Chapter 1 - Business Combination

Question 1

A business combination may be legally structured as a merger, a consolidation, an investment in stock, or a direct acquisition of assets. Which of the following describes a business combination that is legally structured as a merger?

a. The surviving company is one of the two combining companies.
b. An investor-investee relationship is established.
c. A parent-subsidiary relationship is established.
d. The surviving company is neither of the two combining companies.

Answer 1

a. The surviving company is one of the two combining companies.

Question 2

Business combinations are accomplished either through a direct acquisition of assets and liabilities by a surviving corporation or by stock investment in one or more companies. A parent-subsidiary relationship arises from a

a. Statutory Merger
b. Statutory Consolidation
c. Purchase of controlling interest over the investee
d. Acquisition of net assets

Answer 2

c. Purchase of controlling interest over the investee

Question 3

Acquisition of net assets IFRS 3 must be applied when accounting for business combinations, but does not apply to:

i. Formation of joint arrangement
ii. The acquisition of an asset or group of assets that is not a business, although general guidance is provided on how such transactions should be accounted for.
iii. Combinations of entities or businesses under common control
iv. Acquisitions by an investment entity of a subsidiary that is required to be measured at fair value through profit or loss under I F S 10 Consolidated Financial Statements.
v. Mutual Entities
vi. Not-for-profit organization

a. i, ii, iii, iv, v, and vi
b. i, ii, iii, and iv
с. i, ii, iii, iv, and v
d. i, ii, ii, iv, and vi

Answer 3

b. i, ii, iii, and iv

Question 4

A statutory merger is a(an)

a. A business combination ni which only one of the two companies continues to exist as a legal corporation
b. Business combination ni which both companies continue to exist
c. Acquisition of a competitor
d. Legal proposal to acquire outstanding share of the target’s stock

Answer 4

a. A business combination ni which only one of the two companies continues to exist as a legal corporation

Question 5

PFRS 3requires that al business combination be accounted for using:

a. Purchase Method
b. Acquisition Method
c. Equity Method
d. Fair Value Method

Answer 5

b. Acquisition Method

Question 6

Goodwill arising from a business combination is (applying the FULL PFRS)

a. Charged to Retained Earnings after the acquisition is completed.
b. Amortized over 10 years or its useful life, whichever is shorter.
c. Amortized over 20 years or its useful life, whichever is shorter.
d. Never amortized but tested for impairment.
e. At the discretion of management, either tested for impairment or amortized.

Answer 6

d. Never amortized but tested for impairment.

Question 7

In which of the following situations should the provision of IFS 3 be applied?

a.POR and HIK Bank have a holding of 50% each in the equity of XYZ Pharmaceuticals, Ltd.
b. AFG Ltd. has an interest of 20% in equity shares of Entity
D. ABC Inc. has a 5% equity interest in PKJ, Ltd.
d. JPB Insurance acquired four wholly-owned subsidiaries.

Answer 7

d. JPB Insurance acquired four wholly-owned subsidiaries.

Question 8

The consideration transferred ni a business combination should be measured at

a. Carryingamount
b. Acquisition date fair value
c. Transaction value
d. Estimated amount

Answer 8

b. Acquisition date fair value

Question 9

Which of the following is NOT a step under the acquisition method per IFRS 3?

a. Determination of the acquisition date.
b. Determining the cost of a business combination.
c. Recognition and measurement of goodwill or gain on a combination.
d. Identifying the acquirer.
e. None of the above.

Answer 9

b. Determining the cost of a business combination.

Question 10

In recording acquisition cost, which of the following procedures is CORRECT?

a. Registration costs are expensed, and not charged against fair value of the securities issued.
b. Indirect costs are charged against the fair value of the securities issued.
c. Consulting fees are expensed.
d. Direct costs are charged to share premiums.

Answer 10

c. Consulting fees are expensed.

Question 11

It is the period after the acquisition date during which the acquirer may adjust the provisional amounts recognized for a business combination.

a. Measurement Period
b. Revaluation Period
c. Adjustment Period
d. Acquisition Period

Answer 11

a. Measurement Period

Question 12

In reference to I F S 3, a business has three elements, which of the following is NOT abusiness element?

a. Input
b. Transaction
c. Output
d. Process

Answer 12

b. Transaction

Question 13

Which of the following costs should be capitalized and amortized over their estimated useful life?

