Module 1

A. Course Code – Title : C-APrE7 Accounting for Business Combinations

B. Module No – Title : MO1 – Introduction to Business Combinations
C. Time Frame : 1 week – 3 hours
D. Materials : Syllabus, Learning Plan, Curriculum Map, Writing
Materials, Accounting Standards and Books.

1. Overview
This learning material provides an introduction of PFRS 3 – Business Combinations. It
introduces the learner to the subject, guides the learner through the official text, develops the
learner’s understanding of the requirements through the use of examples and indicates significant
judgements that are required in accounting for business combinations. Furthermore, the module
includes questions that are designed to test the learner’s knowledge of the concepts pertaining to
business combinations.

2. Desired Learning Outcomes

At the end of the learning session, you should be able to:
a. Define a business combination.
b. Understand why do enterprises resort to business combinations
c. Differentiate a combination by asset acquisition from a stock acquisition.
d. Differentiate a statutory merger from a statutory consolidation.
e. Identify advantages and disadvantages of business combination.

3. Content/Discussion
 PFRS 3 – BUSINESS COMBINATION>>>>>>>>>>>>>> BUSINESS
ACQUISITION
A business combination is a transaction in which the acquirer obtains control of
another business (the acquiree).

JOLLIBEE FOODS CORPORATION MANG INASAL

ACQUIRER>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>ACQUIREE
(BUYER) (ACQUIRED
ENTITY)

ESSENTIAL REQUISITES/ELEMENTS:
1. BUSINESS>>>>>>>>>>>>>> DULY REGISTERED BUSINESS (SEC)
2. CONTROL>>>>>>>>>>>>>> power to govern financial and operating decisions
of the company.
1,000,000 OUTSTANDING SHARES
VOTING RIGHTS OVER THE INVESTEE
0%-----------------------------20%-------------------------------
50%----------------------------100%
LESS THAN 20% 20% - 50% MORE THAN 50%
PFRS 9 PAS 28 PFRS
3
FINANCIAL INSTRUMENTS INVESTMENT IN ASSOCIATE BUSINESS
COMBINATION
FVTPL OR FVTOCI EQUITY METHOD INV. IN SUBSIDIARY
“TRADING” “SIGNIFICANT INFLUENCE”
 Business combinations are a common way for companies to grow in size.
A business is an integrated set of activities and assets that can provide a return to
investors in the form of dividends, reduced costs, or other economic benefits. A business
typically has inputs, processes, and outputs. A development-stage entity may not yet have
outputs, in which case you can substitute other factors, such as having begun operations and
having plans to produce output, and having access to customers who can purchase the
outputs.
A business combination is not the formation of a joint venture, nor does it involve
the acquisition of a set of assets that do not constitute a business.

THE QUESTION IS: WHAT IS THE REASON WHY COMPANIES DO BUSINESS

COMBINATIONS?
The purpose of business to combination is to strengthen to company’s competitive position in the
global market.

LOCAL COMPANY VS. MULTINATIONAL COMPANY

BDO BANK OF AMERICA

The other reasons for combining two or more businesses are:

 a. To bail out a bankrupt or a financially distressed corporation which has a bright prospect
of recovering and which market, product or expertise will prove advantageous to the
acquiring enterprise. This was the reason behind the PAL acquisition by the group of
Lucio Tan.
LUCIO TAN GROUP>>>>>>>>>>>>>>>>>>>>>>PHILIPPINE
AIRLINES
b. To achieve profitable growth or expansion with the immediate availability of more
capital, resources and expertise. As Hopkins say “Grow or die”. This has been the major
objective of large firms and of some smaller firms, as well. It may grow slowly or it may
grow rapidly by acquiring existing entities.

FACEBOOK>>>>>>>>>>>>>>>>>>INSTAGRAM
1 BILLION US DOLLARS

c. Access to financial assistance and bigger loans are more possible with the acquiring
company showing a more expanded base of resources coming from the acquired
companies. This was the reason why Duterte crony Dennis Uy continues purchasing
businesses while securing loans from BDO.

DENNIS UY>>>>>>>>>>>>>> BANKS

WENDY’S CONTI’S BAKESHOP PHOENIX PETROLEUM
CHELSEA LOGISTICS (2GO) DITO TELECOM (THIRD TELCO)

d. Operating synergy may be derived from the merger such as: stronger and larger market
position, efficient deliver of service, efficient management of pooled resources.
SUPPLIER OF INGREDIENTS>>>>> POULTRY

WENCY’S FRIED CHICKEN

e. Cost savings is possible since start up costs such as costs of hiring and training workers
or employees can be minimized since existing businesses already have the required
expertise, regular suppliers, captured market, programmed productive facilities and
 existing distribution channel. Costs may also be reduced when operation is streamlined
and the number of workers and operating divisions are reduced.
MQC >>>>>>>>>>>>>>>>>>>>>> HAU

FORMS OF BUSINESS COMBINATION (ACCORDING TO STRUCTURE)

A business combination is characterized by acquisition of assets or acquisition of stocks.
I. Asset Acquisition -> ALWAYS 100% PURCHASED
a. Statutory Merger – one entity obtains the assets and liabilities of another entity
in exchange for cash or other assets, debt or stock or a combination of any of
these. The acquirer retains its identity while the acquired entity who transferred its
assets and liabilities dissolves its legal entity. The effect is that the acquiring firm
carries its own operation in a larger scale because it has absorbed the resources
and market of the acquired firm. It’s A + B = A or B.
Examples: BDO + E-PCIB = BDO and PNB + Allied Bank = PNB
b. Statutory Consolidation – two or more entities transfer their assets to a newly
formed entity. The combining entities are dissolved, leaving only the new entity
in existence. It’s A + B = C
Example: Daimler-Motoren-Gesellschaft (DMG) + Benz & Cie = Mercedez-
Benz (Daimler-Benz Corporation)

