MODULE OBJECTIVES

Module 1: Business Combination

Objectives:
1. Describe the nature, scope and characteristics of a business
combination
2. Determine the cost of acquisition of the acquirer
3. Recognize acquired assets and liabilities, compute goodwill or gain
from a bargain purchase
4. Prepare journal entries in the books of the acquirer
5. Present the results of business combination in the financial
statements

Topics:
Lesson 1: Concept of Business Combination
Lesson 2: Acquisition of Assets and Liabilities
Lesson 3: Recognizing and Measuring Goodwill
Lesson 4: Journal Entries

References:
• PICPA PFRS (Philippine Financial Reporting Standards): GIC
Enterprises & Co. Inc., Manila, Philippines
• Vera Cruz-Manuel, Zenaida – Advanced Accounting: Raintree
Trading & Publishing, Inc., Quezon City, Philippines
• Baysa and Lupisan – Advanced Accounting Part 2: Millennium
Books Inc., Mandaluyong City, Philippines
• Dayag, Antonio J. – Advanced Accounting Volume 2: Pixeplate
Publishing and Printing, Manila, Philippines
• Millan, Zeus Vernon B. – Advanced Accounting 2: Bandolin
Enterprises Publishing and Printing, Baguio City, Philippines

Disclaimer: Not all texts in this module are original of the writer. Most of
them are excerpts from the references that are mentioned in this module.
 LESSON 1: CONCEPT OF BUSINESS COMBINATION

When the business reaches the point for expansion as it seeks to generate more profits and
try to increase its operational efficiency, the business may consider either to construct new
amenities such as opening of branches or acquiring an existing business thru business
combination. In deciding on setting up a branch or acquiring an existing business, decision
would depend on the activities to be taken by the parent. The main advantages of business
combination are (1) elimination or reduction of competition; (2) control over the value chain;
and (3) reduced investment risk due to diversification.

What is Business Combination?

Business Combination, under the Philippine Financial Reporting Standards (PFRS), is

defined as “bringing together of separate entities or businesses into one reporting entity.
The result is that one entity, the acquirer, obtains control of one or more other
businesses, the acquiree”.

Discussions does NOT apply to:

a. Acquisition does not constitute a business

A business is defined as an integrated set of activities and assets that is capable

of being conducted and managed for the purpose of providing a return directly to
investors or other owners, members or participants.

b. Joint venture
c. Combination under common control

When do we have CONTROL?

Under the accounting standards, there is control when:

“The investor controls an investee when the investor, through its power over the
investee, is exposed, or has rights, to variable returns from its involvement with the
investee and has the ability to affect those returns.”

General rule:

Acquisitions may be classified as follows:

SIGNIFICANT INFLUENCE
(at least 20%-50%) = ASSOCIATE

CONTROL (50 + 1 percent) = ACQUIRER

Exemption: There is control even at 50% or less under the following:

a. Power over more than half of the voting rights by virtue of an agreement
with other investors.
b. Power to govern the financial and operating policies of the enterprise under
a statute or agreement.
 c. Power to appoint or remove majority of the members of the BOD or
equivalent governing body or
d. Power to cast majority of votes at meetings of the BOD or governing
equivalent body.

What are the objectives of doing business combination?

1. Profitability
2. Operating efficiencies

a. Vertical Integration – Combination of firms with different but successive, stages of

production

b. Horizontal Integration – Combination of firms with the same business lines and
market

c. Conglomeration – Combination of firms with unrelated and diverse products

and/or service functions

LESSON 2: ACQUISITION OF ASSETS AND LIABILITIES

What are the ways of doing business combination?

Under PFRS, a business combination may be structured in a variety of ways for legal,
taxation or other reasons. It may involve (1) the purchase by an entity of the equity of
another entity, (2) the purchase of all the net assets of another entity, the assumption of
the liabilities of another entity, or the purchase of some of the net assets of another entity
that together form one or more businesses. It may involve the establishment of a new
entity to control the combining entities or net assets transferred, or the restructuring of
one or more of the combining entities.

a. ASSET ACQUISITION/FUSION or acquisition by one enterprise of the net assets of

another enterprise and integrating these into its own operations (no parent-subsidiary
relationship). Also referred to as Legal Merger.

b. STOCK ACQUISITION/STOCK CONTROL or acquisition by one enterprise of the

majority shares of another enterprise. There is parent-subsidiary relationship in which
the acquirer is the parent and the acquiree a subsidiary of the acquirer.

