PSBA: AFAR 04_BUSINESS COMBINATIONS: STATUTORY MERGERS & FULL STOCK ACQUISITION
AFAR04
BATCH 2020
BUSINESS COMBINATIONS: STATUTORY MERGERS &
FULL STOCK ACQUISITION
RELATED STANDARDS: PFRS 3 – BUSINESS COMBINATIONS
–
TOPIC OUTLINE
Basic Concepts and Introduction
BUSINESS COMBINATIONS
(PFRS 3)
Accounting for Business
Combination
Accounting for Cost of Business
Combination
PFRS for SMEs
LECTURE NOTES
BASIC CONCEPTS AND INTRODUCTION
DEFINITION
A business combination is a transaction or other event in which an acquirer obtains control of one or more
businesses.
Transactions sometimes referred to as "true mergers" or "mergers of equals" are also business
combinations as that term is used in PFRS 3.
Essential elements in the definition of a business combination are:
(1) Control
Control is the power to govern the financial and operating policies of an entity so as to obtain benefits
from its activities.
Control is normally presumed to exist when the acquirer holds more than 50% interest
(QUANTITATIVE THRESHOLD) in the acquiree voting rights. However, this is only a presumption
because control can be obtained in some other ways, such as when (QUALITATIVE THRESHOLD):
(a) The acquirer has the power to appoint or remove the majority of board of directors of the
acquiree.
(b) The acquirer has the power to cast the majority of votes at board meetings or equivalent bodies
within the acquiree.
(c) The acquirer has power over more than half of the voting rights of the acquiree because of an
agreement with other investors
(d) The acquirer controls the acquiree’s operating and financial policies because of law or an
agreement.
An acquirer may obtain control of an acquiree in variety of ways, for example:
(a) by transferring cash or other assets
(b) by incurring liabilities
(c) by issuing equity securities
(d) by providing more than one type of consideration
(e) without transferring consideration, including by contract alone
(2)
Business
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 in the form of dividends, lower costs or other
economic benefits directly to investors or other owners, members or participants".
CLASSIFICATION OF BUSINESS COMBINATION
ACCORDING TO STRUCTURE (BUSINESS POINT OF VIEW)
(a) Horizontal Integration – this type of business combination is one that involves companies within the
same industry that have been previously competitors.
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(b)
(c)
(d)
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Vertical Integration - this type of business combination take place between two companies involved in
the same industry but at different levels. It normally involves a combination of a company and its
supplier or customers.
Conglomerate Combination – is one involving companies in unrelated industries having little, if any,
production or market similarities for the purpose of entering into a new market or industry.
Circular Combination – entails some diversification, but does not have a drastic change in operation
as a comglomerate.
ACCORDING TO METHOD (LEGAL POINT OF VIEW)
(a) ASSET ACQUISTION – The acquirer purchases the assets and assumes liabilities of the acquiree in
exchange of cash or other non-cash consideration. Under the Corporation Code of the Philippines, a
business combination effected through asset acquisition may be either:

Merger – occurs when two or more companies merge into a single entity which shall be one of
the combining entities. For example: A Corp. + B Corp. = A Corp. or B. Corp.

Consolidation – occurs when two or more companies consolidate into a single entity which shall
be the consolidated entity. For example: A Corp. + B Corp. = C Corp.
(b) STOCK ACQUISITION – instead of acquiring the assets and assuming the liability of the acquiree, the
acquirer obtains control over the acquiree by acquiring majority ownership interest in the voting
rights of the acquiree. In stock acquisition, the acquirer is known as the parent while the acquiree is
known as subsidiary. After the acquisition, the entities retain their separate legal existence but for
financial reporting purposes, both entities are viewed as a single reporting entity.
ACCOUNTING FOR BUSINESS COMBINATIONS
Business combinations are accounted for using the ACQUISITION METHOD. This method requires the
following steps or procedures:
(1) IDENTIFY THE ACQUIRER
(a) In a business combination effected primarily by transferring cash or other assets, or by incurring
liabilities, the acquirer is usually the entity that transfers the cash or other assets, or incurs the
liabilities.
(b) In a business combination effected primarily by exchanging equity interests, the acquirer is
usually the entity that issues its equity interests.
(c) The acquirer is usually the combining entity whose relative size measured in terms of assets,
revenue or profit is significantly greater than that of the other combining entities.
(d) In a business combination involving more than two entities, determining the acquirer shall
include a consideration of which of the combining entities initiated the combination as well as
the relative size of the entities.
(e) If a new entity is formed to issue equity interests to effect a business combination, one of the
combining entities that existed before the combination shall be identified as the acquirer.
(f)
The combining entity whose owners as a group receive the largest proportion of the voting
rights in the combined entity is likely the acquirer.
(g) Where there is a large minority interest in the combined entity and no other owner has a
significant voting interest, the holder of the large minority interest is likely the acquirer.
(h) Where one entity has the ability to select the management team or the majority of the
members of the governing body of the combined entity, such entity is likely the acquirer.
(2)
DETERMINE THE ACQUISITION DATE
The acquisition date is the date on which an ACQUIRER OBTAINS CONTROL over the acquiree. The
acquisition date is normally the date on which the acquirer legally transfers the consideration,
acquires the assets and assumes the liabilities of the acquiree. The acquisition date is also known as,
the "CLOSING DATE”.
However, it is possible for control to pass to the acquirer before or
several dates are key to a business combination, it is the date
determines the acquisition date. For example, the acquisition date
written agreement provides that the acquirer obtains control of the
closing date.
(3)
after the closing date. Where
on which control passes that
precedes the closing date if a
acquiree on a date before the
RECOGNIZING AND MEASURING GOODWILL
On acquisition date, the acquirer computes and recognizes goodwill (or gain or bargain purchase)
using the following formula:
Consideration transferred
xxx
NCI in the acquiree
xxx
Previously held equity interest in the acquiree
xxx
Total
xxx
Less: Fair value of net identifiable assets acquired
xxx
Goodwill / (Gain on Bargain Purchase)
xxx
Goodwill is recognized as an asset while gain on bargain purchase is presented as gain in profit or
loss.
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NOTE: NCI and Previously held equity interest in the acquiree are to be discussed on the next topic.
Consideration transferred
The consideration transferred may include assets or liabilities of the acquirer that have carrying amounts
that differ from their fair values at the acquisition date.
The following are the considerations that the acquirer may transfer or incur and their proper measurement:
(1) Cash or other monetary assets – The fair value is the amount of cash or cash equivalent dispersed.
(2) Deferred payment – the fair value to the acquirer is the amount the entity would have to borrow to
settle their debt immediately. Basically, the amount should be at present value.
(3) Non-monetary assets - Their fair values on acquisition date.
(4) Equity instruments – If an acquirer issues its own shares as consideration, it will need to determine
the fair value of those shares at the date of exchange.
(5) Debt instruments or liabilities undertaken – The fair values of liabilities undertaken are best measured
by the present value of future cash flows.
(6) Contingent consideration – The acquirer shall recognize the acquisition-date fair value of contingent
consideration. Changes that are result of the acquirer obtaining additional information about facts and
circumstances that existed at the acquisition date, and that occur within the measurement period
(which may be a maximum of one year from the acquisition date) are recognized as adjustments
against the original accounting for the acquisition (in other words are adjusted in goodwill). Changes
resulting from events after the acquisition date are not measurement period adjustments. Such
changes are therefore accounted for separately from the business combination.
Recognition and Measurement of Acquired Assets and Liabilities
Recognition Principle
On acquisition date, the acquirer recognizes the identifiable assets acquired and liabilities assumed. To
qualify for recognition, the identifiable assets and liabilities must meet the definition of assets and liabilities
in the Conceptual Framework for Financial Reporting.
Unidentifiable assets are NOT RECOGNIZED. Examples of which are as follows:

Goodwill recorded by acquiree prior to the business combination

Assembled workforce

Potential contracts that the acquiree is negotiating with prospective mew customers at the acquisition
date.
Measurement Principle
1.
The acquirer shall measure the identifiable assets acquired and the liabilities assumed at their
acquisition-date fair value.
2.
For each business combination, the acquirer shall measure any non-controlling interest in the
acquiree either at:
a.
Fair value
b.
The non-controlling interest's proportionate share of the acquiree's identifiable net assets.
Specific Recognition Principle
(1) Operating Leases
Acquiree is the lessee
General Rule: The acquirer does not recognize any assets or liabilities related to an operating lease in
which the acquiree is the lessee.
Exception: The acquirer determines whether the terms of each operating lease in which the acquiree
is the lessee are favorable or unfavorable
If the terms of the lease relative to market terms is:

Favorable – the acquirer recognizes an intangible asset.

Unfavorable – the acquirer recognizes a liability.
Acquiree is the lessor
If the acquiree is the lessor, the acquirer does not recognize any separate intangible asset or liability
regardless whether the terms of the operating lease are favorable or unfavorable when compared
with market terms.
(2)
Intangible assets
PFRS 3 requires the acquirer to recognize IDENTIFIABLE ASSETS acquired regardless of the degree of
probability of an inflow of economic benefits.
An intangible asset is identifiable if it:

can be separated or

meets the contractual-legal criterion. (If it arises from legal or contractual right regardless of
separability.
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Exception to the
Recognition Principle
(1) Contingent Liabilities recognized when they
represent a present
obligation and their fair
value is determinable
even if the outflow is
improbable
Exceptions to both the Recognition
and Measurement Principle
(1) Deferred Taxes - PAS 12 is
applied
(2) Employee Benefits - PAS 19 is
applied
(3) Indemnification assets recognized and measured on the
same basis as the indemnified item.
BATCH 2020
Exception to the
Measurement Principle
(1) Reacquired rights measured based on the
remaining terms of the
related contract
(2) Share-based payment
- PFRS 2 is applied
(3) NCA Held for Sale measured at fair value less
costs to sell
Measurement Period
If the initial accounting for business combination is incomplete by the end of the reporting period in which
the combination occurred, the acquirer can use provisional amounts to measure any of the following for
which the accounting is incomplete:

Consideration transferred

NCI in the acquiree

Previously held equity interest in the acquiree

Identifiable assets acquired and liabilities assumed
Within 12 MONTHS FROM THE ACQUISITION DATE (the measurement period), the acquirer retrospectively
adjusts the provisional amounts for any new information obtained that provides evidence of facts and
circumstances that existed as of the acquisition date, which if known would have affected the measurement
of the amounts recognized on that date. Any adjustment to a provisional amount is recognized as an
adjustment to goodwill or gain on bargain purchase.
ACCOUNTING FOR COSTS OF BUSINESS COMBINATION
Acquisition-related Costs
Examples
Professional fees paid to
accountants, legal advisors, valuers
Direct Costs
and other consultants (finders and
brokerage fees) to affect the
combination
General and administrative costs,
Indirect Costs
including the costs of maintaining an
internal acquisitions department
transaction costs such as stamp
duties, professional adviser's fees,
Cost of Issuing Equity Securities
underwriting costs and brokerage
fees
Cost of Issuing Debt Securities
Treatment
Expensed as incurred
Expensed as incurred
Debit to APIC or Share
Premium Account
Deducted from Carrying
Amount of Financial
Liability
Bond issue costs
PFRS FOR SMEs
FULL PFRS
PFRS for SMEs
Accounting Method
PFRS 3 requires the use of ACQUISITION
PFRS for SMEs requires the use of PURCHASE
METHOD
METHOD
Acquisition Related Costs
Expensed except for costs of issuing debt or
Included in the cost of business combination
equity securities
except for costs of issuing debt or equity securities
Operating Lease
PFRS 3 has a specific provision for operating
PFRS for SMEs has no specific provision for
leases.
operating leases.
Intangible Assets Acquired
Recognized if the intangible asset is either
(a) separable or (b) arises from legal or
Recognized if its fair value can be measured
contractual right
reliably
Contingent Liabilities
Recognized if it is a present obligation and its Recognized if its fair value can be measured
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fair value can be measured reliably
BATCH 2020
reliably
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DISCUSSION EXERCISES
STRAIGHT PROBLEMS:
1.
On January 1, 2019, ALABAMA CORP. acquired all the assets and assumed all of the liabilities of
ALABANG INC. As of this date, the carrying amounts and fair values of the assets and liabilities of
ALABANG acquired by ALABAMA are shown below:
Carrying amounts
Fair value
Petty cash fund
10,000
10,000
Receivables
200,000
120,000
Allowance for doubtful accounts
(30,000)
Inventory
520,000
350,000
Building – net
1,000,000
1,100,000
Goodwill
100,000
20,000
Payables
400,000
400,000
On the negotiation for the business combination, ALABAMA incurred transaction costs amounting to
P100,000 for legal, accounting and consultancy fees.
REQUIREMENTS:
(a) If ALABAMA paid P1,500,000 cash as consideration for the assets and liabilities of ALABANG,
how much is the goodwill or gain or bargain purchase on the business combination?
(b)
(c)
Consideration transferred
Fair value of net identifiable assets (P1,580,000 – P400,000)
Goodwill
P1,500,000
(1,180,000)
P320,000
Consideration transferred
Fair value of net identifiable assets (P1,580,000 – P400,000)
Goodwill
P1,000,000
(1,180,000)
P180,000
If ALABAMA paid P1,000,000 cash as consideration for the assets and liabilities of ALABANG,
how much is the goodwill or gain or bargain purchase on the business combination?
If ALABAMA is an SME and paid P1,500,000 cash as consideration for the assets and liabilities of
ALABANG, how much is the goodwill or gain or bargain purchase on the business combination?
Consideration transferred (P1,500,000 + 100,000)
Fair value of net identifiable assets (P1,580,000 – P400,000)
Goodwill
2.
P1,600,000
(1,180,000)
P420,000
On January 1, 2020, ALASKA CORP. acquired all the assets and assumed all the liabilities of
CONDENSADA CORP for the following considerations:

Cash of P200,000 plus an installment payment of P1,000,000 on December 31, 2020. The
incremental borrowing rate of ALASKA is 5% per annum. (Round-off present value factors in 2
decimal places)

Bonds payable with a face value of P500,000. At the acquisition date, the bonds are trading at
110. The bonds are classified as financial liability at amortized cost.

ALASKA agreed to pay additional P200,000 on January 1, 2022 if the average income of
CONDENSADA during the 2-year period of 2020 – 2022 exceeds P10 million per year. The
expected value is P200,000 calculated based on the 40% probability of achieving the target
average income.
As of this date, the carrying amounts and fair values of the assets and liabilities of CONDENSADA are
shown below:
Carrying amounts
Fair value
Current assets
500,000
800,000
Building – net
400,000
200,000
Equipment – net
200,000
150,000
Patent
200,000
Computer software
150,000
Current liabilities
300,000
350,000
Additional information:

CONDENSADA is a defendant in a pending litigation for which no provision was recognized
because CONDENSADA believes that it will win the case. The fair value of settling the litigation
is P100,000.

ALASKA is renting out a building to CONDENSADA under an operating lease. The terms of the
lease compared with market terms are favorable. The fair value of differential is P50,000.

CONDENSADA has research and development projects with a fair value of P150,000. However,
CONDENSADA recognized the costs expenses.

The assets include an equipment which was assigned a provisional amount of P150,000. This
equipment was assigned a tentative useful life of 10 years and to be depreciated using straightline method. The equipment’s fair value on October 1, 2020 is P300,000.

In addition, ALASKA had an out-of-pocket costs of P10,000 for direct cost, P5,000 for indirect
costs and P20,000 for bond issuance costs.
REQUIREMENTS:
(a) Compute the amount of goodwill arising from the business combination.
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Consideration transferred:
Cash
Notes payable (1,000,000 x 0.95)
Bonds payable (500,000 x 1.10)
Contingent consideration
Fair value of net identifiable assets:
Current assets
Building – net
Equipment – net
Patent
Research and development costs
Operating lease – intangible assets
Current liabilities
Contingent liabilities
Goodwill
Adjustment for provisional amounts
Adjusted amount of goodwill
(b)
(c)
(d)
P200,000
950,000
550,000
200,000
800,000
200,000
150,000
200,000
150,000
50,000
(350,000)
(100,000)
BATCH 2020
P1,900,000
1,100,000
P800,000
150,000
P950,000
Assuming that the terms of the lease compared with market terms are unfavorable, compute for
the amount of goodwill arising from the business combination.
Consideration transferred:
Cash
Notes payable (1,000,000 x 0.95)
Bonds payable (500,000 x 1.10)
Contingent consideration
Fair value of net identifiable assets:
Current assets
Building – net
Equipment – net
Patent
Research and development costs
Operating lease – liability
Current liabilities
Contingent liabilities
Goodwill
Adjustment for provisional amounts
Adjusted amount of goodwill
P200,000
950,000
550,000
200,000
800,000
200,000
150,000
200,000
150,000
(50,000)
(350,000)
(100,000)
P1,900,000
1,000,000
P900,000
150,000
P1,050,000
Assuming that before the contingency period is over, the probability present value of the
earnings contingency declines to P150,000 and the change in value is within measurement
period, compute for the amount of goodwill arising from the business combination.
Consideration transferred:
Cash
P200,000
Notes payable (1,000,000 x 0.95)
950,000
Bonds payable (500,000 x 1.10)
550,000
Contingent consideration
200,000
Fair value of net identifiable assets:
Current assets
800,000
Building – net
200,000
Equipment – net
150,000
Patent
200,000
Research and development costs
150,000
Operating lease – intangible assets
50,000
Current liabilities
(350,000)
Contingent liabilities
(100,000)
Goodwill
Adjustment for provisional amounts (150,000 – 50,000)
Adjusted amount of goodwill
P1,900,000
1,100,000
P800,000
100,000
P900,000
Assuming that before the contingency period is over, the probability present value of the
earnings contingency declines to P150,000 and the change in value is beyond measurement
period, compute for the amount of goodwill arising from the business combination.
Consideration transferred:
Cash
Notes payable (1,000,000 x 0.95)
Bonds payable (500,000 x 1.10)
Contingent consideration
Fair value of net identifiable assets:
Current assets
Building – net
Equipment – net
Patent
Research and development costs
Operating lease – intangible assets
Current liabilities
Contingent liabilities
P200,000
950,000
550,000
200,000
P1,900,000
800,000
200,000
150,000
200,000
150,000
50,000
(350,000)
(100,000)
1,100,000
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Goodwill
Adjustment for provisional amounts
Adjusted amount of goodwill
3.
BATCH 2020
P800,000
150,000
P950,000
The following data relates to the balance sheets of ARIZONA COMPANY and ARENA INC. on December
31, 2020 just before the business combination:
ASSETS
ARIZONA
ARENA
Current Assets
P400,000
P500,000
Land
100,000
150,000
Buildings (net)
200,000
150,000
Total
P700,000
P800,000
LIABILITIES & EQUITY
Accounts Payable
P100,000
P90,000
Bonds Payable
300,000
380,000
Share Capital - Ordinary (P10 par)
100,000
120,000
APIC
50,000
80,000
Retained Earnings
150,000
130,000
Total
P700,000
P800,000
On January 1, 2021, ARIZONA acquired the net assets of ARENA for the following consideration:

Cash of P600,000.

Issuance of 5,000 shares with a market value of P20 per share at the date of combination.

Bonds payable with a face value of P200,000. At the acquisition date, the bonds are trading at
110. The bonds are classified as financial liability at amortized cost.
The following items have a fair value different from their book values that are relevant for business
combination:
ARIZONA
ARENA
Land
P150,000
P200,000
Building
150,000
250,000
Accounts Payable
120,000
150,000
The following out-of-pocket costs of the combination were as follows:
Legal fees for the contract of business combination
P2,000 Direct Costs
Audit fee for SEC registration of share issue
3,000 SIC
Printing costs of share certificates
1,000 SIC
Broker’s fee
2,000 Direct Costs
Accountants fee
1,500 Direct Costs
Lawyer’s fee
3,000 Direct Costs
Other direct cost of acquisition
1,500 Direct Costs
Internal secretarial, general and allocated expense
2,500 Indirect Costs
Documentary stamp tax on new shares
1,000 SIC
Bond issue cost
5,000 BIC
REQUIREMENTS: Using the following assumption (a) Compute the amount of goodwill at the date of
acquisition; (b) The total assets after business combination; (c) Total liabilities after the business
combination; (d) Total retained earnings after business combination; (e) Total shareholders’ equity
after business combination
(1) Assume that ARIZONA acquires the net assets of ARENA.
Consideration transferred:
Cash
Issuance of shares (5,000 shares x P20)
Bonds payable (200,000 x 1.10)
Fair value of net identifiable assets:
Goodwill
(2)
P300,000
100,000
220,000
P620,000
420,000
(a) P200,000
Current Assets (400,000 + 500,000 – 300,000 – 22,500)
Land (100,000 + 200,000)
Building (200,000 + 250,000)
Goodwill
Total assets
577,500
300,000
450,000
200,000
(b) 1,527,500
Accounts payable (100,000 + 150,000)
Bonds payable (300,000 + 380,000 + 220,000 – 5,000)
Total liabilities
250,000
895,000
(c) 1,145,000
Retained earnings (150,000 – 12,500)
Share capital (100,000 + 50,000)
Share premium (50,000 + 50,000 – 5,000)
Total shareholder’s equity
(d) P137,500
150,000
95,000
(e) 382,500
Assume that ARIZONA acquires all of the outstanding shares of ARENA.
Consideration transferred:
Cash
Issuance of shares (5,000 shares x P20)
Bonds payable (200,000 x 1.10)
P300,000
100,000
220,000
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P620,000
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Fair value of net assets:
Goodwill
(3)
420,000
(a) P200,000
Current Assets (400,000– 300,000 – 22,500)
Land
Investment in subsidiary
Building
Total assets
77,500
100,000
620,000
200,000
(b) 997,500
Accounts payable
Bonds payable (300,000 + 220,000 – 5,000)
Total liabilities
100,000
515,000
(c) 615,000
Retained earnings (150,000 – 12,500)
Share capital (100,000 + 50,000)
Share premium (50,000 + 50,000 – 5,000)
Total shareholder’s equity
(d) P137,500
150,000
95,000
(e) 382,500
Assume that ARIZONA acquires the net assets of ARENA but with no cash consideration.
Consideration transferred:
Issuance of shares (5,000 shares x P20)
Bonds payable (200,000 x 1.10)
Fair value of net identifiable assets:
Gain on bargain purchase
(4)
4.
BATCH 2020
100,000
220,000
P320,000
420,000
(a) P100,000
Current Assets (400,000 + 500,000– 22,500)
Land (100,000 + 200,000)
Building (200,000 + 250,000)
Total assets
877,500
300,000
450,000
(b) 1,627,500
Accounts payable (100,000 + 150,000)
Bonds payable (300,000 + 380,000 + 220,000 – 5,000)
Total liabilities
250,000
895,000
(c) 1,145,000
Retained earnings (150,000 + 100,000 – 12,500)
Share capital (100,000 + 50,000)
Share premium (50,000 + 50,000 – 5,000)
Total shareholder’s equity
(d) P237,500
150,000
95,000
(e) 482,500
Assume that ARIZONA acquires the net assets of ARENA and it is an SME.
Consideration transferred:
Cash
Direct costs
Issuance of shares (5,000 shares x P20)
Bonds payable (200,000 x 1.10)
Fair value of net identifiable assets:
Goodwill
P300,000
10,000
100,000
220,000
P630,000
420,000
(a) P210,000
Current Assets (400,000 + 500,000 – 300,000 – 22,500)
Land (100,000 + 200,000)
Building (200,000 + 250,000)
Goodwill
Total assets
577,500
300,000
450,000
210,000
(b) 1,537,500
Accounts payable (100,000 + 150,000)
Bonds payable (300,000 + 380,000 + 220,000 – 5,000)
Total liabilities
250,000
895,000
(c) 1,145,000
Retained earnings (150,000 – 2,500)
Share capital (100,000 + 50,000)
Share premium (50,000 + 50,000 – 5,000)
Total shareholder’s equity
(d) P147,500
150,000
95,000
(e) 392,500
ARKANSAS INC. issued shares in exchange for 100% interest in CALIFORNIA CORP. Relevant
information follows:
ARKANSAS
CALIFORNIA
COMBINED
(Carrying Amounts)
(Fair Values)
ENTITY
Identifiable Assets
2,400,000
1,600,000
4,000,000
Goodwill
?
Total Assets
2,400,000
1,600,000
?
Liabilities
700,000
900,000
1,600,000
Share Capital
600,000
300,000
700,000
Share Premium
300,000
250,000
1,200,000
Retained Earnings
800,000
150,000
?
Total Liabilities & Equity
2,400,000
1,600,000
?
Additional Information:

ARKANSAS’ share capital consists of 60,000 ordinary shares with par value of P10 per share.
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BATCH 2020

CALIFORNIA’s share capital consists of 3,000 ordinary shares with par value of P100 per share.
REQUIREMENTS: Compute for the following:
(1) Number of shares issued by ARKANSAS
(2)
(3)
(4)
Increase in ARKANSAS’ share capital
Divided by ARKANSAS’ par value
Number of shares issued
Fair value per share of the shares issued
P100,000
10
10,000
Fair value of consideration transferred
Divided by number of shares issued
Acquisition date fair value
1,000,000
10,000
100
Consideration transferred
Fair value of identifiable net assets (1,600,000 – 900,000)
Goodwill
1,000,000
700,000
300,000
Goodwill recognized on acquisition date
Retained earnings of the combined entity immediately after the business combination P800,000
MULTIPLE CHOICE: (THEORIES)
1.
S1: Under PFRS 3, the acquirer is the entity that obtains control of the acquiree. In a business
combination effected primarily by transferring cash or other assets, or by incurring liabilities, the
acquiree is usually the entity that transfers the cash or other assets, or incurs the liabilities.
S2: Under PFRS 3, the acquisition date should always be the closing date.
A.
True, false
C.
False, false
B.
False, true
D.
True, true
2.
Under PFRS 3, which of the following statements is incorrect?
A.
The acquirer shall recognize the acquisition-date fair value of any contingent consideration as
part of the consideration transferred in exchange for the acquiree. The acquirer shall classify the
obligation to pay the contingent consideration as either liability or equity.
B.
If the resulting amount in the computation of goodwill is "negative", the acquirer shall recognize
a "gain on bargain purchase" as a contra asset account.
C.
The acquirer shall account for acquisition-related costs as expenses in the period in which the
costs are incurred, except the costs of issuing debt and equity securities.
D.
Under PFRS 3, the acquirer shall account for each business combination under acquisition
method.
3.
Which of the following is not an exception from the recognition principle of items acquired in business
combination under PFRS 3?
A.
Deferred taxes
C.
Employee benefits
B.
Contingent liabilities
D.
Non-current asset held for sale
4.
Which of the following statements is correct?
A.
The PFRS for SMEs does not address the accounting for business combinations.
B.
An SME cannot recognize any goodwill.
C.
The PFRS for SMEs requires the use of the purchase method in accounting for business
combinations.
D.
Control is not an essential criterion in identifying business combination between SMEs.
5.
The
A.
B.
C.
D.
6.
S1: If the consideration transferred in a business combination is deferred, the consideration may be
measured at present value.
S2: An intangible asset that is unrecorded by the acquiree may nevertheless be recognized by the
acquirer in a business combination.
S3: The acquisition method shall be applied only to business combinations wherein the acquirer
obtains control of the acquiree by transferring consideration to the latter.
A.
True, true, false
D.
False, false, false
B.
False, false, true
E.
True, true, true
C.
True, false, false
7.
Provisional amounts may be used if accounting is incomplete by the end of the reporting period in
which the business combination occurs. Provisional amounts are adjusted
A.
prospectively for information obtained during the measurement period.
B.
retrospectively for information obtained during the measurement period.
C.
not adjusted for any information obtained during the measurement period.
D.
PFRS 3 (revised) outlawed the use of provisional amounts.
PFRS for SMEs differs from PFRS 3 in all of the following respects, except
the measurement of the consideration transferred.
the treatment of NCI in the computation of goodwill.
the treatment of acquisition-related costs.
the recognition criteria for contingent liabilities.
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8.
BATCH 2020
Under PFRS 3, contrary to PAS 37, what is the recognition principle of contingent liability assumed in
a business combination?
A.
The acquirer shall recognize as of the acquisition date a contingent liability assumed in a
business combination if it is a present obligation that arises from past events and its fair value
can be measured reliably even only reasonable possible.
B.
The acquirer shall recognize a contingent liability assumed in a business combination at the
acquisition date only if it’s probable that an outflow of resources embodying economic benefits
will be required to settle the obligation.
C.
The acquirer shall recognize a contingent liability assumed in a business combination at the
acquisition date only if it is virtually certain that an outflow of resources embodying economic
benefits will be required to settle the obligation.
D.
The acquirer shall recognize a contingent liability assumed in a business combination at the
acquisition date only if it is remote that an outflow of resources embodying economic benefits
will be required to settle the obligation.
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BATCH 2020
QUIZZER (DO-IT-YOURSELF DRILL)
THEORIES
1.
Which of the following statements best describes the term "control"?
A.
The mutual sharing of risks and benefits
B.
The holding of a significant proportion of the share capital in another entity
C.
The power to participate in the financial and operating policy decisions of an entity
D.
The power to govern the financial and operating policies of an entity so as to obtain benefits
from the activities
2.
The application of the acquisition method of accounting for a business combination requires all of the
following, except
A.
Identifying the acquirer
B.
Determining the acquisition date
C.
Not recognizing gain from bargain purchase
D.
Recognizing and measuring the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree.
3.
In different types of business combination, which of the following is not considered as an acquirer?
A.
The remaining or absorbing corporation in case of merger.
B.
The absorbed corporation in case of consolidation.
C.
The corporation that acquires more than 50% of the other corporation’s ordinary shares.
D.
The corporation that controls the acquiree.
4.
In a business combination, goodwill is measured as the excess of
