ACCOUNTING FOR BUSINESS COMBINATION.pptx

Asset and stock acquisition

1. ACCOUNTING FOR BUSINESS COMBINATION

2. COVERAGE Introduction to Business Combination Accounting for acquisition of net assets Accounting for acquisition of stocks Intercompany transaction Sale of Inventory Sale of Property, Plant and Equipment

3. Introduction to Business Combination Business Combination PFRS 3 Defines a business combination as “a transaction or event in which an acquirer obtains control of one or more businesses” Essential element in the definition of a business combination Transaction or event Business Control

4. Control An investor controls an investee when the investor has the power to direct the investee’s relevant activities (Operating and Financing policies). Holds more than 50% of voting shares in a company.

5. Determining the existence of control Case 1: ABC Company acquires 51% ownership interest in XYZ Company’s ordinary shares. Case 2: ABC Company acquires 90% ownership interest in XYZ Company’s preference shares. Case 3: ABC Company acquires 45% ownership interest in XYZ Company. There is an agreement with the shareholders of XYZ Company that ABC Company will control the appointment of the majority of the board of directors of XYZ Company. Case 4: ABC Company acquires 40% ownership interest in XYZ Company. ABC Company has an agreement with DEF Company which owns 15% of XYZ Company whereby DEF Company will always vote in the same way as ABC Company. Case 5: ABC Company acquires 50% of XYZ Company’s ordinary shares. The board of directors of XYZ Company consists of 8 members. ABC appoints 4 of the members and XYZ appoints the other 4. When there are impasse in casting votes at meetings, the decision will always lies with the directors appointed by ABC Company

6. Kinds of Business Acquisition Acquisition of Net Assets Acquisition of Stocks

7. Kinds of Business Acquisition Acquisition of Net Assets (Assets Acquisition) Acquire all identifiable assets Assume all liabilities Acquirer Company Acquired Company Consideration acquirer Company acquiree Company

8. Kinds of Business Acquisition Acquisition of Net Assets may be either: Merger Statutory Consolidation Acquirer Company Acquired Company Acquirer Company Acquirer Company Acquired Company New Company

9. Kinds of Business Acquisition Acquisition of Stocks (Stock Acquisition) Acquiring (more than 50%) Voting Shares Controlling interest Acquirer Company Acquired Company Consideration PARENT Company SUBSIDIARY Company

10. Accounting for Business Combination Identifying the acquirer; Determining the acquisition date; and Recognizing and measuring goodwill. This requires recognizing and measuring the following: Consideration transferred Non-controlling interest in the acquiree (Stock Acquisition) Previously held equity interest in the acquiree (Stock Acquisition) Identifiable assets acquired and liabilities assumed on the business combination.

11. Identifying the acquirer Transferor of cash and other resources and assumes liabilities Issuer of shares Larger size Initiator of business combination

12. Determining the acquisition date The date on which the acquirer obtains control of the acquired company. It is the closing date.

13. Consideration Given/Transferred Consideration transferred shall be measured at fair value. Examples are the following: Cash Noncash assets Debt instrument Equity instrument Contingent consideration

14. Contingent consideration The acquirer must apply PFRS 3 rather than PAS 37 Contingent liability under PFRS 3 is recognized if: It is a present obligation that arises from past events. Its fair value can be measured reliably.

15. Acquisition related costs Examples of Acquisition related costs: Finder’s fee Professional fees, such as advisory, legal, accounting, valuation and consultation General administrative cost Cost of registering and issuing debt securities Cost of registering and issuing equity securities

16. Acquisition related costs Acquisition related costs are recognized as expense when incurred Except the following: Cost of registering and issuing debt securities Measured at amortized cost and included in the initial measurement of financial liability. Cost of registering and issuing equity securities Deducted from share premium. If the share premium is insufficient, the issue cost are deducted from retained earnings.

