UNIVERSITY OF THE CORDILLERAS
Undergrad Review
Practical Accounting II
Business Combinations / Consolidated Financial Statements
Mark Alyson B. Ngina
IFRS 3 Business Combinations
A business combination is a transaction or event in which an acquirer obtains control of one or more
businesses. A business is defined as an integrated set of activities and assets that is capable of being
conducted and managed for the purpose of providing a return directly to investors or other owners,
members or participants.
Core principle
An acquirer of a business recognises the assets acquired and liabilities assumed at their acquisition-date
fair values and discloses information that enables users to evaluate the nature and financial effects of the
acquisition.
Applying the acquisition method
Acquisition method. The acquisition method (called the 'purchase method' in the 2004 version of IFRS 3)
is used for all business combinations.
Steps in applying the acquisition method are:
1. Identification of the 'acquirer' – the combining entity that obtains control of the acquiree
2. Determination of the 'acquisition date' – the date on which the acquirer obtains control of the
acquiree
3. Recognition and measurement of the identifiable assets acquired, the liabilities assumed and any
non-controlling interest (NCI, formerly called minority interest) in the acquire
4. Recognition and measurement of goodwill or a gain from a bargain purchase
Measurement of acquired assets and liabilities. Assets and liabilities are measured at their
acquisition-date fair value (with a limited number of specified exceptions).
Measurement of NCI. IFRS 3 allows an accounting policy choice, available on a transaction by transaction
basis, to measure NCI either at:
a. fair value (sometimes called the full goodwill method), or
b. the NCI's proportionate share of net assets of the acquiree (option is available on a transaction by
transaction basis).
Acquired intangible assets. Must always be recognised and measured at fair value. There is no 'reliable
measurement' exception.
Goodwill
Goodwill is measured as the difference between:
a. the aggregate of (i) the acquisition-date fair value of the consideration transferred, (ii) the
amount of any NCI, and (iii) in a business combination achieved in stages (see Below), the
acquisition-date fair value of the acquirer's previously-held equity interest in the acquiree; and
b. the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities
assumed (measured in accordance with IFRS 3).
If the difference above is negative, the resulting gain is recognised as a bargain purchase in profit or
loss.
Business combination achieved in stages (step acquisitions)
Prior to control being obtained, the investment is accounted for under IAS 28, IAS 31, or IAS 39, as
appropriate. On the date that control is obtained, the fair values of the acquired entity's assets and
liabilities, including goodwill, are measured (with the option to measure full goodwill or only the acquirer's
percentage of goodwill). Any resulting adjustments to previously recognised assets and liabilities are
recognised in profit or loss. Thus, attaining control triggers remeasurement.
Provisional accounting
If the initial accounting for a business combination can be determined only provisionally by the end of the
first reporting period, account for the combination using provisional values. Adjustments to provisional
values within one year relating to facts and circumstances that existed at the acquisition date. No
adjustments after one year except to correct an error in accordance with IAS 8.
Cost of an acquisition
Measurement. Consideration for the acquisition includes the acquisition-date fair value of contingent
consideration. Changes to contingent consideration resulting from events after the acquisition date must be
recognised in profit or loss.
Acquisition costs. Costs of issuing debt or equity instruments are accounted for under IAS 32 and IAS
39. All other costs associated with the acquisition must be expensed, including reimbursements to the
acquiree for bearing some of the acquisition costs. Examples of costs to be expensed include finder's fees;
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advisory, legal, accounting, valuation and other professional or consulting fees; and general administrative
costs, including the costs of maintaining an internal acquisitions department.
Contingent consideration. Contingent consideration must be measured at fair value at the time of the
business combination. If the amount of contingent consideration changes as a result of a post-acquisition
event (such as meeting an earnings target), accounting for the change in consideration depends on
whether the additional consideration is an equity instrument or cash or other assets paid or owed. If it is
equity, the original amount is not remeasured. If the additional consideration is cash or other assets paid
or owed, the changed amount is recognised in profit or loss. If the amount of consideration changes
because of new information about the fair value of the amount of consideration at acquisition date (rather
than because of a post-acquisition event) then retrospective restatement is required.
Pre-existing relationships and reacquired rights
If the acquirer and acquiree were parties to a pre-existing relationship (for instance, the acquirer had
granted the acquiree a right to use its intellectual property), this must be accounted for separately
from the business combination. In most cases, this will lead to the recognition of a gain or loss for the
amount of the consideration transferred to the vendor which effectively represents a 'settlement' of the
pre-existing relationship. The amount of the gain or loss is measured as follows:

for pre-existing non-contractual relationships (for example, a lawsuit): by reference to fair value

for pre-existing contractual relationships: at the lesser of (a) the favourable/unfavourable
contract position and (b) any stated settlement provisions in the contract available to the
counterparty to whom the contract is unfavourable.
However, where the transaction effectively represents a reacquired right, an intangible asset is
recognised and measured on the basis of the remaining contractual term of the related contract
excluding any renewals. The asset is then subsequently amortised over the remaining contractual
term, again excluding any renewals.
Exception to the recognition and measurement principles
The IFRS provides limited exceptions to these recognition and measurement principles:
a) Leases and insurance contracts. Leases and insurance contracts are required to be classified on
the basis of the contractual terms and other factors at the inception of the contract (or when the
terms have changed) rather than on the basis of the factors that exist at the acquisition date.
b) Contingent Liability. Only those contingent liabilities assumed in a business combination that are
a present obligation and can be measured reliably are recognised. That is, it is not necessary that
an outflow of future economic benefits is probable.
c) Income tax, employee benefits, share-based payment, non-current assets held for sale.
