CHAPTER 2: BUSCOM - DATE OF
ACQUISITION
*Obtain control (have the right to change and
manage) of the corporation.
Focus:
a) Compute for the goodwill or gain on bargain
purchase
b) Create the balance sheet
I. Introduction
Net Asset Acquisition vs Stock Acquisition
a) Net Acquisition
- Obtain control of the acquired corporation
through buying its assets and liabilities.
- Acquirer - Acquiree Relationship
- Consolidated Financial Statement (PFRS 10)
*assets and liabilities are included in the FS after
business combinantion
b) Stock Acquisition
- Obtain control of the acquired corporation
through buying its voting shares (common
stock).
*voting rights only (preference shares are not
included)
- Parent - Subsidiary Relationship (Group)
- Separate (PAS 27) and Consolidted Financial
Statement (PFRS 10)
*PFRS 3 for business combination
Levels of Investment
Level of
Ownership
Types of
Investme
nt
Passive
Investment
in Shares/
Equity
x < 20%
Investment
in Associates
20% < x < 50%
Investment
in
Subsidiary
Investment
in Shares/
Equity
Investment
in
Associates
Investment
in
Subsidiary
50% < x
Strategic
(Active)
Strategic
(Active)
Influence/
Control
No
significant
influence
and control
With
significant
influence
and no
control
With
significant
influence
and control
Accounting
Standards
PFRS 9
Accounting
Methods
Cost Model
Preparation
of FS
Separate FS
PAS 28
Equity
Model
Separate FS
PFRS 10
Cost Model,
Equity
Model, Fair
Value Option
Separate and
Consolidated
FS
a) Passive Investment
- initially recorded at Cost and subsequently
recorded at Fair value (FVTPL or FVTOCI)
- No significant influence nor control
b) Active Investment
- Initially recorded at Cost and subsequently
recorded at either Equity method, Cost method,
or Fair value option.
II. The Concept of Control
Control
- it is the criterion for identifying a parentsubsidiary relationship and the basis for
consolidation.
- PFRS 10 uses control as the single basis for
consolidation.
PFRS 10 Guidance on Control (All of these
requirements should be met)
1. Power over the Investee
- Power on Decision Making
- Power on Management
- Power on Policy Making
2. Exposure, or rights, to variable returns
- Right on the Income and Expenses
3. Ability to use Power over the Investee
- Combination of 1 & 2
Default Presumption
- use of this quantitative criterion is only a guide
in the absence of any evidence of control of the
parent to the subsidiary.
a) Investment in Shares - 0.01% - 19.99%
b) Investment in Associates - 20% - 50.99%
c) Investment in Subsidiary - 51% - 100%
III. Accounting For Stock Acquisition
Acquisition Method
1. Identify the Acquirer and the Acquisition Date
2. Determine the Consideration Transferred, the
previously held Interest (investment before
going to subsidiary), the Net Controlling Interest
(NCI) , and the Level of Ownership.
3. Determine the Fair Value of the Identifiable
Net Assets (FVINA) as well as the adjustment
from their book value.
4. Calculate the Goodwill or Gain on Bargain
Purchase.
Control Premium vs Control Discount
* Control Premium (increase in the cost ) - is an
amount that a buyer is usually willing to pay
over the current market price of a publicly traded
company.
* Control Discount (decrease in the cost) - is the
opposite of control premium which arises from
lack of control.
Business Combinations Achieved in Stages:
Step Acquisition
Ex: 18%
Acquisition Related Cost
- It does not affect the computation of Goodwill.
- It is considered as expense on the books of the
parent entity.
- Direct and Indirect Costs are closed to the
Retained Earnings while Stock-related Costs are
closed to the Share Premium or APIC.
Wholly-Owned vs Partially-Owned
Subsidiaries
a) Wholly-Owned (100%)
- All the shares will be bought
- Controlling Interest (Parent’s Interest)
b) Partially-Owned (50% and above)
- Non-Controlling Interest/NCI (Minority
Interest)
*Non-Controlling Interest (NCI)
Option 1: Can be measured at given Fair value
or implied Fair value (Fair value Basis)
Option 2: Can be measured at proportionate
share of the identifiable net assets acquired
(Proportional Basis)
Goodwill
- is an unidentifiable asset in which its existence
is an important motivation for a parent to acquire
a subsidiary.
2 ways:
a) Full Goodwill (Fair value basis)
- Goodwill is recognized by both the controlling
and non-controlling interest.
- The fair value of the business allocated to the
NCI is not equal to the fair value/implied value
of the NCI.
b) Partial Goodwill (Proportional basis)
- Goodwill is recognized by the controlling
interest ONLY.
- The fair value of the business allocated to the
NCI is equal to the fair value/implied value of
the NCI.
