ACCOUNTING FOR BUSINESS COMBINATION
BUSINESS COMBINATION- DATE OF ACQUISITION
Introduction
As defined by PFRS 3, a business combination is a transaction or event in which an acquirer
obtains control of one or more businesses. In a business combination, one of the parties can always be
identified as the acquirer, being the entity that obtains control of the other business (the acquiree). The
core principle of PFRS 3 sets out that an acquirer of a business recognizes the asset acquired and
liabilities assumed at their acquisition-date fair values and discloses information that enable users to
evaluate the nature and financial effects of the acquisition.
THE SCOPE OF PFRS 3 (Use your textbook as a reference – CH1 and CH2)
Within the Scope
a. Combinations involving mutual entities
b. Combinations achieved by contract alone (dual
listing stapling)
Outside the Scope
a.
Where the business combination results in the
formation of all types of joint arrangements and
the scope exception only applies to the financial
statements of joint venture or the joint operation
itself and not the accounting for the interest in a
joint arrangement in the financial statements of a
party to the joint arrangement.
b.
Where the business combination involves entities
under common control
c.
Where the acquisition of an asset or a group of
assets does not constitute a business.
IDENTIFYING A BUSINESS COMBINATION
As defined by PFRS 3 a _business_is an integrated set of activities and assets that is capable of
being conducted and managed for the purpose of providing a return in the form of dividends, lower cost
or other economic benefits directly to investors or other owners, members or participants.
An entity shall assess whether the group of assets acquired constitute a business. Applying the
guidance of PFRS 3 a business consists of inputs and processes applied to those inputs that have the
ability to create outputs. It have to be noted that output is not necessary for an integrated set to qualify
as business but the mere ability to produce outputs out of the existing processes and inputs.
These elements are defined as follows:
1. Inputs - economic resource that merely needed to have the ability to contribute to the
creation of outputs.
2. Process - a system, standard, protocol, convention or rule that when applied to inputs,
creates outputs.
3. Output - the results of inputs and processes applied to those inputs.
Defensive Techniques. Enumerate. (9)
1.
2.
3.
4.
5.
6.
7.
8.
9.
Poison Pill
Greenmail
White Knight or White Squire.
Pac-man Defense.
“Selling the Crown Jewels” or “Scorched Earth”.
Shark Repellant.
Leveraged Buyouts.
The Mudslinging Defense.
The Defensive Acquisition Tactic.
Page | 1
A. Structure of Business Combination (4)
1. Horizontal Integration
2. Vertical Integration
3. Conglomerate Combination
4. Circular Combination
B. Method to Accomplish the Combination (3)
1. _Acquisition of Net Assets (Assets less Liabilities)_
2. _Acquisition of Common Stock (Stock Acquisition)
3. _Asset Acquisition
a. X + Y = X _Statutory Merger
b. X + Y = Z _Statutory Consolidation
C. Accounting Method Used
I.
Acquisition Method - applied on the acquisition date which is the date the acquirer
obtains control of the acquiree. The acquisition method approaches a business
combination from the perspective of the acquirer.
D. Five Step Process in Acquisition Method
1. Identify the acquirer;
2. Determine the acquisition date;
3. Calculate the fair value of the purchase consideration transferred (i.e., the cost of
purchase)
4. Recognize and measure the identifiable assets and liabilities of the business, and
5. Recognize and measure either goodwill or a gain from a bargain purchase, if either exists
in the transaction.
E. Control. An investor controls an investee if and only if the investor has all the following:
1. Power over the investee, i.e. the investor has existing rights that give it the ability to direct
the relevant activities
2. Exposure, or rights, to variable returns from its involvement with the investee
3. The ability to use power over the investee to affect the amount of the investor's returns.
F. Acquisition Date._According to PFRS 3, it is the date on which the acquirer obtains control of
the acquiree
G. Identifiable when:
(1) can be separated, it means that it can be separated or divided from the entity sold,
transferred, licensed, rented, or exchanged, either individually or together with a related contract.
(2) meets the contractual-legal criterion, it means that it it arises from contractual or legal rights,
it is identifiable regardless of whether those rights are transferable or separable from the acquire or
from other rights and obligations. e.g., license to operate a nuclear power plant is an intangible asset,
even though the acquirer cannot sell or transfer the license separately from the acquired power plant.
H. Fair Value. Identifiable assets acquired and the liabilities assumed are measured at their fair
values on acquisition date fair values. PFRS 13 defines “fair value” as the price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date.
