IFRS 3 BUSINESS COMBINATIONS

INTRODUCTION:
Prior to issuance and adoption of IFRS 3, Business Combinations, two methods were
used to account for business combinations namely,
Purchase/Acquisition method
All assets and liabilities of the acquired company are recorded at fair
values.
Pooling of interests method
All assets and liabilities of the acquired company are recorded at their book
values.
IFRS 3 eliminated the use of the pooling of interests method.
MERGER
Purchase of net assets.
ACQUIRER acquires ACQUIREE. ACQUIREE ceased to exist anymore after the
purchase.
Only one company survives after the purchase, and that is the ACQUIRER.
Acquirer
Co.
Book value of ACQUIREEs net assets
Add (Deduct) Adjustments:
Assets
Liabilities
Assets
Liabilities
Fair value of ACQUIREEs net assets (FVNA)
Less: COST OF INVESTMENT (COI)
Price paid (may be in the form of cash or
shares)
Contingent consideration (liability)
Gain on bargain purchase (Goodwill)

Acquiree
Co.
xx
xx
xx
(xx
)
(xx
)

xx/
(xx)
xx

xx
xx

(xx)
xx/
(xx)

1. FVNA = COI No gain on bargain purchase nor goodwill

2. FVNA > COI Gain on bargain purchase
3. FVNA < COI Goodwill
MEASUREMENT PERIOD: 1 year from date of acquisition.
ACQUISITION EXPENSES: Direct or indirect charged to expense.
STOCK ISSUANCE COST (Only in case the consideration paid is in the form of
shares): Exhaust first the balance of APIC arising from business combination. Any
excess is charged to expense.

STATEMENT OF FINANCIAL POSITION IMMEDIATELY AFTER BUSINESS COMBINATION

Acquirers
Acquirees
Assets
Add: Goodwill
Less: Cash paid to the acquiree co.
Cash paid for expenses in connection with the
BC
TOTAL ASSETS

@ Book
values

Liabilities
Add: Contingent consideration
TOTAL LIABILITIES

@ Book
values

SHAREHOLDERS EQUITY
TOTAL CONTRIBUTED CAPITAL:
Add: Shares issued to the acquiree co. (@fair value)
Less: Share issuance cost (up to the extent of APIC arising from BC)
TOTAL CONTRIBUTED CAPITAL:

@ Fair values

TOTA
L
xx
xx
(xx)
(xx)
XX

@ Fair values

xx
xx
xx

@Book value

xx
xx
(xx)
xx

RETAINED EARNINGS:
Add: Gain on bargain purchase
Less: Acquisition expenses
Less: Excess stock issuance cost
TOTAL SHAREHOLDERS EQUITY

xx
xx
(xx)
(xx)
xx

TOTAL LIABILITIES AND SHAREHOLDERS EQUITY

XX

IFRS 10 CONSOLIDATED FINANCIAL STATEMENTS DATE OF ACQUISITION

STOCK ACQUISITION
The acquiring company deals only with existing stockholders of the acquired
company, not the company itself.
Controlling interest is achieved by acquiring ownership of 51% or more of the
subsidiarys voting stock (common stock). One cannot acquire controlling interest by
acquiring 51% or more of the subsidiarys preference shares since these shares have
no voting rights.
PARENT SUBSIDIARY relationship.
Parent The company owning the controlling interest
Subsidiary The controlled company.
EXAMPLE: P Co. acquired 60% of the S Co.s voting stocks.

60%

P Co.

40%

Noncontrolling
interest

S Co.

S Co. is owned by stockholder P Co. and minority interest stockholders.

JOURNAL ENTRIES (in parents book only):
Investment in
x
Subsidiary
x
Cash
x
x
Acquisition expenses
Cash

x
x

x
x

Investment in Subsidiary is a non-current asset (long-term investment)

Even if the parent co. acquired control over the subsidiary co., the subsidiary co.
retains its legal identity and continues to prepare its own F/S.
Separate F/S As a legal entity
Consolidated F/S As an economic entity

100% owned subsidiary

The consolidated SFP of a parent and its 100% owned subsidiary after acquisition
look exactly the same with that if the net assets been acquired.
On date of acquisition, a consolidated SFP is the only statement that is prepared.
Acquirer
Co.

Acquiree
Co.

Under stock acquisition, the acquired co. remains as a separate legal entity with its
own F/S unlike in acquisition of net assets.
Under stock acquisition, NCI may (less than 100%) or may not exist (100%) but in
acquisition of net assets, NCI will never exist.
P Co. acquired 60% of the S Co.s voting stocks.
Book value of ACQUIREEs net assets
Add (Deduct) Adjustments:
Assets
xx
Liabilities
xx
Assets
(xx
Liabilities
)
(xx
)
Fair value of ACQUIREEs net assets (FVNA)
Less: CONSIDERATION

xx

xx/
(xx)
xx

(60%) Paid by P Co.

(40%) NCI
Gain on bargain purchase (Goodwill)

xx
xx

NCI is measured at fair value or proportionate share of subsidiarys FV net assets.

Usually higher if fair value method is used.
If proportionate share method is used, the higher rule is not followed.
Goodwill or gain on bargain purchase is not recorded either in the books of the parent
or subsidiary.
They appear only in the consolidated SFP.

Proportionate share in FVNA of Subsidiary

Co.
Allocated Goodwill

(xx)
xx/
(xx)

Parent Co.
xx
(xx)

NCI
xx
(xx)

xx

xx

FULL GOODWILL METHOD: NCI has share in the goodwill.

PARTIAL GOODWILL METHOD: NCI has no share in the goodwill.
In no case NCI has share in the bargain purchase gain.

WORKING PAPER ELIMINATION ENTRIES:

Ordinary shares Subsidiary
xx
SP OS Subsidiary
xx
Investment in Subsidiary
(%)
NCI (%)
Eliminate SHE of Subsidiary
Assets
Liabilities
Investment in Subsidiary
(%)
NCI (%)
FMV adjustment

xx

Goodwill
Investment in Subsidiary
NCI
Recognition of GW/Gain on
BP

xx

Investment in Subsidiary
Gain on BP

xx
xx

xx
xx
xx

Or
xx

xx
xx

xx

NEXT: CONSOLIDATED F/S SUBSEQUENT TO DATE OF ACQUISITION

LAST: ACCOUNTING FOR INTERCOMPANY SALE OF INVENTORIES AND FIXED ASSETS