Assets and liabilities are required to be recognised or measured in accordance with their respective
IFRS’s, rather than at fair value.
d) Reacquired rights. The acquirer may reacquire a right that it had previously granted to the
acquiree; for example, the right to use the acquirer's technology under a technology licensing
agreement. The acquirer recognizes the reacquired intangible right as an asset and determines its
fair value on the basis of the remaining contractual term of the contract, regardless of whether
market participants would consider potential contractual renewals in determining its fair value.
Subsequently, the reacquired right is amortized over the remaining contractual period.
e) Indemnification asset. Indemnification assets are recognised and measured on a basis that is
consistent with the item that is subject to the indemnification, even if that measure is not fair
value.
Disclosure
The IFRS requires the acquirer to disclose information that enables users of its financial statements to
evaluate the nature and financial effect of business combinations that occurred during the current reporting
period or after the reporting date but before the financial statements are authorised for issue. After a
business combination, the acquirer must disclose any adjustments recognised in the current reporting
period that relate to business combinations that occurred in the current or previous reporting periods.
IAS 27 Separate Financial Statements
The objective of the Standard is to prescribe the accounting and disclosure requirements for investments in
subsidiaries, joint ventures and associates when an entity prepares separate financial statements.
The Standard shall be applied in accounting for investments in subsidiaries, joint ventures and associates
when an entity elects, or is required by local regulations, to present separate financial statements.
Separate financial statements are those presented by a parent (ie an investor with control of a
subsidiary) or an investor with joint control of, or significant influence over, an investee, in which the
investments are accounted for at cost or in accordance with IFRS 9 Financial Instruments.
When an entity prepares separate financial statements, it shall account for investments in subsidiaries,
joint ventures and associates either:
a) at cost, or
b) in accordance with IFRS 9.
The entity shall apply the same accounting for each category of investments. Investments accounted for at
cost shall be accounted for in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations when they are classified as held for sale (or included in a disposal group that is classified as
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held for sale). The measurement of investments accounted for in accordance with IFRS 9 is not changed in
such circumstances.
IFRS 10 Consolidated Financial Statements
The objective of this IFRS is to establish principles for the presentation and preparation of consolidated
financial statements when an entity controls one or more other entities. To meet the objective, this IFRS:
a) requires an entity (the parent) that controls one or more other entities (subsidiaries) to present
consolidated financial statements;
b) defines the principle of control, and establishes control as the basis for consolidation;
c) sets out how to apply the principle of control to identify whether an investor controls an investee
and therefore must consolidate the investee; and
d) sets out the accounting requirements for the preparation of consolidated financial statements.
Key Definitions:
Consolidated
financial statements
Control of an
investee
Parent
Power
Protective rights
Relevant activities
The financial statements of a group in which the assets, liabilities, equity,
income, expenses and cash flows of the parent and its subsidiaries are
presented as those of a single economic entity
An investor controls an investee when the investor is exposed, or has rights,
to variable returns from its involvement with the investee and has the ability
to affect those returns through its power over the investee
An entity that controls one or more entities
Existing rights that give the current ability to direct the relevant activities
Rights designed to protect the interest of the party holding those rights
without giving that party power over the entity to which those rights relate
Activities of the investee that significantly affect the investee's returns
Control
An investor determines whether it is a parent by assessing whether it controls one or more investees.
An investor considers all relevant facts and circumstances when assessing whether it controls an
investee.
An investor controls an investee if and only if the investor has all of the following elements:
a) power over the investee, i.e. the investor has existing rights that give it the ability to direct the
relevant activities (the activities that significantly affect the investee's returns)
b) exposure, or rights, to variable returns from its involvement with the investee
c) the ability to use its power over the investee to affect the amount of the investor's returns.
Power arises from rights. Such rights can be straightforward (e.g. through voting rights) or be complex
(e.g. embedded in contractual arrangements). An investor that holds only protective rights cannot
have power over an investee and so cannot control an investee.
An investor must be exposed, or have rights, to variable returns from its involvement with an investee
to control the investee. Such returns must have the potential to vary as a result of the investee's
performance and can be positive, negative, or both.
A parent must not only have power over an investee and exposure or rights to variable returns from its
involvement with the investee, a parent must also have the ability to use its power over the investee to
affect its returns from its involvement with the investee.
When assessing whether an investor controls an investee an investor with decision-making rights
determines whether it acts as principal or as an agent of other parties. A number of factors are
considered in making this assessment. For instance, the remuneration of the decision-maker is
considered in determining whether it is an agent.
Preparation of consolidated financial statements
A parent prepares consolidated financial statements using uniform accounting policies for like
transactions and other events in similar circumstances. However, a parent need not present
consolidated financial statements if it meets all of the following conditions:

it is a wholly-owned subsidiary or is a partially-owned subsidiary of another entity and its other
owners, including those not otherwise entitled to vote, have been informed about, and do not
object to, the parent not presenting consolidated financial statements

its debt or equity instruments are not traded in a public market (a domestic or foreign stock
exchange or an over-the-counter market, including local and regional markets)

it did not file, nor is it in the process of filing, its financial statements with a securities commission
or other regulatory organisation for the purpose of issuing any class of instruments in a public
market, and

its ultimate or any intermediate parent of the parent produces consolidated financial statements
available for public use that comply with IFRSs.
