ACCOUNTING FOR BUSINESS COMBINATIONShare-for-share exchangesA business combination may be accomplished through exchange of equity interestsbetween the acquirer and the acquiree (or its former owners). The general principle isthat the consideration transferred (in this case, the shares issued by the acquirer) ismeasured at fair value.However, there may be cases where the fair value of the acquiree’s equity interests maybe more reliably measurable than the acquirer’s. In such cases, the acquirer computesfor 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 anexchange 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 equityinstruments, which resulted to ABC obtaining 100% interest in XYZ. Both entities arepublicly listed. At the acquisition date, ABC’s sharesare quoted at P100 per share. ABCCo., recognized goodwill of P300,000 on the business combination.Additional information follows:ABC CO.,COMBINED ENTITY(before acquisition) (after acquisition)Share capital600,000700,000Share premium300,0001,200,000Totals900,0001,900,000Requirements: 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 reflectedon the increase in share capital and share premium:ABC Co.,Combined EntityIncreaseShare Capital600,000700,000100,000Share premium300,0001,200,000900,000Totals900,0001,900,0001,000,000The fair value of the shares issued as consideration for the business combination isP1,000,000.FV of shares issuedP1,000,000Divide by: FV per ABC’s share100Number of shares issued10,000(b)Par value per shareIncrease in share capital accountP100,000Divide by number of shares issued10,000Par value per shareP10(c)FV of the net assets acquiredConsideration transferred1,000,000Non-controlling interest in the acquiree-Previously held equity interest in the acquiree-Total1,000,000FV of net identifiable assets acquired(squeeze)(700,000)Goodwill (given information)300,000
Business Combination achieved in stagesA business combination is ‘achieved in stages’ whenthe acquirer obtains control of anacquiree in more than one transaction.For example, Entity A acquires 20% interest in EntityB in Year 1. This transaction is nota business combination because Entity A has not yetobtained control of Entity B. InYear 2, Entity A acquires additional 40% interestin Entity B, thereby bringing its interestto a total of 60%. The second acquisition qualifies as a business combination becauseEntity A has obtained control of Entity B.