17. Identifiable assets and liabilities Identifiable assets acquired and liabilities assumed on the business combination. Recognize the identifiable assets and liabilities at the date of acquisition Measure the assets and liabilities at fair value on the acquisition date Unidentifiable assets are not included. Examples: Goodwill of acquired company Assemble workforce Potential contracts that the acquiree is negotiating

18. Accounting for Business Combination Identifying the acquirer; Determining the acquisition date; and Recognizing and measuring goodwill. This requires recognizing and measuring the following: Consideration transferred Non-controlling interest in the acquiree (Stock Acquisition) Previously held equity interest in the acquiree (Stock Acquisition) Identifiable assets acquired and liabilities assumed on the business combination.

19. Recognizing and measuring Goodwill Consideration transferred XXX Less: Fair Value of Acquired Company’s net assets XXX Goodwill (Gain on Acquisition) XXX Fair Value of Acquired Company’s net assets Fair value of identifiable assets acquired XXX Less: Fair value of liability assumed XXX Fair value of Acquired Company’s net assets XXX

20. Acquisition of Net Assets (Assets Acquisition) Illustration

21. Illustration 1 Analyze the business transaction Identify the acquirer Determine the acquisition date Prepare a schedule for the computation of goodwill or gain on acquisition Journalize the business transaction Record the consideration given Record the assets acquired and liabilities assumed Record goodwill or gain on acquisition Record the acquisition related cost Post the journal entries to ledger accounts Prepare the consolidated financial statement after business combination ABC Company purchased XYZ Company on January 1, 2021. The statement of financial position of ABC and XYZ are presented below:   ABC Company XYZ Company   Book Value Book Value Fair Value Cash 800,000 50,000 50,000 Accounts Receivable 200,000 100,000 80,000 Inventory 800,000 400,000 440,000 Equipment 2,750,000 500,000 -   Less: Accumulated Depreciation 550,000 2,200,000 100,000 400,000 320,000 Goodwill   -     50,000 - Total Assets   4,000,000     1,000,000       Accounts Payable 200,000 50,000 52,500 Bonds Payable 600,000 550,000 577,500 Ordinary Share Capital 1,600,000 300,000   Share Premium 400,000 50,000   Retained Earnings   1,200,000     50,000   Total Liabilities and Equity   4,000,000     1,000,000     Additional information 1. Unrecognized marketable securities with fair value of P15,000 2. Unrecorded Notes Payable amounting to P25,000 3. ABC company issued 100,000 shares of its P1 par value common stocks with a market value of P2 each to purchase XYZ company 4. ABC company gives P100,000 to purchase XYZ company. 4. ABC company will give additional P50,000 if XYZ company is profitable after a year. (highly probable) 5. ABC company pays professional fees of P 10,000 to accomplish the acquisition and stock issuance cost of P 5,000.

22. Illustration 2 Analyze the business transaction Identify the acquirer Determine the acquisition date Prepare a schedule for the computation of goodwill or gain on acquisition Journalize the business transaction Record the consideration given Record the assets acquired and liabilities assumed Record goodwill or gain on acquisition Record the acquisition related cost Post the journal entries to ledger accounts Prepare the consolidated financial statement after business combination ABC Company purchased XYZ Company on January 1, 2021. The statement of financial position of ABC and XYZ are presented below:   ABC Company XYZ Company   Book Value Book Value Fair Value Cash 800,000 50,000 50,000 Accounts Receivable 200,000 100,000 80,000 Inventory 800,000 400,000 440,000 Equipment 2,750,000 500,000 -   Less: Accumulated Depreciation 550,000 2,200,000 100,000 400,000 320,000 Goodwill   -     50,000 - Total Assets   4,000,000     1,000,000       Accounts Payable 200,000 50,000 52,500 Bonds Payable 600,000 550,000 577,500 Ordinary Share Capital 1,600,000 300,000   Share Premium 400,000 50,000   Retained Earnings   1,200,000     50,000   Total Liabilities and Equity   4,000,000     1,000,000     Additional information 1. Unrecognized marketable securities with fair value of P15,000 2. Unrecorded Notes Payable amounting to P25,000 3. ABC company issued 25,000 shares of its P1 par value common stocks with a market value of P2 each to purchase XYZ company 4. ABC company gives P100,000 to purchase XYZ company. 4. ABC company will give additional P50,000 if XYZ company is profitable after a year. (highly probable) 5. ABC company pays professional fees of P 10,000 to accomplish the acquisition and stock issuance cost of P 5,000.