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    Business Combination

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    Emma Mariz Garcia
    The document discusses accounting for business combinations and mergers. It defines key terms like acquirer and acquiree. It explains that the acquirer measures the acquiree's assets and liabilities at fair value and recognizes goodwill or gain from the difference between fair value of net assets and consideration. Acquisition-related costs are generally expensed except for certain issuance costs. Journal entries are provided to record the acquisition and subsequent adjustments within the measurement period.

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    Business Combination

    Uploaded by

    Emma Mariz Garcia
    74 views7 pages
    The document discusses accounting for business combinations and mergers. It defines key terms like acquirer and acquiree. It explains that the acquirer measures the acquiree's assets and liabilities at fair value and recognizes goodwill or gain from the difference between fair value of net assets and consideration. Acquisition-related costs are generally expensed except for certain issuance costs. Journal entries are provided to record the acquisition and subsequent adjustments within the measurement period.

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    Business Combination

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    BUSINESS COMBINATION

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    The document discusses accounting for business combinations and mergers. It defines key terms like acquirer and acquiree. It explains that the acquirer measures the acquiree's assets and liabilities at fair value and recognizes goodwill or gain from the difference between fair value of net assets and consideration. Acquisition-related costs are generally expensed except for certain issuance costs. Journal entries are provided to record the acquisition and subsequent adjustments within the measurement period.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    74 views7 pages

    Business Combination

    Uploaded by

    Emma Mariz Garcia
    The document discusses accounting for business combinations and mergers. It defines key terms like acquirer and acquiree. It explains that the acquirer measures the acquiree's assets and liabilities at fair value and recognizes goodwill or gain from the difference between fair value of net assets and consideration. Acquisition-related costs are generally expensed except for certain issuance costs. Journal entries are provided to record the acquisition and subsequent adjustments within the measurement period.

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    BUSINESS COMBINATION

    MERGER
    MERGER – Terms are ACQUIRER and ACQUIREE

    CONSIDERATION
    1. Cash (at face value)
    2. Non-Current Assets (at Fair Value)
    3. Liability (at Fair Value)
    4. Contingent Considerations (at Fair Value/Best Estimates)
    a. If Cash - it’s a liability b. If Shares – it’s an equity

    FAIR VALUE OF NET ASSETS (FVNA) = FV of Assets - FV of Liabilities

    FVNA < Consideration = Goodwill


    FVNA > Consideration = Gain

    ACQUISITION-RELATED COSTS
    General Rule: Must be EXPENSE
    EXCEPTION:
    1) Bond Issue Cost – DEDUCTED from Bonds Payable Account
    2) Share Issue Cost – DEDUCTED from Share Premium from Issuance related to the combination
     In case Share Premium is not enough to absorb the share issue cost, entity must create an
    account “Stock Issue Cost”, which is a contra-equity or a DEDUCTION from retained
    earnings.

    JOURNAL ENTRY FOR ACQUISITION


    - Debit all the assets of the ACQUIREE company, except for CASH. (must be measured at FV)
    o The amount of cash of the ACQUIREE company shall be deducted from the amount of CASH paid as
    consideration by the ACQUIRER company.
    - Credit all the liabilities of the ACQUIREE company. (must be measured at FV)
    - Then credit ALL the considerations paid by the ACQUIRER company
    - EXAMPLE: Problem #1 in BUSINESS COMBINATION –MERGER handout of CPAR

    Accounts Receivable
    Inventories
    Prepaid Expenses
    Land
    Building
    Equipment
    Goodwill (computed in #1)
    Accounts Payable
    Notes Payable
    Cash (Consideration paid – Cash of Acquiree)
    Bonds Payable (at Face Amount)
    Premium on Bonds Payable, if any
    Share Capital (Use the par value of the ACQUIRER)
    Share Premium – Issuance
    Contingent Liability (at Fair Value)

