UM Tagum College

Arellano Street, Tagum City, 8100 Philippines

Business Combination; Consolidated & Separate FS PROF. JON D. INOCENTES,CPA

LECTURE January 31, 2018

REVIEW NOTES – BUSINESS COMBINATION

1.0 Business Combination
Transaction or other events, in which, an acquirer obtains control of one or more businesses. Transaction
sometimes referred to as ‘true mergers’ or ‘mergers of equals’ are also business combinations as that term is
used in this IFRS. [IFRS 3(2008) (Appendix A)]
2.0 Acquisition Method
An entity shall account for each business combination by applying the Acquisition Method [IFRS 3 Paragraph
4]
Step 1 Determining whether the transaction or event is a business combination
Step 2 Identify the acquirer*
Step 3 Determining the acquisition date*
Step 4 Recognizing and measuring the identifiable assets acquired, the liabilities assumed and any non-
controlling interest in the acquiree*
Step 5 Measuring consideration and determining what is part of the business combination
Step 6 Recognizing and measuring goodwill or a gain from a bargain purchase
Step 7 Subsequent measurement and accounting
3.0 Identifying the Acquirer
Acquirer – the entity that obtains control of another entity
3.1 Existence of Control
3.1.1 An investor controls an investee when it is exposed, or has rights, to variable returns from its
involvement with the investee and has the ability to affect those returns through its power
over the investee. [IFRS 10 (amended) Paragraph 6]
3.1.2 Control is the power to govern the financial and operating policies of an entity so as to
obtain benefits from its activities. [IAS 27(2008).4]
3.2 Presumption of Control
3.2.1 Control is generally presumed to exist when the parent owns, directly or indirectly through
subsidiaries, more than half of the voting power of an entity. [see also IAS 27 (2008) Par 13]
[note: IAS 27 (2008) was superseded by IAS 27 (2011), IFRS 10, and IFRS 12]
3.3 Special Case: Combinations effected by creating a new entity [IFRS 3 Appendix B Paragraph 18]
3.3.1 If new entity issues its equity instrument in exchange for equity instrument of the combining
entities, then one of the combining entities must be identified as the acquirer in accordance
with the guidance in IFRS 3 and IAS 27.
3.3.2 If the new entity transfers cash (or other assets) in exchange for equity instruments of the
combining entities, then the NEW entity may be identified as the acquirer.
4.0 Acquisition Date
4.1 The date in which the acquirer obtains control over the acquiree.
4.2 Generally the date on which the acquirer legally transfers the consideration, acquires the assets and
assumes the liabilities of the acquiree—the closing date. [IFRS 3 Paragraph 8-9]
5.0 Consideration Transferred to effect Combination [Purchase Price]
The consideration transferred in a business combination shall be measured at fair value, which shall be
calculated as the sum of the acquisition-date fair values of the assets transferred by the acquirer, the
liabilities incurred by the acquirer to former owners of the acquiree and the equity interests issued by the
acquirer.
5.1 Contingent Consideration
The consideration the acquirer transfers in exchange for the acquiree includes any asset or liability
resulting from a contingent consideration arrangement (see paragraph 37). The acquirer shall
recognize the acquisition-date fair value of contingent consideration as part of the consideration
transferred in exchange for the acquiree. [IFRS 3 Paragraph 39]
5.2 Measurement Period [Refer to IFRS 3 Paragraph 45]
- The period within which the acquirer shall finalize the Acquisition-date fair values of the assets
acquired, liabilities assumed, and consideration transferred.
- Not to exceed one year from acquisition date
 - Adjustments relating to the acquisition date fair values brought by information determined
during the measurement period shall be adjusted to goodwill or gain recognized at acquisition
date.

