Chapter 14 – Business Combinations (Part 2) Multiple Choice – Theory 1. C 6. B 2. C 7. D 3. D 8. A 4. A 9. A 5. A Multiple Choice – Computational Answers at at a glance: 1. A 6. D 2. D 7. B 3. A 8. A 4. B 9. C 5. D 10. C
11 11. 12. 13. 14. 15.
A B D A B
16. 17. 18 18. 19. 20.
C D C D A
21 21. 22 22. 23 23. 24. 25.
B C A B C
26. 27 27. 28.
D C B
Solution: 1. A Solution: Share capital Share premium Totals
COLL COLLOQ OQUY UY Co. Co. 2,400,000 1,200,000 3,600,000
Comb Combin ined ed enti entity ty 2,800,000 4,800,000 7,600,000
Incr Increa ease se 400,000 3,600,000 4,000,000
The fair value of the shares transferred as consideration for the business combination is ₱ 4,000,000 4,000,000 (i.e., total increase in share capital and share premium accounts). 2. D Solution: Increase in COLLOQUY’s share capital account (see table above)
Divide by: ABC’s par value per share Number of shares issued 3. A Solution: Fair value of consideration transferred transferr ed Divide by: Number of shares issued Acquisition-date Acquisition-date fair value value per share share 4.
B
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400,000 40 10,000
4,000,000 10,000 400
Solution: Consideration transferred Non-controlling interest in the acquiree Previously held equity interest in the acquiree Total Fair value of net identifiable assets acquired (6.4M - 3.6M) Goodwill 5.
4,000,000 4,000,000 (2,800,000) 1,200,000
D 3,200,000 – COLLOQUY’s retained earnings
6. D Solution: Share capital Share premium Totals
COLLOQUY Co. 2,400,000 1,200,000 3,600,000
Combined entity 2,800,000 4,800,000 7,600,000
Fair value of shares transferred Divide by: ABC’s fair value per share Number of shares issued 7. B Solution: Increase in share capital account (see table above) Divide by: Number of shares issued Par value per share 8. A Solution: Consideration transferred (see previous computation) Non-controlling interest in the acquiree Previously held equity interest in the acquiree Total
Increase 400,000 3,600,000 4,000,000 4,000,000 400 10,000
400,000 10,000 40
Goodwill (given information)
4,000,000 4,000,000 (3,700,000) 300,000
9. C Solution: Consideration transferred Non-controlling interest in the acquiree (1M x 25%) Previously held equity interest in the acquiree Total Fair value of net identifiable assets acquired Goodwill
3,200,000 1,000,000 720,000 4,920,000 (4,400,000) 920,000
Fair value of net identifiable assets acquired (squeeze)
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10. C Solution: Consideration transferred Non-controlling interest in the acquiree (1M x 25%) Previously held equity interest in the acquiree Total Fair value of net identifiable assets acquired Goodwill
3,200,000 1,000,000 720,000 4,920,000 (4,400,000) 920,000
11. A Solution: Consideration transferred Non-controlling interest in the acquiree (1M x 10%) Previously held equity interest in the acquiree Total Fair value of net identifiable assets acquired Goodwill
3,200,000 400,000 720,000 4,320,000 (4,000,000) 320,000
12. B Solution: Consideration transferred Non-controlling interest in the acquiree (4M x 100%) Previously held equity interest in the acquiree Total Fair value of net identifiable assets acquired Goodwill
4,000,000 4,000,000 (4,000,000) -
13. D Solution: Consideration transferred (4M x 60%*) Non-controlling interest in the acquiree (4M x 40%*) Previously held equity interest in the acquiree Total Fair value of net identifiable assets acquired Goodwill
2,400,000 1,600,000 4,000,000 (4,000,000) -
*After the business combination, the parent’s ownership interest is increased to 60% (i.e., 36,000 ÷ 60,000). Consequently, the noncontrolling interest is 40%. 14. A 15. B
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16. C 17. D 18. C Solution: The consideration transferred on the business combination is computed as follows: Cash payment on business combination 4,000,000 Additional payment to subsidiary’s former owner 200,000 Consideration transferred on the business combination 4,200,000 The fair value of net identifiable assets acquired is computed as follows: Fair value of identifiable assets 6,400,000 Fair value of inventory not transferred to DIAPHANOUS (360,000) Adjusted fair value of identifiable assets acquired 6,040,000 Fair value of liabilities assumed (3,600,000) Adjusted fair value of net identifiable assets acquired 2,440,000 Goodwill (gain on bargain purchase) is computed as follows: Consideration transferred 4,200,000 Non-controlling interest in the acquiree Previously held equity interest in the acquiree Total 4,200,000 Fair value of net identifiable assets acquired (2,440,000) Goodwill 1,760,000 19. D Solution: The settlement loss to is computed as follows: Settlement loss before adjustment (“off-market” value) Carrying amount of deferred liability Adjusted settlement loss
