Akawnting Exercise/Lesson: Business Combinations

Akawnting for Business Combinations

1.       On December 31, 2015, Patrick Corporation purchased 18,000 shares of stock to Santiago Company by paying P 250,000 cash and issuing its 10,000 shares, P 20 par ordinary shares.  The current market value of shares of stock of Patrick and Santiago were P 25 and P 20 per share respectively.  At that time the book value of the shares of stock of Santiago was P 15 per share.  In addition, a contingent payment of P 200,000 cash on January 1, 2018 was to be made, if the average income during the 2-year period of 2016-2017 exceeds P 300,000 per year. Patrick estimated that there was a 50% chance or probability that the P 200,000 payment would be required.

In addition, Patrick paid the following at the time of the business combination:  

·         Finder’s fee, P 25,000

·         Accounting fees, P20,000

·         Legal fees to arrange the business combination P25,000

·         Cost of SEC registration, including cost of printing and issuing stock certificates, accounting and legal fees P19,600

·         Indirect costs of combining, including allocated overhead and executive salaries P 10,400

Business Combination_exercise

1.       On December 31, 2015, Honest Corporation enters into a business combination by acquiring the assets and assuming the liabilities of Kind corporation.  In effect Kind corporation will be dissolved. Honest transferred the following to Kind Corporation:

a.       20,000 unissued shares of its P10 par common stock, with a market value of P25 per share;

b.      P180,000 in long-term 8% notes payable, and

c.       A contingent payment of P 120,000 cash on January 1, 2018, if the average income during the 2-year period of 2016-2017 exceeds P 300,000 per year. Honest estimate that there is a 60%  chance or probability that the P 120,000 payment will be required.

In addition, Honest pays the following at the time of the merger:  

Business Combinations

10 Basic important things that you need to know about BUSINESS COMBINATIONS

1.  Legal basis:      IFRS/PFRS #3 2004 and 2008 (Revised)
2. Definition: An event where the acquirer obtains control of one or more businesses.
3. Core  Concept: Acquisition of Control  
4. How control is achieved?  a. Acquisition of net assets     b. Acquisition of stocks
5. Accounting Method:   Purchase method/Acquisition method
6. Steps In applying the acquisition method:
       1.) Identify the acquirer            2.) Determine the acquisition date            3.) Determine the considerations given (Price paid) by the acquirer     4.) Recognize and measure the following:    
   
   • Identifiable assets acquired  Liabilities assumed
   •  Non-controlling interest in the acquired company
   • Any resulting goodwill or gain from a bargain purchase.
   
   
7.  Identifying the acquirer: The one transferring the cash or other assets or assuming the liabilities is the acquiring company
8. When is the Acquisition date?   
•  The date the acquirer obtains control of the acquired company
•  The date on which the acquirer legally transfers the considerations or acquired the assets and assumes the liabilities.
9.    Considerations and acquisition costs:    To get considerations given, get the sum of the following:
•  Assets transferred of the acquirer either, cash, NCA, contingent consideration, equity instruments, options or warrants
• Liabilities incurred of the acquirer
• Equity instruments issued by the acquirer
10.  Net Assets recognition and measurement:    Follow the simple principles below
•  The fair values of all identifiable assets and liabilities of the acquired company are measured and recorded.  
•  The identifiable assets should never include goodwill that may exist in the books of the acquired company
• The excess of the price paid over the values assigned to net assets is the goodwill
• The excess of the fair value assigned to the net assets over the price paid is recorded as gain from bargain purchase. 

Note: Acquisition-related costs are costs by the acquirer to effect a business combination such as broker’s fees, accounting, legal and   other professional fees and  general administrative costs. These costs are recorded as expenses. Where the consideration given is stock of the acquirer the issue costs are usually deducted from the value assigned to Additional Paid In Capital/Share Premium.