Furthermore, post-employment benefit plans or other long-term employee benefit plans to which IAS
19 Employee Benefits applies are not required to apply the requirements of IFRS 10.
Consolidation procedures
Consolidated financial statements:

combine like items of assets, liabilities, equity, income, expenses and cash flows of the parent with
those of its subsidiaries

offset (eliminate) the carrying amount of the parent's investment in each subsidiary and the
parent's portion of equity of each subsidiary (IFRS 3 Business Combinations explains how to
account for any related goodwill)
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eliminate in full intragroup assets and liabilities, equity, income, expenses and cash flows relating
to transactions between entities of the group (profits or losses resulting from intragroup
transactions that are recognised in assets, such as inventory and fixed assets, are eliminated in
full).
An entity must use uniform accounting policies for reporting like transactions and other events in
similar circumstances.
The parent and subsidiaries are required to have the same reporting dates, or consolidation based on
additional financial information prepared by subsidiary, unless impracticable. Where impracticable, the
most recent financial statements of the subsidiary are used, adjusted for the effects of significant
transactions or events between the reporting dates of the subsidiary and consolidated financial
statements. The difference between the date of the subsidiary's financial statements and that of the
consolidated financial statements shall be no more than three months
Non-controlling interests in subsidiaries must be presented in the consolidated statement of financial
position within equity, separately from the equity of the owners of the parent.

-
-
Changes in the ownership interests
A. No Loss of Control
Changes in a parent’s ownership interest in a subsidiary that do not result in the parent losing control
of the subsidiary are equity transactions (ie transactions with owners in their capacity as owners).
B. Loss of control / Deconsolidation
If a parent loses control of a subsidiary, the parent:
a) derecognises the assets and liabilities of the former subsidiary from the consolidated statement of
financial position.
b) recognises any investment retained in the former subsidiary at its fair value when control is lost
and subsequently accounts for it and for any amounts owed by or to the former subsidiary in
accordance with relevant IFRSs. That fair value shall be regarded as the fair value on initial
recognition of a financial asset in accordance with IFRS 9 or, when appropriate, the cost on initial
recognition of an investment in an associate or joint venture.
c) recognises the gain or loss associated with the loss of control attributable to the former controlling
interest.
Examples of loss of control
1. Liquidation, receivership and administration. When a subsidiary becomes a subject of
insolvency proceedings involving the appointment of a receiver or liquidator, if the effect is that the
shareholders cease to have the power to govern the financial and operating policies. Although this
will often be the case in a liquidation, a receivership or administration order may not involve loss of
control by shareholders.
2. Seizure of assets or operation. An example of loss of control is seizure of assets or operations of
an foreign subsidiary by local government.
Note: Short-term restrictions on cash flows from a subsidiary and severe long-term restrictions impairing the
ability to transfer funds to the parent does not necessarily precludes control.
Acquiring additional shares in the subsidiary after control was obtained
This is accounted for as an equity transaction with owners (like acquisition of 'treasury shares'). Goodwill is
not remeasured.
Disclosure
The disclosure requirements for interests in subsidiaries are specified in IFRS 12 Disclosure of Interests in
Other Entities.
Investment
Joint Venture
Current
IAS 31 Investment in Joint
Venture
Subsidiary
IAS 27 Consolidated and Separate
Financial Statements
Associate
IAS 28 Investment in Associate
January 1, 2013
IAS 28 Investment in Associates and Joint
Venture
IFRS 11 Joint Arrangements
IFRS 12 Disclosure of Interest in Other Entities
IFRS 10 Consolidated Financial Statement
IAS 27 Separate Financial Statement
IFRS 12 Disclosure of Interest in Other Entities
IAS 28 Investment in Associate and Joint Venture
IFRS 12 Disclosure of Interest in Other Entities
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Classifying Investments
The Binfathi Group’s investment in Al-Taweel Limited
1. Binfathi has a 15% holding in the shares of Al-Taweel Limited. In addition, one of Binfathi’s
subsidiaries, Gulfwings Inc., which is 60% owned, has a holding of 55% of the shares in Al-Taweel.
Binfathi’s effective share of Al-Taweel Limited is, therefore, 48% (15% + (60% of 55%)). How should
this investment be classified?
a. A subsidiary
b. An associate
c. A jointly controlled company
d. None of these categories
A - Al-Taweel is a subsidiary through the Gulfwings’ majority holding of the share capital, and would be
even if Binfathi did not have its 15% direct holding. 70% of the voting shares in Al-Taweel are controlled
either directly or indirectly by Binfathi. It is not relevant that the existence of a non-controlling interest in
the intermediate subsidiary reduces Binfathi’s effective share to below 50%. It is the chain of control that
is significant. Thus, Binfathi should consolidate Al-Taweel and eliminate 52% as non-controlling interests.
The Binfathi Group’s investment in Bamco Construction Company
2. Binfathi has a 25% holding in Bamco Construction Company. The remaining 75% of the shares is held
by two other companies, which are parties to an agreement between themselves as to the conduct of
Bamco’s business. Binfathi is represented on the board of Bamco, but most of the decisions are made
by directors representing the other two companies. How should this investment be classified by the
Binfathi Group?
a. Clearly a subsidiary
b. Clearly an associate
c. Clearly a jointly controlled entity
d. Possibly an associate or just an investment
D - As per IAS 31, Bamco appears to be a jointly controlled entity, but the venturers appear to be the
other two parties, whereas Binfathi ranks only as an investor because it is not a party to the joint control
agreement. Still, Bamco could be an associate of Binfathi, depending on whether Binfathi exercises
significant influence over it.