5.3 Acquisition-Related Costs

Accounted for as expenses; however, cost to issue debt or equity securities shall be recognized in
accordance with IAS 32 and IFRS 9.
The transaction costs of an equity transaction are accounted for as a deduction from equity (net of
any related income tax benefit) to the extent they are incremental costs directly attributable to the
equity transaction that otherwise would have been avoided. [IAS 32 Paragraph 37]
6.0 Net Assets Acquired
As of the acquisition date, the acquirer shall recognize, separately from goodwill, the identifiable assets
acquired, the liabilities assumed and any non-controlling interest in the acquiree. [IFRS 3 Paragraph 10]
The acquirer shall measure the identifiably assets acquired and the liabilities assumed at their acquisition-
date fair values. [IFRS 3 Paragraph 18]
Liabilities assumed shall include Contingent Liabilities. [IFRS 3 Paragraph 23]
7.0 Non-Controlling Interest (NCI)
7.1 For each business combination, the acquirer shall measure at the acquisition date components of
non-controlling interests in the acquiree that are present ownership interests and entitle their
holders to a proportionate share of the entity’s net assets in the event of liquidation at either:
a. Fair value; or,
b. The present ownership instruments’ proportionate share in the recognized amounts of the
acquiree’s identifiable net assets.
All other components of non-controlling interests shall be measured at their acquisition-date fair
values, unless another measurement basis is required by IFRSs. [IFRS 3 Paragraph 18-19]
7.2 Fair Value of NCI
Basis:
a. Quoted price in an active market for the equity shares
b. Other valuation techniques (if no active market for the equity shares) [IFRS 3 par. 19]
The fair values of the acquirer’s interest in the acquiree and the non-controlling interest on a per-
share basis might differ primarily due to the inclusion of a control premium in the per-share fair
value of the acquirer’s interest in the acquiree.
8.0 Goodwill and Gain Recognition and Measurement
Goodwill or Gain shall be recognized as the difference of
a. The aggregate of:
i. The consideration transferred measured in accordance with this IFRS, which generally requires
acquisition-date fair value (see paragraph 37);
ii. The amount of any non-controlling interest in the acquiree measured in accordance with this
IFRS; and,
iii. In a business combination achieved in stages (see paragraphs 41 and 42), the acquisition-date
fair value of the acquirer’s previously held equity interest in the acquiree.
b. The net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed
measured in accordance with this IFRS. [IFRS 3 Paragraph 32]
Therefore,
Consideration Transferred XX
Non-Controlling Interest XX
Fair Value of Previously Held Equity Interest XX
Net Assets – Acquiree (XX)
Goodwill/(Bargain Purchase Gain) XX
9.0 Subsequent Measurement
9.1 Contingent Consideration
The acquirer shall account for changes in the fair value of contingent consideration that are not
measurement adjustment as follows:
a. Contingent consideration classified as equity shall not be re-measured and its subsequent
settlement shall be accounted for within equity.
b. Contingent consideration classified as an asset or a liability that:
i. Is a financial instrument and is within the scope of IFRS 9 or IAS 39 shall be measured at
fair value, with any resulting gain or loss recognized either in profit or loss or in other
comprehensive income in accordance with IFRS 9.
 ii. Is not within the scope of IFRS shall be accounted for in accordance with IAS 37 or other
IFRSs as appropriate. [IFRS 3 Paragraph 58]

9.2 Contingent Liabilities

Higher of:
a. The amount that would be recognized in accordance with IAS 37 (Provisions, Contingent
Liabilities, and Contingent Assets); and,
b. The amount initially recognized less, if appropriate, cumulative amortization recognized in
accordance with IAS 18 (revenue)
9.3 Non-Controlling Interest
Subsequently adjusted; by the non-controlling interests’ share of changes in equity, from the date of
the combination. [IAS 27 (2008).18(c)]
9.4 Reacquired Rights
A reacquired right recognized as an intangible asset shall be amortized over the remaining
contractual period of the contract in which the right was granted
9.5 Indemnification Assets
At the end of each subsequent reporting period, the acquirer shall measure an indemnification asset
that was recognized at the acquisition date on the same basis as the indemnified liability or asset
STATUTORY MERGER
PROBLEM 1
On January 1, 2011, David Corporation paid P800,000 and issued 18,000 shares of P50 par ordinary shares with
market value of P1,320,000 for all the net assets of Goliath Corporation. In addition, David paid P12,000 for
registering and issuing the 18,000 shares and P20,000 for indirect costs of the business combination. Summary
balance sheet information for the companies immediately before the merger is as follows:

David Corporation Goliath Corporation

Book Value Fair Value
Cash P1,400,000 P160,000 P160,000
Inventories 480,000 320,000 400,000
Other current assets 120,000 80,000 80,000
Plant assets - net 1,040,000 720,000 1,120,000
Current liabilities 640,000 120,000 120,000
Other liabilities 320,000 200,000 160,000
Ordinary shares, P50 par 1,680,000 800,000
Retained earnings 400,000 160,000
1. The total assets immediately after the merger is
a. P 4,488,000 b. P 4,608,000 c. P 4,008,000 d. P 5,440,000
2. The total stockholders’ equity after the merger is
a. P 3,368,000 b P 4,210,000 c. P 5,410,000 d. P 3,460,000
PROBLEM 2
Bruno Mars Company acquired Billboard Company’s net assets by issuing its own P 14 par value ordinary shares
totaling 50,000 shares at market price of P 14.55. Bruno Mars Company had the following expenditures incurred:
Finder’s fee paid P 50,000
Pre-acquisition audit fee, 30% was paid 40,000
General administrative costs 15,000
Legal fees for the combination paid 32,000
Audit fees for SEC registration of share issue 46,000
SEC registration for the share issue paid 10,000
Share issuance costs paid 10,000
Other indirect costs paid 16,000
1. The total amount debited to expense should be
a. P 191,500 c. P 156,500
b. P 163,500 d. P 153,000

PROBLEM 3
Agdao corporation paid P5,000,000 to purchase NCR corporation on January 2, 2013, and NCR was dissolved. The
purchase price consisted of 100,000 shares of agdao’s common stock with a market value of P4,000,000 plus
P1,000,000 cash. In addition, Agdao paid 100,000 for registering and issuing the 100,000 shares and P200,000 for
other costs in consummating the combination. The statement of Financial Position for the companies immediately
before combination is summarized as follows;

Agdao NCR
Fair Book Fair
Book Value value Value Value
Cash 6,000,000 6,000,000 480,000 480,000
Accounts Receivable (net) 2,600,000 2,450,000 720,000 720,000
Notes Receivable,(net) 3,000,000 2,900,000 600,000 600,000
Inventories 5,000,000 6,000,000 840,000 1,000,000
Other current assets 1,400,000 1,500,000 360,000 400,000
Land 4,000,000 6,000,000 200,000 400,000
Buildings, (net) 18,000,000 17,000,000 1,200,000 2,400,000
Equipment,(net) 20,000,000 18,550,000 1,600,000 1,200,000
Total Assets 60,000,000 60,350,000 6,000,000 7,200,000

Accounts payable 2,000,000 2,000,000 600,000 600,000

Mortgage payable, 10% 10,000,000 10,500,000 1,400,000 1,200,000
Capital stock, P10 par 20,000,000 2,000,000
Additional Paid-in capital 16,000,000 1,200,000
Retained Earnings 12,000,000 800,000

1. How much must be the goodwill (bargain) recognized as a result of this business combination?
a. 1,000,000 b. (1,000,000) c. 400,000 d. (400,000)

2. How must is the total assets of Agdao after the acquisition?

a. 67,200,000 b. 66,900,000 c. 65,500,000 d. 65,900,000
b.
STATUTORY CONSOLIDATION-DATE OF ACQUISITION
PROBLEM 1
On January 1, 2018, Pank Corporation and Spank Corporation and their condensed balance sheet are as follows:

Pank Corp. Spank Corp.

Current Assets P 70,000 P 20,000
Non-current Assets 90,000 40,000
Total Assets P160,000 P60,000
Current Liabilities P30,000 P10,000
Long-term Debt 50,000
Stockholder’s Equity 80,000 50,000
Total Liabilities and Equities P160,000 P60,000

On January 2, 2018, Pank Corporation borrowed P60,000 and used the proceeds to obtain 80% of the outstanding
common shares of Spank Corporation. The acquisition price was considered proportionate to Spank’s fair value.
The P60,000 debt is payable in 10 equal annual principal payments, plus interest, beginning December 31, 20181.
The excess fair value of the investment over the underlying book value of the acquired net assets is allocated to
inventory (60%) and to goodwill (40%). On the consolidated statement of financial position as of January 2, 2018,
what should be the amount of the following?