I.
Non-controlling Interest. It is the equity in a subsidiary not attributable, directly or indirectly, to
a parent (PFRS 9).
Exceptions to Recognition Principle
Contingent Liabilities
In a business combination where the acquired entity has contingent liabilities the recognition
principle of PAS 37 does not apply. Instead, the acquirer shall recognize contingent liabilities assumed
as of the acquisition date if it arises from past events and it has a fair value that can be measured
reliably, regardless of whether it is probable or not that an outflow of resources embodying economic
benefits will be required to settle the obligation.
Page | 2
J. Formula to Compute Goodwill/ Gain from Bargain Purchase
Consideration transferred
Non-controlling interest in the acquire
Previously held equity interest in the acquire
Total
Less: Fair value of the net identifiable assets acquired
Goodwill/ Gain on Bargain Purchase
xx
xx
xx
xx
(xx)
xx
K. Contingent Consideration.
PFRS 3 define contingent consideration as “Usually, an obligation of the acquirer to transfer
additional assets or equity interests to the former owners of an acquiree as part of the exchange for
control of the acquiree if specified under future events occur or conditions are met. However, contingent
consideration also may give the acquirer the right to the return of previously transferred consideration if
specified conditions are met”.
The acquirer is required to measure the assets acquired and liabilities assumed in a business
combination at its acquisition-date fair values, however, such information is not always available at that date
and the entity measures identifiable items at provisional amounts. Therefore, PFRS 3 allows a measurement
period which is a period after the acquisition date during which the acquirer may adjust the provisional
amounts recognized for a business combination.
L. How to Identify Measurement Period Adjustments?
a) One year from the acquisition date
b) The date when the acquirer receives needed information about facts and circumstances
M. Business Combination Achieved in Stages. It is sometimes called a step acquisition where
control is achieved in two or more transactions-step acquisition. A business combination occurs
when the acquirer obtains control of the acquiree. It is at that date of the second acquisition of
shares that the business combination occurs and this is referred to as business combination
achieved in stages. Obviously, there may be a number of step purchases in the acquiree prior to
the obtaining control.
N. Acquisition Costs. Acquisition-related costs are excluded from the measurement of the
consideration paid because such costs are not part of the fair value of the acquiree and are not
assets. These are the total costs a company recognizes on its book for property or equipment
after adjusting for discounts, incentives, closing costs and other necessary expenditures but
before sales taxes.
COSTS
a. Direct and Indirect
Ex. Direct - legal fees, finder’s and brokerage fee,
advisory, accounting, valuation (valuer) and other
professional or consulting fees to effect the
combination Indirect - general and administrative
costs such as managerial (including the costs of
maintaining an internal acquisitions department,
(management salaries, depreciation, rent, and
costs incurred to duplicate facilities), overhead that
are allocated to the merger but would have existed
in its absence and other costs of which cannot be
directly attributed to the particular acquisition
b. Share Issuance Cost
Ex. Transaction costs such as stamp duties on new
shares, professional adviser’s fees, underwriting
costs and brokerage fees
c. Bond Issue Cost
Ex. Professional adviser’s fees, underwriting costs
and brokerage fees
TREATMENT
These costs are accounted for as expenses in the
periods in which they are incurred and the services
are rendered
Debit to “Share Premium” or “Additional paid-in
capital” account
• These costs are accounted for in
accordance with PAS 32. It states that
these outlays should be treated as a
reduction in the share capital of the entity
as such costs reduce the proceeds from
the equity issue, net any related income
tax benefit.
Bond issue costs
•
Included in the initial measurement of the
liability as bond issue costs and amortized
the life of the debt
Page | 3
O. Measurement of Consideration
Consideration
1. Cash/Monetary
•
•
Measured at
The fair value as cash or cash equivalent
is dispersed.
For deferred payment, it is measured at
the present value of the obligation.
➢ The discount rate to be used is the
entity’s incremental borrowing rate
2. Non-Monetary
•
It is measured at the fair value on the
sale of the asset.
➢ If the carrying amount of the asset
in the records of the aquirer is
different from fair value, a gain or
loss on the asset is recognized at
acquisition date.
3. Issuance of Stocks
•
It is measured at fair value of the issued
shares at acquisition date.
➢ For listed entities, reference is
made to the the shares quoted
price of the shares.