II. Stock Acquisition -> 100% OR LESS

One entity acquires the majority shares of stocks of another entity and in the
process achieve control over it. Although control is present, no dissolution takes
place as each entity remains in existence and continues operating as legal entities,
Each entity continues to maintain its records and prepares its financial statements.
It’s A + B = A and B
Examples: Facebook purchased Instagram for 1billion US Dollars in 2012 and On
March 24, 2000, PLDT completed its share-swap acquisition of Smart, making
Smart a 100%-owned PLDT subsidiary.
TYPES OF BUSINESS COMBINATIONS (according to purpose)
There are three types of combining or integrating businesses:
I. Horizontal Integration – combination of two or more enterprises belonging to the
same industry. Examples: Metro Bank acquired Solid Bank and Jollibee Foods
Corporation acquired Mang Inasal

JOLLIBEE “same industry” MANG INASAL

II. Vertical Integration – combination of two or more enterprises having dissimilar but
related stages of operation, production or distribution. Example: A Bulacan leather
maker and a Marikina shoemaker.
SUPPLIER>>> BULACAN LEATHER
MAKER

PRODUCER>>>> MARIKINA
SHOEMAKER
 III. Conglomeration – combination of two or more enterprises of unrelated stages of
operation, production or distribution.
Example: SM Investments Corporation acquiring different businesses.

Advantages of Business Combination

The advantages of a combination are controversial because the creation of monopoly and
elimination of competition both are considered the merits and demerits of the combination.

Anyway, following are the important merits of combination:

1. Increase in Capital - The volume of capital may be increased by the formation of a
combination. The members combine their resources to conduct large size business.
2. Elimination of Competition - By the formation of combination unnecessary competition
is eliminated and member firms earn monopoly profit.
3. Saving in Expenses - Administrative production and distribution expenses reduce due to
combination.
4. Controls over Production - The combination is very effective to control overproduction.
It helps to adjust the supply according to the demand.
5. Experts Services - A combination can acquire the services of experienced specialists. It
increases the efficiency of the combination.
 6. Research Work - A combination can spend money on research work which is very
important for the business. This research work reduces its cost and increases its profit.
7. Use of Modern Technology - A combination is capable to use the latest inventions and
new methods of production as a consequence of a transfer of technology. It will increase
profit.
8. Stability - A combination is a more stable form of business as compared to the
individuals’ units. The chances of dissolution are also less than others.
Disadvantages of Business Combination
Following are important disadvantages of combination:
1. Creation of Monopoly - It creates a monopoly that is harmful to the people in the long
run.
2. The concentration of Wealth - It concentrates the wealth in a few hands and divides
society into few classes, such as rich, middle and poor.
3. Reluctant to be Accepted - The combination is disliked by the people, it is not acceptable.
4. Changes in Friction - The chances of friction among directors and officers are bright.
They quarrel with, each other for their interest
5. No Personal Contact - It is not possible to maintain direct contact between employees,
creditors, and shareholders, due to this business may suffer a loss.
6. Costly Management - A combination hires costly management, which increases the cost
of production.
7. Over Capitalization - There is always a danger of over-capitalization in the combination.
It is harmful to the combination.
8. Misuse of Funds - The directors of the company enjoy unlimited power and misuse the
capital.
9. National Interest Ignored - Generally, the combinations ignore the national interest and
they involved in such activities that are against the national interest.

4. Progress Check
a. What is a business combination?
b. Why do enterprises resort to business combinations?
c. Differentiate a combination by asset acquisition from a stock acquisition.
d. Differentiate a statutory merger from a statutory consolidation.
e. Identify advantages and disadvantages of business combination.

5. Assignment
Enumerate and explain businesses which acquired other companies under the three forms and
three types of business combinations.

6. Evaluation
Case Study
FACTS: In 2019, Jollibee Foods Corp., the Philippines’ biggest restaurant company, spent $350
million in acquiring Coffee Bean & Tea Leaf which has nearly 1,200 stores across more than 25
countries. The brand's cafes serve brewed coffee and sweet blended drinks like chocolate cookie
lattes and frozen mango sunrise ice blended tea. Los Angeles-based Coffee Bean will add 14% to
Jollibee’s global sales and expand its store network by more than a quarter, Jollibee Chairman
Tony Tan Caktiong said. The coffee chain was founded in 1963 and opened its first coffee shop
in L.A.'s Brentwood neighborhood in 1968. It has grown to 1,189 stores, most of which are in
Asia, and last year it reported a net loss of $21 million on revenue of $313 million. According to
an April auditors report prepared by Ernst & Young, the coffee company had a senior credit
facility that would mature this month, “which raises substantial doubt about the company’s
ability to continue as a going concern.” The Coffee Bean acquisition is Jollibee’s largest to date,
according to Bloomberg data. It follows Jollibee’s $210.3-million takeover of American fast-
food chain Smashburger last year. Jollibee said the deal will boost contributions from
international businesses to 36% of its total sales and closer to its goal of becoming one of the top
five restaurant companies in the world in terms of market capitalization.

REQUIREMENTS: If you’re the external advisor of Jollibee Foods Corporation, what can you
say about the recent acquisition of JFC? Is it beneficial for the company? Why?

E. References

1. Millan, Z.V. (2019). Accounting for Business Combinations. Baguio City, Philippines:
Bandoline Enterprise
2. Dayag, A.J. (2019). Advanced Accounting Vol. 2. Manila, Philippines: Lajara Publishing
House