1. The amount of goodwill using proportionate basis (partial):

a. P 0 b. P8,000 c. P10,000 d. P20,000
2. Using the same information above, the amount of goodwill using full fair value (full/gross-up ) basis:
a. P 0 b. P8,000 c. P10,000 d. P20,000
3. Using the same information above, the amount of currents assets should be
a. P105,000 b. P102,000 c. P100,000 d. P 90,000
4. Using the same information above, the amount of non-current assets using proportionate basis (partial) in
computing goodwill should be:
 a. P130,000 b. P134,000 c. P138,000 d. P140,000

5. Using the same information above, the amount of non-current assets using full fair value basis in
computing goodwill should be:
a. P130,000 b. P134,000 c. P138,000 d. P140,000
6. Using the same information above, the amount of current liabilities should be
a. P50,000 b. 46,000 c. P40,000 d. P30,000
7. Using the same information above, the amount of non-current liabilities should be:
a. P50,000 b. 46,000 c. P40,000 d. P30,000
8. Using the same information above, the amount of stockholders’ equity using proportionate (partial
goodwill) basis to determine non-controlling interest should be:
a. P80,000 b. P93,000 c. P95,000 d. P130,000
9. Using the same information above, the amount of stockholders’ equity using full fair value basis to
determine non-controlling interest should be:
a. P80,000 b. P93,000 c. P95,000 d. P130,000

PROBLEM 2
Best Company has gained control over the operations of Cure Corporations by acquiring 85% of its outstanding
capital stock for P 2,580,000. This amounts includes a control premium of P30,000. Acquisition expenses, direct
and indirect, amounted to P83,000 and P42,000 respectively.
Best Cure
Book Value Book Value Fair Value
Cash P3,541,500 P128,000
Accounts Receivable 300,000 325,000
Inventories 550,000 360,000
Prepaid Expense 148,500 125,000
Land 2,350,000 879,000
Building 1,560,000 558,000
Equipment 300,000 185,000
Goodwill 300,000
Total Assets P8,750,000 P2,860,000

Accounts Payable 675,000 253,000

Notes Payable 1,400,000 730,000
Capital Stock,50 Par 3,400,000 800,000
Additional Pain in Capital 1,575,000 600,000
Retained Earnings 1,700,000 477,000
Total Equities P8,750,000 P2,860,000

The following was ascertained on the date of acquisition for Cure Corporation:
 The value of receivables and equipment has decreased by P25,000 and P14,000 respectively.
 The fair value of inventories is now P436,000 whereas the value of land anfair value of and
building has increased by P471,000 and P107,000 respectively.
There was an unrecorded accounts payable amounting to P27,000 and the fair value of notes is P738,000.
Compute for the following balances to be presented in the consolidated statement of financial position at the date
of business combination:
10. Total assets
A. P9,875,000 C. P10,112,000
B. P10,093,000 D. P9,215,000
11. Shareholder’s equity
A. P7,000,000 C. P8,200,000
B. P7,500,000 D. P8,000,00
STATUTORY CONSOLIDATION- SUBSEQUENT TO THE DATE OF ACQUISITION
PROBLEM 1
On January 1, 2011, Bristol Company acquired 80 percent of Animation Company's common stock for P280,000
cash. At that date, Animation reported common stock outstanding of P200,000 and retained earnings of P100,000,
and the fair value of the noncontrolling interest was P70,000. The book values and fair values of Animation's assets
and liabilities were equal, except for other intangible assets which had a fair value P50,000 greater than book
value and an 8-year remaining life. Animation reported the following data for 2011 and 2012: Animation
Corporation

Year Comprehensive Income Dividends Paid

2011 P30,000 P5,000
2012 P45,000 P10,000

Bristol reported net income from own operations of P100,000 and paid dividends of P30,000 for both the years.
1. Based on the preceding information, what is the amount of consolidated comprehensive income reported for
2011?
a. P125,000 b. P123,750 c. P118,750 d. P130,000
2. Based on the preceding information, what is the amount of consolidated comprehensive income reported for
2012?
a. P145,000 b. P135,000 c. P138,750 d. P128,750

3. Based on the preceding information, what is the amount of comprehensive income attributable to the
controlling interest for 2011?
a. P123,750 b. P118,750 c. P119,000 d. P104,000

4. Based on the preceding information, what is the amount of comprehensive income attributable to the
controlling interest for 2012?
a. P138,750 b. P131,000 c. P128,750 d. P135,00