Acquisition date model - equity instruments
would be measured on the date the acquirer
obtains control over the business acquired.
4. Assume Liabilities
•
It is measured at the fair value of
liabilities (present values of expected
future cash outflows).
➢ Future losses or other costs
expected to be incurred as a result
of the combination are not
liabilities of the acquirer and are
therefore not included in the
calculation of the fair value of
consideration paid.
5. Contingent Consideration
•
•
Fair value at acquisition date
May include the distribution of cash or
other assets or the issuance of debt or
equity securities.
Contingent consideration is an add-on to the
base acquisition price that is based on events
occurring or conditions being met some time after
the purchase takes place.
6. Share-Based Payment
It is measured in accordance with PFRS 2
referred to as the “market based measure”.
P. Levels of Ownership
1. Passive Investment
2. Strategic (Active) Investment a. Influential
b.Controlling
Q. PAS 27 is entitled __Separate Financial Statements
R. PFRS 10 is entitled _Consolidated Financial Statements._
S. Consolidation. Consolidation is the process of combining the assets, liabilities, earnings and
cash flows of a parent and its subsidiaries as if they were one economic entity._
T. Two Methods of Consolidation. Differentiate. Write the corresponding formula.
Page | 4
a. Full-goodwill Approach (or Fair Value
Basis)
b. Partial-goodwill
Approach
(or
Proportional Basis of the Acquiree’s
Identifiable Net Assets)
•
•
When non-controlling interests are
measured at fair value (we refer to this
value as the fair value option), goodwill
attributable to non-controlling interests will
be recognized in the consolidated financial
statements.
Under the fair value basis, non-controlling interests
comprise three components:
•
•
•
Share of book value of identifiable net
assets of subsidiary;
Share (fair value – book value) of
identifiable net assets of subsidiary at
acquisition date; and
Share of goodwill in subsidiary at
acquisition date.
Under the fair value basis, non-controlling interests
are determined with reference to either active
market price of equity shares of the subsidiary at
acquisition date or other valuation techniques.
Fair value per share of non-controlling interests
may differ from fair value per share of the acquirer
because a control premium may be paid by the
acquirer. For example, in a takeover bid, an
acquirer may pay a 20% premium over market
price to gain control of the acquiree.
Formula: Full Goodwill
Fair value of subsidiary (100%)
Less: Book value of stockholder’s
equity (net assets)
Allocated Excess
Less: Over/Undervaluation of assets
and liabilities
Positive excess: Goodwill (Full)
•
Under the second option where noncontrolling interests are measured as a
proportion of the acquiree’s identifiable net
assets, non-controlling interests comprise
two components as follows:
- Share of book value of identifiable
net assets of subsidiary; and
- Share (fair value – book value) of
identifiable
net
assets
of
subsidiary at acquisition date.
Non-controlling interests share of goodwill
(NCI-goodwill) is not recognized under the
second option (proportional basis.)
Formula: Partial Goodwill
Fair value of subsidiary
(less than 100%)
Less: Book value of stockholder’s
equity (net assets)
Allocated Excess
Less: Over/Undervaluation of assets
and liabilities
Positive excess: Goodwill (partial)
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
U. Theory in Consolidation
1. Entity (Economic Unit) Theory
2. Parent Theory
3. Proprietary Theory
V. RmEAR stands for? _Reliable measurement, Elimination, Amortize, and Recognize._
W. Push-down Accounting. __The term “push- down accounting" refers to the practice of revaluing
an acquired subsidiary's asset and liabilities to their fair values directly on that subsidiary's books
at the date of acquisition._
Those who favor push- down argue:
•
•
That the change in the subsidiary's ownership in an acquisition is reason for adopting a new
basis of accounting for the subsidiary's assets and liabilities, and this new basis of accounting
should be reflected directly on the subsidiary's books.
The above argument is most persuasive when the subsidiary is wholly- owned and is
consolidated or has its separate financial statements included with the statements of the
parent.
Further, those who oppose push- down accounting believe:
•
•
That, under the historical cost concept, a change in ownership of an entity does not justify a
new accounting basis in its financial statements.
Push- down accounting results in the evaluation of assets and liabilities of a continuing
enterprise, a practice that is normally acceptable.
Page | 5
X. Reverse Acquisition. __A reverse acquisition occurs when an enterprise obtains ownership of
the shares of another enterprise but, as part of the transaction, issues enough voting shares as
consideration that control of the combined enterprise passes to the shareholders of the acquired
enterprise.
