Module II BUSINESS COMBINATION.pdf - ACCOUNTING FOR...

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ACCOUNTING FOR BUSINESS COMBINATIONRESTRUCTURING PROVISIONS-A program that is planned and controlled by management and materiallychanges either:(a) The scope of a business undertaken by an entity; or(b) The manner in which that business is conducted-It may also include the costs of an entity’s plan:(a) To exit an activity of the acquiree(b) To involuntarily terminate employee of the acquiree, or(c) To relocate non-continuing employees of the acquiree**The costs above are sometimes referred to as “liquidation costs”**Restructuring provisions do not include such costs as (a) retaining or relocatingcontinuing staff, (b) marketing; or (c)investment in new systems and distributionnetworks.PAS 37 Provisions, Contingent Liabilities and Contingent Assets provides thatrestructuring provisions are generally not recognized as part of businesscombination unless the acquiree has, at the acquisition date, an existing liabilityfor restructuring.-A restructuring provision meets the definition of a liability at the acquisition date ifthe acquirer incurs a present obligation to settle the restructuring costs assumed,such as when the acquiree developed a detailed formal plan for the restructuringand raised a valid expectation in those affected that the restructuring will becarried out by publicly announcing the details of the plan or has begunimplementing the plan or on before the acquisition date.-If the acquiree’s restructuring plan is conditional on it being acquired, theprovision does not represent a present obligation, nor is it a contingent liability, atacquisition date.-Restructuring provisions that do not meet the definition of a liability at theacquisition date are recognized as post-combination expenses of the combinedentity when the costs are incurred.
Illustration: Restructuring ProvisionsOn January 1, 20x1, ABC Co. acquired all the assets and liabilities of XYZ Inc. forP1,000,000. On this date, XYZ’s assets and liabilities have fair values of P1,600,000and P900,000, respectively.ABC Co. has estimated restructuring provisions of P200,000 representing costs ofexiting the activity of XYZ, including costs of terminating and relocating the employeesof XYZ.Requirement: Compute for goodwill.**Solution:Consideration transferredP 1,000,000Non-controlling interest in the acquiree-Previously held equity interest in the acquiree-TotalP1,000,000FV of net identifiable assets acquired (P1.6M-.9M)(700,000)GoodwillP 300,000*The restructuring provisions are simplyignoredin the computation of goodwill.*These are considered only when they qualify for recognition under PAS 37 at theacquisition date.*Restructuring provisions that do not meet the recognition criteria as at the acquisitiondate are recognized as post-combination expenses.
SPECIFIC RECOGNITION PRINCIPLESPFRS 3 provides the following special recognition principles:(1) Operating LeasesAcquiree is the lesseeGeneral Rule:The acquirer does not recognize any assets or liabilities related to anoperating lease in which the acquiree is the lessee.

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