• Costs of goodwill from purchase business combination
• Costs of developing goodwill internally

a. No, No
b. Yes, No
c. Yes, No
d. Yes, Yes

Answer 13

a. No, No

Question 14

Should the folowing costs be included in the consideration transferred in business combination, according to IFS 3, Business Combination?

i. Costs of maintaining an acquisitions department.
ii. Fees paid to accountants to effect the combination.

a. No, No
b. No, Yes
c. Yes, No
d. Yes, Yes

Answer 14

a. No, No

Question 15

In a business combination, the direct acquisition, indirect acquisition, and security issuance costs are accounted for as follows:

i. Direct Costs
ii. Indirect Acquisition Costs
iii. Share Issue Costs

a. Added to price paid, Added to price paid, Added to price paid
b. Added to price paid, Expense, Deducted from share premium
c. Expense, Expense, Deducted from share premium
d. Expense, Expense, Expense

Answer 15

c. Expense, Expense, Deducted from share premium

Question 16

The entity that obtains control over another business in a business combination is called

a. Acquirer
b. Controller
c. Buyer
d. Acquiree,

Answer 16

a. Acquirer

Question 17

According to IFRS 3, the acquisition date is the date when
a. The consideration was transferred
b. The acquirer obtains control over the acquiree
c. The acquiree transferred the net assets to acquirer
d. The transfer tax was settled with the BIR

Answer 17

b. The acquirer obtains control over the acquiree

Question 18

According to IFRS 3, Business Combination, the acquirer measures non-controlling interest (NCI) in the acquiree:

a. At fair value
b. At proportionate share in the acquiree’s identifiable assets
c. Either a or b, whichever is higher
d. Either a or b, as an accounting policy choice

Answer 18

d. Either a or b, as an accounting policy choice

Question 19

Entity AMAZING and Entity ADORABLE combined their businesses. The acquirer in the business combination is not clearly identifiable. Which of the following is NOT an indicator that Entity AMAZING is the acquirer?

a. Entity AMAZING is the one who initiates the combination and issues consideration.
b. Entity AMAZING’s former owners receive the largest portion of the voting rights of the combined entity.
c. Entity AMAZING’s former management team dominates the management of a combined entity.
d. Entity AMAZING receives cash together with Entity A D O R A B L E from a newly formed entity, Entity AWESOME.

Answer 19

d. Entity AMAZING receives cash together with Entity A D O R A B L E from a newly formed entity, Entity AWESOME.

Question 20

A contingent (consideration) liability assumed in a business combination, under IFRS 3 is

a. Not accounted for by the acquirer if the outcome is not highly
probable.
b. Recognized even if the outcome is improbable as long as there is a present obligation that can be measured reliably.
c. Recognized if it will meet the criteria on recognition and measurement set by IAS 37: Provisions, Contingent
Liabilities and Contingent Assets.
d. Not recognize until the probability is virtually certain.

Answer 20

b. Recognized even if the outcome is improbable as long as there is a present obligation that can be measured reliably.

Question 21

According to IFRS 3, “gain on bargain purchase” is

a. Recognized ni the P/L in the year of acquisition provided there is a re-assessment made on the valuation of assets acquired and liabilities assumed.
b. Recycled in the P/L over its estimated useful life.
c. Recognized in the OCI in the year of acquisition provided there is a re-assessment made on the valuation of assets acquired and liabilities assumed.
d. Presented within the equity separate from the shareholder’s equity of the acquirer.

Answer 21

a. Recognized ni the P/L in the year of acquisition provided there is a re-assessment made on the valuation of assets acquired and liabilities assumed.

Question 22

A type of business combination wherein an investor, has an existing investment in the investee and acquires additional interest in order to obtain control over the investee.

a. Business combination achieved by contract alone
b. Business combination achieved in exchanges of shares
c. Step by step acquisition
d. Business Combination achieved in stages

Answer 22

d. Business Combination achieved in stages

Question 23

If the initial accounting for a business combination is incomplete by the end of the reporting period in which the
the combination has occurred, the acquirer

a. Shall be exempted from preparing consolidated financial statements until the business combination is completed.
b. Shall prepare a financial statement as if there is no business combination that occurred since the information is still
incomplete.
c. Shall report in its financial statement provisional amounts for the item for which accounting is incomplete and finalize the accounting for a maximum period of one year from the date of combination.
d. Shall report in its financial statement provisional amounts for the item for which accounting is incomplete and finalize the accounting whenever data are available, even beyond one year from the date of combination.