Y. Define.
a. Investment Entities.
• Obtains funds from one or more investors for the purpose of providing those
investor(s) with investment management services;
• Commits to its investor(s) that its business purpose is to invest funds solely for returns
from capital appreciation investment income or both; and
• Measures and evaluates the performance of substantially all of its investments on a
fair value basis.
b. Variable Interest Entities. _A second type of controlled enterprise is a structured entity, also
known as variable interest entity or a special purpose entity. PFRS 10 provides guidance on when
a structured entity (SE) should be consolidated. An SE is set up the reporting enterprise (or
“sponsor”)to perform a very specific and narrow function.
Z. Useful Computational Formulas
NON-CONTROLLING INTEREST
At Fair Value
1) Given in the problem
Proportionate basis
Book value of stockholder’s equity of
subsidiary
Add: Adjustment to reflect fair value
Fair value of stockholders’ equity of subsidiary
Multiplied
by:
Non-controlling
interest
percentage
Non-controlling interest (partial)
Fair Value basis
Non-controlling interest (partial)
Add: Non-controlling interest on full-goodwill
Non-controlling interest (full)
xx
II.
xx
xx
xx
Proportionate basis
Book value of stockholder’s equity of
subsidiary
Add: Adjustment to reflect fair value
Fair value of stockholders’ equity of subsidiary
Multiplied
by:
Non-controlling
interest
percentage
Non-controlling interest (partial)
xx
xx
xx
xx
2) Not given, then estimate the Fair Value
Proportionate basis
Book value of stockholder’s equity of
xx
subsidiary
Add: Adjustment to reflect fair value
xx
Fair value of stockholders’ equity of subsidiary xx
Multiplied
by:
Non-controlling
interest xx
percentage
Non-controlling interest (partial)
xx
Fair Value basis
Non-controlling interest (partial)
Add: Non-controlling interest on full-goodwill
Non-controlling interest (full)
I.
Consideration paid Includes premium
Fair Value basis
Non-controlling interest (partial)
Add: Non-controlling interest on full-goodwill
Non-controlling interest (full)
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
Consideration Paid Includes Premium
(Fair Value given)
Proportionate basis
Book value of stockholder’s equity of
subsidiary
Add: Adjustment to reflect fair value
Fair value of stockholders’ equity of subsidiary
Multiplied
by:
Non-controlling
interest
percentage
Non-controlling interest (partial)
Fair Value basis
Non-controlling interest (partial)
Add: Non-controlling interest on full-goodwill
Non-controlling interest (full)
xx
xx
xx
xx
xx
xx
xx
xx
Page | 6
III. Proportionate Share in Identifiable Net CONSOLIDATED TOTAL ASSETS
Assets of the Subsidiary
Fair value of Subsidiary’s net assets
Multiplied by: Non-controlling interest
Proportionate shares
xx
xx
xx
CONSOLIDATED TOTAL LIABILITIES
Parent total assets at acquisition date
Consideration given up (cash or NCA)
Payment to acquisition date costs
Goodwill on business combination
Parent adjusted total assets at book values
Subsidiary adjusted total assets at fair value
Consolidated assets at acquisition date
xx
(xx)
(xx)
xx
xx
xx
xx
CONSOLIDATED RETAINED EARNINGS
Parent total assets at acquisition date
Add: Contingent Consideration
Parent adjusted total liability at book values
Add: Subsidiary adjusted total liability at fair
values
Consolidated liabilities at acquisition date
CONSOLIDATED SHAREHOLDER’S EQUITY
xx
xx
xx
xx
Consolidated
common
stock
(before
acquisiton)
Consilidated additional paid-in capital
Consolidated retained earnings
Non-controlling interest
Consolidated Shareholders’ equity
xx
•
xx
xx
xx
xx
•
Parent R/E before acquisition
Add: Gain from acquisition, if any
Total
Less: Expenses ( direct, indirect)
Consolidated Retained Earnings
xx
xx
xx
xx
xx
xx
NOTES:
Supporting Computations:
•
•
Parent R/E before acquisition
Add: Gain from acquisition, if any
Total
Less: Expenses ( direct, indirect)
Consolidated Retained Earnings
xx
xx
xx
xx
xx
Parent additional paid-in capital
Add: New issued share to acquire subsidiary
excess of par
Total
Less: Stick issue cost, if any
Consolidated additional paid-in capital
xx
xx
Par in common stock (before acquisition)
Add: New-issued shares to acquire
subsidairy at par value
Consolidated Common stock
xx
xx
Description of nature and financial effect of
business combinations during the period.