The Binfathi Group’s investment in Calco Fabricating Limited
3. Binfathi has a 100% holding in Calco Fabricating Limited, which is located in a politically unstable
country. The government of that country recently announced that it will not allow any remittances of
profits or other cash disbursements to be made to foreign investors for the foreseeable future and has
threatened to nationalize foreign-owned investments without compensation. At the moment, however,
Calco continues to trade within its own local market. How should this investment be classified?
a. A subsidiary
b. An associate
c. A jointly controlled entity
d. Probably a jointly controlled company but possibly an associate
A - According to IAS 27 the existence of severe long-term restrictions is one of the factors to consider
when deciding whether Calco is controlled by Binfathi. However, such restrictions do not preclude control.
If, after considering all the facts, control still exists, then Calco is a subsidiary and should be consolidated;
otherwise, it should be accounted for under IAS 39.
The Binfathi Group’s investment in Darweesh Establishment
4. Binfathi has a 10% holding in Darweesh Establishment. Each of the seven other investors in Darweesh
holds between 10% and 20% of its equity. The Darweesh Establishment owns a fleet of ships that is
used by all the investors to transport their own products around the world. The operation of Darweesh
and of its fleet is the subject of a detailed agreement among all the investors. Binfathi has a director on
the board of Darweesh, but in accordance with the agreement, the entity is operated by one of the
other investors, who receives a fee for this service. How should this investment be classified?
a. A subsidiary
b. An associate
c. Probably a jointly controlled entity
d. None of the above
C - This appears to be a jointly controlled entity under IAS 31. Although one of the other parties operates
it, it does not have the control on Darweesh, because the control is exercised only within the terms of the
joint agreement. Under IAS 31’s benchmark treatment, it will be proportionately consolidated, although
equity accounting is an allowed alternative treatment.
The Binfathi Group’s investment in Emir Holding Company (EHC)
5. Binfathi has a 49% holding in Emir Holding Company (EHC), which is located in a foreign country.
EHC’s business is to import goods from the Binfathi Group and sell them locally. Local laws do not
permit foreign investors to hold a majority stake or to have a majority of board members on companies
in that country. Thirty-one percent is held by a local bank, whose investment is funded by a deposit of
the same amount lodged by Binfathi. This holding is held in trust by the bank for Binfathi as per trustship agreement. A local entrepreneur who is also the chief executive officer holds the remaining 20%.
How should this investment be classified?
a. A subsidiary
b. An associate
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c.
d.
A jointly controlled entity
Probably a jointly controlled entity but possibly an associate
A
The answer to this depends on whether Binfathi controls EHC, which in a real case would have to be
evaluated in the light of all the detailed facts, particularly what has been agreed upon by the other
shareholders. However, it seems likely EHC is a subsidiary of Binfathi, notwithstanding Binfathi's apparent
inability to exercise control.
Binfathi has the largest equity investment in the entity, and it appears that the bank is, in substance,
holding its stake as a nominee for Binfathi. Furthermore, the fact that EHC’s business is dependent on
imports from Binfathi gives it a commercial dominance that makes it unlikely that the 20% shareholder
would act against the wishes of Binfathi. Accordingly, it appears that EHC is a subsidiary of Binfathi. Thus,
EHC should be consolidated, and it is for consideration whether the minority interest is 20% or 51%.
Assuming no dividends will be paid (31% of which would prima facie be due to the bank), the bank’s
apparent independent holding likely has no substance and EHC likely is an 80% subsidiary.
Problems: Business Combination
1.
CPA’s acquisition of BSA for cash proceeded as follows:
23 January
2 March
12 June
1 July
30 October
15 November
25 November
Approach made to the management of BSA seeking endorsement of the
acquisition
Public offer made for 100% of the equity shares of BSA, conditional on
regulatory approval, shareholder approval and receiving acceptances
representing 60% of BSA’s shares
Regulatory approval received
Shareholder approval received
Acceptances received to date represent 50% of BSA’s shares
Acceptances received to date represent 95% of BSA’s shares
Cash paid out to BSA’s accepting shareholders
Required: Identify the acquisition date.
Answer: The acquisition date, being the date on which CPA obtains control over BSA, is 30 October. (hint:
board examination date)
2.
Riki Co. acquires the entire share capital of Doom Co. by issuing 100,000 new P1 ordinary shares at a
fair value at the acquisition date of P2.50. The professional fees associated with the acquisition are
P20,000 and the issue costs of the shares are P10,000. The carrying value of the net assets of Doom
Co. at the time of acquisition is P150,000, which is equal to its fair value.
Other information related to the acquisition includes the following:
a) If Doom’s profits for the first full year following acquisition exceed P2 million, Riki Co. will pay
additional consideration of P 6 million in cash three months after that year end. It is doubtful
whether Doom Co. will achieve this profit, hence the acquisition-date fair value of this contingent
consideration is P100,000.
b) A contract exists whereby Riki Co. will buy certain components from Doom Co. over the next five
years. The contract was signed when market prices for these components were markedly higher
than they are at the acquisition date. At the acquisition date the fair value of the amount by which
the contract prices are expected to exceed market prices over the next five years is P1.5 million.
Question 1: What amount should Riki present for goodwill in its statement of financial position at
December 31, 2011, according to IFRS3 Business combinations?
a. P250,000
b. P230,000
c. P200,000
d. P190,000
C – The contract is not part of the business combinations. Riki Co. now controls Doom Co and can
therefore cancel this contract. P1.5 million of the consideration should be recognized as an expense (i.e.
cancelling the contract) in profit or loss, rather than treated as transferred in the business combination.
