1. Big Net pays P3 million to acquire all of Smallport's assets and liabilities. The consideration includes P1 million cash and 20,000 shares worth P2 million. Since the consideration exceeds the fair value of net assets acquired, Big Net recognizes goodwill of P1 million. 2. Big Net pays P2 million consideration through issuing 20,000 shares worth that amount to acquire Smallport. Since the consideration equals the fair value of net assets acquired, no goodwill or bargain gain is recognized. 3. Business combinations involve an acquirer obtaining control of one or more businesses. The acquisition method is used, where the acquirer identifies and measures identifiable assets,

1. BUSINESS COMBINATIONS Advanced Accounting II

2. Definition IFRS 3 (2008) Business combination is a transaction or event in which an acquirer obtains control of one or more businesses. 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 return directly to investors or other owners, members or participants. NOTE: An acquirer must be identified for all business combinations.

3. Definition The term business combination refers in general to any set of conditions in which two or more organizations are joined together through common ownership. It is the term applied to external expansion in which separate enterprises are brought together into one economic entity as a result of one enterprise uniting with or obtaining control over the net assets and operations of another enterprise. SCOPE: PFRS 3 Revised applies to all business combinations except the formation of a joint venture, the acquisition of an asset or a group of assets that does not constitute a business and a combination between entities or businesses under common control.

6. Classification of Business Combination Methods of Combination (Legal Point of View) 1. Acquisition of Assets Statutory Merger- results when one company acquires all the net assets (assets and liabilities) of one or more other companies through an exchange of stock, payment of cash or other property, or the issue of debt instruments (or a combination of these methods). The acquiring company survives (remains in existence), whereas the acquired company (or companies) ceases to exist as a separate legal entity, although it may be continued as a separate division of the acquiring company. Statutory Consolidation – results when a new corporation is formed to acquire the net assets (assets and liabilities) of two or more other corporations. The acquired company, then, ceases to exist as a separate legal entity.

7. Classification of Business Combination 2. Stock Acquisition- an acquiring corporation may acquire majority ownership interest of outstanding voting stock or control of a corporation and the separate legal entity of each enterprise is preserved. In this case, the acquiring corporation is known as the parent and the acquired corporation as subsidiary.

8. What are the positive impacts of a business combination on the part of the acquirer? On the part of the acquiree? What are the limitations and risks involved in a business combination?

10. Acquiring a controlling interest in the target company (usually over 50%)ACQUISITION OF ASSETS Statutory Consolidation: Refers to the combining of two or more existing legal entities into one new legal entityStatutory Merger: Refers to the absorption of one or more existing legal entities by another existing company that continues as the sole surviving entity

11. Acquisition of Control STOCK ACQUISITION A controlling interest of another company’s voting common stock is acquired. The acquiring company is called “parent” (also the acquirer) and the acquired company is termed as “subsidiary” (also the acquiree). Both the parent and the subsidiary remain separate legal entities and maintain their own financial records and statements. However, for external financial reporting purposes, the companies will usually combine their individual financial statements into a single set of consolidated statements.

12. Methods of Business Combinations Under the old standard, two methods were used to account for business combinations. Purchase method (acquisition method under the revised IFRS 3) Pooling of interests method (eliminated under the revised IFRS 3)

14. In a stock acquisition, the company transferring cash or other assets for a controlling interest in the voting stock of the acquiree

15. The company issuing the voting stock is the acquirer

17. IFRS 3 explains that the date on which the acquirer obtains control of the acquiree is generally the date on which the acquirer legally transfers the consideration, acquires the assets and assumes the liabilities of the acquiree-the closing date

18. Acquisition date may be earlier or later than the closing date

20. IFRS 3 (2008) requires the consideration given in a business combination to be measured at fair value.

21. This is calculated as the sum of the acquisition-date fair values of

22. The assets transferred by the acquirer

23. The liabilities incurred by the acquirer to former owners of the acquiree, and

26. Contingent consideration is measured at its acquisition-date fair value

28. Unrecognized Assets and Liabilities The acquirer may recognize some assets and liabilities that the acquiree had not previously recognized in its financial statements.