320,000 (240,000) 80,000
The consideration transferred on the business combination is computed as follows: Cash payment 4,000,000 Payment for the settlement of pre-existing relationship (‘off-market’ value) (320,000) Consideration transferred on the business combination 3,680,000 The fair value of net identifiable assets acquired is computed as follows:
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Fair value of subsidiary’s identifiable assets Intangible asset – reacquired right
6,400,000 160,000
Carrying amount of asset related to the reacquired rights – prepayment
(200,000)
Adjusted fair value of identifiable assets acquired Fair value of liabilities assumed Fair value of net identifiable assets acquired
6,360,000 (3,600,000) 2,760,000
Goodwill (gain on bargain purchase) is computed as follows: Consideration transferred 3,680,000 Non-controlling interest in the acquiree Previously held equity interest in the acquiree Total 3,680,000 Fair value of net identifiable assets acquired (2,760,000) Goodwill 920,000 20. A Solution: The consideration transferred on the business combination is computed as follows: Cash payment 4,000,000 Payment for the settlement of pre-existing relationship (360,000) (‘off-market’ value) Consideration transferred on the business combination 3,640,000 Goodwill (gain on bargain purchase) is computed as follows: Consideration transferred 3,640,000 Non-controlling interest in the acquiree Previously held equity interest in the acquiree Total 3,640,000 Fair value of net identifiable assets acquired (2,800,000) Goodwill 840,000 21. B Solution: The settlement gain or loss is computed as follows: Payment for the settlement of pre-existing relationship (fair value) Carrying amount of estimated liability on pending lawsuit
Settlement gain
400,000 (520,000) 120,000
The consideration transferred on the business combination is computed as follows: 4,000,000 Cash payment (400,000) Payment for the settlement of pre-existing relationship
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(fair value) Consideration transferred on the business combination
3,600,000
Goodwill (gain on bargain purchase) is computed as follows: Consideration transferred 3,600,000 Non-controlling interest in the acquiree Previously held equity interest in the acquiree Total 3,600,000 Fair value of net identifiable assets acquired (1.6M - .9M) (2,800,000) Goodwill 800,000 22. C Solution: The consideration transferred on the business combination is computed as follows: 4,000,000 Cash payment 40,000 Fair value of contingent consideration Consideration transferred on the business combination
4,040,000
Goodwill (gain on bargain purchase) is computed as follows: Consideration transferred 4,040,000 Non-controlling interest in the acquiree Previously held equity interest in the acquiree Total 4,040,000 Fair value of net identifiable assets acquired (1.6M - .9M) (2,800,000) Goodwill 1,240,000 23. A Solution: *The unrealized loss on change in fair value is computed as follows: Fair value of liability on January 1, 20x1 40,000 Fair value of liability on December 31, 20x1 60,000 [(2.2M – 1.6M) x 10%]
Increase in fair value of liability (loss) Dec. 31, 20x1
Unrealized loss on change in fair value – P/L
20,000
Liability for contingent consideration
20,000
to recognize loss on change in fair value of liability assumed for contingent consideration
24. B Solution: Dec. Liability for contingent consideration 31, 20x1
(20,000)
Gain on extinguishment of liability – P/L
20
40,000 40,000
25. C Solution: The consideration transferred on the business combination is computed as follows: 4,000,000 Fair value of shares issued (10,000 sh. x ₱400 per sh.) 360,000 Fair value of contingent consideration Consideration transferred on the business combination
4,360,000
Goodwill (gain on bargain purchase) is computed as follows: Consideration transferred 4,360,000 Non-controlling interest in the acquiree Previously held equity interest in the acquiree Total 4,360,000 Fair value of net identifiable assets acquired (6.4M –3.6M) (2,800,000) Goodwill 1,560,000 26. D 27. C Solution: Dec. Share premium – contingent consideration 31, Share premium
360,000
20x1
360,000
28. B Solution: The adjusted fair value of net identifiable assets acquired is computed as follows: Fair value of identifiable assets acquired 3,600,000 Fair value of liabilities assumed 400,000 Fair value of contingent liability assumed Fair value of net identifiable assets acquired
6,400,000 (4,000,000) 600,000
Goodwill (gain on bargain purchase) is computed as follows: Consideration transferred 4,000,000 Non-controlling interest in the acquiree 320,000 Previously held equity interest in the acquiree Total 4,320,000 Fair value of net identifiable assets acquired (2,400,000) Goodwill 1,920,000