25%
60%
100%
* The previous percentage of shares will be
considered as the previously held interest.
a) Investment in Shares - 0.01% - 19.99%
b) Investment in Associates - 20% - 50.99%
c) Investment in Subsidiary - 51% - 100%
Entity Theory vs Parent Theory
FVINA
difference @ the
date of
acquisition
Presentation of
NCI
Goodwill
Entity Theory
Parent Theory
Recognized in
full, both parent’s
and NCI’s share
of the Fair value
adjustment.
As part of Equity
Recognized only
in respect of
parent’s share
Goodwill is an
entity asset and
should be
recognized in full
at the date of
acquisition
Neither as Equity
or Debt
Goodwill is
Parent’s Asset
Consolidation
- Process of combining the assets, liabilities,
earnings, and cash flows of a parent and its
subsidiaries (also known as “Group”) as if they
were one economic entity.
- The purpose of consolidated financial
statement is to present, primarily for the benefit
of the owners and the creditors of the parent, the
result of operations and the financial position of
the parent company and all its subsidiaries as if
the consolidated group were a single economic
entity.
a) Elimination - changes that prevent certain
amounts on the separate-entity statements from
appearing on the consolidated financial
statements (e.g. Subsidiary’s Equity and
Intercompany Transactions)
b) Adjustments - made to alter reported amounts
to reflect the economic substance of transactions
rather than their nominal amount.
*In consolidation, Investment in subsidiary
should be ZERO.
Consolidated FS
Parent FS
Assets, including
Investment
Parent and
Subsidiary’s
Assets and
Liabilities
Liability
Goodwill/gain on
Bargain Purchase
Equity
Parent’s Equity
Revenue
NCI
Expenses
Parent and
Subsidiary’s
Revenue and
Expenses
Subsidiary FS
Reverse Acquisition/Takeover
1. Occcurs when an enterprise obtains ownership
of the shares of another enterprise
2. But, as a part of the transaction, issues enough
voting shares as consideration
3. That control of the combined enterprise passes
to the shareholders of the acquired enterprise
4. The issuing enterprise is deemed to be the
acquiree while the company who receives the
share is deemed to be the acquirer.
--------------END OF CHAPTER 2---------------
Assets
Liability
Equity
Revenue
Expenses
CHAPTER 3: BUSCOM - SUBSEQUENT
DATE OF ACQUISITION
- In preparing the consolidated FS, Cost model
should be converted to Equity model.
I. Introduction
Two Stage Process
Subsidiary
Control
Associates
Significant Influence
Joint Ventures
Joint Control
(51% or more)
PFRS 10
(20% - 50%)
PAS 28/PFRS 10
Investment is
eliminated and
net assets of
subsidiary are
consolidated
with those of
the parent.
Investment is
accounted for using
the equity method.
(20% - 50%)
PAS 28/PFRS
10/ PFRS 11
Investment is
accounted for
using the equity
method.
Accounting for the Investments in the
Separate Financial Statements
These Investments should be either:
 At Cost
 In accordance with PFRS 9 (Fair value
Option)
 Using Equity Method as described n PAS
28
* The main difference between the three
investments is TIMING
Investments
Cost Model
Equity
Model
Fair Value
Option
Investments
Cost Model
Equity
Model
Fair Value
Option
Net Income of
Subsidiary
No Entry
DR. Investment
Account
CR. Investment
Income
No Entry
Amortization of
Allocated
Excess
No Entry
DR. Investment
Income
CR. Investment
Account
No Entry
Cash Dividend
of Subsidiary
No Entry
DR. Cash
/Dividend
Receivable
CR.Investment
Income
DR. Cash
/Dividend
Receivable
CR.Dividend
Income
Impairment of
Goodwill
No Entry
DR. Investment
Income
CR. Investment
Account
No Entry
II. Cost Model vs Equity Model
Cost Model
- PAS 27 does not define “Cost”
- PFRS 3 no longer refers to the term “Cost” to
the cost of an acquisition
- Relevant Measure will be:
a) Consideration Transferred
b) PAS 32 and PFRS 9 (financial instruments)
all entities are obliged to do the following stages:
1. ALL Dividends are taken into Account
- all dividends paid or payable by a subsidiary to
a parent are to be recognized as revenue by the
parent.
2. Determine if the Investment have been
Impaired
Indicators of Impairment includes:
a) Dividends exceed the total comprehensive
income of the subsidiary.
b) Carrying amount of the Investment in separate
FS exceeds its carrying amounts in the
consolidated FS.
Equity Method (One-line Consolidation)
-Record investments at cost, adjust for earnings,
losses, dividends, amortization of allocated
excess and goodwill impairment.
- Investment income under the equity method
reflects the investor’s share of the net income of
the investee, and the investment account reflects
the investor’s share of the investee’s net assets.
