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

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ACCOUNTING FOR BUSINESS COMBINATION Share-for-share exchanges A business combination may be accomplished through exchange of equity interests between the acquirer and the acquiree (or its former owners). The general principle is that the consideration transferred (in this case, the shares issued by the acquirer) is measured at fair value. However, there may be cases where the fair value of the acquiree’s equity interests may be more reliably measurable than the acquirer’s. In such cases, the acquirer computes for goodwill using the fair value of the acquiree’s equity interests instead of its own. Example: XYZ Inc., an unlisted company, acquires ABC Co., a publicly listed entity, through an exchange of equity instruments. The FV of ABC’s (acquiree) shares may be more reliably measurable than XYZ’s (acquirer) because ABC’s shares are quoted, while XYZ’s are not. Illustration 1: ABC Co., and XYZ, Inc., combined their businesses through exchange of equity instruments, which resulted to ABC obtaining 100% interest in XYZ. Both entities are publicly listed. At the acquisition date, ABC’s shares are quoted at P100 per share. ABC Co., recognized goodwill of P300,000 on the business combination. Additional information follows: ABC CO., COMBINED ENTITY (before acquisition) (after acquisition) Share capital 600,000 700,000 Share premium 300,000 1,200,000 Totals 900,000 1,900,000 Requirements: Compute for the following: (a) Number of shares issued by ABC Co. (b) Par value per share of the shares issued
(c) Acquisition-date fair value of the net identifiable assets of XYZ (a) The consideration transferred is in the form of shares. Accordingly, this is reflected on the increase in share capital and share premium: ABC Co., Combined Entity Increase Share Capital 600,000 700,000 100,000 Share premium 300,000 1,200,000 900,000 Totals 900,000 1,900,000 1,000,000 The fair value of the shares issued as consideration for the business combination is P1,000,000. FV of shares issued P1,000,000 Divide by: FV per ABC’s share 100 Number of shares issued 10,000 (b) Par value per share Increase in share capital account P100,000 Divide by number of shares issued 10,000 Par value per share P 10 (c) FV of the net assets acquired Consideration transferred 1,000,000 Non-controlling interest in the acquiree - Previously held equity interest in the acquiree - Total 1,000,000 FV of net identifiable assets acquired (squeeze) (700,000) Goodwill (given information) 300,000
Business Combination achieved in stages A business combination is ‘achieved in stages’ when the acquirer obtains control of an acquiree in more than one transaction. For example, Entity A acquires 20% interest in Entity B in Year 1. This transaction is not a business combination because Entity A has not yet obtained control of Entity B. In Year 2, Entity A acquires additional 40% interest in Entity B, thereby bringing its interest to a total of 60%. The second acquisition qualifies as a business combination because Entity A has obtained control of Entity B.

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