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Exercises 1. Solutions: Requirement (a): Number of shares issued CONJUNCTION Co . Combined entity 1,200,000 1,400,000 Share capital 600,000 2,400,000 Share premium 1,800,000 3,800,000 Totals
Increase 200,000 1,800,000 2,000,000
The fair value of the shares transferred as consideration for the business combination is P2,000,000 . The number of shares issued in the business combination is computed as follows: Fair value of shares transferred 2,000,000 Divide by: CONJUNCTION’s fair value per share 200 Number of shares issued 10,000 Requirement (b): Par value per share The par value per share of the shares issued is computed as follows: Increase in share capital account (see table above) 200,000 Divide by: Number of shares issued 10,000 Par value per share 20 Requirement (c): Acquisition-date fair value of the net identifiable assets acquired (1) Consideration transferred (see previous computation) (2) Non-controlling interest in the acquiree (3) Previously held equity interest in the acquiree Total Fair value of net identifiable assets acquired (squeeze)
Goodwill (given information)
2,000,000 2,000,000 (1,400,000) 600,000
2. Solutions: Scenario #1: Goodwill (gain on bargain purchase) is computed as follows: 1,600,000 (1) Consideration transferred 500,000 (2) Non-controlling interest in the acquiree (2M x 25%) 360,000 (3) Previously held equity interest in the acquiree 2,460,000 Total (2,200,000) Fair value of net identifiable assets acquired 460,000 Goodwill *100% minus 75%
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Scenario #2: The previously held interest was initially classified as FVOCI Goodwill (gain on bargain purchase) is computed as follows: 1,600,000 (1) Consideration transferred 500,000 (2) Non-controlling interest in the acquiree (2M x 25%) 360,000 (3) Previously held equity interest in the acquiree 2,460,000 Total (2,200,000) Fair value of net identifiable assets acquired 460,000 Goodwill 3. Solution: (1) Consideration transferred (2) Non-controlling interest in the acquiree (2M x 10%*) (3) Previously held equity interest in the acquiree Total Fair value of net identifiable assets acquired Goodwill *100% minus 90%
1,600,000 200,000 360,000 2,160,000 (2,000,000) 160,000
4. Solution: (1) Consideration transferred (2) Non-controlling interest in the acquiree (2M x 100%) (3) Previously held equity interest in the acquiree Total Fair value of net identifiable assets acquired Goodwill
2,000,000 2,000,000 (2,000,000) -
5. Solution: (1) Consideration transferred (2M x 60%) (2) Non-controlling interest in the acquiree (2M x 40%) (3) Previously held equity interest in the acquiree Total Fair value of net identifiable assets acquired Goodwill
1,200,000 800,000 2,000,000 (2,000,000) -
6. Solutions: Case #1: The unadjusted goodwill is computed as follows: (1) Consideration transferred (2) Non-controlling interest in the acquiree (3) Previously held equity interest in the acquiree
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2,000,000 -
Total Fair value of net identifiable assets acquired Goodwill (recognized on Sept. 30, 20x1)
2,000,000 (1,400,000) 600,000
The adjusted fair value of net identifiable assets acquired is computed as follows: Fair value of identifiable assets acquired 3,200,000 Provisional amount assigned to building (1,400,000) Fair value of building per appraisal 1,000,000 Adjusted fair value of identifiable assets acquired 2,800,000 Fair value of liabilities assumed ( 1,800,000) Adjusted fair value of net identifiable assets acquired 1,000,000 The (1) (2) (3)
adjusted goodwill is computed as follows: Consideration transferred Non-controlling interest in the acquiree Previously held equity interest in the acquiree Total Fair value of net identifiable assets acquired Goodwill
The adjustment to goodwill is computed as follows: Goodwill recognized on September 30, 20x1 Adjusted goodwill Increase in goodwill
2,000,000 2,000,000 (1,000,000) 1,000,000
600,000 1,000,000 400,000
The adjustment to depreciation expense recognized in 20x1 is computed as follows: Depreciation recognized (P1,400,000 ÷ 10 years x 3/12) 35,000 Adjusted depreciation (P1,000,000 ÷ 5 years x 3/12) 50,000 Additional depreciation expense for 20x1 15,000 The measurement period adjusting entries are as follows: July Goodwill 400,000 1, Building 20x2 July 1, 20x2
400,000
to record adjustment to provisional amount assigned to building
Retained earnings Accumulated depreciation
15,000 15,000
Of course if monthly depreciation expenses were recognized during January to June 30, 20x2, the monthly depreciation expenses recognized shall also be adjusted accordingly.
