BUSINESS COMBINATION (IFRS 3)
DEFINITION
Business combination - A transaction or event in which a acquirer obtains control of one or more
business.
Business – an integrated set of activities and assets that is capable of being conducted and managed for
the purpose of providing return directly to investors or other owners, members or participants.
ACQUISITION OF CONTROL
Asset acquisition Stock acquisition
All of the company’s assets are acquired Controlling interest of another company’s
directly from the company. voting common stock is acquired.
Payment may be made in cash, exchanged Parent – acquiring company
property, or issuance of either debt or equity Subsidiary – acquired company
securities.
This is achieved legally either by statutory Both the parent and the subsidiary remain
consolidation or statutory merger. separate legal entities and maintain their own
financial records and statements.
ACCOUNTING FOR BUSINESS COMBINATION
An entity shall account for each business combination by applying the Acquisition Method.
1. Identifying the acquirer
2. Determining the acquisition date
3. Determine the consideration given by the acquirer.
4. Recognizing and measuring the identifiable assets acquired, the liabilities assumed and any non-
controlling interest, in the acquiree. Any resulting goodwill or a gain on bargain purchase should be
recognized.
IFRS for SMEs: All business combinations are accounted for by applying the Purchase Method.
1. Identify the acquirer;
2. Measure the cost of the business combination; and
3. Allocate the cost of the business combination to the identifiable assets acquired and liabilities and
contingent liabilities assumed at the acquisition date.
IDENTIFY THE ACQUIRER
Asset acquisition Stock acquisition
The company transferring cash or other assets The acquirer is the company transferring cash
and/or assumed liabilities is the acquiring or other assets for a controlling interest in the
company. voting common stock of the acquiree
It may be accomplished by exchanging voting
common stock.
The company issuing the voting common
stock is the acquirer.
In some cases, the acquiree may issue the
stock in the acquisition. This may occur when
a publicly traded company is acquired by a
privately traded company.
DETERMINE THE ACQUISITION DATE
The date on which the acquirer obtains control of the acquiree. The general rule is that the acquisition date is the
date on which the acquirer legally transfers the consideration, acquires the assets and assumes the liabilities of
the acquiree – the closing date.
DETERMINE THE CONSIDERATION GIVEN
The consideration transferred in a business combination is the sum of the following elements measured at the
acquisition date:
The fair value of the assets transferred by the acquirer.
The fair value of the liabilities incurred by the acquirer to former owners of the acquiree – at the
present value of the future payments, discounted at the acquiring entity’s normal borrowing cost.
The fair value of the equity interest issued by the acquirer – at market price at the date of exchange.
The fair value of the previously held interest.
The fair value of the contingent consideration.
Acquisition-related cost
All other costs associated with the acquisition must be expensed, including reimbursements to the acquiree for
bearing some of the acquisition costs. Examples are:
1. Directly attributable costs such as finder’s fee, advisory, legal, accounting, valuation and other
professional or consulting fees.
2. General administrative costs, including costs of maintaining an internal acquisition department.
3. Future losses and other costs to expected to be incurred.
Stock issuance costs
When the acquirer issued shares of stock for the net assets acquired, the following will be treated as deduction
from additional paid in capital (APIC) from previous share issuance:
1. SEC registration fees
2. Documentary stamp tax
3. Newspaper publication fees
In case APIC is reduced to ZERO, the remaining stock issuance costs is treated as a contra-account from
retained earnings presented as a separate line item. (Philippine Interpretation Committee).
Contingent consideration
An obligation of the acquirer to transfer additional assets or equity interest to the former owners of an acquiree
as part of the exchange for control of the acquiree. However, it may also give the acquirer the right to the return
of previously transferred consideration if specified conditions are met.
Measurement at acquisition date. Measured at its acquisition date fair value and classified as a liability or as
equity, ignore probability or measurement reliability criteria. A right to the return of previously transferred
consideration if specified conditions for a repayment are met is classified as an asset.
Subsequent measurement. If the amount of the contingent consideration changes:
Because of new information about acquisition date fair value of the amount of consideration that
existed at acquisition date (rather than because of a post-acquisition event), and that occur within the
measurement period (which may be a maximum of one year from acquisition date) then
retrospective restatement is required.
As a result of a post-acquisition event (such as meeting an earnings target, reaching a specified share
price or reaching a milestone on a research and development project):
Once the fair value of the contingent consideration at the acquisition date has been determined, any
subsequent adjustment which:
do not reflect fair value at the acquisition date, or
which occur outside the measurement period
are treated in accordance with other Standards – typically this means measurement of through profit
or loss.
Accounting for the change in consideration that are not measurement period adjustments depends on
whether the additional consideration is an equity instrument or cash, or other assets paid or owed.
If it is equity – original amount is not remeasured, and its subsequent settlement is accounted for
within equity
If the additional consideration is cash or other assets paid or owed, the changed amount is
recognized in profit or loss.
IFRS for SMEs: Contingent consideration is included as part of the acquisition cost if it is probable that the
amount will be paid, and its fair value can be measured reliably.