Business combination may be done by the issuance of equity instruments, the

transfer of cash, cash equivalents or other assets, or a combination thereof. The
transaction may be between the shareholders of the combining entities or between one
entity and the shareholders of another entity.
What are the steps in doing business combination?

Under the accounting standards, all business combination shall be accounted for by
applying the ACQUISITION METHOD

Steps in the application of acquisition method:

1. Identification of the 'acquirer‘.
2. Determination of the 'acquisition date'.
3. Recognition and measurement of the identifiable assets acquired, the liabilities
assumed and any non-controlling interest (NCI, formerly called minority interest)
in the acquiree.
4. Recognition and measurement of goodwill or a gain from a bargain purchase
option.

The ACQUIRER is the combining entity that obtains control of the other combining
entities or businesses.

Usual indicators:

a. The entity with the greater fair value is likely to be the acquirer;
b. The entity giving up cash or other assets is likely to be the acquirer; and
c. The entity whose management can dominate is likely to be the acquirer

In a business combination effected through an exchange of equity interest, the entity

that issues the equity interest is normally the acquirer.

ACQUISITION DATE is the date on which the acquirer obtains control of the acquiree.
This is also the measuring date of the asset acquired and liabilities assumed. Typically,
the acquisition date would be the date when payment or consideration is transferred
whether in the form of assets given, liabilities incurred or assumed, and equity
instruments issued. But in some cases, control can be obtained even without exchanging
any consideration like securing an agreement. Control can also be achieved over time
or in stages, this is called “step acquisition”

The ASSETS ACQUIRED and LIABILITY ASSUMED in a business combination are

measured at acquisition date fair values. An acquirer classifies and designates asset
acquired and liabilities assumed based on the contractual terms, economic conditions,
operating and accounting policies and other pertinent conditions existing at acquisition
date.

After identifying the assets and liabilities acquired, the acquirer must also determine the
existence of non-controlling interest. The value of non-controlling interest is often
ascertained based on the number of shares held by the non-controlling interest. PFRS
allows an accounting policy choice available on a transaction-by-transaction basis, to
measure NON-CONTROLLING INTEREST (NCI) either at:

➢ fair value (sometimes called the full goodwill method), or

➢ the NCI's proportionate share of net assets (sometimes called partial goodwill
method) of the acquiree.
 The acquirer shall measure the COST OF ACQUISITION / CONSIDERATION
TRANSFERRED at the fair values, at the date of acquisition, of assets given, liabilities
incurred or assumed, and equity instruments issued by the acquirer, in exchange for
control of the acquiree. Consideration for the acquisition includes the acquisition-date
fair value of contingent consideration.

Published price at the date of exchange of a quoted equity instrument provides the best
evidence of the instruments fair value.

Cost of arranging and issuing financial liabilities (PAS 39 under bond issue cost)
and equity instruments (PAS 32 under share premium) shall not be included in the cost
of business combination.

All other costs associated with the acquisition must be expensed, including
reimbursements to the acquiree for bearing some of the acquisition costs. Examples of
costs to be expensed include finder's fees; advisory, legal, accounting, valuation, and
other professional or consulting fees; and general administrative costs, including the
costs of maintaining an internal acquisitions department.

Goodwill internally developed by the acquired company and included in its statement of
financial position as part of assets to be transferred is IGNORED in computing for
goodwill from combination or in the consolidation of parent and subsidiary financial
statements

LESSON 3: RECOGNIZING AND MEASURING GOODWILL

In an acquisition of a company, the acquirer is buying more than the assets and liabilities
found in its financial statements. The acquirer is also buying the company’s reputation, its
customer’s loyalty, expertise of its employees and other unrecorded potentials of said
company. In this regard, the acquisition price would normally be higher than the value of its
net assets, but it does not necessarily mean overpayment rather a recognition of
GOODWILL.

What is goodwill?

Goodwill can be defined as an established reputation of a company resulting from its

good name, good location, good performance, or even good customer relations. In
accounting, goodwill is classified as a long-term asset categorized as an intangible
quantifiable asset represented by the excess of price paid over the fair value of interest
acquired from an acquisition of a business. Before acquiring an existing business, a
forecast of future income is made to arrive at a logical purchase price and the payment
for expected earnings in excess of normal future earnings is considered goodwill.
How do we measure goodwill?

