Business Combination

BUSINESS COMBINATION & CONSOLIDATED STATEMENTS                                  

Business Combination is the result of the acquiring of control of one or more enterprises by another enterprise or the uniting of interests of two or more enterprises.  Based on capital structure, a business combination may be classified as merger, consolidation or acquisition

Merger – A business combination is classified as a merger if the surviving entity is one of the combining entities participating in the business combination.  The acquired companies are dissolved and the acquiring entity takes over all the assets and assumes all the liabilities.

Consolidation- A business combination is considered as a consolidation if none of the combined entities continue to exist and a new corporation is organized to take over all the assets and assume all the liabilities of the combined entities that are subsequently dissolved.

Acquisition – A business combination is an acquisition if both companies participating in the business combination continue to legally exist upon the acquisition of a majority share of stock of one company by another company. 

Either of the Parent or the subsidiary may sell merchandise to each other in inter-company transactions.  Such sale may be either a downstream or an upstream sale.  Downstream sale is one where the parent is the seller and the subsidiary is the buyer.  Upstream sale on the other hand is one where the subsidiary is the seller and the parent is the buyer.  In either case, one company sells merchandise to its affiliate at a price above cost which will result to the ending inventory of the buying party containing an element of unrealized gross profit, which should be eliminated prior to the preparation of consolidated financial statements.

Business Combination and Goodwill

Item	F- PFRS	SME
1. Business combination	‘…is a transaction or other event in which an acquirer obtains control of one or more businesses.’	‘bringing together separate entities or businesses into one reporting entity’
2. Contingent    Consideration	• Initially recognized as part of the consideration transferred to be measured at acquisition date-fair value. • Non-occurrence of a future event (e.g. not meeting earnings target) is not considered to be a measurement period adjustment – therefore not adjusted against goodwill.	• Initially recognized in the cost of the combination only if it meets probability and ‘reliably measurable’ criteria. • If future event does not occur, then any adjustments to the cost of the business combination are made against goodwill.
3. Consideration    transferred    Share-based payment          Awards	Provides guidance to assist in determining the portion of a replacement award that is part of the consideration transferred for the entity acquired.	No specific guidance.
4. Costs incurred in a business combination            Direct costs Indirect costs Costs to issue and register stocks Costs to issue debts	Expensed Expensed Debited to APIC/Share    Premium Debited to BIC	Capitalized Expensed Debited to APIC/Share    Premium Debited to BIC
5. Recognizing and measuring assets acquired and liabilities assumed on initial recognition         Identifiable             Intangible assets         Valuation allowances/            provisions	Recognized separately from goodwill if it meets either the separability or contractual-legal criteria. Prohibits separate valuation allowance at acquisition date for assets measured at fair value but whose future cash flows are uncertain (e.g. doubtful receivables).	Requires recognition if their fair value can be measured reliably.                                                  No specific guidance.
6. Exceptions to recognition or measurement principles, or both on initial recognition    Assets held for sale         Contingent liabilities	Requires measurement in accordance with PFRS 5 Noncurrent assets Held for Sale and Discontinued Operations. Requires recognition of ‘liabilities’ that meet the definition of a liability in the Framework, and only where there is a present obligation that arises from past events and its fair value can be measured reliably.	No specific guidance. Requires recognition of possible obligations if their fair value can be measured reliably.
7. Accounting Method
Term Used	Acquisition Method	Purchase Method
Measuring goodwill/bargain purchase gain Valuation of goodwill	Options: 1. Full fair Value (Full Goodwill) 2. Proportionate share of identifiable net assets (Partial Goodwill) Cost less impairment    losses	Proportionate share of   identifiable net assets (Partial Goodwill) Cost less impairment losses and amortization (life should be presumed    to be 10 years)
8. Accounting for investment in subsidiaries, jointly controlled entities and associates	Either: (a)          at cost, or (b) in accordance with IAS(PAS) 39	Either: (a)        at cost less  impairment, or (b) at fair value with changes in fair value recognized in P&L.
9. Non-controlling Interests (NCI)in the acquiree	NCI can be measured using either at: 1.  Fair value     (full goodwill); or 2. Proportionate interest in the fair value of net identifiable assets of   the entity acquired   (partial goodwill)	NCI are stated at the proportionate interest in the fair value of the net assets of the entity acquired (partial goodwill)