Chapter 4 - Accounting for Business Combination 179 SOLUTIONS AND EXPLANATIONS PROB. 4-1 Suggested answer (a) In a business combination legally structured as merger, one enterprise acquires all of the net assets of one or, more other enterprises through an exchange of stock, payment of cash or other property, or the issue of debt instruments. Under which, the surviving company is one of the two combining companies. PROB. 4-2 Suggested answer (b) In a legal merger, where net assets are acquired, the acquirer shall record the assets and liabilities acquired but not an Investment account. There can be no investment to be recorded, because the acquired company, in this case, will cease to exist. PROB. 4-3 Suggested answer (a) No No According to PFRS 3, Business Combination, acquisition related costs should not ‘form part of the consideration transferred, instead should be recognized in the profit or loss in the period in which they are incurred; except the costs of issuing equity instruments, which are an integral part of the equity issue transaction, should reduce the proceeds from the equity issue. Likewise, costs of issuing debt securities, which are included in the measurement of financial liabilities. PROB.4—4 Suggested answer (@) No No ‘Asa general rule, purchased goodwill is capitalized; while internally developed goodwill is expensed. In addition, PFRS 3, Business Combination provides that goodwill is no longer amortize but tested for impairment. PROB.4-5 Suggested answer(c) Expensed Expensed Deducted from value of security issued ‘Scarne wih CamScanetCO 180 ——— Chapter 4 — Accounting for Business Combinay SE Combination in. in accordance with PERS 3, Business Combination, acquisition rey Aga eld not form part of the consideration transferred, instead shoe eaieat in the profit or loss in the period in which they are incurreg. ad the costs of issuing equity instruments, which are an integral Part Of the eouiy tsene transaction, should reduce the proceeds from the equity issue: and cau issuing debt securities, which are included in the measurement of Sinaney liabiliti PROB. 4-6 Suggested answer (b) Yes No Again, as explained earlier, all acqusition-related costs should not farm part og the consideration transferred. Therefore, fees of finders and consultants op included in the profit or loss; while registration fees for equity securities iy should not be included in.the determination of income, PROB. 4-7 Suggested answer (a) 3,600,000 Market value of stock issued (100,000 x 36) 3,600,000 Again, as explained earlier, all acquisition-related costs should not form part of the consideration transferred. Thus, the consideration transferred in a business combination is the total fair value at the acquisition date of the consideration given by the acquirer. PROB. 4-8 Suggested answer (c) The cost of the business combination is measured primarily by reference ‘0 the consideration transferred which reflects what was given, NOT what was received PROB. 4-9 Suggested answer (d) JERS 3, Business Combination provides that the acquirer shall measwt a identifiable assets acquired and the liabilities assumed at their acquisition Jair values, NOT acquisition-date agree values, ‘Scanne wih CamScanetChapter 4= Accounting for Business Combination — —__181 proB. 4-10 Suggested answer (b) Fair Value Fair Value PERS 3, Business Combination, provides that the identifabh ‘any ped contingent liabilities, where the fair value can be measured relighi st Meonded initially at its fair value, irrespective of the extent of am sete ara 1y minority pROB. 4-11 Suggested answer (a) PFRS 3, Business Combination, provides that at the acquisition date, the acquirer shall recognize goodwill acquired in a business combination as an asset, and initially measure that goodwill at its cost, being the excess of the cost of the business combination over the acquirer's interest in the fair value of the identifiable assets, liabilities, and contingent liabilities. Furthermore, goodwill acquired in a business combination shall not be amortized: instead, the acquirer shall test it for impairment annually or more frequently if events or changes in ‘circumstances indicate that it might be impaired. PROB. 4- 12 Suggested answer (a) 4,000,000 Market value of stock