Goodwill is measured as the difference between:

➢ the aggregate of (i) the acquisition-date fair value of the consideration

transferred, (ii) the amount of any non-controlling interest (NCI), and in a
business combination achieved in stages, the acquisition-date fair value of the
acquirer's previously-held equity interest in the acquiree; and
➢ the net of the acquisition-date amounts of the identifiable assets acquired
and the liabilities assumed (measured at fair values).

If the difference above is negative, the resulting GAIN is recognized as a bargain

purchase in profit or loss.

Goodwill acquired in a business combination shall not be amortized. Instead, the

acquirer shall test it for impairment. After initial recognition, the acquirer shall measure
goodwill acquired in a business combination at cost less any accumulated impairment
losses. But Small and Medium Enterprises (SME) are allowed to amortized goodwill
(10 years) based on the accounting standards for SME

Module 1.3.1 Illustration (100% Acquisition)

Ama Inc. acquired 100% of Anak Co. for P10,000,000. The carrying value of the net assets
of Anak Co. is P8,500,000 and the fair value of the net assets is also P8,500,000.

Compute for goodwill:

Consideration transferred P10,000,000
Less book value of net assets 8,500,000
Goodwill P 1,500,000

Let us assume instead, Ama Inc. acquired 100% of Anak Co. for P10,000,000. The carrying
value of the net assets of Anak Co. is P8,500,000 and the fair value of the net assets is
P9,000,000.

Compute for goodwill:

Consideration transferred P10,000,000
Less book value of net assets 8,500,000
Allocated excess P 1,500,000
Less over/under valuation of assets and liabilities
(9,000,000 – 8,500,000) 500,000
Goodwill P 1,000,000
Module 1.3.2 Illustration (Less than 100% Acquisition)

Ama Inc. acquired 80% of Anak Co. for P10,000,000. The carrying value of the net assets
of Anak Co. is P8,500,000 and the fair value of the net assets is P9,000,000.

PARTIAL GOODWILL APPROACH

Compute for goodwill:

Consideration transferred P10,000,000
Less book value of net assets (8,500,000 x 80%) 6,800,000
Allocated excess P 3,200,000
Less over/under valuation of assets and liabilities
(9,000,000 – 8,500,000) x 80% 400,000
Goodwill (Partial Goodwill) P 2,800,000

Compute non-controlling interest:

Book value of net assets P8,500,000
Over/under valuation of assets and liabilities
(9,000,000 – 8,500,000) 500,000
Fair value of net assets P9,000,000
NCI % (100% - 80%) 20%
NCI (Proportionate share or partial goodwill) P1,800,000

Module 1.3.3 Illustration (Less than 100% Acquisition)

Ama Inc. acquired 80% of Anak Co. for P10,000,000. The carrying value of the net assets
of Anak Co. is P8,500,000 and the fair value of the net assets is P9,000,000.

FULL GOODWILL APPROACH

Compute for goodwill:

Consideration transferred (10,000,000 / 80%) P12,500,000
Less book value of net assets 8,500,000
Allocated excess P 4,000,000
Less over/under valuation of assets and liabilities
(9,000,000 – 8,500,000) 500,000
Goodwill (Full Goodwill) P 3,500,000

Compute non-controlling interest:

Book value of net assets P 8,500,000
Over/under valuation of assets and liabilities
(9,000,000 – 8,500,000) 500,000
Fair value of net assets P 9,000,000
Goodwill 3,500,000
Total P12,500,000
NCI % (100% - 80%) 20%
NCI (Fair value or full goodwill) P 2,500,000
Take note that goodwill is attributable to both parent and NCI as follows:
Parent share (3,500,000 x 80%) P2,800,000
NCI share (3,500,000 x 20%) 700,000
Total goodwill (full goodwill) P3,500,000

Module 1.3.4 Illustration (Fair value of non-controlling interest is given)

Ama Inc. acquired 80% of Anak Co. for P10,000,000. The carrying value of the net assets
of Anak Co. is P8,500,000 and the fair value of the net assets is P9,000,000. Additional
information showed that non-controlling interest was assigned a fair value of
P2,300,000

Computation of goodwill and non-controlling interest under PARTIAL GOODWILL is not

affected by the additional information. Partial goodwill will remain at P2,800,000 and NCI at
P1,800,000 (refer to Module 1.3.2 Illustration)

FULL GOODWILL APPROACH

Compute for goodwill:

Consideration transferred P10,000,000
Fair value of NCI 2,300,000**
Fair value of subsidiary P12,300,000
Less book value of net assets 8,500,000
Allocated excess P 3,800,000
Less over/under valuation of assets and liabilities
(9,000,000 – 8,500,000) 500,000
Goodwill (Full Goodwill) P 3,300,000

Full goodwill P3,300,000

Less goodwill attributable to parent 2,800,000
Goodwill attributable to NCI P 500,000

Compute non-controlling interest:

Book value of net assets P 8,500,000
Over/under valuation of assets and liabilities
(9,000,000 – 8,500,000) 500,000
Fair value of net assets P 9,000,000
NCI % (100% - 80%) 20%
NCI share on net assets P 1,800,000
Add NCI share in goodwill 500,000
NCI (Fair value or full goodwill) P 2,300,000

** This amount should not be lower compared to fair value of NCI computed at fair
value of net assets (9,000,000 x 20% = 1,800,000). Otherwise, the higher amount
should be used.
 LESSON 4: JOURNAL ENTRIES

Journal entries on business combination will depend on the way the combination was made.
Under asset-acquisition or merger, the acquirer acquires the assets and assumes the
liabilities of the acquiree thereby consolidating them to its own assets and liabilities after
which the acquiree would no longer exist. Whereas under stock-acquisition or stock control
the acquirer purchased shares of stocks or equity of the acquiree and gain control. Stock
control creates a parent-subsidiary relationship with both acquirer and acquiree continuing
to exist.

It should also be noted that business combination as it is defined involves two parties, the
acquirer and acquiree/s. The focus of discussion for this course would be acquirer’s point-
of-view with some selected discussion on the acquiree’s books.

What are the journal entries for ASSET ACQUISITION/FUSION (no parent-subsidiary
relationship?

Books of the ACQUIRER:

1. Consideration Transferred

DEBIT:
• Investment in Acquiree (to be reversed upon transfer of net assets)

CREDIT:
• Cash/property/liabilities/equity/combination thereof at fair value

2. Acquisition related cost

DEBIT:
• Expense (if any) for direct or indirect acquisition related cost
• Share premium (if any) for cost of issuing equity securities
• Bond issue cost (if any) for cost of arranging and issuing debt securities

CREDIT:
• Cash

3. Receipt of Net Assets

DEBIT:
• Itemized assets acquired at fair value
• Goodwill if any

CREDIT:
• Itemized liabilities assumed at fair value
• Gain on Bargain Purchase if any
• Investment in Acquiree
 The following procedures will be made on the books of the ACQUIREE.
1. Adjust and close the nominal accounts and transfer the profit to date of
combination to retained earnings.
2. Revalue the assets to its fair value against retained earnings. Any goodwill in the
books of the acquiree before the combination are also closed to retained earnings.
3. Close the asset and liability accounts for the transfer of net assets to a receivable
account to be collected from the acquirer.
4. Record the receipt the consideration transferred as payment by the acquirer
5. Record the distribution of consideration transferred as final settlement to the
shareholders.

Module 1.4.1 Illustration

Z Corp. agreed to a merger on March 1 with A Corp. A Corp. will issue 1,200 shares of
stock to acquire the assets and assume the liabilities of Z Corp. Their balance sheet just
before the combination are as follows:

A Corp Z Corp
Cash 300,000 10,000
Receivables 25,000
Inventories 60,000 20,000
F & F (net) 80,000 50,000
Equipment (net) 120,000 70,000
Total 585,000 150,000

Accounts payable 55,000 15,000

Capital stock, par P100 300,000
par P100 100,000
Share premium 120,000 20,000
RE 110,000 15,000
Total 585,000 150,000

Additional information: Equipment’s FMV P100,000

Accrued expenses to be recognized 5,000
Market value of A’s stock P180

Additional costs incurred by A Corp.:

Legal fees for business combination P10,000
Legal and audit fees for the registration 25,000
SEC registration fees 1,000
Brokerage fees 28,125
Printing cost of securities 1,200

REQUIRED: Prepare journal entries for the business combination

ANSWER:

Books of A Corporation:

1. Consideration transferred:

Investment in Z Corp. 216,000

Capital stock (1,200 x P100) 120,000
Share Premium (1,200 x P80) 96,000

2. Acquisition related costs:

Expense (10,000 + 28,125) 38,125

Share Premium (25,000 + 1,000 + 1,200) 27,200
Cash 65,325

3. Receipt of net assets:

Cash 10,000
Inventories 20,000
F&F 50,000
Equipment 100,000
Goodwill 56,000
Accts. Payable 15,000
Accrued Expense 5,000
Investment in Z Corp. 216,000