A.
The consideration transferred over the identifiable net assets acquired.
B.
The total of the consideration transferred and the amount of any non-controlling interest in
acquiree over the identifiable net assets acquired.
C.
The total of the consideration received and the fair value of the previously held interest in
acquiree over the identifiable net assets acquired.
D.
The total of the consideration transferred, the amount of any non-controlling interest in
acquiree and the fair value of previously held interest in the acquiree over the identifiable
assets acquired.
the
the
the
net
5.
Which of the following statements in relation to a business combination is true?
I.
The acquirer shall recognize the acquiree's contingent liabilities if certain conditions are met.
II.
The acquirer shall recognize the acquiree's contingent assets if certain conditions are met.
A.
I only
C.
Both I and II
B.
II only
D.
Neither I nor II
6.
As of acquisition date, the acquirer shall recognize, separately from goodwill, the identifiable assets
acquired, the liabilities assumed and any non-controlling interest in the acquiree. As a general rule,
the acquirer shall measure the identifiable assets acquired and the liabilities assumed at their
A.
Acquisition date fair values
C.
Acquisition date face values
B.
Acquisition date book values
D.
Acquisition date carrying values
7.
What is the measurement of the consideration transferred or given up in a business combination?
A.
Acquisition date fair values
C.
Acquisition date face values
B.
Acquisition date book values
D.
Acquisition date carrying values
8.
If the initial accounting for a business combination is incomplete by the end of the reporting period in
which the combination occurs, the acquirer shall report in its financial statements provisional amounts
for the items for which the accounting is incomplete. What is the maximum term or period of the
measurement period?
A.
One year or 12 months from the acquisition date
B.
6 months from the acquisition date
C.
3 months from the acquisition date
D.
1 month from the acquisition date
9.
Which of the following statements in relation to an acquisition date of a business combination is
incorrect?
A.
The acquisition date can never precede the closing date.
B.
The acquisition date is the date on which an acquirer obtains control over the acquiree.
C.
Where several dates are key to a business combination, the date on which control passes is the
acquisition date.
D.
The acquisition date is normally the "closing date" or the date on which the acquirer legally
transfers the consideration, acquires the assets and assumes the liabilities of the acquiree.
10.
What is the requirement with respect to the allocation of the cost of a business acquisition?
A.
Cost to be allocated based on fair value.
B.
Cost to be allocated based on original cost.
C.
Cost to be allocated based on carrying amount.
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11.
BATCH 2020
D.
None of these
During the current year, an entity acquired another entity in a transaction properly accounted for as a
business combination. At the time of the acquisition, some of the information for valuing assets was
incomplete. How should the acquirer account for the incomplete information in preparing the financial
statements immediately after the acquisition?
A.
Record the uncertain items at the carrying amount of the acquiree.
B.
Do not record the uncertain items until complete information is available.
C.
Record a contra account to the investment account for the amount involved.
D.
Record the uncertain items at a provisional amount measured at the date of acquisition.
12.
The contingent consideration of the acquired entity shall be recognized at fair value. The existence of
contingent consideration is often reflected in a lower purchase price. Recognition of such contingent
consideration shall
A.
Increase the value attributed to goodwill, thus increasing the risk of impairment of goodwill.
B.
Decrease the value attributed to goodwill, thus decreasing the risk of impairment of goodwill.
C.
Decrease the value attributed to goodwill, thus increasing the risk of impairment of goodwill.
D.
Increase the value attributed to goodwill, thus decreasing the risk of impairment of goodwill.
13.
Which of the following accounting treatments for costs related to business combination is incorrect?
A.
Acquisition related costs such as finder’s fees; advisory, legal, accounting, valuation and other
professional and consulting fees; and general administrative costs, including the costs of
maintain an internal acquisitions department shall be recognized as expense in the Profit/Loss in
the periods in which the costs are incurred.
B.
The costs related to issuance of stock or equity securities shall be deducted/debited from any
share premium from the issue and any excess is charged to “share issuance cost” reported as
contract-equity account against either (1) share premium from other share issuances or (2)
retained earnings
C.
The costs related to issuance of financial liability at fair value through profit or loss shall be
recognized as expense while those related to issuance of financial liability at amortized cost shall
be recognized as deduction from the book value of financial liability or treated as discount on
financial liability to be amortized using effective interest method.
D.
The costs related to the organization of the newly formed corporation also known as preincorporation costs shall be capitalized as goodwill or deduction from gain on bargain purchase.
14.
After this type of business combination, the acquired entity ceases to exist as a separate legal or
accounting entity. The acquirer records in its accounting records the assets acquired and liabilities
assumed in the business combination.
A.
stock acquisition
B.
acquisition of control without transfer of consideration
C.
combination of mutual entities
D.
asset acquisition
15.
How is goodwill or gain from bargain purchase computed?
A.
The difference between the consideration transferred, including non-controlling interest in the
acquiree, and the acquisition-date fair value of net identifiable assets acquired.
B.
The difference between the purchase price and the acquisition-date fair value of net identifiable
assets acquired.
C.
The difference between the sum of (a) consideration transferred; (b) non-controlling interest in
