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PART I

(Date of Acquisition)

Papio, Alieza P.

A3A

BUSINESS COMBINATIONS

Statutory Merger and Consolidation

PART I

(Date of Acquisition)

Introduction

Nowadays, business entities are in to business combinations. One major reason is perhaps, growth.

Business organizations these days aim for continuous development making them consider growth as very

important. The following is a short and easy-to-understand discussion about Business Combinations-

Statutory Merger and Consolidation.

Definition of Terms:

Assets- resources own and controlled by a business entity.

Liabilities- debts or obligations that a business entity must pay.

Net Assets- difference between Assets and Liabilities.

Acquirer- the one who buys another, the acquiring company, the parent company.

Acquiree- the one who is bought by another, the acquired company, the subsidiary company.

Fair Value- the price in the market which is the seller is willing to sell and the buyer is willing to

buy.

Goodwill- if the fair value of the consideration is greater than the fair value of the bought company.

Gain- if the fair value of the consideration is less than the fair value of the bought company.

Reasons for Business Combinations

Cost advantage- for expansions, to construct new buildings is more expensive than to combine with

other firms.

Lower risk- the buying of existing product lines and markets has lower risks than developing new

ones.

Avoidance of takeovers- companies combine to avoid being dissolved and acquired by other

companies.

Acquisition of Intangible Assets- to bring together both tangible and intangible resources.

Other reasons- for business tax advantage, for personal income or for personal reasons.

Types of Business Combination

1. Based on the structure of combination

a. Horizontal Integration- companies with the same industry combine, usually, they are

previous competitors.

b. Vertical Integration- companies with the same industry but different level combine,

usually, they are company-supplier-customer.

c. Conglomerate Combination- companies with the different industry combine, usually to

enter new markets.

d. Circular Combination- involves some variation, simpler than conglomerate.

Possible Structures:

1 business becomes a subsidiary of another

2 entities legally become 1 entity

1 entity transfers its net assets to another

2 or more entities transfer their net assets or their ownership to a 1 new entity

group of former owners of 1 entity gain control of combined entity

2. Based on the method used to do the combination

a. Acquisition of Assets- the books of the acquired company (ACQUIREE) are closed and all

its resources and obligations are transferred to the books of the acquiring company

(ACQUIRER)

Statutory Merger- the acquiring company survives and the acquired stops to exist

on its own. For example, A is the acquiring company and B is the acquired

company, so:

A Company + B Company = A Company

companies and the acquired companies stop to exist. For example, C is formed to

combine A and B.

A Company + B Company = C Company

b. Stock Acquisition- the books of the acquired company (ACQUIREE) and the acquiring

company (ACQUIRER) remain intact and consolidated (joined) financial statements are

prepared periodically.

Financial Statements of X Company +

Financial Statements of Y Company =

Consolidated Financial Statements of X and Y

PFRS 3 is the accounting standard for business combinations issued by the International

Accounting Standards Board.

a. Acquisition Method- it is applied on the acquisition date (the date the acquirer obtains

control of the acquiree). This is mainly on the point of view of the acquirer, the acquiring

company. Under this method, all assets and liabilities are identified at their fair values.

PART I

(Date of Acquisition)

5 step process:

1. Identify the acquirer.

The acquirer is the one who bought another company. It is the buying company or simply

the parent company.

2. Determine the date of acquisition.

This is the date the acquirer obtains control of the acquired company. This date is when

the parent company acquired 50%+1 of the bought company.

3. Calculate the fair value of the consideration to be given or simply the payment.

It is measured at the fair value at the acquisition date.

Considerations are the ff:

Cash or other monetary assets

Non-monetary assets- property, equipment and etc.

Equity Instruments- shares of stock

Contingent Considerations- additional payments if some future events and

conditions are met.

NOTE:

Acquisition related costs (costs to acquire net assets) are excluded in calculating

the payment and therefore, those are expenses.

Share issuance costs (costs to acquire shares)

4. Calculate the fair value of the identifiable assets and liabilities of the company to be bought and

compute the net assets by using the formula: Net Assets= Assets-Liabilities

If 100 % of the company is bought by another, calculate the whole.