PROBLEM 2
On January 2, 2017, Keith Urban Corporation purchased 70% of the ordinary shares of Mimi Company for P
4,675,000. At that date, Mimi Company had P 4,887,500 of ordinary shares outstanding and accumulated profits of
P 1,572,500. Mimi’s equipment with a remaining life of 5 years had a book value of P 2,380,000 and a fair value of
P 2,550,000. Mimi’s remaining assets had a book value equal to their fair values. Non-controlling interest shall be
measured at fair value. NCI is measured at the present ownership instruments' proportionate share in the
recognized amounts of the Mimi Company:'s identifiable net assets (partial)
The income and dividend figures for both Keith Urban and Mimi Company are as follows:
Income Dividends
Keith Urban Corporation: 2017 P 1,572,500 P 425,000
2018 1,785,000 510,000
Income Dividends
Mimi Company: 2017 P 340,000 P 55,000
2018 569,500 127,500
Keith Urban’s income shown does not include any dividend income from Mimi. Keith Urban’s accumulated profits
balance at the date of acquisition was P 5,958,500.
5. What amount of goodwill be reported be reported on January 2, 2017 in the consolidated of Keith Urban
Corporation and Mimi Company company?
a. 0 b. 34,000 c. 153,000 d. 272,000
6. On December 31, 2018, determine the consolidated accumulated profits attributable to parent.
a. P 8,821,300 b. P 8,970,050 c. P 8,993,850 d. P 9,017,650
7. Non-controlling interest in net assets in 2018
a. 1,989,000 b. 2,064,300 c. 2,186,700 d. 2,207,100
8. On December 31, 2018, determine the consolidated accumulated profits attributable to parent.
a. P 8,821,300 b. P 8,970,050 c. P 8,993,850 d. P 9,017,650
 9. Non-controlling interest in net assets in 2018
a. 1,989,000 b. 2,064,300 c. 2,186,700 d. 2,207,10

PROBLEM 3
Peer, Inc. acquires 60 percent of Sea-breeze Corporation for P454,000 cash on January 1, 2016. The remaining 40
percent of the Sea-breeze shares traded near a total value of P276,000 both before and after the acquisition date.
On January 1, 2016, Sea-breeze had the following assets and liabilities:
Book Value Fair Value
Current Assets P 150,000 P 150,000
Land 200,000 200,000
Building (net) – 6-year-year life 300,000 360,000
Equipment (net) – 4-year life 300,000 280,000
Patent (10-year life) -0- 100,000
Liabilities (400,000) (400,000)
Net P 550,000 P 690,000
Common Stock P 480,000
Retained Earnings P 70,000

The companies’ financial statements for the year ending December 31, 2016 using cost method are as follows:
Peer Sea-Breeze
Revenue P (600,000) P (300,000)
Operating expenses 410,000 210,000
Dividend Income (42,000) 0
Net Income P (232,000) P (90,000)

Peer Sea-Breeze
Retained earnings, 1/1/16 P (650,000) P (70,000)
Net Income (232,000) ( 90,000)
Dividends paid 92,000 70,000
Retained earnings, 12/31/16 P (790,000) P (90,000)

Current Assets P 240,000 P 70,000

Land 220,000 200,000
Building (net) 700,000 200,000
Equipment (net) 400,000 500,000
Investment in Sea-breeze 454,000
Total Assets P 2,014,000 P 970,000

Liabilities P (500,000) P (400,000)

Common Stock (724,000) (480,000)
Retained Earnings, 12/11/16 (790,000) (90,00)
Total Liabilities & Equities P 2,014,000 P (970,000)
10. What is the consolidated net income for 2016?
a. Nil or 0 c. P 235,000
b. P 30,000 d. P 265,000
11. Compute the consolidated Retained earnings on December 31, 2016?
a. P 650,000 c. P 793,000
b. P 790,000 d. P 700,000
12. Compute the non-controlling interest on December 31, 2016?
a. P 276,000 c. P 288,000
b. P 278,000 d. P 258,000
13. Compute the consolidated total shareholder’s equity as of December 31, 2016?
a. P 1,795,000 c. P 1,975,000
b. P 1,597,000 d. P 1,579,000
14. Compute the consolidated total assets as of December 31, 2016?
a. P 2,605,000 c. P 2,655,000
b. P 2,695,000 d. P 2,565,000