the acquiree; and (c) acquisition-date fair value of the acquirer’s previously held equity interest
in the acquiree; and the acquisition-date fair value of net identifiable assets acquired.
D.
The excess of the acquisition-date fair value of net identifiable assets acquired and there
carrying amounts in the acquiree's books.
16.
The
A.
B.
C.
D.
17.
A business combination may be legally structured as a merger, a consolidation, an investment in
stock, or a direct acquisition of assets. Which of the following best describes a business combination
that is legally structured as a merger?
A.
The surviving company is one of the two combining companies
B.
The surviving company is neither of the two combining companies
C.
An investor-investee relationship is established
D.
A parent-subsidiary relationship is established
18.
Which is true?
I
The acquiree is the entity that obtains control after the business combination.
II
The acquisition date in a business combination is normally the closing date.
costs of issuing debt securities in a business combination are
expensed
included in the initial measurement of the debt securities issued
accounted for like a “discount" on liability
b and c
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19.
20.
BATCH 2020
A.
I only
C.
Both I and II
B.
II only
D.
Neither I nor II
Which is false?
I
According to PFRS 3 Business Combinations, a “gain on a bargain purchase” (or ‘negative
goodwill) is recognized as an allocated deduction to the net identifiable assets acquired in the
year of business combination
II
An intangible asset that is unrecorded by the acquiree may nevertheless be recognized by the
acquirer in a business combination.
A.
I only
C.
Both I and II
B.
II only
D.
Neither I nor II
Consider the following
I
The two important elements in the definition of business combination under PFRS 3 are
“business” and “combination.”
II
Under PFRS 3 Business Combinations, business combinations are accounted for using the
purchase method.
A.
True, true
C.
False, false
B.
True, false
D.
False, true
PROBLEMS
Use the following information in answering the next item(s):
CALIFORNIA CORP. acquired the net assets of CALA INC. by issuing 10,000 ordinary shares with par
value of P10 and bonds payable with face amount of P500,000. The bonds are classified as financial
liability at amortized cost.
At the time of acquisition, the ordinary shares are publicly quoted at P20 per share. On the other
hand, the bonds payable, classified as financial liability at amortized cost, are trading at 110.
CALIFORNIA paid P10,000 share issuance costs and P20,000 bond issue costs. CALIFORNIA also paid
P40,000 acquisition related costs and P30,000 indirect costs of business combination.
Before the date of acquisition, CALIFORNIA and CALA reported the following data:
CALIFORNIA
CALA
Current assets
1,000,000
500,000
Noncurrent assets
2,000,000
1,000,000
Current liabilities
200,000
400,000
Noncurrent liabilities
300,000
500,000
Ordinary shares
500,000
200,000
Share premium
1,200,000
300,000
Retained earnings
800,000
100,000
At the time of acquisition, the current assets of CALIFORNIA have fair value of P1,200,000 while the
noncurrent assets of CALA have fair value of P1,300,000. On the same date, the current liabilities of
CALA have fair value of P600,000 while noncurrent liabilities of CALIFORNIA have fair value of
P500,000.
1.
What is the goodwill or gain on bargain purchase arising from business combination?
A. 50,000 goodwill
B.
150,000 gain on bargain purchase
C. 120,000 goodwill
D. 70,000 gain on bargain purchase
2.
What total amount should be expensed as incurred at the time of business combination?
A. 20,000
C.
30,000
B. 70,000
D.
50,000
3.
What is CALIFORNIA’s amount of total assets after the business combination?
A. 4,520,000
C.
4,750,000
B. 4,810,000
D.
4,440,000
4.
What is CALIFORNIA’s amount of total liabilities after the business combination?
A. 2,240,000
C.
2,320,000
B. 2,150,000
D.
2,130,000
5.
COLORADO INC. paid P300,000 for the outstanding common stock of COLOR CORP. At that time,
COLOR had the following condensed balance sheet:
Carrying amounts
Current assets
P 40,000
Plant and equipment, net
380,000
Liabilities
200,000
Stockholders’ equity
220,000
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6.
7.
BATCH 2020
The fair value of the plant and equipment was P60,000 more than its recorded carrying amount. The
fair values and carrying amounts were equal for all other assets and liabilities. What amount of
goodwill, related to COLOR’s acquisition, should COLORADO report in its consolidated balance sheet?
A. P20,000
C.
P60,000
B. P40,000
D.
P80,000
On October 1, 20X8, FLORIDA INC. acquired 100% of FLOUR CORP. for P275,000. On that date, the
carrying values of FLOUR's assets and liabilities were P450,000 and P200,000, respectively. The fair
values of FLOUR's assets and liabilities were P550,000 and P200,000, respectively. Additionally,
FLOUR had identifiable intangible assets at the time of acquisition with a fair value of P60,000. What
is the gain to be reported on FLORIDA's December 31, 20X8 consolidated income statement?
A. P0
C.
P75,000
B. P25,000
D.
P135,000
GEORGIA CORP. issues 390,000 shares of its own P10 par ordinary shares for the net assets of
GEORGY INC. in a merger consummated on August 30, 2014. On this date, the GEORGIA stock is
quoted at P12 per share. Balance sheets for the combining entities at August 30, 2014 just before
combination are as follows:
GEORGIA
GORGY
Current assets
P14,400,000
P1,200,000
Plant and Property
17,600,000
5,200,000
P32,000,000
P6,400,000
Liabilities
P9,600,000
P1,600,000
Ordinary shares, P10 par
16,000,000
2,400,000
Share premium
2,400,000
800,000
Retained earnings
4,000,000
1,600,000
P32,000,000
P6,400,000
GEORGIA also paid finder's fees of P50,000; as well as indirect expenses of P30,000. The cost of
registering and issuing the stocks is P150,000.
The amount of Retained Earnings on the balance sheet to be presented by GEORGIA at August 30,
2014 will be
A. P4,040,000
C.
P5,070,000
B. P4,950,000
D.
P5,600,000
Use the following information in answering the next item(s):
HAWAII INC. decided to acquire the net assets of HELLO CORP. on January 1, 2014 in exchange for
50,000 of its own shares with a par value of P4.00 and a market value of P4.50 per share. HAWAII’s
stockholders' equity at this date showed Share Capital of P400,000 Share Premium of P500,000 and