Comparison between Cost and Equity Model
Investment
Balance
Adjustment
needed to
eliminate
Elimination
entry
Allocated
Excess
Distribution
Amortization
of Excess
Goodwill
Impairment
Loss
Cost Model
Cost
Convert to equity
method as of the
date of
acquisition
Eliminate
beginning of year
balance
Cost Model
Original amount
of schedule of
determination and
allocation of
excess
Prior year
retained earnings;
current year to
nominal accounts
Prior year
retained earnings;
current year to
nominal accounts
Equity Model
Cost + Parent’s %
of Subsidiary
(Income Dividends Amortization of
allocated expenses)
- Goodwill
Impairment
None
Eliminate
beginning of year
balance
Equity Model
Remaining
unamortized
balance from
schedule of
determination and
allocation of excess
Only current year
to nominal accounts
Only current year
to nominal accounts
* Working paper elimination used in the two
methods are different.
* Separate FS are different
* Main difference is TIMING
*The cost model is slower in recognizing income
*Consolidated financial statements between the
two methods are the same
III. Goodwill Impairment and Allocated
Excess
Goodwill Impairment Test
a) What accounting standard?
- PAS 36, Impairment of assets requires
goodwill to be reviewed annually for impairment
loss.
b) Where to present?
- The impairment loss is reported in the
consolidated income statement for the period in
which it occurs.
c) How to account?
- The company can have two ways in handling
the impairment loss:
- Parent could record it on its books
- It could be recorded only on the consolidated
worksheet.
NOTE: It will be treated as Goodwill
impairment like all other allocated excess value.
IV. Consolidated Financial Statements
Working-Paper
- Accounting workpaper are used to accumulate,
classify, and arrange data for a variety of
accounting purposes, including the preparation
of financial reports and statements. The
following are the key points to the working
paper for consolidation:
1. Investment account must be eliminated in the
consolidated financial statement.
2. The subsidiary’s stock and the related
stockholder’s equity account must be eliminated
3. The subsidiary’s individual assets and
liabilities are combined with those of the parent.
4. Eliminating entries are used in the
consolidation worksheet to adjust the totals.
5. Eliminating entries appear only in the
consolidation worksheets and do not affect the
books of separate companies.
What are included in the working-paper?
1. Eliminating entries - adjustments to the
accounts in the FS
2. Subsidiary’s Separate FS - Assets, Liabilities,
Equity, Revenue, Expenses
3. Parent’s Separate FS - Assets, Liabilities,
Equity, Revenue, Expenses
Amortization of Allocated Excess
Set of Consolidated Financial Statements
Examples of Amortization to the allocated
excess
*Inventory - Amortized when the inventory is
sold to outsiders (COGS).
*Depreciable Fixed Assets - Amortized using
the depreciable asset’s useful life (Depreciation
Expense).
*Non-Depreciable Fixed Assets - Amortized
when the non-depreciable assets is sold to
outsiders (Gain/Loss).
*Liabilities - Amortized using an appropriate
method (Effective Interest Method/Straight
Line).
1. Consolidated Income Statement - Revenue,
Expenses, Impairment Loss, Amortization of
Excess, Dividend Income
2. Consolidated Comprehensive Income - Other
Comprehensive Income
3. Consolidated Retained Earnings - Net Income,
Dividends
4. Non-Controlling Interest - Share in the
Subsidiary’s Net Income, Dividends
5. Consolidated Balance Sheet - Assets,
Goodwill, Liabilities, Consolidated
Shareholder’s Equity, NCI
Fair value >
Book value
Fair value <
Book value
Income Statement
-The amortization
amount of an asset
decreases the net
income.
- The amortization
amount of a liability
increases the net
income
- The amortization
amount of an asset
increases the net
income
- The amortization
amount of a liability
decreases the net
income.
Balance Sheet
- The
amortization
amount decreases
the assets or
liabilities.
- The
amortization
amount increases
the assets or
liabilities.
V. Other Topics
Other Comprehensive Income (OCI)
a) Net Income
- Includes revenues, Expenses, Gains and Losses
- It will be closed to Consolidated Retained
Earnings and NCI Balance.
b) Other Comprehensive Income (OCI)
- Includes Foreign Currency Translation
Adjustment, Unrealized gain and Losses on
Derivatives, certain minimum pension Liability
adjustments.
- It will be closed to a special stockholder’s
equity account, Accumulated Other
Comprehensive Income and NCI balance.
De-Consolidation or Discontinuance of
Consolidation
Reasons:
a) Subsidiary - Subsidiary issues additional
common stock to the other shareholders.
b) Parent - Parent sell some or all of its interest.
Parent enter into an agreement to relinquish
control.
c) Government - Subsidiary comes under the
control of the government or other regulator.
% of Interest Sold
Fair Value of the Proceeds
% of the Interest Retained
Fair value of any retained
non-controlling equity
investment
% of the NCI
Carrying value of the NCI
100% of the Interest
Carrying value of the
Subsidiary’s net assets
Gain/Loss on Disposal
--------------END OF CHAPTER 3---------------