from ordinary activities
Elements of a Business
a. Input- any economic resource that result to an output when one or more processes are
applied to it such as non-current assets, intellectual property, the ability to obtain access to
necessary materials or rights and employees
,b. Process- any system, standard, protocol, convention or rule that when applied to an input,
creates an output such as strategic management processes, operational processes and
management processes.
c. Output – the result of 1 and 2 above that provides goods or services to customers,
investment income or other income from ordinary activities
Identifying a Business Combination
- An entity determines whether a transaction is a business combination in relation to the
definition provided under PFRS 3
- If the assets acquired (and related liabilities assumed) do not constitute a business, the
entity accounts for the transaction as a regular asset acquisition and not a business
combination. Accordingly, the entity applies other applicable standards.
Accounting for Business Combination (Acquisition Method)
a. Identify the acquirer
b. Determine the acquisition date
c. Recognizing and measuring goodwill.
i. Consideration transferred
ii. Non-controlling Interest in the acquire
iii. Previously held equity interest
iv. Identifiable assets acquired and liabilities assumed on the business
combination
Identifying the Acquirer
The acquirer is the entity that obtains control of the acquire. The acquire is the business that the
acquirer obtains control in the business combination.
Guidance in identifying the acquirer
a. Who is the transferor of cash or other resources or assumes liabilities?
- the acquirer is usually the entity that transfers cash or other assets or incurs the liabilities
b. Who is the issuer of shares?
- the entity that issues equity interests except in Reverse Acquisition wherein the issuing
entity is the issuer
, i. whose owners, as a group, have the largest portion of the voting
rights of the combined entity
ii. whose owners have the ability to appoint or remove a majority of the
members of the governing body of the combined entity
iii. whose (former) management dominates the management of the
combined entity
iv. pays a premium over the pre-combination fair value of the equity
interests of the other combining entity or entities
c. Who is larger?
- The acquirer is usually the larger
d. Who is the initiator of the combination?
- The acquirer is usually the one who initiated the combination
e. Substance over form
- If the new entity is formed to effect the business combination, the acquirer is identified as
i. To issue equity interest, one of the combining entities that existed
before the business combination is the acquirer
ii. To transfer cash or other assets or incur liabilities, the new entity is the
acquirer
Determining the acquisition date
Acquisition date
- the date on which the acquirer obtains control of the acquire
- normally the closing date or the date on which the acquirer legally transfers the
consideration, acquires the assets and assumes the liabilities of the acquiree except when there
is a written agreement to that effect.
Recognizing and measuring goodwill
Formula:
Consideration Transferred xx
NCI xx
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