issued (500,000 x 8) Again, as explained earlier, all acquisition-related costs should not form part of the consideration transferred. PROB, 4-13 Suggested answer (d) According to IFRS 3, Business Combination, at acquisition date, the acquirer shall recognize, separately from goodwill, the identifigble assets acquired, the liabilities assumed and any non- controlling interest in the acquiree. PROB. 4-14 Suggested answer &® i 3, Business Combination, requires ihe use of acquisition nehod fo 'siness combinations, Under this method, the acquisition cost is alloca ‘Scarne wih CamScanetChapter 4 - Accounting for Business ¢ Combi ai ir fair values. Any exces tities based on their fair 55 Of acquired assets and liabi * ocated to goodwill 1 ng the fair value of net assets IS PROB. 4-15 Suggested answer (a) Business Combination, provides that Ld acquirer must recog, y at the date of acquisition the acquiree's identifiable assets, libitte -nt liabilities that satisfy the recognition criteria at that date Set out j fy for recognition as part of applying the acquisition meth «i meet the definition of an asset or liability in the Framework fy, stion and Presentation of Financial Statements at the acquisition id PROB. 4-16 Suggested answer (c) PFRS 3, Business Combination, provides that the acquirer shall recognize intax cibles as assets separate from goodwill if they are separable and arise from zal or other legal rights, regardless of whether those rights ae cransferable or separable from the entity or from other rights and obligations, ademarks, lease agreements, and patents arise from cv iractual or legal ghts, while employee quality does not arise from contractual ov «..,.1! rights and “ot separable. PROB. 4-17 Suggested answer (a) Uf the intangible asset has a finite useful life, it must be systematically amortized over its useful life. On the other hand, if the intangible asset has an indefinite useful life, the asset must not be amortized, but is subject to impairment testing accordance with LAS 36, Impairment of Assets, PROB. 4-18 Suggested answer (d) IFRS 3, Business Combination, allow acquisition-by-acquisition basis, for an to be measured either at: Fair Value method); or The Non. identifiable net asse san accounting policy choice. a4 y non-controlling interest in the acqu i (often referred to as the Full God -controlling interest’s proportionate share of the acai! 13 (sometimes referred to as the Partial Goodwill method ‘Scanne wih CamScanetChapter 4— Accounting for Business Combinatic ion 183 proB. 4-19 Suggested answer (b) pull ane the “full goodwill” method, the total fair value of the subsidiary (the fai 1¢ fair Undet value of the consideration transferred by th , pon-controlling interest) is compared with ‘the fair va a lus the fair value of the resets acquire Sin otter words, it is a medsure of ba Of the identifiable net Fesiness combination at acquisition date. e total goodwill of the PROB. 4-20 Suggested answer (@) True True Acquisition cost 100,00 Non-controlling interest share in net assets: bated (85,000,000 x 20%) 17,000,000 Total | 117,000,000 Less fair value of net assets of acquired company 85,000,000 Goodwill (NCI measured at its proportionate share) 32,000,000 Acquisition cost 100,000,000 Fair value of ‘non-controlling interest (10,000,000 — 24,000,000/80% x 20%) 19,000,000 Total 119,000,000 Less fair value of net assets of acquired company 85,000,000 d at fair value) 34,000,000 Goodwill (NCI measure Under PFRS 3, Business Combination, the acquirer shall, at the acquisition date, measure the acquiree’s identifiable assets ‘and liabilities at their fair value. In ed, the acquirer should recognize any addition to the identifiable net assets acquire non-controlling interest in the acquiree ‘at either, fair value; or at the non- ionate share of the acquiree’s identifiable net controlling interest's proporti assets, PROB. 4-21 Suggested answer (c) US 3 . s 2 eee of Assets, provides that an impairment loss recognized for shall not be reversed in a subsequent period. | | ‘Scarne wih CamScanetChapter 4 Accounting for Busing, rea aTa Ca PROB, 4-22 Seggesied answer (6) Nhe form Aargain purchase or negative goodwill is used to de, 1 net assets recognized in a business co} 2 ration transferred and the