Supporting computation:

Consideration transferred:
Stock issued (1,200xP180) P216,000

Net assets of acquired:

Cash 10,000
Inventories 20,000
F & F (net) 50,000
Equipment (net) 100,000
Accts. Payable (15,000)
Accrued expenses (5,000) 160,000
Goodwill P 56,000
Module 1.4.2 Illustration

Using the data in Illustration 1.4.1 but assume that a CASH PAYMENT of P105,000 is given
by A Corp. for the net assets (except for the cash) of Z Corp. and that direct out of pocket
costs such legal fees of P10,000 and brokerage fees of P28,125 were incurred. The other
cash outlays in Illustration 1.4.1 are irrelevant as these are cost incurred only when stocks
are issued.

REQUIRED: Prepare journal entries for the business combination

ANSWER:

Books of A Corporation:

1. Consideration transferred:

Investment in Z Corp. 105,000

Cash 105,000

2. Acquisition related costs:

Expense (10,000 + 28,125) 38,125

Cash 38,125

3. Receipt of net assets:

Inventories 20,000
F&F 50,000
Equipment 100,000
Accts. Payable 15,000
Accrued Expense 5,000
Investment in Z Corp. 105,000
Gain on Bargain Purchase 45,000

Supporting computation:

Consideration transferred:
Cash price P105,000

Net assets of acquired:

Inventories 20,000
F & F (net) 50,000
Equipment (net) 100,000
Accts. Payable (15,000)
Accrued expenses (5,000) 150,000
Gain on bargain purchase P( 45,000)
In a business combination effected by issuance of share capital which involves two or more
acquirees, it is important that to prepare an EQUITABLE STOCK DISTRIBUTION PLAN to
determine the number of shares to be issued by the acquirer to recognize the contribution
of each of the acquiree companies. A satisfactory allocation of individual contribution of the
acquiree companies is affected by (1) net asset contribution and (2) earnings
contribution or goodwill. When earning rates are approximately the same, parties may
agree that shares be issued based on net asset contribution alone. Goodwill or earning
contribution may be computed as follows:
1. By capitalizing or dividing excess earnings at a certain agreed rate
2. Excess of total contribution over net asset contribution where total contribution is
determined by capitalizing estimated earnings.

The issuance of share capital maybe through a single class of share capital or two classes
of share capital.

When a SINGLE SHARE CAPITAL is to be issued, parties may provide that earnings above
normal be the basis for measuring goodwill or earning contribution which is to be added to
net asset contribution to determine the company’s total contribution. The parties may agree
that goodwill will not be recognized but computed only for the purpose of an equitable
allocation of stocks to be issued.

Module 1.4.3 Illustration

M Corp., P Corp. and R Corp. are parties to a merger whereby M will take over the assets
and assume the liabilities of P and R. You are given the following data:

P Corp R Corp Total

Total assets P600,000 P400,000 P1,000,000
Total liabilities 400,000 100,000 500,000
Average annual
earnings 56,000 42,000 98,000

Normal profit for the industry is 10% of net assets with the excess earnings capitalized at
20% in recognition of goodwill. Assume that M’s stock has a par value of P200 and will
distribute shares of stock equal to contribution of the acquirees.

Requirements:
1. Prepare Equitable Distribution Plan
2. Journal entries for business combination
a. Goodwill is recognized
b. Goodwill is not recognized

ANSWER:

1. Equitable Stock Distribution Plan

P Corp R Corp Total

Net assets P200,000 P300,000 P500,000
Ave. Earnings 56,000 42,000 98,000
 Normal Earnings (10%) 20,000 30,000 50,000
Excess Earnings 36,000 12,000 48,000
Capitalization rate 20% 20% 20%
Goodwill P180,000 P 60,000 P240,000
Total Contribution P380,000 P360,000 P740,000

2.a. Goodwill is recognized:

1. Consideration transferred:

Investment in P & R 740,000

Capital stock 740,000

2. Receipt of net assets:

Assets (in detail) P1,000,000

Goodwill 240,000
Liabilities (in detail) P500,000
Investment in P & R 740,000

Supporting computation:

Shares to be issued based on P740T

P Corp (3,700 x (380,000 / 740,000) = 1,900 shares @ P200
R Corp (3,700 x (360,000 / 740,000) = 1,800 shares @ P200
Total (740,000 / 200) = 3,700 shares

2.b. Goodwill is NOT recognized:

1. Consideration transferred:

Investment in P & R P500,000

Capital stock 500,000

2. Receipt of net assets:

Assets (in detail) P1,000,000

Liabilities (in detail) P500,000
Investment in P & R 500,000

Supporting computation:

Shares to be issued based on P740T

P Corp (2,500 x (380,000 / 740,000) = 1,284 shares @ P200
R Corp (2,500 x (360,000 / 740,000) = 1,216 shares @ P200
Total (500,000 / 200) = 2,500 shares
Module 1.4.3 Two Classes of Share Capital

The following procedures are generally applied in the allocation of TWO CLASSES OF
SHARE CAPITAL of the acquirer to the acquirees:
1. Estimated earnings of the acquirees are capitalized at a certain rate to determine the
total share capital to be issued to each acquiree. This rate must not exceed the
earnings rate of any of the acquirees
2. Preference share capital is distributed equal to the net assets contribution of each of
the acquirees. This share capital is fully participating and is preferred as to assets
upon dissolution, and the dividend rate does not exceed the capitalization rate.
3. Ordinary share capital is issued to each company for the difference between the total
contribution and the amount of preference share capital and it shall represent
payment for goodwill. If no goodwill is recorded, the value of net assets is allocated
between the preference shares and the ordinary shares on a rational manner.

Using 1.4.3 Illustration, assume instead that earnings are to be capitalized at 10% in
determining the total contributions of P Corp and R Corp. 8% preference shares, fully
participating are to be distributed in proportion to the net assets contributions. Ordinary
shares are to be distributed for the difference between the total contributions and the net
assets contributions. Both shares have par values of P200 each.

REQUIRED:
1. Prepare Equitable Distribution Plan
2. Journal entries for business combination
a. Goodwill is recognized
b. Goodwill is not recognized

ANSWER:

1. Equitable Stock Distribution Plan

P Corp R Corp Total
Net assets (PS) P200,000 P300,000 P500,000
Ave. Earnings 56,000 42,000 98,000
Capitalization rate 10% 10% 10%
Total Contribution P560,000 P420,000 P980,000
Goodwill (CS) P360,000 P120,000 P480,000

2.a. Goodwill is recognized:

1. Consideration transferred:

Investment in P & R P980,000

Preference share capital 500,000
Ordinary share capital 480,000

2. Receipt of net assets:

Assets (in detail) P1,000,000

Goodwill 480,000
Liabilities (in detail) P500,000
Investment in P & R 980,000
 Supporting computation:

P Corp R Corp Total

Number of preference shares

(500,000 / P200) 2,500 @ P200
(2,500 x (200T / 500T) 1,000
(2,500 x (300T/500T) 1,500

Number of ordinary shares

(480,000 / P200) 2,400 @ P200
(2,400 x (360T / 480T) 1,800
(2,400 x (120T / 480T) 600
.
Total (980,000 / 200) 4,900 .

2.b. Goodwill is NOT recognized:

1. Consideration transferred:

Investment in P & R P500,000

Preference share capital 255,200
Ordinary share capital 244,800

2. Receipt of net assets:

Assets (in detail) P1,000,000

Liabilities (in detail) P500,000
Investment in P & R 500,000

Supporting computation:

P Corp R Corp Total

Number of preference shares

((500,000 x (500T/980T) / P200) 1,276 @ P200
(1,276 x (200T / 500T) 510
(1,276 x (300T/500T) 766

Number of ordinary shares

((500,000 x (480T/980T) / P200) 1,224 @ P200
(1,224 x (360T / 480T) 918
(1,224 x (120T / 480T) 306
.
Total (500,000 / 200) 2,500 .
Under STOCK ACQUISITION, the acquirer purchases equity shares to control the activities
of the acquiree/s but does not dissolve the later resulting in a parent-subsidiary relationship.
Thus, both the acquirer (parent) and acquiree/s (subsidiary) will continue to operate
separately. Accordingly, all parties continue to maintain its separate books of accounts and
issues its corresponding separate financial statements.

Upon business combination. The acquiree/s records the issuance of their corresponding
shares and the acquirer shall include its interest in the acquiree in any separate financial
statements it issues as an INVESTMENT IN SUBSIDIARY.

