Business Combination

Structures of Business Combination
1.) Horizontal Integration – combination that involves companies with the same industry

2.) Vertical Integration – combination that involves companies that involves in the same industry but different levels

3.) Conglomerate Combination – involving companies in unrelated industries having little, if any, production or market similarities entering a new market

4.) Circular Combination – entails diversification

The Acquisition Method
Applied on the acquisition date which is the date the acquirer obtains control of the acquiree.

Statutory Merger
Acquiring company survives, whereas the acquired company ceases to exist
Example:
Business + Combination = Business Combination
Statutory Consolidation
It results when a new corporation is formed to acquire two or more corporations.
Example:
Business + Combination = AFAR

Accounting Procedures

1.) Identify the acquirer
PFRS 3 paragraph 7 states that the acquirer is the entity that obtains control of the acquiree.

2.) Determine the acquisition date
PFRS 3 defines it as the date on which the acquirer obtains control of the acquiree
Dates that are important during the process of combination
-Date the contract is signed
-Date the consideration is paid
-Date nominated in the contract
-The date which assets acquired are delivered to the acquirer
-The date on which an offer becomes unconditional

3.) Calculating Fair Value of the Consideration Transferred
PFRS 3 paragrpah 7, the consideration transferred:
– measured at fair value at acquisition date
– calculated as the sum of the acquisition date fair value of
1.) the assets transferred by the acquirer
2.) the liabilities incurred by the acquirer to former owners of acquiree
3.) the equity interest issued by the acquirer

Consideration transfers
1.) Cash or other Monetary Assets
2.) Non-monetary Assets
3.) Equity Instruments
4.) Liabilities Undertaken
5.) Contingent Consideration

4.) Measurement Principle for Assets and Liabilities
– measured at fair value

Valuation Techniques
-Market approach
Uses prices and other relevant information generated by market transactions
-Income approach
Based on future economic benefit
-Cost approach
Reflects the amount that would be required currently to replace the service capacity of an asset

5.) Measure of goodwill

Goodwill
The acquirer shall recognize goodwill as of the acquition date, measured as the excess of (I) over (II) below:

I. The aggregate of
a.) The consideration transferred measured in accordance with this standard which requires acquisition date
b.) The amount of any non-controlling interest in the acquiree
c.) the acquisition date fair value

II. The net of the acquisition date amounts of the indentifiable assets acquire and the liabilites assumed measure in accordance with this standards

Items Included in Goodwill
1.) Assembled workforce of the acquiree
2.)Potential contractors
3.) Contingent Assets
4.) Future contracts renewal


Bargain purchase gain = Acquirer’s interest net fv of acquiree identifiable assets –
Consideration transferred