Question 2: Using the data given above and assuming that Doom Co. achieves its earnings target,
how should the difference of the additional consideration and its acquisition date fair value treated?
a. The difference should be added to the consideration transferred, but not addition to goodwill
b. The difference should be added to the consideration transferred, but added to the amount of
goodwill initially recognized.
c. The difference should be recognized as an income.
d. The difference should be recognized as an expense in profit or loss.
D - The additional consideration relates to events after the acquisition date, so should be recognized as an
expense in profit or loss.
3.
ABC acquired 750,000 of the 1 million equity shares of LMN at a price of P5 each at the time when the
total fair value of LMN’s assets less liabilities was P4 million. ABC estimated that the price paid included
a premium of P0.50 per share in order to gain control over LMN. Compute for the following
a. Fair value of non-controlling interest using the full goodwill method – P1,125,000
b. The amount of goodwill using the full goodwill method – P875,000
c. The non-controlling interest using the partial goodwill method – P1,000,000
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d. The amount of goodwill using the partial goodwill method – P750,000
Full Goodwill Method - P1,125,000 (250,000 shares × (P5.00 – 0.50).
Proportionate Method - 1 million (P4 million × 25%).
4.
On July 1, 2010 The Magna Company acquired 100% of The Natural Company for a consideration
transferred of P160,000. At the acquisition date the carrying amount of Natural's net assets was
P100,000. At the acquisition date a provisional fair value of P120,000 was attributed to the net assets.
An additional valuation received on May 31, 2011 increased this provisional fair value to P135,000 and
on July 30, 2011 this fair value was finalized at P140,000. What amount should Magna present for
goodwill in its statement of financial position at December 31, 2011, according to IFRS3 Business
combinations?
a. P20,000
b. P40,000
c. P25,000
d. P60,000
C. The consideration transferred should be compared with the fair value of the net assets acquired, per
IFRS3 para 32. When provisional fair values have been identified at the first reporting date after the
acquisition, adjustments arising within the measurement period (a maximum of 12 months from the
acquisition date) should be related back to the acquisition date. Subsequent adjustments are recognized in
profit or loss, unless they can be classified as errors under IAS8 Accounting policies, changes in accounting
estimates and errors. See IFRS3 paras 45 and 50. The final amount of goodwill is P160,000 consideration
transferred less P135,000 fair values at 31 May 2008 = P25,000.
5.
At the acquisition date, an acquirer has established fair values for items recognized as an expense in
profit or loss by the acquiree and is trying to decide whether they can be classified as identifiable
assets.
a) In-process development of new compounds for food flavoring – P500,000
b) Patents developed internally – P2,500,000
c) Selling efforts leading to an order backlog – P3,000,000
d) Franchise agreements developed internally – P700,000.
What is the amount to be recognized as identifiable intangible asset?
a. P0
b. P3,200,000
c. P6,200,000
d. P6,700,000
D- All of the above items could be sold to another buyer and are therefore separable, hence they should all
be recognized as identifiable intangible assets.
6.
SGV acquired ABS on 30 June 2010. By 31 December 2010, the end of its 2010 reporting period, SGV
had provisional fair values for the following:

Trademarks effective in certain foreign territories of P400,000. These had an average remaining
useful life of 10 years at the acquisition date. The acquisition date fair value was finalized at
P500,000 on 31 March 2011.

Trading rights in other foreign territories of P600,000. These had an average remaining useful life
of 5 years at the acquisition date. The acquisition date fair value was finalized at P300,000 on 30
September 2011.
Based on the information above, which of the following statement is correct?
a. In SGV’s 2010 financial statements, amortization of trademarks and trading rights amounts to
P160,000
b. In SGV’s 2010 financial statements, amortization of trademarks and trading rights amounts to
P55,000
c. The difference between the initial and finalized fair value of the trading rights is recognized in profit
or loss prospectively from 30 September 2011.
d. The difference between the initial and finalized fair value of the trading rights is recognized in as
either adjustment to goodwill or gain on bargain purchase
C – The amortization on trademark during 2010 should be adjusted by P5,000 (P100,000/10 years x 6/12
months)
7. TV5 acquired an 80% interest in GMA for P900,000. The carrying amounts and fair values of DEF’s
identifiable assets and liabilities at the acquisition date were as follows:
Carrying amount
Fair value
Tangible non-current assets
375,000
350,000
Intangible non-current assets
0
200,000
Current assets
400,000
350,000
Liabilities
(300,000)
(300,000)
Contingent liabilities
0
(30,000)
475,000
570,000
If TV5 has decided to measure the non-controlling interest at its share of DEF’s identifiable net assets,
what is the amount of gain on bargain purchase?
a. P444,000
b. P555,000
c. P666,000
d. P0
D
Consideration transferred
Non-controlling interest (20% of Php570,000 fair value)
Fair value of net assets acquired
Goodwill
8.
900,000
_114,000
1,014,000
_570,000
444,000
The Lampard Company acquired a 70% interest in The Ohau Company for P1,960,000 when the fair
value of Ohau's identifiable assets and liabilities was P700,000 and elected to measure the noncontrolling interest at its share of the identifiable net assets. Annual impairment reviews of goodwill
Page 7 of 21
have not resulted in any impairment losses being recognized. Ohau's current statement of financial
position shows share capital of P100,000, a revaluation reserve of P300,000 and retained earnings of
P1,400,000. Under IFRS3 Business combinations, what figure in respect of goodwill should now be
carried in Lampard's consolidated statement of financial position?
a. P160,000
b. P700,000
c. P1,260,000
d. P1,470,000
D
9.