Description of nature and financial effect of
business combinations after reporting period
before statements authorized for issue.
Explanation if financial effect of adjustments
related to business combinations
Additional information about nature and
financial effect of business combination.
xx
(xx)
xx
xx
Page | 7
PROBLEM-SOLVING
I – Statutory Merger versus Stock Acquisition. Valuation of assets and liabilities acquired, stock
acquisition, goodwill, stock price contingency
Below is the condensed balance sheet of Sons, Inc., along with estimates of fair values. Pop, Inc. is
planning to acquire Sons by issuing 100,000 shares of its P1 par value common stock (market value P8/share) in
exchange for all the outstanding common stock of Sons. Pop also guarantees the value of its shares issued. The
expected present value of this stock price contingency is P200,000.
Pre-Combination Condensed Balance Sheet
Book value
P 380,000
___740,000
P1,120,000
P 500,000
50,000
170,000
___400,000
P1,120,000
Current assets
Plant assets
Total assets
Liabilities
Common stock
Additional paid-in capital
Retained earnings
Total liabilities and equity
Fair value
P 350,000
810,000
450,000
Required:
1. Statutory Merger: Prepare Pops’ (acquirer/acquiring) entry(ies) to record the acquisition.
2. Stock Acquisition: Prepare Pops’ (parent/acquirer/acquiring) entry to record the acquisition.
1.
Statutory Merger
Common Stock (100,000 shares x 8)
Expected Probability of PV stock price contingency
Total Consideration Transferred
Less: FV of net identifiable asset and liab. acquired:
Current Assets
350,000
Plant Assets
810,000
Liabilities
(450,000)
Goodwill
800,000
200,000
1,000,000
(710,000)
290,000
2. Stock Acquisition
Consideration transferred:
Common Stock (100,000x8)
PV Stock price contingency
FV of subsidiary
BV of shareholder’s equity of subsidiary:
Common Stock
50,000
Additional Paid-in capital 170,000
Retained Earnings
400,000
Allocated Excess
Add (deduct): Over/undervaluation of net assets
Decrease in current assets (350,000-380,000)
Increase in Plant assets
(810,000-740,000)
Decrease in liabilities (450,000-500,000)
Goodwill
800,000
200,000
1,000,000
620,000
380,000
(30,000)
70,000
50,000
(90,000)
290,000
II - Assets and Liabilities Acquired, Goodwill and Bargain Purchase Gain, Contingent Consideration,
Changes in Contingent Consideration
Here are the pre-acquisition balance sheets of Pop Company and Sicle Company on December 31, 20x5:
Current assets
Investments
Land
Buildings (net)
Equipment (net)
Total assets
Current liabilities
Pop Co.
Book value
P 5,000,000
1,000,000
10,000,000
40,000,000
25,000,000
P81,000,000
P 4,000,000
Sicle Co.
Book value
Market value
P 2,000,000
P 1,500,000
500,000
500,000
5,000,000
6,000,000
25,000,000
16,000,000
10,000,000
2,000,000
P42,500,000
P 1,500,000
1,500,000
Page | 8
Long-term liabilities
Common stock, P10 par
Additional paid-in capital
Retained earnings
Total liabilities & equity
20,000,000
5,000,000
40,000,000
12,000,000
P81,000,000
10,000,000
1,000,000
20,000,000
10,000,000
P42,500,000
12,000,000
In addition to the above, Sicle Co. has identifiable intangibles with a fair value of P5,000,000, not
recognized on its books but appropriately capitalized by Pop.
On January 1, 20x6, Pop issues 400,000 shares of its stock, with a par value of P10/share and a market
value of P100/share, to acquire Sicle Company’s assets and liabilities. SEC registration fees are P1,100,000,
paid in cash.
Required:
1. Determine the following:
(a) Total assets;
(b) Total liabilities;
(c) Additional paid-in capital (share premium);
(d) Retained earnings (accumulated profit or loss); and
(e) Stockholders’/Shareholders’ equity;
2. Assume Pop issued 90,000 shares of stock at a market value of P100 per share with contingent cash
consideration amounted to P500,000 that is present obligation and reliably measureable, expected present
value of earnout agreement of P200,000 and probability present value of stock price contingency
agreement of P300,000. The following out-of-pocket costs in relation to acquisition are as follows:
Legal fees for the contract of business combination
Broker’s fee
Accountant’s fee for pre-acquisition audit
Other direct cost of acquisition
Internal secretarial, general and allocated expenses
Documentary stamp tax on the new shares
SEC registration fee of issued shares
Printing costs of share certificates.