non-controlling interest in the ral syerally wnuswal for a discount to arise, since it means that the fee eesti for the business. PERS 3, Business 2a such an amount will not normally arise and therejy, ofan error in the measurement of the acquiree’s ney interest or the consideration transferred. It requires ing he recognition or the identifiable net assets acquired. If g ins afler the reassessment has been completed, then it \gnized in profit or loss in the period in which the business combiy place. This rvatment is required since any discount reflects “ie reali a dargain purchase was made. 2 Scribe tng mbinatic & 32 PROB, 4-23 Suggested answer (a) P150,000 Acquisition cost 620,000 Less market value of the net asset acquired: Cash 60,000 Inventory at fair value 150,000 Property and equipment (net) at fair value 380,000 Liabilities (120,000) _470.0 Goodwill. 154) — in a business combination appropriately accounted as prachse f consideration given to acquire the other company may be cash, oF 13 * other assets or the purchaser's own securities. If the aggregate pire! (cash purchase) exceeds the market value of identifiable assets [es * assumed, the difference is attributed to goodwill, It should be poin s0odwill is recorded only whén purchased, and represents an ints the book of the purchaser. In addition, under PERS 3, goodwil sl be amortized but tested for impairment, . ‘Scanne wih CamScanetchapter 4 — Accounting for Business Combination 185 proB. 4-24 Suggested answer (a) 1,470,000 Acquisition cost Non-controlling interest share in net , 1,960,000 (700,000 x 30% assets: Total — 210,000 Less fair value of net assets of acquired company ee Goodwill ie e70 0000 tation of goodwill if the non-controlling interest is measured at its The comp! dential share of the i fentifiable net assets is similar with the approach i goodwill under the PERS 3 before its revision in January 2008; as ome ‘Below: ‘Acquisition cost 1,960,000 Less market value of net assets acquired (700,000 x 70%) : 490,000 Goodwill 1,470,000 PROB. 4-25 Suggested answer @ Swain. Hadji Acquisition costs 1,420,000 300,000 Less market value of net assets acquired (70% x 1,200,000) 840,000 (65% x 640,000) 416,000 __ Goodwill (Gain on bargain purchase) 580,000 (116,000) Since the computation of goodwill if the non-controlling interest is measured at its share of the identifiable net assets is similar with the approach of measuring B00dwill under the PFRS 3 before its revision in January 2008, that approach was used for purposes of simplicity. pe PFRS 3, Business Combination, goodwill is the excess of the acquire tn transferred plus the amount of any non-conrolling interest the over the idemifiable net assets and liabilities recognized. It is to be recognized i Position, 5% Set Of the acquiring entity in the statement of financial ‘Scanne wih CamScanetChapter 4 Accounting for Business 186 _ net Contd sin on bargain purchase or negative goodwill is ys 1 term £0 hase o” nega The ter iy the identifiable net assets recognized ina busin 8 combi excess srred and the non-controlling interest in the! consideration transfe rollin int Eecaribel in profit or loss in the period in which the business comp took place: thus, no amount of which shall be presented in the sar {financial position. ed to des, PROB. 4-26 Suggested answer (a) 25, 000,000 Acquisition cost . Less increase in provisional fair value Goodwill The standard requires the acquirer should assess the identifiable astey liabilities acquired by the end of the reporting period in which the ir takes place. However, if it is not practicable for the assessment to be finalized; this time scale, the acquirer is required to make a provisional assessment at end of the reporting period and adjustment should be made, which may rests increase/decrease in goodwill or gain on bargain purchase. PROB. 4-27 Suggested answer (c) Gain on bargain purchase of P8,000,000 recognized in profit or loss. Acquisition cost 112,000,000 Less MV of the net assets acquired (100%) __120,000000 Gain on bargain purchase 8,000,000 —_—_—_—_ The term bargain purchase (negative goodwill) is used to describe the exes ie ‘identifiable net assets recognized in a business combination ° eae transferred and the non-controlling interest in the acqt 4 