GOODWILL/(GAIN ON BARGAIN PURCHASE) COMPUTATION:
FULL IFRS 3
Consideration transferred:
Cash or other assets XX
Shares issued XX
Contingent consideration XX
Acquiree’s Previously held Interest XX
NCI @FV or Proportionate share XX
Total XX
Fair value of Identifiable Net Assets Acquired (XX)
Goodwill/(Gain on bargain purchase) XX/(XX)
IFRS for SMEs
Consideration transferred:
Cash or other assets XX
Shares issued XX
Contingent consideration if probable XX
Acquiree’s Previously held Interest XX
NCI @ Proportionate share XX
Total XX
Fair value of Identifiable Net Assets Acquired (XX)
Goodwill/(Gain on bargain purchase) XX/(XX)
RECOGNIZE AND MEASURE ANY NONCONTROLLING INTEREST IN THE ACQUIREE
Noncontrolling interest is the equity in a subsidiary not directly or indirectly attributable to its parent.
FAIR VALUE PROPORTIONATE SHARE OF THE VALUE OF
THE IDENTIFIABLE ASSETS AND
LIABILITIES
Will result in recognizing goodwill Will result in recognizing goodwill associated
constituting all of the goodwill of the acquired with only the percentage of interest acquired.
business (with the NCI of the total goodwill
assigned to the NCI)
Fair value of the NCI is determined based on
market prices for equity shares not held by the
acquirer, or, if not available, by using
valuation technique.
It is likely that there will be a difference in the
fair value per share of the NCI and the fair
value per share of the CI (controlling
interest). The difference is likely to be the
inclusion of a control premium in the per-
share fair value of the CI or similarly, what
has been referred to as a “NCI discount”
applicable to the NCI.
Problem 1 MERGER
Entity A has decided to enter into a business combination with Entity B and Entity C on July 1, 2024. The
following information was gathered from the books of the entities:
Entity A Entity B Entity C
Current assets 8,250,000 2,340,000 1,560,000
Noncurrent assets 18,750,000 15,300,000 10,200,000
Total assets 27,000,000 17,640,000 11,760,000
Liabilities 1,950,000 1,260,000 840,000
Ordinary shares, P100 16,491,000 10,681,200 7,120,800
par
Share premium 1,059,000 1,018,800 679,200
Retained earnings 7,500,000 4,680,000 3,120,000
Total SHE 27,000,000 17,640,000 11,760,000
Entity A will issue 135,000 of its ordinary shares and will issue bonds with face amount P1,000,000 in exchange
for the net assets of Entity B On the other hand, Entity A will 67,200 of its ordinary shares and pay P400,000
cash in exchange for the net assets of Entity C. The fair value of Entity A’s shares is P150, and the bonds is
traded at 160. The bonds are classified as financial liability at fair value through profit or loss. In addition, the
following adjustments should be made to the current assets of Entity B and Entity C which have a fair value of
P2,700,000 and P1,380,000, respectively. The noncurrent assets have a fair value of P12,900,000 and
P11,850,000 for Entity B and Entity C, respectively. Entity A paid the following out-of-pocket expenses in
relation with the business combination: ∙ Legal fees for the contract of business combination P80,000 ∙ Audit
fee for SEC registration of share issue 90,000 ∙ Printing cost of share certificates 50,000 ∙ Broker’s fee 40,000∙
Accountant’s fee for pre-acquisition audit 100,000∙ Documentary stamp tax on the new shares 20,000∙ Other
direct cost of acquisition 70,000∙ General and administrative expenses allocated 90,000∙ Bond issue cost
125,000.
1. At the date of acquisition, what is the goodwill resulting from the merger?
2. At the date of acquisition, what is the gain from bargain purchase resulting from the merger?
3. At the date of acquisition, what are the total liabilities resulting from the merger?
4. At the date of acquisition, what are the total assets resulting from the merger?
5. At the date of acquisition, what is the total shareholders' equity resulting from the merger?
Problem 2
On September 2, 2024, Entity A gained control over Entity B and the following were ascertained at the date of
acquisition:
Entity B's shareholders' equity at book value (including a goodwill of P50,000 and excluding the contingent
liability) P2,487,500; Excess of fair value over the book value of assets of Entity B P536,250; Contingent
liability of Entity B can be measured reliably at fair value P100,000; Entity A's consideration given ( including a
control premium of P68,750) P2,053,125.
1. Assuming Entity A acquired 65% of the outstanding shares of Entity B and the non-controlling interest is
measured at fair value in the amount of P1,150,000. What is the goodwill or (gain on acquisition) to be reported
in the consolidated statement of financial position at the date of acquisition?
2. Assuming Entity A acquired 70% of the outstanding shares of Entity B and the non-controlling interest is
measured at fair value. What is the goodwill or (gain on acquisition) to be reported in the consolidated statement
of financial position at the date of acquisition?
