Business Combination & Consolidation on Acquisition Date

Question 1

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Please review your diagram for relevant FORMULAS MOSTLY USED IN PFRS 3 AND 10

Question 2

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Under IFRS___
What method for ALL business combinations?

Answer 2

IFRS 3
Acquisition Method (Purchase Method)

Question 3

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The acquisition method involves 4 steps:

Answer 3

✓ Identifying the acquirer.
✓ Determining the acquisition date.
✓ Recognizing and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree.
✓ Recognizing and measuring goodwill or a gain from a bargain purchase.

Question 4

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A) Control as the basis for consolidation (PFRS 10)

B) What is control?

Answer 4

A)
* The basic rule is:
✓ If an investor controls its investee,
then investor must consolidate.
✓ If an investor does NOT control its investee,
then investor does NOT consolidate.

B)
An investor controls an investee when the investor:
✓ Is exposed to, or has right to variable returns from its involvement with the investee.
✓ Has the ability to affect those returns.
✓ Through its power over the investee.

Question 5

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Accounting requirements of IFRS 10

Provide two (2) Consolidation procedures

Answer 5

In order to prepare consolidated financial
statements, IFRS 10 prescribes the
following consolidation procedures:

▪ Combine like items of assets, liabilities, equity, income, expenses and cash flows of the parent with those of its subsidiaries.

▪ Offset (eliminate):
✓ The carrying amount of the parent’s investment in each subsidiary; and
✓ The parent’s portion of equity of
each subsidiary.
✓ Eliminate in full intragroup assets
and liabilities, equity, income,
expenses and cash flows relating to
transactions between entities of the
group.

Question 6

Bus Comb

A business combinations are carried through:

1. Asset Acquisition - the acquirer purchases the assets and assumes the liabilities of the acquiree in exchange for cash or non-cash consideration:
   Under Corpo Code of the PH, a business combi effected through asset acquisition may be either:
   a. Statutory Merger - A+B=A or B
   b. Statutory Consolidation - A+B=C
2. Stock Acquisition:
   Instead of acquiring assets and assuming the liabs of the acquiree, the acquirer obtains CONTROL over the acquiree by acquiring majority ownership interest (more than 50%) in the voting rights of the acquiree.

IMPT: Usually, the stock acquisition will acquire from the existing stockholders thru a stock broker! Bottom lines is kaya walang entry na mangyayari sa Subsidiary. Only in Parent.

Here, after business combination, the parent and subsidiary RETAIN their separate legal existence. However, for financial reporting purposes, both the parent and subsidiary are viewed as single reporting entity. Thats why, IFRS 3 requires that their FS should be consolidates esp for external purposes!

Answer 6

Notes:
*The combine statement of financial position is produced automatically for Merger and Consolidation as acquisition date, and no consolidation is necessary for subsequent date. Hence, no accounting challenge for that, only for Stock Acquisition especially for partially owned Subsidiary.

*At para sakin, pag kino consolidate mo yung Stock Acquisition, parang as if binili nya rin yun ASSETS at inassume yung LIABS ng subsidiary. Then same treatment padin sa Goodwill or Gain.
*Pinag iba lang, need ng Working Paper at eliminations para ma conso si Parent at Subsidiary.
*Kasi basic lang entry pag stock acquisition:
Dr. Investment in Subsidiary
Cr. Cash/NCA/Shares/Debt/etc.
*The saka mo lang marerecognize yung Goodwill or Bargain (at NCI) pag consolidation na thru working paper.

Question 7

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You know that there are two options of measuring NCI in an acquiree
1. FV
2. Proportionate share of the acquiree’s identifiable net assets
Mostly given yung FV.

A) If the FV of NCI is not given, what is the assumption?

B) Also, how to compute the proportionate share of the acquiree’s identifiable net assets?

Answer 7

A) You will just get the 100% of the consideration given up / price paid. Then get the percentage.

B) Just multiply the percentage on FV of the net assets acquired

Question 8

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Note on consolidation with partially owned subsidiary (e.g., 80%):

100% of the assets and liabs of subsidiary are included in the consolidated FS even though the parent holds only 80% interest. This is an application of the ff concepts:

a. Substance over form - since the parent controls the whole of subsidiary not just 80%
b. Entity Theory - parent and subsidiary are viewed as single reporting entity

Question 9

Bus Comb

Provide 2 basic steps in Consolidation on “Acquisition Date”:

Answer 9

1. Eliminate “Investment in Subsidiary” account and:
   a. Measure/Update the subsidiary’s assets and liabilities at their ACQUISITION DATE FAIR VALUES;
   b. Recognize Goodwill (Asset) or Gain on Bargain Purchase (RE)
   c. Replace the subsidiary’s pre combination equity accounts with NCI in net assets
2. Then, Add mo lang line by line, similar items of assets and liabs of the combining constituents

Ganyan lang ka simple.

Question 10

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Stock Acquisition
When the stocks are acquired, the acquirer may choose two methods when accounting for its investment stock:
A) Please provide and explain the treatment of dividends receive from subsidiary

B) What is the prescribes method under PAS 27 - Consolidated and Separate Financial Statements?

Answer 10

A)
1. Cost Method
-used when 51-100% ownership
-Investment in Subsidiary account is retained at its original COST of acquisition (consideration given)
-Income on the investment is limited to dividends from subsidiary

2. Equity Method
   -21-50%
   -Investment Account will increase or decrease by investor’s share of the income/loss.
   -Dividends received form investee reduce the investment account balance
   -Adjustments to the investment account may also be necessary for changes arising from revaluation of assets and liabs

B) Cost Method

Question 11

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Notes:
1. Investment In Subsidiary - Makikita lang yan sa separate FS ng Parent
2. NCI and Goodwill - Nakikita lang sa Consolidated FS

Question 12

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Roger Corporation owns 75 percent of Roel Corporation’s outstanding common stock. Roel, in turn, owns 15 percent of Roger’s outstanding common stock. What percent of the dividends paid by Roger is reported as dividends declared in the consolidated retained earnings statement?

100 percent
75 percent
85 percent
None

Answer 12

85 percent - <21% yung ownership ni Roel, subsidiary parin sya ni Roger. So intercompany transaction padin yun. Kay need i eliminate.

Question 13

Bus Comb

When a company purchases another company that has existing goodwill and the transaction is accounted for as a stock acquisition, the goodwill should be treated in the following manner

A. Goodwill on the books of an acquired company should be
disregarded.
B. Goodwill is recorded prior to recording fixed assets
C. Goodwill is treated consistent with other tangible assets.
D. Goodwill is not recorded until all assets are stated at full fair value.

Answer 13

D. Goodwill is not recorded until all assets are stated at full fair value.

Question 14

Bus Comb

An economic advantage of a business combination includes:

Horizontally combining levels within the marketing chain
Creating separate management teams
Coordinated marketing campaigns
Utilizing duplicative assets

Answer 14

Coordinated marketing campaigns

Question 15

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Separately identified intangible assets are accounted for by amortizing:

A amortizing over a period not to exceed a maximum of 40 years.
B based upon a pattern that reflects the benefits conveyed by the asset.
C over the useful economic life less residual value using only the straight-line method.
D exclusively by using impairment testing.

Answer 15

based upon a pattern that reflects the benefits conveyed by the asset.