If less than 100% of the company is bought by another, the non-controlling interest or the

remaining unbought portion will also have to be computed.

5. Get the difference between 3 and 4 and recognize it as either goodwill (if the consideration is greater

than the bought portion) or gain (if the consideration is less than the bought portion).

EXAMPLE 1: The Parent Company buys 100%

On August 01, 20x1, A Company bought all the net assets of B Company for P100,000. As of this date, the

fair value and the book value of the assets of B is P100,000 and P90,000 respectively and the fair value and

the book value of its liabilities is P 40,000 and P30,000 respectively.

Requirement: Calculate the goodwill or gain.

1. Identify the acquirer.

A Company is the one who bought B Company, so, A is the acquirer.

2. Determine the date of acquisition.

August 01, 20x1 is the date A acquired 50%+1 of B.

3. Calculate the fair value of the consideration to be given or simply the payment..

The payment is P100,000.

4. Calculate the fair value of the identifiable assets and liabilities of the company to be bought and

compute the net assets by using the formula: Net Assets= Assets-Liabilities

Since 100% is bought, then calculate the whole.

Net assets= P100,000-40,0000=P60,000

5. Get the difference between 3 and 4 and recognize it as either goodwill (if the consideration is

greater than the bought portion) or gain (if the consideration is less than the bought portion).

FV of Consideration P100,000

Less:FV of Net Assets of the Bought Company P 60,000

Goodwill P 40,000

The answer is a goodwill of P40,000 since the fair value of the consideration is greater

than the bought company.

EXAMPLE 2: The Parent Company buys less than 100% resulting to a Goodwill, FV of NCI is

given, Expenses are paid

On January 01, 20x2, A Company bought 80% the net assets of B Company by paying P300,000 cash. As

of this date, the fair value and the book value both A and B are the following:

A Company B Company

Fair Value Book Value Fair Value Book Value

Assets P520,000 P500,000 P400,000 P350,000

Liabilities 120,000 100,000 110,000 100,000

TOTAL P640,000 P600,000 P510,000 P450,000

Ordinary Shares P500,000 P450,000 P460,000 P400,000

Retained Earnings 140,000 150,000 50,000 50,000

TOTAL P640,000 P600,000 P510,000 P450,000

The fair value of the Non-Controlling Interest is P76,000. A Company paid direct and indirect acquisition

related expenses of P50,000.

Requirement: Calculate the following:

Goodwill or gain.

Total Assets

Total Liabilities

Total Shareholder’s Equity

Total Retained Earning

Since less than 100% of the company is bought, the non-controlling interest or the remaining unbought

portion will also have to be considered. To answer the above problem, a simple formula table can be used.

TOTAL 100% A Company 80% B Company 20%

(acquirer) (acquiree)

FV of a.(b + c) b. Total Consideration c.FV of Non-controlling

Consideration Interest

If given:

Higher of given and

d*percentage of acquiree

If not given:

Higher of

b÷percentage of acquirer

*percentage of acquiree

and

d*percentage of acquiree

Less: FV of Net d.FV of Net Assets of e.if goodwill: f. if goodwill:

Assets of the the Bought Company d*the percentage d*the percentage

Bought Company if gain: if gain:

(d-f) copy c

Goodwill/Gain (a-d) (b-e) (c-f)

Applying the table for the above problem answers will be:

TOTAL 100% A Company 80% B Company 20%

(acquirer) (acquiree)

FV of

a.P376,000 b.P300,000 c.P76,000

Consideration

Less: FV of Net

Assets of the d.P290,000 e.P232,000 f. 58,000

Bought Company

Goodwill/Gain P86,000 P68,000 P18,000

a. P300,000+76,000=P376,000

b. P300,000 given in the problem

c. P76,000 is higher of given and d*percentage of acquiree

P76,000 > P58,000 (290,000*20%)

d. B Company FV of Assets-Liabbilities

P400,000-110,000=P290,000

e. P290,000*80%=P232,000

f. P290,000*20%=P58,000

Goodwill= P86,000 since the fair value of the consideration is greater than the bought

company.

