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BUSINESS COMBINATIONS

Statutory Merger and Consolidation


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

Statutory Consolidation- a new company is formed upon acquiring two or more


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

3. Based on the accounting method used


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