uch an amount will not normally ari may have arisen ari ar of aoe ly arise and therefore contol i measurement of the acquiree’s net assets, the NOW" gs pres or the consideration transferred, IFRS Srequires the acquirer J remetag t & the identifiable net assets acquired. And if the er se f le reassessment has been completed, then it should pt a Ab B in proj fe ment peers ede ‘od in which the business combination eh uired si sh Purchase was mia since any discount reflects the reality ‘Scarne wih CamScanetrr Se | | Chapter 4 ~ Accounting for Business Combination 187 PROB. 4-28 Suggested answer (c) P22,500,000 Again, the net assets of the subsidiary acquirea by an acquirer shall be recognized at fair values. Specifically, the fair value of property, plant and equipment shall be the market value the amount which an entity will pay, say, an asset when it is exchanged between unrelated and willing parties, not in forced sale. The asset at fair value is being added to similar asset of the acquirer. PROB. 4-29 Suggested answer (b) The new standard on business combination requires the acquirer to recognize separately an intangible asset of the acquiree at the acquisition date only if it meets the definition of an intangible assets and its fair value can be measured reliably. The fair value of intangible assets shall be determined by reference to an active market and if no active market exists, on a basis that reflects the amounts the acquirer would have paid for the assets in arm’s length transactions between knowledgeable willing parties and not in forced sale. PROB. 4-30 Suggested answer (a) When a reporting unit is disposed of in its entirety, goodwill of that reporting unit (to the extent an impairment loss has not been recognized) is included in the carrying amount of the reporting unit for purposes of determining the gain or loss'on disposal. Consequently, the unimpaired goodwill of each reporting unit of the acquired entity is included in the total carrying amount of that entity. PROB, 4-3) 4. Suggested answer(b) Goodwill recorded at P224,800 Acquisition cost - 1,400,000 Less fair value of the net assets acquired: , Cash 40,000 Accounts receivable 437,000 Inventories 133,000 Plant, property & equipment 900,000 Liabilities (350,800) 1,175,200 Goodwi sodsilt 224,800 ‘Scanne wih CamScanet188, os" Chapter 4 Accounting for Busines __Chapie’ a Com tina, X regate amount paid for the purchase exceeds the Again, if the age ssets tess liabilities as. Lhe ny (ga assets less liabilities assumed, the Alien value of the idemifiable attributed to goodwill. Suggested answer (b) P1,175,200 time of purchase transaction, it is necessary to determine the fe oles oho assets acquired and liabilities assumed. The estimating these values is to provide a basis for allocating the total involved to individual balance sheet items, The aggregate value Assigned fy the net assets acquired (including goodwill) will be equal to the cost involved in the purchase transaction. Therefore, the net assets (excluding goodwill be recorded in the books of the acquiring company should be PI,1752 (1,400,000 - 224,800). Stated differently, what is to be recorded by te acquiring company should be the fair value of the net assets acquired a shown in “a”. Suggested answer (c) P441,400 more than owners’ equity Acquisition cost 1,400,000 Less book value of the net assets acquired: Cash 36,000 Accounts receivable 457,000 Inventories 120,000 Mant property & equipment 696,400 600 Liabilities 58, : (350,800) 958) excess of acquisition cost over the —— unadjusted owners? equity 41400, The question being asked is the dif isition cost a . i is erence between the acquisition ie book value ofthe net assets acquired, whieh tn this cave is He owners’ equity since this is 100% acquisition; thus P441,400. d. Suggested answer (b) P175,200 ‘Scanne wih CamScanetre Chapter 4~ Accounting for Business Combination 189. Acquisition cost 1,000,000 Less fair value of the net assets acquired: | Cash 36,000 Accounts receivable 457,000 Inventories 133,000 Plant, property & equipment 900,000 Liabilities (350,800) 1,175,200 7 1,175,200" Excess of fair value over cost (175,200) In this case, what is being asked is the excess of fair market value over cost, which according to PFRS 3, Business