    JOURNAL ENTRY OF ACQUISITION – RELATED COST


    1. EXPENSE
    Retained Earnings (of the ACQUIRER) P xx
    Cash P xx
    2. STOCK ISSUANCE COST
    Share Premium – Issuance P xx
    Cash P xx
    3. BOND ISSUE COST
    Premium on Bonds Payable P xx
    Cash P xx
    TOTAL ASSETS OF THE MERGED CORPORATION
    Book Value of the Assets of ACQUIRER P xx
    Fair Value of the Assets of ACQUIREE xx
    Cash Consideration Paid ( xx )
    Acquisition Related Cost Paid ( xx )
    Goodwill from Acquisition ( xx )
    Total Asset of the Merged Corporation P xx

    TOTAL LIABILITIES OF THE MERGED CORPORATION


    Book Value of the Liabilities of ACQUIRER P xx
    Fair Value of the Liabilities of ACQUIREE xx
    Bonds issued by the ACQUIRER xx
    Premium/(Discount) on Bonds Issued xx
    Bond Issue Cost ( xx )
    Contingent Liability (at FV) xx
    Total Liabilities of the Merged Corporation P xx

    SHARE PREMIUM OF THE MERGED CORPORATION


    Share Premium of the ACQUIRER P xx
    Share Premium – Contingent Consideration xx
    Share Premium from the Issuance (consideration) xx
    Share Issuance Cost ( xx )
    Total Share Premium of Merged Corporation P xx

    SHARE CAPITAL OF THE MERGED CORPORATION


    Share Capital of the ACQUIRER P xx
    Share Capital from Issuance (consideration) xx
    Share Capital – Contingent Consideration xx
    Total Share Capital of Merged Corporation P xx

    RETAINED EARNINGS BALANCE OF THE MERGED CORPORATION


    Retained Earnings of ACQUIRER P xx
    Acquisition Related Expense ( xx )
    Gain from Acquisition xx
    Excess of Share Issue Cost from Share Issuance ( xx )
    Total Retained Earnings of the Merged Corporation P xx

    CONCEPTS AFTER ACQUISITION


    1. Measurement Period Adjustments
    - This applies to provisional value and Contingent consideration
    - Provisional Values is the value wherein the amount is not sure
    - Measurement period ends when best information is obtained, or one year, whichever is earlier.
    - Retroactive application (this will increase or decrease the Goodwill/Gain)
    - Non-measurement period adjustments apply prospectively. It only affects Profit/(Loss). No effect in
    Goodwill/Gain

    PROVISIONAL VALUE
    - If within measurement period and there is INCREASE in provisional value
    o You have to adjust the asset and goodwill
    Asset P xx
    Goodwill/Gain P xx
    o If the asset is PPE, compute the correct depreciation of the PPE using the final measurement,
    then deduct the depreciation recognized for the year to compute for the additional
    depreciation expense.
    - if within measurement period and there is DECREASE in provisional value
    o You have to adjust the asset and Goodwill/Gain: Goodwill/Gain P xx
    Asset P xx
    o If the asset is PPE, compute the correct depreciation of the PPE using the final measurement,
    then deduct the depreciation recognized for the year to compute for the DECREASE in
    depreciation expense.

    CONTINGENT CONSIDERATION – LIABILITY


    - Remeasure the liability to its Fair Value
    a. If the remeasurement happens within measurement period – Retrospective application
     TERM use “It was determined that the probability that the condition attached to
    the additional cash consideration is x% AS OF ACQUISTION DATE”
    b. If BEYOND measurement period – Prospective: it only affects the Profit/(Loss)
    c. Compliance with Conditions – Prospective: it only affects the Profit/(Loss)
     TERM used “it was shown that the condition has been complied with.”
     Journal Entry: In case Complied Loss P xx
    Con. Liability P xx
     Journal Entry: In case Not complied Con. Liability P xx
    Gain P xx
    - If there is an INCREASE IN CONTINGENT LIABILITY within Measurement Period, the journal entry is:
    Goodwill/Gain P xx
    Contingent Liability P xx
    -

    CONTINGENT CONSIDERATION – EQUITY


    - No remeasurement until settlement
    - UPON SETTLEMENT DATE & condition has been complied
    Share Premium – Contingency Share P xx
    Share Capital P xx
    Share Premium – Issuance xx

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