BUSINESS COMBINATION
Method of Accounting for
Business Combination
Prepared by:
Rowel Dela Cruz
Marc Jomel Navarro
BUSINESS
A business consists of inputs and processes applied to those
inputs that have the ability to contribute to the creation of
outputs.
2
BUSINESS COMBINATION
Is a transaction or 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
this PFRS.
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Old Method
Pooling of Interest
Method
Pooling method
is pooling away
By FASB
Current Method
Purchase Method
Purchase
method has been
replaced or
renamed.
Acquisition
Method
Acquisition Method
is the method that
we currently using.
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COMPARISON:
Pooling Interest method
• No revaluation to the fair market
value under this method. But it is
recorded at Book value.
• No goodwill as a result of using
this method.
• No excess of cost over the book
value exist, and no goodwill is
recorded.
• Revaluating process based on the
Fair market value.
• There is a Goodwill as a result of
using this method.
• Any excess of cost over the fair
value of net assets acquired is
recorded as goodwill.
ACQUISITION METHOD
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ACQUISITION METHOD
The acquisition method (called the 'purchase method'
in the 2004 version of IFRS 3) is used for all
business combinations. [IFRS 3.4]
Steps in applying the acquisition method are: [IFRS
3.5]
1.Identification of the 'acquirer'
2. Determination of the 'acquisition date’
3. Determine the consideration given by the acquirer.
4. Recognition and measurement of the identifiable
assets acquired, the liabilities assumed and any noncontrolling interest (NCI, formerly called minority
interest) in the acquiree
5. Recognition and measurement of goodwill or a
gain from a bargain purchase
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STEPS IN APPLYING THE ACQUISITION METHOD
1. IDENTIFY ACQUIRER
Entity that transfer cash and
other assets where the
business combination is
effective in this manner. The
acquirer is usually the entity
with the largest size of assets,
revenues or profit.
2. DETERMINE ACQUISITION
DATE
An acquirer considers all the
pertinent facts and
circumstances when
determining the acquisition
date (the date on which it
obtains control of the
acquiree).
3. DETERMINE CONSIDERATION
GIVEN
Consideration given or price
paid by the acquirer is
assumed to be fair value of the
acquiree as an entity. IFRS 3
requires these consideration to
be measured at fair value on
the acquisition date.
Consideration can be cash,
non-cash, bonds, ordinary
share or preference share.
4. RECOGNITION AND
MEASUREMENT OF
IDENTIFIABLE ASSETS,
LIABILITIES AND NCI
Recognition principl. Identifiable
assets acquired, liabilities assumed
and non-controlling interest in the
acquiree are recognized separately
from Goodwill.
Measurement principle. All assets
acquire, liabilities assumed are
measured at acquisition date fair
value.
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STEPS IN APPLYING THE ACQUISITION METHOD
Consideration Paid
Pxx
Fair Value of the Net asset of Acquiree
Goodwill (Gain on Bargain Purchase)
(xx)
xx/(xx)
4. RECOGNITION AND
MEASUREMENT OF
IDENTIFIABLE ASSETS,
LIABILITIES AND NCI
2. DETERMINE ACQUISITION
3. DETERMINE CONSIDERATION
DATE
GIVEN
5. GOODWILL OR A GAIN FROM
An acquirer considers all the
A BARGAIN PURCHASE
Consideration given or price
Goodwill
is
measured
as
the
difference
pertinent facts and
paid by the between:
acquirer is
circumstances when
assumed to be fair value of the
the aggregate of (i) the valuedetermining
of consideration
transferred
(generally
at fair
value),
(ii) the amount of any
the acquisition
acquiree
as an entity.
IFRS
3
non-controlling interest anddate
(iii)(the
in adate
business
combination
in stages,tothe acquisition date fair
on which
it
requiresachieved
these consideration
obtainsequity
control of
the
be measured
fair value
on of the acquisition date
value the acquirer previously-held
interest
in the
acquiree,atand
the net
acquiree).and the liabilities
theassumed(measured
acquisition date.
amounts of the identifiable assets acquired
accordance with IFRS 3 )
Consideration can be cash,
non-cash, bonds, ordinary
share or preference share.
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SAMPLE PROBLEM:
The condensed Balance sheet of LYLIA Corporation as of December 31,2022 is shown below:
BOOK VALUE
FAIR VALUE
P 200,000
P 225,000
Plant Assets
300,000
400,000
Total Assets
P 500,000
Liabilities
P 150,000
Current Assets
Capital Stock,P10 par
50,000
Additional Paid in Capital
100,000
Retained Earnings
200,000
Total Equities
P 500,000
On January 1, 2023, ATLAS Company paid P500,000 for the net asset of LYLIA
Corporation. How much is the Goodwill as a result of the merger?
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ANALYZING THE PROBLEM:
BOOK VALUE
FAIR VALUE
P 200,000
P 225,000
Plant Assets
300,000
400,000
Total Assets
P 500,000
Liabilities
P 150,000
Current Assets
Capital Stock,P10 par
50,000
Additional Paid in
Capital
100,000
Retained Earnings
200,000
Total Equities
STEPS:
1. Identification of the 'acquirer’
2. Determination of the 'acquisition date’
3.Determine the consideration given by
the acquirer.
4. Recognition and measurement of the
identifiable assets acquired, the liabilities
assumed and any non-controlling interest
(NCI, formerly called minority interest) in
the acquiree
5. Recognition and measurement of
goodwill or a gain from a bargain purchase
P 500,000
On January 1, 2023, ATLAS Company paid P500,000
for the net asset of LYLIA Corporation. How much is
the Goodwill as a result of the merger?
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COMPUTATION OF GOODWILL:
Consideration Paid
Pxx
Fair Value of the Net asset of Acquiree
Goodwill (Gain on Bargain Purchase)
(xx)
xx/(xx)
Consideration Paid
Fair Value of the Net Asset of the Acquiree
Goodwill
Fair Value of Assets – Fair Value of Liabilities
225,000 + 400,000 – 150,000
P500,000
( 475,000)
25,000
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Journalizing:
Current Assets
225,000
Plant Assets
400,000
Goodwill
25,000
Liabilities
Cash
150,000
500,000
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THANK YOU
FLORA@CONTOSO.COM
Prepared
by:
Rowel Dela Cruz
HTTP://WWW.CONTOSO.COM/
Marc Jomel Navarro