The National Company acquired 80% of The Local Company for a consideration transferred of
P100,000. The consideration was estimated to include a control premium of P24,000. Local's net assets
were P85,000 at the acquisition date. Which of the following statements is in accordance to IFRS3
Business combinations?
I. Goodwill should be measured at P32,000 if the non-controlling interest is measured at its share of
Local's net assets.
II. Goodwill should be measured at P34,000 if the non-controlling interest is measured at fair value.
a.
I only
b. II only
c. Both I and II
d. Neither I nor II
C
Consideration transferred
NCI
Net assets
Goodwill
NCI at share
of net assets
P100,000
17,000
P117,000
85,000
P 32,000
NCI at FV
P100,000
19,000
P119,000
85,000
P 34,000
10. Roxas Holdings, a subholding of the Roxas Group, makes an offer for all the equity shares of Contrado
on 1 July 2010. The consideration for the offer is 50,000 shares in Roxas together with 10,000 cash.
Roxas also agreed to pay two employees an additional amount of 10,000 each at the end of two years
after the acquisition if they are still in the employment of Contrado. The offer is accepted on 1 August
2010, at which point Contrado's assets and liabilities were as listed below.
Assets
Goodwill
Land and buildings
Plant and equipment
Net pension asset
Intangible assets
Inventories: F/G
Inventories: RM
Accounts receivable
Cash
10,000
8,000
12,000
4,600
4,000
20,000
4,000
5,000
400
Liabilities
Accounts payable
Income tax payable
Long-term loan
Total
9,060
9,940
30,000
49,000
Additional Information:
 Contrado is expected to incur a loss of 5,000 for the rest of the year to 31 December 20 10.
 Contrado has accumulated tax losses carried forward of 10,000. The tax rate is 30%. These are not
recognized in Contrado's balance sheet. After the acquisition, Roxas Holdings will, beyond
reasonable doubt, be able to use all of Contrado's accumulated loss carryforwards against future
taxable profits of Roxas Holdings.
 The goodwill carried in Contrado's balance sheet relates to an acquisition it made three years ago.
 The market value of the land and buildings for their existing use as production sites is appraised at
18,000. The appraiser believes that the fair value of the plant and equipment is not materially
different from its book value.
 Two years ago, Contrado bought the right to make use of the technology under a technology
licensing agreement from Binfathi Holding plc. Contrado paid 8,000 for the license for a period of
four years. Contrado has the option to renew the license for another four years at the end of the
period. A similar agreement can currently be obtained on the same terms as the original one.
 Apart from this license, Contrado owns the rights to a number of patented products, which was a
significant reason behind Roxas's desire to buy the company. No active market exists for these
intangible assets, but the production director of Roxas believes them to be worth at least 40,000.
However, the chief financial officer is skeptical about this, pointing to Roxas's current poor
performance; in any event, he does not think it likely that an independent expert could be found to
give a valuation of the patents.
 The finished goods are valued at 20,000 based on the costs incurred by Contrado to produce the
goods. Roxas can sell them in an arm's length transaction for 23,000, after deduction of the costs
incurred to sell the goods. The current replacement cost of the raw material inventory amounts to
6,000. The book value of the raw material inventory in Contrado is 4,000.
 The long-term loan is at a fixed rate of 10%, interest is payable annually on 1 August and the
principal is repayable on 1 August 2012. Since the loan was originally taken out, interest rates
have fallen, and an equivalent loan could now be obtained at 6%. Acquiree already paid the
interest due on 1 August 2010.
 The amount of the pension plan asset includes 350 of actuarial losses that are not required to be
recognized under IAS 19. An actuarial appraisal of the plan at the date of acquisition estimates that
the investments held have a fair value of 27,000 and the pension obligation a present value of
24,400.
Page 8 of 21
Roxas's own share price was 0.40 when it made the offer on 1 July 20 10 and 0.42 when it was
accepted on 1 August 2010. It incurred professional fees of 2,000, and the chief financial officer
has calculated that the cost of senior management time devoted to researching, launching and
completing the offer amounted to 800.

What is the amount of goodwill to be included in the consolidated financial statements of Roxas
Holdings Group?
a. P11,660
b. P11,440
c. P12,460
d. P14,680
B
Solution:
A. Identify the acquirer
B. Determination of the acquisition date
C. Recognize and measure the assets of Contrado.
Book Value
Assets
Goodwill
10,000
Patents
0
License agreement
4,000
Unutilized losses
0
Land and buildings
8,000
Plant and equipment
12,000
Net pension asset
4,600
Inventories: F/G
20,000
Inventories: RM
4,000
Accounts receivable
5,000
Cash
400
Total
68,000
Fair Value
0
0
4,000
3,000
18,000
12,000
2,600
23,000
6,000
5,000
400
74,000
Liabilities
Accounts payable
Income tax payable
Long-term loan
Operating loss provision
Total
9,060
9,940
30,000
0
49,000
9,060
9,940
32,200
0
51,200
1.
Goodwill. Goodwill relating to previous acquisitions is not an identifiable asset that can be
recognized in an acquisition. Assigning a nil value to it means that it will, in effect, be subsumed
into the value of the goodwill recognized on this acquisition.
2. Patents. Intangible assets should be recognized whether or not they have been recognized by the
acquiree, but only if they meet the definition of an intangible asset and can be measured reliably
3. License agreement. In principle, a reacquired right should be recognized as an intangible asset
separately from goodwill and measured on the basis of the remaining contractual term regardless
of whether market participants would consider potential renewals. The fair value is therefore 4,000.