Stock exchange listing fee
P 80,000
40,000
100,000
70,000
60,000
20,000
90,000
50,000
30,000
Determine the following:
(a) Total assets;
(b) Total liabilities;
(c) Additional paid-in capital (share premium);
(d) Retained earnings (accumulated profit or loss); and
(e) Stockholders’/Shareholders’ equity;
3. Now assume that Pop issues 100,000 shares for all of Sicle’s shares, as in requirement (1) above, and
Pop agrees to pay cash to Salt’s previous owners if the combined earnings of Pop and Sicle exceed a
certain threshold over the next two years. The expected present value of the earnings contingency is
P8,000,000. Determine the amount of goodwill (bargain purchase gain or gain on acquisition).
4. Assume the same facts as in requirement (3). Before the contingency period is over, the estimated value
of the earnings contingency declines to P7,800,000. Prepare Pop’s entry to reflect the change in value
of the earnings contingency, if
(a) the value decline occurs within the measurement period, or
(b) the value decline is due to events occurring subsequent to acquisition.
1.
(a) Total Assets:
Assets of Pop Co.
Total Assets – SEC registration fee (81,000,000 – 1,100,000)
79,900,000
Assets of Sicle Co.
Current Assts
Investments
Land
Buildings (net)
Equipment (net)
Initial Goodwill
Goodwill
Total Assets:
53,500,000
133,400,000
1,500,000
500,000
6,000,000
16,000,000
2,000,000
5,000,000
22,500,000
(b) Total Liabilities:
Liabilities of Pop Co.
Page | 9
Current liabilities
Long-term liabilities
Liabilities of Sicle Co.
Current liabilities
Long-term liabilities
Total liabilities:
4,000,000
20,000,000
1,500,000
12,000,000
(c) Additional Paid-in capital (share premium)
Additional Paid-in capital of Pop Co.
40,000,000
(400,000 x 90)
36,000,000
(1,100,000)
Additional Paid-in capital of Sicle Co.
Total Additional Paid in capital (share premium)
(d) Retained earnings
Pop Co.
Sicle Co.
Total retained earnings
24,000,000
13,500,000
37,500,000
74,900,000
-_____
74,900,000
12,000,000
-______
12,000,000
(e) Stockholders’/ Shareholders’ Equity
Pop Co. [5,000,000 + (10 x 400,000)]
Additional Paid-in Capital
Retained Earnings
Total Stockholders’/ Shareholders’ Equity
9,000,000
74,900,000
12,000,000
95,900,000
2.
(a) Total Assets:
Assets of Pop Co.
Total Assets – Out-of-pocket costs (81,000,000 – 540,000)
80,460,000
Assets of Sicle Co.
Current Assts
Investments
Land
Buildings (net)
Equipment (net)
Initial Goodwill
Total Assets:
31,000,000
111,460,000
1,500,000
500,000
6,000,000
16,000,000
2,000,000
5,000,000
(b) Total Liabilities:
Liabilities of Pop Co.
4,000,000 +20,000,000 + 200,000
Liabilities of Sicle Co.
Current liabilities
Long-term liabilities
Total liabilities:
24,200,000
1,500,000
12,000,000
13,500,000
37,700,000
(c) Additional Paid-in capital (share premium)
Additional Paid-in capital of Pop Co.
40,000,000
(90,000 x 90)
8,100,000
300,000
48,400,000
Less: Stock Issuance cost
Documentary Stamp
20,000
SEC registration fee
90,000
Printing cost
50,000
(160,000)
Additional Paid-in capital of Pop Co.
48,240,000
Additional Paid-in capital of Sicle Co.
-_____
Total Additional Paid in capital (share premium)
48,240,000
(d) Retained earnings
Page | 10
Pop Co. Retained Earnings initial
Legal fees
Broker’s fee
Accountant’s fee for pre-acquisition audit
Other direct cost of acquisition
Internal secretarial, general and allocated expenses
Stock exchange listing fee
Pop Co. Retained Earnings
Negative goodwill/Gain
Sicle Co.