Answer 23

c. Shall report in its financial statement provisional amounts for the item for which accounting is incomplete and finalize the accounting for a maximum period of one year from the date of combination.

Question 24

24. Provisional amounts recognized in a business combination is:

a . Adjusted prospectively for the information obtained during
the measurement period.
b. Adjusted retrospectively for the information obtained during
the measurement period.
c. Not adjusted, unless there is an error on initial accounting.
d. Ignored, because I F S 3 prohibit provisional valuation.

Answer 24

b. Adjusted retrospectively for the information obtained during
the measurement period.

Question 25

Consideration in a business combination will most likely include:

a. Fixed number of shares to be issued in the future after certain conditions were met.
b. Variable number of shares to be issued in the future after
certain conditions were met.
c. Additional cash payment that is dependent upon the occurrence of future events, deemed possible only and not
probable.
d. All of the above.
e. None of the above.

Answer 25

e. None of the above.

Question 26

In a business combination, an acquirer’s interest in the fair value of the net assets acquired exceeds the consideration transferred in the combination. Under IFRS 3, Business Combination, the acquirer should

a. Recognize the excess immediately in profit or loss.
b. Recognize the excess immediately in other comprehensive income.
c. Reassess the recognition and measurement of the net assets acquired and the consideration transferred, then recognize any excess immediately in profit or loss.
d. Reassess the recognition and measurement of the net assets acquired and the consideration transferred, then recognize any excess immediately in other comprehensive income.

Answer 26

c. Reassess the recognition and measurement of the net assets acquired and the consideration transferred, then recognize any excess immediately in profit or loss.

Question 27

King Company issues ordinary shares to acquire al the assets of the Reign Company on January 1, 2021. There is a contingent share agreement, which states that if the income of the Reign Company exceeds a certain level during 2021 and 2022, additional shares wil be issued on January 1, 2023. The impact of issuing the additional shares will:

а. Increase the recognized goodwill
b. Have no effect on asset values and no impact on the total
equity
c. Reduce retained earnings.
d. Decrease the recognized goodwill
e. Affects current year P/L

Answer 27

b. Have no effect on asset values and no impact on the total
equity’

Question 28

Which of the following statements is/are TRUE?

a. The acquirer shall measure the identifiable assets acquired and the liabilities assumed at their acquisition-date book value.
b. In net asset acquisition, gain on bargain purchase is recognized in the Profit or Loss of the acquirer (after reassessment) if the consideration transferred is more than the
fair value of net assets acquired.
c. Transaction costs directly related to the issue of debt
instruments are deducted from the fair value of the debt on initial recognition and are amortized over the life of the debt as part of the effective interest rate. Directly attributable transaction costs incurred issuing equity instruments are
deducted from revenue.
d. According to IFRS 3, Revised, cost directly attributable in effecting the business combination (e.g., finders fee and another direct cost) must be “expensed as incurred”.
e. All of the above

Answer 28

d. According to IFRS 3, Revised cost directly attributable in effecting the business combination (e.g., finders fee and other direct cost) must be “expensed as incurred”.

Question 29

Group A has acquired the following. Which of the following acquisitions are business combinations under IFRS 3?

A. Land and a vacant building from Company B. No processes, other assets, or employees are acquired. Group A does not enter into any of the contracts of Company B.
b. An operating hotel, the hotel’s employees, the franchise agreement, inventory, the reservations system, and all “back office” operations.
c. All of the outstanding shares in Biotech d. a development stage company that has a license for a product candidate. Phase I clinical trials are currently being performed by Biotech D employees. Biotech D’s administrative and accounting functions are performed by a contract employee.

а. All three acquisitions are business combinations under PFRS3.
b. A and Bacquisitions are business combinations under PFRS3.
c. A and Cacquisitions are business combinations under PFRS 3.
d. B and C acquisitions are business combinations under PFRS3.

Answer 29

d. B and C acquisitions are business combinations under PFRS3.

Question 30

What is the effectivity date of IRS 3 Revised - Business Combination?

a. July 1, 2009
b. January 1, 2008
c. January 1, 2009
d. July 1, 2008
e. January 1, 2010

Answer 30

a. July 1, 2009