Prelims Flashcards
A business combination occurs when…
- One company acquires another
- 2 or more companies merge into one
The company that obtains control over the other.
Parent / Acquirer
The other company that is controlled
Subsidiary / Acquiree
Business combinations can be carried out through…
- Asset acquisition
- Stock acquisition
The acquirer purchases the assets and assumes the liabilities of the acquirer.
Asset Acquisition
Legal forms of Combination under asset acquisition
- Merger
- Consolidation
Occurs when one corporation takes over all the operations of another business entity and that other entity is dissolved.
Merger
Occurs when a new corporation is formed to take over the assets and operations of two or more separate entities
Consolidation
The acquirer obtains control over the acquiree by purchasing stocks or majority ownership interest that is more than 50% in the voting rights of the acquiree.
Stock acquisition
When the parent records the ownership interest acquired as…
Investment in Subsidiary
3 types of Business Combination
- Horizontal Integration
- Vertical Integration
- Conglomeration
Same business lines and markets
Horizontal Integration
Operations in different, but successive stages of production or distribution, or both
Vertical Integration
Unrelated and diverse products or services
Conglomeration
Advantages of Business combinations
- Competition is eliminated or lessened
- Synergy
- Increased business opportunity and earning potential
- Reduction of operating cost
- Combination utilized economies scale (Increases in production efficiency)
- Cost savings on business expansion
- Favorable tax implications
Business combination are accounted for under…
PFRS 3
The objective of PFRS …
To enhance the relevance, reliability, and comparability of information provided about business combinations and their effects
PFRS 3 does not apply to the following:
- Formation of joint venture
- Acquisition of asset and related liability that does not constitute a business
- Combination of entities under common control
Essential elements in the definition of business combinations
- Control
- Business
Usually exists when the acquirer holds more than 50% of ownership interest.
Control
Other ways control can be obtained:
- The acquirer has the power to appoint or remove the majority of the board of directors of the acquiree
- The acquirer has the power to cast majority votes at board meetings
- The acquirer has the power over more than 50% of voting rights because of an agreement with other investors
- The acquirer has the power to control the acquiree’s operating and financial policies.
Defined as an organization or enterprising entity engaged in commercial, industrial, or professional activities.
Business
Elements of business
- Input
- Process
- Output
The acquisition method
- Identifying the acquirer
- Determining the acquisition date
- Recognizing and measuring goodwill or an income from the acquisition
Recognizing and measuring goodwill or an income from the acquisition
- Consideration transferred
- Non-controlling interest in the acquirer
- Previously held equity interest in the acquirer
- Identifiable assets acquired, the liabilities assumed on the business combination
Examples of potential forms of consideration
- Cash
- Non-cash assets
- Equity Instrument
- A business or subsidiary of the acquirer
- Contingent consideration
Consideration Transferred by the Acquirer
Shall be measured at Fair Value at the date of acquisition
Acquisition-related cost
Acquirer incurs related to business
combination and should be expensed immediately.
Examples of Acquisition-related cost
- Finder’s fees
- Professional fees
- General administrative cost
- Cost of registering and issuing debt and equity securities
situations when acquisition-related cost is not expensed immediately
- Cost to issue debt securities measured at amortized cost (deducted to carrying amount of debt)
- Cost to issue equity securities (deducted to the related share premium, of none, to the retained earnings)
Ownership position wherein a shareholder owns less than 50% of outstanding shares and has no control over decisions
Non-controlling interest / minority interest
A non-controlling interest should be measured either at..
- Fair Value
- The non-controlling interest’s proportionate share of acquirer’s identifiable net assets
An acquirer may obtain control over the acquiree in which it held some equity interest at the time of obtaining control.
Previously held equity interest