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Case #2: INNOCUOUS shall recognize the fair value of the patent as a retrospective adjustment to the goodwill recognized on September 30, 20x1. Further, the amortization expense that would have been recognized had the patent been recorded on September 30, 20x1 shall also be recognized as retrospective adjustment. The adjusted fair value of net identifiable assets acquired is computed as follows: Fair value of identifiable assets acquired 3,200,000 Fair value of unrecorded patent 200,000 Adjusted fair value of identifiable assets acquired 3,400,000 Fair value of liabilities assumed ( 1,800,000) Adjusted fair value of net identifiable assets acquired 1,600,000 The adjusted goodwill is computed as follows: Unadjusted (1) (2) (3)
Adjusted
Consideration transferred Non-controlling interest in the acquiree Previously held equity interest in the acquiree
2,000,000
2,000,000
-
-
-
-
Total Fair value of net identifiable assets acquired
2,000,000
2,000,000
(1,400,000)
(1,600,000)
600,000
400,000
Goodwill
The measurement period adjusting entries are as follows: July 1, Patent 200,000 20x2 Goodwill July 1, Retained earnings (200K ÷ 4 x 3/12) 12,500 20x2 Accumulated amortization
200,000 12,500
Case #3: Because the new information is obtained after the measurement period (i.e., beyond one year from September 30, 20x1), INNOCUOUS should account for the new information in accordance with PAS 8 as correction of error . PAS 8 requires the correction of an error to be accounted for retrospectively and for the financial statements to be presented as if the error had never occurred by correcting the prior period’s information. Adjustments shall be made similar to those in Case #2; however, the disclosures provided in the notes will vary because of the application of PAS 8 instead of PFRS 3.
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The correcting entries on the 20x1 financial statements are as follows: Nov. 1, Patent 200,000 20x2 Goodwill 200,000 Nov. 1, Retained earnings (200K ÷ 4 x 3/12) 12,500 20x2 Accumulated amortization 12,500 7.
The new information obtained on April 1, 20x2 shall be accounted for as measurement period adjustment because it provides evidence of facts and circumstances that, if known, would have affected the measurement of the amounts recognized as of September 30, 20x1.
The new information obtained on July 1, 20x2 shall not be accounted for as a measurement period adjustment because it relates to facts and circumstances that have not existed as of acquisition date. However, this information may necessitate impairment testing on the goodwill recognized. Any impairment shall be recognized in profit or loss (see discussion later in this chapter). . The adjusted goodwill is computed as follows: (1) (2) (3)
Consideration transferred Non-controlling interest in the acquiree Previously held equity interest in the acquiree Total Fair value of net identifiable assets acquired Goodwill
Unadjusted 2,000,000
Adjusted 2,000,000
-
-
-
-
2,000,000
2,000,000
(1,400,000)
(1,600,000)
600,000
400,000
The measurement period adjusting entry on April 1, 20x2 is as follows: Apr. 1, Net identifiable assets 200,000 20x2 Goodwill 200,000 8. Solution: The consideration transferred on the business combination is computed as follows: Cash payment on business combination 2,000,000 Additional payment to TRANSPARENT’s former owner 100,000 Consideration transferred on the business
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combination
3,100,000
The fair value of net identifiable assets acquired is computed as follows: Fair value of identifiable assets 2,200,000 Acquisition-date fair value of inventory not transferred to DIAPHANOUS ( 180,000) Adjusted fair value of identifiable assets acquired 3,020,000 Fair value of liabilities assumed (1,800,000) Adjusted fair value of net identifiable assets acquired 1,220,000 Goodwill (gain on bargain purchase) is computed as follows: 2,100,000 (1) Consideration transferred (2) Non-controlling interest in the acquiree (3) Previously held equity interest in the acquiree 2,100,000 Total (1,220,000) Fair value of net identifiable assets acquired 880,000 Goodwill 9. Solution: The consideration transferred on the business combination is computed as follows: Cash payment 2,000,000 Payment for the settlement of pre-existing relationship (“off-market value)
Consideration transferred on the business combination
( 160,000) 1,840,000
The fair value of net identifiable assets acquired is computed as follows: Fair value of SLAVE’s identifiable assets 3,200,000 Identifiable intangible asset on reacquired rights 80,000 Carrying amount of asset related to the reacquired rights – prepayment