Combination, is regarded as gain on bargain purchase; thus the correct answer is P175,200. PROB, 4-32 Suggested answer (a) 2,100,000 Fair value of the consideration transferred: Cash 4,000,000 Shares issued (10,000,000 x 1.20) 12,000,000 16,000,000 Less: Fair value of net assets acquired 13,900,000 2,100,000 Goodwill Ina business combination, goodwill is the excess of the sum of the acquisition- date fair value of the assets transferred by the acquirer, the liabilities incurred by the acquirer to former owners of the acquiree and equity interests issued by the acquirer, over the net of the acquisition date amounts of the identifiable assets acquired and the liabilities assumed. Acquisition-related cost is expensed in the periods incurred except cost to issue debt or equity securities. 1 securities shall be included in the measurement of The cost of issuing deb financial liability; while the share issuance cost is deducted from share premium or from retained earnings. PROB. 4-33 Suggested answer (c) I 187,500 Average earnings (800,000/5) 160,000 Less normal earnings 145,000 Excess earnings 15,000" | Multiply by capitalization rate "8% | Goodwill 97500" ‘Scanne wih CamScanetChapter 4 — Accounting for Business G o wn - ‘oodwill may be computed using either direct valuation ap Goodwi i je hor in: ion approach. Under the direct valuation Pproach, 1. igs, pesen ie cot over the market value of the net asset acquire is Cay, acquis - “ Ody der the indirect valuation approach, goodwill may be determi’ aia ways. One of which isthe capitalization of the FACES caring rey the excen of average earnings over the normal earnings ay PROB. 4-34 a. Suggested answer(a) P6,800,000 Total assets of Com Co. and Pol Co. before the purchase (4,000,000 + 2,500,000) 6 S009 Add increase in appraised value of Pol Co.'s assets 300-99 Total assets/ liabilities & stockholders’ equity 6.800.000" When a business combination is appropriately accounted under method, there is a new basis of accountability for the assets acquired With the acquisition of assets through Purchase, assets should be recorded a current fair values, which is their Cost to the buyer that need not coincide with the values reported on the books of the seller. acquisition b. Suggested answer (d) 4,000,000 Com Co.'s capital stock before purchase 2,000,000 Capital stock issued by Com Co. in ‘(2,500,000 + 300,000) - 800,000] Com Co.'s capital stock reflecting the combination the combination 2,000,000 000,000, 4000.00 iinet Com Co.'s eapital stock is no par stated value, the capital so issued by Com Co. for purposes of business combination is equal to market value of Pol Co.'s net assets (@s mentioned in the problem). PROB. 4.35 Suggested answer (d) P8,000,000 . v0 Fair value of preferred stock issued — Minor Co. a ‘Scanne wih CamScanet-F- chapter 4 Accounting for Business Combination 191, Inapplying the acquisition method, the cost to the purchasing, entity of acquiring entity is the amount of cash paid or the fair value of other assets given another ao up. liability assumed, or equity instrument issued in the transaction. ain, PFRS 3, Business Combination, provides that all acquisition related costs be expensed, except the cost of issuing equity securities which reduce the pr from the equity issue; and costs to issue debt securities, which are included in the measurement of financial liabilities. qherefore, the fair value of preferred stock given up is used to measure this Mensaction, except the preferred shares issued (0 an indi: incr! as finder’s fee, d., Accordingly, the acqu’. snow recogr.ize an increase in net which is expense . assets at the acquisition date, because of the issuance of preferred. ‘stock. PROB. 4-36 Suggested answer (b) Decreased by P5,000 | Trademark amortization (100,000/10 x 6/12) 00 The identifiable assets and liabilities acquired by an acquire should be reassessed by the end of the reporting period in which the combination takes place. However, when it is not practicable for the assessment to be finalized in this time scale, the acquirer is required to make a provisional assessment at the end ofthe first reporting period. These provist. «a1 values svoutsi sunsequently be finalized within the measurement period and adjustments siioul ! ee made directly 