As the terms of the agreement are similar to current market rates, no gain or loss is recognized on
acquisition.
4. Unutilied losses. Under IFRS 3 (Revised), previously unrecognized deferred tax assets in respect
of loss carryforwards are recognized if their recovery is sufficiently assured. The amount recognized
is the losses of 10,000 at the effective rate of 30%, which is 3,000
5. Land and buildings. Land and buildings are measured at their fair value. The fair value of land
and buildings is usually determined from market-based evidence by appraisal that is normally
undertaken by professionally qualified valuers
6. Net pension asset. The pension asset is based on an up-to-date valuation of the plan; that is,
27,000 minus 24,400. Actuarial losses and other amounts that are not recognized on an ongoing
basis under IAS 19 are not relevant to fair value allocations.
7. Inventories; F/G. The fair value of the finished goods is 23,000 (what Binfathi expects to sell the
finished goods for after the costs to sell are deducted).
8. Raw Materials: The raw materials are included at their current replacement value of 6,000
9. Long-term loan: The fair value of the loan is determined by discounting the future payments of
both principal and interest at the current rate of 6% as follows: [3,000 / 1.06] + [30,000 / (1.06 x
1.06)] + [3,000 / (1.06 x 1.06)] = 32,200.
10. Operating loss provision: No provision for future operating losses can be made under IFRS 3
(Revised).
D. Recognizing and measuring other assets and liabilities of Contrado
Book Value
Fair Value
Total assets
68,000
74,000
Total liabilities
49,000
51,200
Net assets
19,000
22,800
Deferred tax on adjustments
0
3,240
Net assets at fair value
19,560
10,000 (land/buildings) plus -2,000 (pension) plus +3,000 (finished goods) plus 2,000 (raw
materials) plus -2,200 (long-term loan) = 10,800 x 30% (tax effect) = 3,240
Page 9 of 21
E. Recognizing and measuring goodwill or gain on acquisition of Contrado
Net assets at fair value
19,560
Non-controlling interest
0
Fair value of previous investment in Contrado
0
Fair value of the consideration transferred
31,000
Goodwill
11,440
The consideration payable for the acquisition equals 21,000 (fair value of shares issued – share
price at date of acquisition [50,000 x 0.42]) + 10,000 (cash), or 31,000. Goodwill is 31,000 19,560, or 11,440. The contingent consideration to the employees is not part of the consideration
of the transaction but employee costs. Transaction costs are expensed (if they meet the definition
of transaction costs per IAS 39 they may be recognized in equity)
11. The Mooneye Company acquired a 70% interest in The Swain Company for P1,420,000 when the fair
value of Swain's identifiable assets and liabilities was P1,200,000. Mooneye acquired a 65% interest in
The Hadji Company for P300,000 when the fair value of Hadji's identifiable assets and liabilities was
P640,000. Mooneye measures non-controlling interests at the relevant share of the identifiable net
assets at the acquisition date. Neither Swain nor Hadji had any contingent liabilities at the acquisition
date and the above fair values were the same as the carrying amounts in their financial statements.
Annual impairment reviews have not resulted in any impairment losses being recognized. Under IFRS3
Business combinations, what figures in respect of goodwill and of gains on bargain purchases should be
included in Mooneye's consolidated statement of financial position?
a. Goodwill: P580,000;
Gain on bargain purchase: P116,000
b. Goodwill: 0;
Gain on bargain purchase: P116,000
c. Goodwill: 0;
Gain on bargain purchase: 0
d. Goodwill: P580,000;
Gain on bargain purchase: 0
D
12. On October 1, 2010 The Tingling Company acquired 100% of The Greenbank Company when the fair
value of Greenbank's net assets was P116,000 and their carrying amount was P120,000. The
consideration transferred comprised P200,000 in cash transferred at the acquisition date, plus another
P60,000 in cash to be transferred 11 months after the acquisition date if a specified profit target was
met by Greenbank. At the acquisition date there was only a low probability of the profit target being
met, so the fair value of the additional consideration liability was P10,000. In the event, the profit
target was met and the P60,000 cash was transferred. What amount should Tingling present for
goodwill in its statement of consolidated financial position at December 31, 2011, according to IFRS3
Business combinations?
a. P94,000
b. P80,000
c. P84,000
d. P144,000
A
The consideration transferred should be compared with the fair value of the net assets acquired, per IFRS3
para 32. The contingent consideration should be measured at its fair value at the acquisition date; any
subsequent change in this cash liability comes under IAS39 Financial instruments: recognition and
measurement and should be recognized in profit or loss, even if it arises within the measurement period.
See IFRS3 paras 39, 40 and 58. Goodwill is the P210,000 (P200,000 + P10,000 acquisition date fair value
of contingent consideration) less P116,000 fair value of net assets = P94,000.
13. 100% of the equity share capital of The Raukatau Company was acquired by The Sweet Company on
June 30, 2010. Sweet issued 5,000 new P100 par ordinary shares which had a fair value of P800 each
at the acquisition date. In addition the acquisition resulted in Sweet incurring fees payable to external
advisers of P200,000 and share issue costs of P180,000. In accordance with IFRS3 Business
combinations, goodwill at the acquisition date is measured by subtracting the identifiable assets
acquired and the liabilities assumed from
a. P4.00 million
b. P4.18 million
c. P4.20 million
d. P4.38 million
A
The answer is CU4.00 million. Goodwill is calculated by reference to the consideration transferred plus
noncontrolling interest (nil in this case) plus the fair value of any shares in Raukatau already held by Sweet
(nil in this case). Professional fees should be recognized in profit or loss and the issue costs deducted from
the fair value of the shares issued. The consideration transferred is CU4 million (500,000 x CU8). See
IFRS3 paras 37 and 53.
