Chapter 1

• A business combination occurs when one company acquires another company merge into one.
• Parent or acquirer have control
• subsidiary or acquiree are the one to be controlled
• PFRS 3 is Business Combination
• business combination are carried out either through asset acquisition or stock acquisition
• Asset acquisition - purchase the asset and assumes the liabilities of the acquiree in exchange for cash or other non-cash consideration
• Asset acquisition may be either merger or consolidation.
• merger - two or more companies merge into single entity. A+B= A Co. or B Co.
• consolidation = two or more companies consolidate into singe entity which mean into different company. A + B = C Co.
• Stock acquisition - acquiring a majority ownership interest (i.e more than 50%).
• Business Combination may also be described as:

  • horizontal combination - similar businesses ( bank acquires bank).
  • vertical combination - different levels in a marketing chain (manufacturer acquires its supplier of raw materials)
  • conglomerate - dissimilar businesses ( real estate acquires bank).
• Advantages of BusCom

  1. Competition is eliminated or lessened
  2. synergy
  3. increased business opportunities and earnings potential
  4. reduction of operating costs
  5. combinations utilizes economies of scale
  6. cost savings on business expansion
  7. favorable tax implications
• Disadvantages of BusCom

  1. monopoly
  2. loss of sense of identity
  3. incompatible internal cultures
  4. overcapitalization
  5. strict regulation
• A business combination is a transaction or other event in which an acquire obtains control of one or more businesses.
• Essential Elements

  • Control
  • Business
• Control - power to direct the investee's relevant activities and acquirer more than 50% interest. control can obtained in some other ways:

  • power to appoint or remove the majority of the bod
  • power to cast the majority votes
  • over more than half of the voting rights
  • acquirer controls acquires operating and financial policies
• Example 1: ABC Co. acquires 51% ownership interest in XYZ, Inc.’s ordinary shares

  Analysis: ABC is presumed to have obtained control over XYZ because of the ownership interest acquired in the voting rights of XYZ is more than 50%
• Example 2: ABC Co. acquires 100% of XYZ, Inc.’s preference shares.

  Analysis: ABC does not obtain control over XYZ because preference shares do not give the holder voting rights over the financial and operating policies of the investee
• Example 3: ABC Co. acquires 40% ownership interest in XYZ, Inc. There agreement that ABC has a control the appointment o the majority of BOD

  Analysis. ABC Co. has control over even though the 40% ownership , since ABC has a power to appoint the majority of BOD.
• Example 4: ABC Co. acquires 45% ownership interest in XYZ, Inc. ABC Co. agreement with EFG Co. which owns 10% of XYZ, whereby EFG will always vote in the sameway as ABC.

  Analysis: ABC has control over XYZ because more than 50% of the voting rights (40% XYZ + 10% EFG)
• Business - an integrated set of activities and assets that is capable of being conducted and managed for purpose of providing good or services to customers, generating investments income ( such as dividends or interest ) or generating other income from ordinary activities.
• three elements of business:

  • Input - necessary materials or rights and employees
  • Process - applied to an input, creates an input
  • Output - result and provides goods or services
• Acquisition Method:

  1. identifying the acquirer
  2. Acquirer obtain control of the acquiree.
  3. Acquirer is the entity that transfers the cash
  4. determining the acquisition date
  5. the date on which the acquirer obtain the control.
  6. closing date (legally transfer the consideration)
  7. Recognizing and measuring the goodwill
  8. consideration transferred
  9. Non-controlling interest (NCI) in the acquiree
  10. Previously held equity interest in the acquiree
  11. net identifiable asset acquired and liabilities assumed
• A negative amount resulting from the formula is called gain on a bargain purchase (referred as negative goodwill)
• the acquirer recognizes a resulting

  • goodwill as an asset
  • gain on a bargain purchase as a gain in profit or loss
• Concept of Conservatism - the acquirer shall reassess the all of the assets acquired and liabilities assumed whether it has correctly.
• Consideration transferred is measured at fair value
• Acquisition-related are cost that the acquirer incurs to the effect a buscom. Expensed Immediately

  Examples

  • Finder fees
  • Professional fee
  • General administrative cost
  • Cost of registering
• Acquisition-related cost are expensed

  except

  • debt securities - as deduction (bond issue cost)
  • equity securities - deducted from share premium (if insufficient)
• Non-controlling interest (NCI) is the equity in a s subsidiary not attributable, directly or indirectly, to a parent.

  • Also called minority interest
  • excess of consideration
• NCI in the acquiree either:

  • fair value
  • NCI's proportionate share in the acquiree's net identifiable
• Previously held equity interest in the acquiree - held by the acquirer before business combination.

  • this affect the computation of goodwill
• Net Identifiable assets acquired - on acquisition date

  Unidentifiable assets are not recognized. Example

  • goodwill recorded by acquiree prior to the buscom
  • assembled workforce
  • potential contract of acquiree for negotiating with prospective new customers at the acquisition date
• Restructuring provision is reorganizing or a program that is planned and controlled by management and materially changes either:

  • scope of business
  • manner in which conducted
• Restructuring include the cost

  • exit an activity
  • involuntarily terminate employees
  • relocate non-continuing employees

  the costs referred to as liquidation cost
• Restructuring provision that do not meet the definition of a liability at the acquisition date are recognized as post-combination expenses of the combined entity when the cost are incurred.
• 1. Operating Leases

  Acquiree is the lessee - does not recognized any assets or liabilities related to operating lease.

  Exception:

  • Favorable - intangible asset
  • unfavorable - liability

  Acquiree is the lessor - does not recognize separate intangible asset or liability regaler of favorable or unfavorable.
• 2. Intangible Asset - acquired and recognized separately from goodwill

  • Separability criterion
  • separable if t can be separated from the acquiree and sold.
  • if there is evidence
  • Contractual-legal criterion
  • intangible asset is not separable.
• Exception to the recognition principle - Contingent Liabilities

  Under the PFRS 3 contingent liability assumed is recognized if:

  • present obligation arise from past events
  • fair value
• Exception to both the recognition and measurement principles

  1. income taxes - deferred taxes affect the goodwill amount
  2. employee benefits - PAS 19
  3. indemnification asset - former owner of the acquiree agree to reimburse and measure at fair value.