What are the journal entries for STOCK ACQUISITION/STOCK CONTROL (with parent-
subsidiary relationship)?

Books of the ACQUIRER:

1. Consideration Transferred:

DEBIT:
• Investment in Subsidiary

CREDIT:
• Cash/property/liabilities/equity/combination thereof at fair value

2. Acquisition related cost:

DEBIT:
• Expense (if any) for direct or indirect acquisition related cost
• Share premium (if any) for cost of issuing equity securities
• Bond issue cost (if any) for cost of arranging and issuing debt securities

CREDIT:
• Cash

Note: Any difference between fair value interest acquired and consideration
transferred shall be taken into consideration upon consolidation of financial
statements.

Module 1.4.4 Illustration

The following are the balance sheet of P and S Co. at March 1, 2019 just before the stock
acquisition:
P Company S Company
Cash P140,000 P 40,000
Inventories 160,000 80,000
Investment in MS 100,000 100,000
Plant & Equipments 475,000 300,000
Patents 20,000
Total P875,000 P540,000
 Liabilities P351,000 P150,000
Capital stock, par P10 300,000 200,000
Share premium 90,000 60,000
Retained earnings 134,000 130,000
Total P875,000 P540,000

P acquired ALL of the stocks of S by issuing 10,000 of its shares of stock currently selling
at P40. Paid direct cost of P50,000

Fair value of some of S assets: Inventories, P110,000; PPE, P350,000; and Patents,
P50,000.

REQUIRED: Prepare journal entries for business combination

ANSWER:

Books of P Company:

1. Consideration transferred:

Investment in S Co. 400,000

Capital stock 100,000
Share premium 300,000

2. Acquisition related cost:

Expense 50,000
Cash 50,000

Module 1.4.7 Illustration

The following are the balance sheet of P and S Co. when P decided to acquire 4,500 shares
of S for P580,000 including direct cost of P30,000:

P Company S Company
Cash P850,000 P 50,000
Receivables 200,000 100,000
Inventories 600,000 200,000
Plant & Equipments 1,260,000 450,000
Total P2,910,000 P800,000

Liabilities P300,000 P200,000

Capital stock, par P100 2,000,000 500,000
Share premium 400,000
Retained earnings 210,000 100,000
Total P2,910,000 P800,000

On this date the market values of S inventories and PPE are P210,000 and P470,000
respectively
REQUIRED: Prepare journal entries for business combination

ANSWER:

Books of P Corporation:

1. Consideration transferred:

Investment in S Co. (580T – 30T) 550,000

Cash 550,000

2. Acquisition related cost:

Expense 30,000
Cash 30,000

Assume instead, that P acquired 4,500 shares of stocks of S by issuing 5,000 of its shares
with a market value of P116 and paid printing cost of said securities amounting to P3,000.

Books of P Corporation:

1. Consideration transferred:

Investment in S Co. 580,000

Capital stock (5,000 x 100) 500,000
Share premium (5,000 x (116 – 100)) 80,000

2. Acquisition related cost:

Share premium 3,000

Cash 3,000

Module 1.4.8 Disclosures

What are the financial statement disclosures required for business combination?

The acquirer shall disclose information that enables users of its financial statements to
evaluate the nature and financial effect of a business combination that occurs either during
the current reporting period or after the end of the period but before the financial statements
are authorized for issue. Among the disclosures required to meet the foregoing objective are
the following:
• name and a description of the acquiree.
• acquisition date.
• percentage of voting equity interests acquired.
• primary reasons for the business combination and a description of how the acquirer
obtained control of the acquiree. description of the factors that make up the goodwill
recognized
• acquisition-date fair value of the total consideration transferred and the acquisition-
date fair value of each major class of consideration
• details of contingent consideration arrangements and indemnification assets
• details of acquired receivables
• the amounts recognized as of the acquisition date for each major class of assets
acquired and liabilities assumed.
• details of contingent liabilities recognized
• total amount of goodwill that is expected to be deductible for tax purposes
• details of any transactions that are recognized separately from the acquisition of
assets and assumption of liabilities in the business combination
• information about a bargain purchase
• for each business combination in which the acquirer holds less than 100 per cent of
the equity interests in the acquiree at the acquisition date, various disclosures are
required
• details about a business combination achieved in stages
• information about the acquiree's revenue and profit or loss
• information about a business combination whose acquisition date is after the end of
the reporting period but before the financial statements are authorized for issue