Retained Earnings of P300,000. Additional costs incurred were: consultancy fees, P50,000 and cost of
registration of stocks, P27,000. The balance sheet of HELLO just before combination follows:
Book Value
Fair Value
Current assets
P152,500
P142,500
Plant assets
230,000
201,000
Goodwill
25,000
P407,500
Liabilities
Share capital
Share premium
Retained earnings
8.
P95,000
200,000
65,000
47,500
P407,500
How much will be the share premium shown in the shareholders' equity post combination?
A. P423,000
C.
P498,000
B. P489,000
D.
P500,000
9.
How much will be the retained earnings presented in the shareholders' equity post combination?
A. P215,700
C.
P271,500
B. P253,700
D.
P273,500
10.
How much will be the total shareholders' equity post combination?
A. P1,175,300
C.
P1,371,500
B. P1,357,100
D.
P1,713,500
11.
On June 30, 2013 INDIANA CORP. issued 100,000 shares of its P20 par value common stock for the
net assets of INDIAN INC. The market value of INDIANA's common stock on June 30 was P36 per
share. INDIANA paid a fee of P100,000 to the broker who arranged this acquisition. Costs of SEC
registration and issuance of the equity securities amounted to, P50,000. Contingent consideration
determined to be paid after acquisition amounts to P 120,000.
What amount should INDIANA capitalize as the cost of acquiring INDIAN's net assets.
A. P3,700,000
C.
P3,720,000
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B.
P3,650,000
D.
BATCH 2020
P3,750,000
12.
The stockholders' equities of KANSAS INC. and KANSER CORP. at July 1, 2013 were as follows:
KANSAS
KANSER
Capital stock, P100 par
P15,000,000
P8,000,000
Additional paid in capital
2,000,000
4,000,000
Retained earnings
6,000,000
3,000,000
On July 2, 2013, KANSAS issued 150,000 of its shares with a market value of P120 per share for the
assets and liabilities of KANSER, and KANSER was dissolved. On the same day, KANSAS paid P50,000
for professional fees and P100,000 for SEC registration of equity securities.
After the combination, what is the total stockholders' equity of KANSAS?
A. P41,000,000
C.
P41,150,000
B. P40,850,000
D.
P40,900,000
13.
MONTANA CORP. will issue common shares with a par value P10 for the net assets of HANA CORP.
MONTANA's common stock has a current market value of P40 per share. HANA's statement of
financial position on the date of acquisition follow:
Current assets
P320,000 Common stock, P5 par
P80,000
Property and equipment
880,000 Additional paid in capital
320,000
Liabilities
400,000 Retained earnings
400,000
HANA's current assets are appraised at P400,000 and the property and equipment was also appraised
at P1,600,000. Its liabilities are fairly valued. Accordingly, MONTANA issued shares of its common
stock with a total market value equal to that of HANA's net assets including goodwill.
To recognize goodwill of P200,000, how many shares were to be issued by MONTANA
A. 45,000
C.
50,000
B. 40,000
D.
55,000
14.
MARYLAND INC. was merged into JOSEPHLAND INC. in a combination properly accounted for as an
acquisition. Their condensed statement of financial position before the combination are:
MARYLAND
JOSEPHLAND
Current assets
P3,288,000
P1,627,600
Property and equipment, net
4,654,000
1,040,000
Patents
260,000
Total assets
P7,942,000
P2,927,000
Liabilities
P3,704,000
P171,600
Capital stock, Par P100
2,600,000
1,300,000
Additional paid in capital
390,000
350,000
Retained earnings
1,248,000
1,106,000
Total liabilities and equity
P7,942,000
P2,927,600
Per appraisal's report, Horse assets have fair values of:
Current assets
P1,653,600
Property and equipment
1,248,000
Patents
338,000
MARYLAND purchases the net assets of Horse for P3,168,000 cash. What is the total asset of
MARYLAND after the combination?
A. P7,354,000
C.
P8,113,600
B. P7,254,000
D.
P9,181,600
15.
NEBRASKA INC. and ALASKA CORP. agreed to combine their businesses, with NEBRASKA as the
surviving entity. NEBRASKA will issue 48,000 shares of its capital stock, with a par value of P100 per
share, and a fair market value of PI75 per share. NEBRASKA incurred the following additional
acquisition-related costs:
Professional fees
P120,000
Broker's fees
80,000
Costs to register and issue stock
50,000
Before combination, their respective statement of financial position showed stockholders' equity
accounts as follows:
NEBRASKA
ALASKA
Capital stock
P7,200,000
P3,600,000
Additional paid in capital
3,120,000
360,000
Retained earnings
6,000,000
2,040,000
The total stockholder's equity of NEBRASKA after the combination is:
A. P24,720,000
C.
P24,670,000
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B.
P24,470,000
D.
BATCH 2020
P24,890,000
Use the following information in answering the next item(s):
UTAH INC. issued 120,000 shares of P10 par common stock with a fair value of P2,550,000 for all the
outstanding stock of JAZZ CORP. In addition UTAH incurred the following costs:
Professional fees to arrange the business combination
P27,000
Cost of SEC registration
12,000
Cost of printing and issuing stock certificates
3,000
Immediately before the business combination in which JAZZ was dissolved, JAZZ's assets and equities
were as follows (in thousands):
Book value
Fair value
Current assets
P1,000
P1,100
Plant assets
1,500
2,200
Liabilities
300
300
Common stock
2,000
Retained earnings
200
16.
What is the amount of goodwill (gain on acquisition)?
A. P 450,000
C.
P(450,000)
B. P(550,000)
D.
P 500,000
17.
Using the data, how much additional paid in capital is recorded by UTAH?
A. P1,350,000
C.
P1,365,000
B. P1,335,000
D.
P1,330,000
18.
Using the data, UTAH should recognize expense of:
A. P32,000
C.
P15,000
B. P27,000
D.
P12,000
19.
Using the data, the net increase (decrease) in the retained earnings of UTAH is:
A. P2,600,000
C.
P3,300,000
B. P3,000,000
D.
P2,200,000
20.
OHIO CORP. exchanged its common stock worth P280,000 for all of the net assets of OHELLO INC. in
a business combination treated as a purchase. At the date of combination, OHIO’s net assets had a
book value of P480,000 and a fair value of P680,000. OHELLO’s net assets had a book value of
P260,000 and a fair value of P272,000. Immediately following the combination, the net assets of the
combined company should have been reported at what amount?
A. P740,000
C.
P760,000
B. P752,000
D.
P952,000
- END OF HANDOUTS -
Advanced Financial Accounting & Reporting by Karim G. Abitago, CPA
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