Adjusted fair value of identifiable assets acquired Fair value of liabilities assumed Fair value of net identifiable assets acquired
( 100,000) 3,180,000 ( 1,800,000) 1,380,000
Goodwill (gain on bargain purchase) is computed as follows: (1) Consideration transferred 1,840,000 (2) Non-controlling interest in the acquiree (3) Previously held equity interest in the acquiree Total 1,840,000 Fair value of net identifiable assets acquired (1,380,000)
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Goodwill
460,000
10. Solution: Because the settlement of the pre-existing relationship is treated as a separate transaction, the amount attributed to the settlement loss (i.e., P180,000) shall be accounted for as payment for the settlement of the pre-existing relationship. Therefore, the adjusted consideration transferred on the business combination is P1,820,000 (P2M – P180,000). The “at-market” value of P140,000 shall be subsumed in goodwill because there is no reacquired right. Goodwill (gain on bargain purchase) is computed as follows: (1) Consideration transferred 1,820,000 (2) Non-controlling interest in the acquiree (3) Previously held equity interest in the acquiree Total 1,820,000 Fair value of net identifiable assets acquired (1,400,000) Goodwill 420,000 11. Solution: The consideration transferred on the business combination is computed as follows: Cash payment 2,000,000 Payment for the settlement of pre-existing relationship (fair value) ( 200,000) 1,800,000 Consideration transferred on the business combination The settlement gain or loss is computed as follows: Payment for the settlement of pre-existing relationship (fair value) 200,000 Carrying amount of estimated liability on pending lawsuit ( 260,000) Settlement gain 60,000 There is gain because the liability is settled for a lower amount. Goodwill (gain on bargain purchase) is computed as follows: (1) Consideration transferred 1,800,000 (2) Non-controlling interest in the acquiree (3) Previously held equity interest in the acquiree Total 1,800,000 Fair value of net identifiable assets acquired (1,400,000)
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Goodwill
400,000
12. Solution: The consideration transferred on the business combination is computed as follows: Cash payment 2,000,000 Fair value of contingent consideration Consideration transferred on the business combination
20,000 2,020,000
Goodwill (gain on bargain purchase) is computed as follows: (1) Consideration transferred 2,020,000 (2) Non-controlling interest in the acquiree (3) Previously held equity interest in the acquiree Total 2,020,000 Fair value of net identifiable assets acquired (1,400,000) Goodwill 620,000 13. Solution: The consideration transferred on the business combination is computed as follows: Fair value of shares issued 2,000,000 Fair value of contingent consideration Consideration transferred on the business combination
180,000 2,180,000
Goodwill (gain on bargain purchase) is computed as follows: (1) Consideration transferred 2,180,000 (2) Non-controlling interest in the acquiree (3) Previously held equity interest in the acquiree Total 2,180,000 Fair value of net identifiable assets acquired (1,400,000) Goodwill 780,000 14. Solution: The adjusted fair value of net identifiable assets acquired is computed as follows: Fair value of identifiable assets acquired 3,200,000 Fair value of liabilities assumed
1,800,000
Fair value of contractual contingent liability assumed
20,000
Fair value of contractual contingent liability assumed
60,000
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Fair value of noncontractual contingent liability assumed
100,000
Total fair value of liabilities assumed
1,980,000
Fair value of net identifiable assets acquired
1,220,000
Goodwill (gain on bargain purchase) is computed as follows: 2,000,000 (1) Consideration transferred 160,000 (2) Non-controlling interest in the acquiree (3) Previously held equity interest in the acquiree 2,160,000 Total (1,220,000) Fair value of net identifiable assets acquired 940,000 Goodwill 15. Solution: The adjusted fair value of net identifiable assets acquired is computed as follows: Fair value of identifiable assets acquired Fair value of liabilities assumed
3,200,000 1,800,000
Fair value of contractual contingent liability
assumed Fair value of net identifiable assets acquired
200,000
(2,000,000) 1,200,000
Goodwill (gain on bargain purchase) is computed as follows: 2,000,000 (1) Consideration transferred 160,000 (2) Non-controlling interest in the acquiree (3) Previously held equity interest in the acquiree 2,160,000 Total (1,200,000) Fair value of net identifiable assets acquired 960,000 Goodwill
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