Total retained earnings
12,000,000
(80,000)
(40,000)
(100,000)
(70,000)
(60,000)
(30,000)
11,620,000
8,000,000
-______
19,620,000
(e) Stockholders’/ Shareholders’ Equity
Pop Co. [5,000,000 + (10 x 90,000)]
Additional Paid-in Capital
Retained Earnings
Total Stockholders’/ Shareholders’ Equity
5,900,000
48,240,000
19,620,000
73,760,000
3.
Consideration transferred (100 x 100,000)
Estimated liability for Contingent Consideration
Total consideration transferred
Less: Fair value of assets and liabilities acquired
Current Assets
1,500,000
Investment
500,000
Land
6,000,000
Building (net)
16,000,000
Equipment (net)
2,000,0000
Identifiable intangibles
5,000,000
(Current liabilities)
(1,500,000)
(Long-term Liabilities)
(12,000,000)
Goodwill:
(17,500,000)
500,000
4. Pop’s Entry
a.
Estimated liability for contingent consideration
Goodwill (8,000,000 – 7,800,000)
200,000
200,000
b.
10,000,000
8,000,000
18,000,000
estimated liability for contingent consideration
Gain on acquisition
200,000
200,000
Gain on acquisition
Retained Earnings
200,000
200,000
III –Valuation of Assets acquired and Liabilities assumed, Measurement of Consideration Transferred,
Change in value of Assets acquired, Pre-acquisition Contingency, In-process R&D
Sandy Corporation’s balance sheet at January 2, 20x5 is as follows:
Cash and receivables…………………………………………………………..
Inventories…………………………………………………………………………
Property, plant and equipment, net………………………………………….
Current liabilities…………………………………………………………………..
Long-term debt……………………………………………………………………
Capital stock……………………………………………………………………….
Retained earnings………………………………………………………………..
Accumulated other comprehensive income………………………………
Sandy-Dr(Cr)
P200,000,000
600,000,000
7,500,000,000
(400,000,000)
(7,200,000,000)
(7,200,000)
( 25,000,000)
(5,000,000)
An analysis of Sandy’s assets and liabilities reveals that book values of some reported items do not reflect their
market values at the date of acquisition:
●
●
●
Inventories are overvalued by P200,000,000
Property, plant and equipment is overvalued by P2,000,000,000
Long-term debt is undervalued by P100,000,000
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In addition, the following items are not currently reported on Sandy’s balance sheet:
●
●
●
●
●
Customer contracts, valued at P25,000,000
Skilled work force, valued at P45,000,000
In-process research and development, valued at P300,000,000
Potential contracts with prospective customers, valued at P15,000,000
Sandy has not recorded expected future warranty liabilities with a present value of
P10,000,000
On January 2, 20x5, Velasco issues new stock with a market value of P700,000,000 to acquire the assets
and liabilities of Sandy. Stock registration fees are P100,000,000, paid in cash. Consulting, accounting, and legal
fees connected with the merger are P150,000,000, paid in cash. In addition, Velasco enters into an earnings
contingency agreement, whereby Velasco will pay the former shareholders of Sandy an additional amount if
Sandy’s performance meets certain minimum levels. The present value of the contingency is estimated at
P50,000,000.
Required:
1. Determine the amount of goodwill.
2. Assume that during March, 20x5, new information comes in regarding the value of Sandy’s property,
plant and equipment at the date of acquisition. It is determined that the property was actually worth
P1,500,000 less than previously estimated. Make the entry to record this new information.
Goodwill = Consideration transferred less Acquirer’s interests net fair value of the Acquiree’s
identifiable assets and liabilities
Solution # 1:
Consideration transferred:
Shares
Estimated liability for Contingency Agreement
Consideration transferred
P 700,000,000
50,000,000
P 750,000,000
Less: Fair Value of Assets and Liabilities Acquired:
Cash and Receivables
Inventories (600M-200M)
Property, Plant & Equipment (7.5B2B)
Customer Contracts
In-process Research & Development
Current liabilities
Long-term debt (7.2B+.1B)
Expected Warranty liability
P 200,000,000
400,000,000
5,500,000,000
25,000,000
300,000,000
( 400,000,000)
(7,300,000,000
)
( 10,000,000)
Goodwill
(1,285,000,000)
P 2,035,000,000
Solution # 2:
Goodwill
Property, Plant & Equipment
P 1,500,000
P 1,500,000
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