3. Assuming Entity A acquired 90% of the outstanding shares of Entity B and the non-controlling interest is
measured at the minimum. What is the goodwill or (gain on acquisition) to be reported in the consolidated
statement of financial position at the date of acquisition?
4. Assume the information and answer in No. 1 and the total assets at book value of Entity A and B were
P15,000,000 and P5,000,000 respectively, what are the total consolidated assets?
5. Assume the information and answer in No. 3 and the Total stockholders' equity at book value of Entity A was
P8,500,000, what is the consolidated stockholders' equity?
Problem 3 STEP ACQUISITION
Entity A’s stockholders’ equity as of December 31, 2023 was P7,308,000. On January 1, 2024 Entity A acquired
30% of Entity B's ordinary shares for P540,000 cash and issued its own shares with a fair value of P1,350,000.
Entity A acquired significant influence over Entity B as a result of the stock acquisition. After four months,
Entity A purchased another 60% of Entity B’s ordinary shares for a cash payment of P3,942,000. On this date,
Entity B reported identifiable assets with a carrying value of P6,480,000 and fair value of P11,520,000 and it
has liabilities with a book value and a fair value of P3,240,000. At the acquisition date, net loss reported by
Entity B for the four-month ended amounted to P900,000. The fair value of the non-controlling interest is
P1,296,000. Non-controlling interest is valued using the proportionate basis. Entity A also paid the following:
P90,000 for legal fees, P72,000 for finder’s fee, P77,400 for accountant’s fee, P64,800 for audit fee for SEC
registration of stock issued and P19,800 for printing of stock certificates.
Immediately after the business combination, how much is the consolidated stockholders’ equity?
Problem 4 CONTINGENT CONSIDERATION - LIABILITY
Entity A Co. merged into Entity B on August 1, 2024. In exchange for the net assets at fair market value of
Entity B amounting to P2,785,800, Entity A issued 68,000 ordinary shares at P36 par value, with a market price
of P41 per share. Relevant data on ordinary shareholders’ equity immediately before the combination show:
Entity A Entity B
Ordinary shares 8,790,000 2,030,000
Share premium 3,834,000 782,000
Retained earnings (1,516,000) 495,000
Out of pocket costs of the combination were as follows:
∙ Legal fees for the contract of business combination 174,700 ∙ Audit fee for SEC registration of stock issue
198,400 ∙ Printing costs of stock certificates 144,900 ∙ Broker’s fee 135,000 ∙ Accountant’s fee for pre-
acquisition audit 161,000∙ Other direct cost of acquisition 90,400∙ General and allocated expenses 115,300∙
Listing fees for new shares 72,000.
a. Included as part of the acquisition agreement is the additional cash consideration of P163,000 in the event
Entity A’s share price will reach P32 per share by year-end.
b. At acquisition date, there was only a low probability of reaching the target share price, so the fair value of the
additional consideration was determined at P74,000.
c. At acquisition date, the share price was P27.50 and increased by P4.80 by December 31, 2024.
1. On August 1, 2024, what is the result of the business combination?
2. On December 31, 2024, to record the change in the additional cash consideration, it involves a
A. Debit to goodwill in the amount of 89,000
B. Debit to expense in the amount of 89,000
C. Debit to gain on bargain purchase in the amount of 89,000
D. No entry
3. What is the amount of expenses to be recognized in the statement of comprehensive income for the year
ended December 31, 2024?
Problem 5 CONTINGENT CONSIDERATION - EQUITY
On January 1, 2024, Entity A acquired all the assets and liabilities of Entity B by issuing 50,000 shares. On this
date the fair value of Entity A’s shares is P50 per share and its par value is P10 per share. On January 1, 2024,
the book value of Entity B’s total assets is P2,500,000 and its fair value is P3,000,000 while its total liabilities
book value and fair value are P1,200,000 and P1,000,000 respectively. Entity A and Entity B agreed that Entity
A shall issue additional 2,000 shares to the former owners of Entity B if the market price per share of Entity A's
shares increases to P55 per share as of December 31, 2024. On the date of acquisition, the contingent
consideration that was probable and reasonably estimated amounted to P100,000. On December 31, 2024, the
actual market price of Entity A’s share was P60. The contingent consideration is settled on March 1, 2025.
1. Which of the following is incorrect?
A. Entity A will credit ordinary shares amounting to P500,000 on the date of acquisition.
B. The goodwill from the business combination is P600,000.
C. On March 1, 2025, Entity A will credit ordinary shares amounting to P100,000.
D. On March 1, 2025, Entity A will credit share premium amounting to P80,000.
2. Assuming the actual market price of Entity A's share on December 31, 2024, is P52, which of the following
statements is incorrect?
A. The goodwill from the business combination is P600,000.
B. The share premium to be recorded on the January 1, 2024 arising from the issued shares from acquiring
Entity B is P2,000,000
C. The ordinary share to be credited on January 1, 2024, is P500,000.
D. Entity A will credit gain on extinguishment of contingent consideration on March 1, 2025 amounting to
P100,000.