10 the identifiable net assets, the consideration transferred and goodwill as well. The measurement period ends as soon as the acquirer obtains enough information to finalize the provisional amounts, but in any event does not exceed one year from the date of acquisition. Adjustments that arise afte. » +1 of the measurement period should be recognized as revision of estii:~ so ‘wrefore 1 rror is re ed in profit or loss in the current md ‘Ws ; identified, retrospective treatn:ent is required. | Give _ | Eon te finalization Of the fair value of the trading rights ‘> made after the end loss pros Tai date (more than 12 months), so it is r.cgmized in profit or ively from September 30, 2017 and *>+ no effec’ in 2U16 net income. On the other han Within 1: ‘er hand, the finalization of the fair value of the trademarks is made 2 mor nth dott tad ges 90M the acquisition date, soit i considered tn be relted (0 ingly, the increase in carrying amount by £10,000 (f10,000- ‘Scarne wih CamScanetaX Y Chapter 4 — Accounting for Bs ] sine COL 12 Goi ‘e hich in the amount of P5.000 will decreageg MO 2 longer ane 409,000) will reduce the recorded goodwill by the sar sation of a Noe oF inder the eurrent standards, goodbvil is na income. ! but tested for impairment. PROB. 4-37 Suggested answer (b) 20,400,000 Goodwill (given) , | ‘Add: Fair valve of net assets acquired 000,099 (18,000,000 + 2,000,000) 20,000,000 Deferred tax liability (600,000) Consideration paid by Igloo Co. When an asset in a business combination was revalued at fair value bu iy base remains the same, this would give rise to a taxable temporary diff Recognizing deferred tax asset and deferred tax liability in a combination affects the amount of goodwill or gain from bargain purchase. The recognition of deferred tax asset will increase the fair value of identifiable ws asset; conversely, deferred tax liability will decrease the fair value identifiable nt assez. This impacts on the goodwill or gain from bargain purchase, whichis te “erence between the acquisition cost and the fair value 0). «lentifiable mt ssets acquired. PROB. 4-38 Suggested answer (a) 3,000,000 Before control is obtained, an acquirer accounts for its investment in the interests of an acquiree in accordance with the nature of the invesinat applying the relevant standard (e.g., IAS 28, Investment in Associates 1S. Venture, IAS 39, Financial Instruments: Recognition and Measurement on Financial Instruments). As part of accounting for business combina acquirer remeasures any previously held interest at fair value and 1 ag) account in the determination of goodwill. Any resulting gain oF los Tag in profit or loss or other comprehensive income, as appropriate. Ts Tai of gain t0 be recognized is the increase in fair value of interest aca" amount of P3,000,000 (P 15,000,000 — 12,000,000). PROB. 4-39 Suggesied answer @ ‘canna wih CamScanetcooper t= Accounting for Business Combination 193 1h 19.2, Section 19, Business Combinatis apes the accounting ‘for all business ear fete ination oF erties or ‘businesses under com non eee hae Sect rovides that applying the purchase method MeatneT pi i el ‘Pomipring the acquirer: 2) Measuring ihe cost of th eed ation and 3.) Allocating, at the acquisition date, the cost of the business cuived and Tiailities and provisions for contingent prow. 4-40 suggested answer @ to paragraph 19.12, Section 19, Business Combination, when a business ‘combination agreement provides for an adjustment to the cost of the combination ‘contingent on future Zvents, the acquirer shall include the estimated iustment in the cost of the combination at the acquisition date if -ed reliably. amount of that adj the adjustment is probable and can be measur According PROB. 4-41 Suggested answer ) tecording to paragraph 19.23. Section 19, Business Combination, after initial recognition, the acquirer “Shall measure goodwill acquired in a business ‘combination at cost less accumulated ‘amortization and accumulated impairment losses. PROB, 4-42 Suggested answer (C) mbination (amended in Wa 015 to paragraph 19.230, Section 19, Buaiess Co shee se if the useful life af goodwill cannot be tablished reliably, the life a determined based on management's best estimate but shall not exceed ten ‘Scarne wih CamScanet