Total Assets:

Book Value of Acquirer P500,000

Fair Value of Acquiree 400,000

Goodwill 86,000

Less: Paid Expenses 50,000

TOTAL: P936,000

Total Liabilities:

Book Value of Acquirer P100,000

Fair Value of Acquiree 110,000

Contingent Consideration -

Less: Incurred Expenses -

TOTAL: P210,000

NOTE: For the expenses, if the word paid or amounted is used in the problem, it is paid by cash

thus subtracting it to the total assets since cash is an asset. If the word incurred is used in the

problem, it will result to an account payable thus adding it to the total liabilities since account

payable is a liability.

Total Shareholder’s Equity:

Total Assets P936,000

Total Liabilities 210,000

TOTAL: P726,000

Total Retained Earnings:

Acquirer’s RE Beg. Balance BV P150,000

Gain -

Less: Excess Charge to Share Premium -

Less: Expenses 50,000

TOTAL: P100,000

EXAMPLE 3: The Parent Company buys less than 100% resulting to a Gain, FV of NCI is not

given, Expenses are incurred, with Contingent Consideration

On January 01, 20x2, A Company bought 80% the net assets of B Company by paying P200,000 cash. As

of this date, the fair value and the book value both A and B are the following:

A Company B Company

Fair Value Book Value Fair Value Book Value

Assets P520,000 P500,000 P400,000 P350,000

Liabilities 120,000 100,000 110,000 100,000

TOTAL P640,000 P600,000 P510,000 P450,000

Ordinary Shares P500,000 P450,000 P460,000 P400,000

Retained Earnings 140,000 150,000 50,000 50,000

TOTAL P640,000 P600,000 P510,000 P450,000

A Company agreed to pay an additional P20,000 on January 01, 20x4 if the average income for the 2-year

period of 20x2 and 20x3 exceeds P900,000. A also incurred direct and indirect acquisition related expenses

of P50,000.

Requirement: Calculate the following:

Goodwill or gain.

Total Assets

Total Liabilities

Total Shareholder’s Equity

Total Retained Earning

Since less than 100% of the company is bought, the non-controlling interest or the remaining unbought

portion will also have to be considered. The FV of the non-controlling interest is not given, so we have to

compute it. To answer the above problem, a simple formula table can be used.

Applying the table for the above problem answers will be:

TOTAL 100% A Company 80% B Company 20%

(acquirer) (acquiree)

FV of

a.P278,000 b.P220,000 c.P58,000

Consideration

Less: FV of Net

Assets of the d.P290,000 e.P232,000 f. 58,000

Bought Company

Goodwill/Gain (P12,000) P68,000 P18,000

a. P220,000+58,000=P258,000

b. P200,000+20,000=P220,000 the P20,000 contingent consideration is included in the total consideration

c. P58,000 is higher of b÷percentage of acquirer *percentage of acquiree and d*percentage of acquiree

P58,000 (290,000*20%) > P50,000 (200,000÷80%*20%)

d. B Company FV of Assets-Liabbilities

a. P400,000-110,000=P290,000

e. P290,000*80%=P232,000

f. P290,000*20%=P58,000

Gain= P12,000 since the fair value of the consideration is less than the bought company.

Total Assets:

Book Value of Acquirer P500,000

Fair Value of Acquiree 400,000

Goodwill -

Less: Paid Expenses -

TOTAL: P900,000

Total Liabilities:

Book Value of Acquirer P100,000

Fair Value of Acquiree 110,000

Contingent Consideration 20,000

Less: Incurred Expenses 50,000

TOTAL: P280,000

NOTE:

Total Shareholder’s Equity:

Total Assets P900,000

Total Liabilities 280,000

TOTAL: P620,000

Total Retained Earnings:

Acquirer’s RE Beg. Balance BV P150,000

Gain 12,000

Less: Excess Charge to Share Premium -

Less: Expenses 50,000

TOTAL: P212,000

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