Business Combination

Question 1

What is good will?

Answer 1

Difference between COI and FVNA

Question 2

How is good will presented in the books?

Answer 2

It is presented in the Asset Section

Question 3

How do you compute for goodwill/GBP?

Answer 3

COI
(FVNA)
=
GW/GBP

Question 4

What is gain on bargain purchase?

Answer 4

A negative amount when deducting FVNA from COI

Question 5

How is gain on bargain purchase presented in the books?

Answer 5

INCOME
(Income Statement)

Question 6

Types of Business Combination schemes?

Answer 6

*Structure
*Method
*Accounting Method used

Question 7

What are the types of business combination as to structure?

Answer 7

*Horizontal
*Vertical
*Conglomerate
*Circular
——
H: Same industry
V: Same Industry, different levels
Co: Unrelated Industries
Ci: Diversified but with no drastic change like CONGLOMERATE

Question 8

What are the types of business combination as to legal pov?

Answer 8

*Statutory Merger
*Statutory Consolidation
*Stock Acquisition

Question 9

What are the 3 layers ownership to gain influence?

Answer 9

P-stock C-stock
<20% @FV @FV
20-50% @FV Associate
>50% @FV Subsidiary
——–
Associate:
Significant power to influence and participate

Subsidiary:
Power to control
(PERA)
Power
Exposure
Rights to valuable returns
Ability to use your power

Question 10

What is non-controlling interest?

Answer 10

These are interests that is not purchased by an acquirer.

(Remaining stocks in the hands of different investors)

Question 11

What is preferred shares?

Answer 11

A type of share that is sold without the property of power to influence and control.

Question 12

Who is acquirer?

Answer 12

Buyer

Question 13

As to what extent is the meaurement period in the business combination?

Answer 13

1 year after the acquisition date

Question 14

What is the table to always remember in business combination?

Answer 14

Total Parent NCI
COI xx
FVNA (xx)
————————————–
GW/GBP XX

Question 15

What is COI?

Answer 15

It is the total cost given up by the acquirer to obtain control and influence in from the Acquiree

Question 16

What are the matters to consider under the COI?

Answer 16

*Cash
*Liabilities Assumed
*Equity Instruments
*Non-monetary assets
*Contingent consideration
*Share-based payments
*NCI
*PHI

Question 17

Finder’s fee, Professional fees, General Administrative costs, accounting and legal fees are example of?

Answer 17

Acquisition-related costs

Question 18

How do you recognize costs to issue equity shares?

Answer 18

A deduction to share premium, if share premium is insufficient, then deduct it to retained earnings

Question 19

How are acquisition-related costs recognized?

Answer 19

Expensed

Question 20

Hierarchy valuation of NCI

Answer 20

*Explicit
*Assumed
*Proportionate FV (only to stock acquisition)

Question 21

How is control premium accounted?

Answer 21

Share Premium:

FV is Higher than BV

Question 22

Compute for Fair Value of Net Assets

Answer 22

Identifiable assets @FV
(Identifiable liabilities @FV)
———————————
FVNA

Question 23

Explain Previously Held Interest (PHI)

Answer 23

Previously bought interest of the holder before purchasing another set of interests

Question 24

Share-for-share exchanges

Answer 24

It is a business combination through exchange of equity interests.

Consideration transferred is measured at FV either from “ee” or “er” whichever is more reliably determinable.

Question 25

How do you compute for number of shares issued under the share for share exchanges?

Answer 25

Determine the increase in the share capital Divide the Par Value per share

Question 26

How to compute fair value per share?

Answer 26

Determine the increase in both Share Capital and Share premium, total it Divide the number of shares issued

Question 27

Step acquisition or Business Combination in stages

Answer 27

When an investor aacquires additional shares from an investee The acquisition resulted to the investor gaining control over the investee

Question 28

Where should the Goodwill/GBP be recorded under the asset acquisition?

Answer 28

Books of acquirer

Question 29

Where should the Goodwill/GBP be recorded under stock acquisition?

Answer 29

Consolidated books

Question 30

How are adjustment in provisional amounts accounted?

Answer 30

It is accounted retrospectively

Question 31

Are goodwill apart from the business combination be recognized as an asset?

Answer 31

No

Question 32

How to account subsequent expenditures in maintaining goodwill?

Answer 32

Expensed immediately

Question 33

Are Goodwill amotized?

Answer 33

NO, it is tested for impairment at least annually

Question 34

These are the smallest identifiable group of assets that are largely independent of the cash inflows from the other assets or group of assets

Answer 34

Cash Generating Units (CGU)

Question 35

Is goodwill identifiable?

Answer 35

No, it is not identifiable therefore, it cannot be measured by impairment alone, only in conjunction with groups of assets that generate independent cash inflows (CGU)

Question 36

CGU is impaired when___

Answer 36

The recoverable amount is LESS than the carrying amount (including the allocated goodwill)

Question 37

Who initiated the due diligence audit?

Answer 37

Acquirer

Question 38

Due diligence audits are commonly performed by ___

Answer 38

CPAs and external firms

Question 39

Methods of estimating goodwill (2)

Answer 39

1. Indirect Valuation 2. Direct Valuation

Question 40

(UNDER DIRECT VALUATION) -Excess Earnings Normalized earnings are computed as:

Answer 40

Total earnings from the past years (PLUS/MINUS) the appropriation if any = Normalized Earnings

Question 41

(UNDER DIRECT VALUATION) -Excess Earnings Average earnings are computed as:

Answer 41

Normalized earnings (DIVIDE) past years = Average earnings

Question 42

(UNDER DIRECT VALUATION) -Excess Earnings Normal earnings are compputed as:

Answer 42

FV of net assets (TIMES) Normal rate of return (DIVIDE) past years = Normal Earnings

Question 43

(UNDER DIRECT VALUATION) -Excess Earnings Excess earnings are computed as:

Answer 43

Difference between the Average and the normal earnings = Excess earnings

Question 44

(UNDER DIRECT VALUATION) -Excess Earnings Goodwill is computed as:

Answer 44

Excess earnings (TIMES) Duration of excess earnings in years = Goodwill

Question 45

Full Goodwill Method indicates a share of ____ in the goodwill

Answer 45

Non-controlling interest

Question 46

Partial/proportionate method in the goodwill has ____

Answer 46

NO non-controlling interest share in the goodwill.

Question 47

Gain on Bargain Purchase is recognized in?

Answer 47

Profit or Loss

Question 48

What is directly attributable costs?

Answer 48

These are professional fees paid (legal advisors, accountants, brokerage) to effect the combination.

Question 49

Directly attributable costs are ___ immediately.

Answer 49

Expensed

Question 50

Indirect acquisition costs are ___?

Answer 50

General and administrative costs (costs that cannot be directly attributed to the particular costs) expensed

Question 51

Costs of issuing securities is recognized as a debit to ____?

Answer 51

APIC/Share premium Account

Question 52

Identifiable tangible assets are recognized if it passes these 2 steps:

Answer 52

Probability test (if future inflows of economic benefit is probable) Reliability test (if its FV can be measured reliably)

Question 53

Identifiable intangible assets are recognized even if:

Answer 53

There is no probable future inflow of economic benefit

Question 54

Are intangible assets part of goodwill?

Answer 54

NO. Under PAS 38, intangible assets are separate from goodwill and has a separate line item under INTANGIBLE ASSETS in the financial statements

Question 55

Are liabilities recognized?

Answer 55

Yes, only if there is probable outflow of cashflow to settle the obligation. (Except: Contingent Liability, it is always recognized if it can be measured reliably)