14. On September 31, 2011 Azang Co. issues 2.5 shares in exchange for each ordinary share of Pitot Co.
or a total of 150,000 ordinary shares in exchange for all 60,000 ordinary shares of Pitot Co. All of Pitot
Co.’s shareholders exchange their shares in Pitot Co. The statements of financial position of Azang Co.
and Pitot Co. immediately before the business combination are:
Azang Co.
Pitot Co.
Current assets
500,000
700,000
Non-current assets
1,300,000
3,000,000
Total Assets
1,800,000
3,700,000
Current liabilities
Non-current liabilities
Total Liabilities
300,000
400,000
700,000
600,000
1,100,000
1,700,000
Page 10 of 21
Retained earnings
Share Capital
100,000 shares
60,000 shares
Total Shareholders’ Equity
800,000
1,400,000
1,100,000
600,000
2,000,000
Total Liabilities and Shareholders’ Equity
1,800,000
3,700,000
300,000
The fair value of each ordinary share of Pitot Co. at September 31, 2011 is P40. The quoted market
price of Azang Co.’s ordinary shares at that date is P16. All assets and liabilities book values equal
their fair values except Azang’s Co.’s non-current assets with fair value of P1,500,000 and Pitot Co.
non-current assets at P3,500,000.
Question 1: What is the amount of goodwill on the combination?
a. P300,000
b. P400,000
c. P3,000,000
d. P3,500,000
A
As a result of Azang Co. (legal parent, accounting acquiree) issuing 150,000 ordinary shares, Pitot
Co. shareholders own 60 per cent of the issued shares of the combined entity (ie 150,000 of
250,000 issued shares). The remaining 40 per cent are owned by Azang Co. shareholders. If the
business combination had taken the form of Pitot Co. issuing additional ordinary shares to Azang
Co. shareholders in exchange for their ordinary shares in Azang Co., Pitot Co. would have had to
issue 40,000 shares for the ratio of ownership interest in the combined entity to be the same. Pitot
Co. shareholders would then own 60,000 of the 100,000 issued shares of Pitot Co. - 60 per cent of
the combined entity. As a result, the fair value of the consideration effectively transferred by Entity
B and the group’s interest in Azang Co. is P1,600,000 (40,000 shares with a fair value per share of
P40).
Consideration transferred (40,000 x P40)
P1,600,000
Less: Fair Value of Net Asset Acquired
Current assets
500,000
Non-current assets
1,500,000
Current liabilities
( 300,000)
Non-current liabilities
( 400,000)
1,300,000
Goodwill
P 300,000
Question 2: How much total assets to be shown in the consolidated statement of financial position?
a. P5,500,000
b. P6,000,000
c. P8,000,000
d. P9,500,000
B
Question 3: How much total liabilities to be shown in the consolidated statement of financial position?
a. P2,800,000
b. P2,600,000
c. P2,400,000
d. P3,000,000
C
Question 4: How much is the consolidated retained earnings on December 31, 2011?
a. P800,000
b. P1,000,000
c. P1,200,000
d. P1,400,000
D
Question 5: How much is the consolidated share capital on December 31, 2011?
a. P2,200,000
b. P2,400,000
c. P6,200,000
d. P6,300,000
A – The share capital of the legal entity will be reflected in the consolidated FS (250,000 shares)
250,000 shares (600,000 + 1,600,000)
Question 6: Assume the same facts as above, except that only 56,000 of Pitot Co. 60,000 ordinary
shares are exchanged. How much should be shown as noncontrolling interest?
a. P132,000
b. P134,000
c. P136,000
d. P138,000
B
Retained Earnings (1,400,000 x 56/60)
1,306,000
Equity [(600,000 x 56/60) + 1,600,000)
2,160,000 (240,000 shares)
NCI [(1,400,000 x 4/60) + (600,000 x 4/60)]
134,000
Total SHE
3,600,000
15. BaneHallow has a 70% ownership interest in EHC, giving it control. On 1 January 2010, Binfathi
acquires an additional 15% interest. At that date, equity of EHC is as follows: Share capital –
1,000,000; Other Comprehensive income – 500,000; Accumulated profits – 800,000.
On 1 January 2010, the non-controlling interest in EHC had a value of 610,000. Binfathi paid 400,000
for the additional 15% interest in EHC. Which of the following statements is correct?
a. BaneHallow recognizes a decrease in non-controlling interest of 400,000 and an increase in the
parent's equity attributable to EHC of 400,000.
b. BaneHallow recognizes a decrease in non-controlling interest of 305,000 and an increase in
goodwill of 305,000. The remaining 95,000 is recognized as a reduction of equity.
c. BaneHallow recognizes a decrease in non-controlling interest of 305,000 and an increase in the
parent's equity attributable to EHC of 305,000. The remaining 95,000 is recognized as goodwill.
d. BaneHallow recognizes a decrease in non-controlling interest of 305,000 and an increase in the
parent's equity attributable to EHC of 305,000. The remaining 95,000 is recognized as a reduction
of the parent's equity.
D
16. Pitlord owns 75% of Shadow Fiend’s voting shares and loses control of Shadow Fiend by selling 40% of
Shadow Fiend’s shares for P400,000. The fair value of Pitlord’s remaining investment in Shadow Fiend
is P335,000. At the time of the sale, the carrying amount of the NCI is P220,000, and the carrying
Page 11 of 21