ACC2001 FINANCIAL ACCOUNTING

Trimester 1 AY2020/21

LECTURE 7: ACCOUNTING FOR BUSINESS

COMBINATIONS I

1
Accounting Standards

Standards relevant to the preparation and presentation of

consolidated financial statements

SFRS(I) 10 Consolidated Financial Statements (specifies

under what situations consolidated financial statements
are to be prepared)

SFRS(I) 3 Business Combination (deals with issues relating

to business combination generally)

SFRS(I) 1-27 Separate Financial Statements (prescribes the

accounting and disclosure requirements for investments in
subsidiaries, joint ventures and associates when an entity
prepares separate financial statements.)
2
Scope and aims of the standard
SFRS(I) 10:

• (a) requires an entity (the parent) that controls one or more other
entities (subsidiaries) to present consolidated financial statements;

• (b) defines the principle of control, and establishes control as the basis
for consolidation;

• (c) sets out how to apply the principle of control to identify whether
an investor controls an investee and therefore must consolidate the
investee;

• (d) sets out the accounting requirements for the preparation of

consolidated financial statements

3
Scope and aims of the standard

The main principles of SFRS(I) 10 are:

• An entity that is a parent shall present consolidated financial

statements (para 4).

• An investor, regardless of the nature of its involvement with an entity

(the investee), shall determine whether it is a parent by assessing
whether it controls the investee (para 5).

• An investor controls an investee when it is exposed, or has rights, to

variable returns from its involvement with the investee and has the
ability to affect those returns through its power over the investee
(para 6).

4
SIA Annual Report

5
SIA Group versus SIA Company

6
Three levels of financial reporting

• A primary issue that underpins financial reporting is the identification

of the reporting entity.

Financial information may be reported at three levels

Financial information

Disaggregated reporting
Separate financial
Aggregated reporting for business units
statements for the legal
for the economic entity within a legal or
entity
economic entity

7
Legal versus economic entity
Legal entity Economic entity

Recognized in the eyes of the Unit for financial reporting whose

law as a separate person boundaries are determined by
control over relevant activities

Financial statements are Prepared to show the financial

prepared for legal purposes, position, financial performance
taxation and other purposes. and cash flow for decision-making
by investors of the parent and
non-controlling interests

A parent is a legal entity which The parent is an active investor

has interests in the subsidiary and the accounts it prepares as an
and the accounts it prepares as a economic entity (“group”) is
legal entity is known as separate known as the consolidated
financial statements financial statements

What is the nature of the What happens to the investment?

investment to the legal entity? Eliminated & replaced by net
Investment in subsidiary assets

What is the nature of the What is the nature of the income?

income? Dividend income from Profits and losses of subsidiary
subsidiary 8
Parent-Subsidiary Relationship

Parent-Subsidiary Relationship
Group
Subsidiary

Consolidation:
Parent Process of preparing and
Control
(Controlling Subsidiary presenting financial
entity) statements of parent and
subsidiary as if they were
one economic entity

Subsidiary
Consolidated FS:
Artificial creations
9
Group Reporting

Relationship of control within legal entities

• Shared ownership
• Contractual or statutory
arrangements

Legal Entity Control

Legal entity
Individual financial
Individual financial
Effective relationship statement
statement

Economic entity:
Consolidated financial statement 10
What is consolidation?

• Consolidation is the process of combining the assets, liabilities,

earnings and cash flows of a parent and its subsidiaries as if they were
one economic entity.

• Consolidation (or group reporting) is brought about by strategic

corporate decisions to extend corporate boundaries (e.g. through
mergers and acquisitions).

• Since an economic, and not legal, perspective is adopted, transactions

between companies within this economic entity (and their resultant
balances) must be eliminated.

• Before consolidation is carried out, it is important to determine

whether a parent-subsidiary relationship exists.

• To establish that, we need to consider the attributes of control

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Types of M&A transactions

Acquirer gains “control” over

Two or more acquirers gain
the operating and financial
“joint control” over the
policies of the acquiree
acquiree
(“Consolidation”)
(“Joint arrangement”)

Arrangements in M&A

Reciprocal investments held Investor has “significant

by each of the two firms, influence” over the
both are deemed to be operating and financial
equally dominant policies of the investee
(“Pooling of interests”) (“Associate”)

12
Definition of Control

• An investor controls an
investee if and only if the Power
investor has all of the
following:
– Power over the investee
– Exposure, or rights to
variable returns from its Ability
involvement with the Control
investee, and
– The ability to use its
power over the investee
to affect the amount of
the investor’s returns Returns

13
Past and Present

• Current relevant accounting standards

– SFRS(I) 10: Consolidated Financial statements
– SFRS(I) 1-27: Separate Financial statements
– SFRS(I) 1-28 Investments in Associates and Joint Ventures
To cover in ACC2007 CA
– SFRS(I) 11: Joint Arrangements

• Definition of control
Under previous standard SFRS(I) 10

Control is determined by the following: Investor controls an investee when:

1. Power to govern financial and 1. It is exposed, or has rights to the
operating policies variable returns from an investee
2. Benefits derived therein, or risk and 2. Has power over investee and ability to
rewards affect those returns
3. Relevant facts and circumstances

14
Relevant facts and circumstances

• SFRS(I) 10 requires the investor to consider all facts and circumstances

to establish if control exists. There are no bright lines or prescriptive
quantitative thresholds. Unlike the previous standard, SFRS(I) 10
requires consideration of all available evidence, including fact patterns
to determine if control exists.

• An example of a fact pattern is the past voting pattern in general

meetings. Another example is the dispersion and number of investors
to determine if relative voting rights are concentrated in one or more
investors.

• The spirit of SFRS(I) 10 is thus intended to capture the primary essence

of control through the three variables (Power, Ability and Return),
which previously was simplistically depicted through quantitative
thresholds. 15
Quantitative Thresholds

Continuum of intercorporate ownership

Zero 20% 50% 100%

Ownership Ownership Ownership Ownership
Significant
Passive Control
Influence
Quantitative
Active thresholds do NOT
Passive Active apply in SFRS(I) 10,
Investment Investment Investment
but they are often
used as a rule of
• Trading securities • Associated thumb measure in
• Partially-owned subsidiary
• Available- for-sale company straight forward
• Fully-owned subsidiary
securities • Joint-arrangements situations
p
u 1. Exert significant
r 1. Gain entry intro a new market
1. Earn dividend influence or
p 2. Achieve synergistic benefits
2. Make capital control over
o from complementary strengths
gain investee’s
s 3. Gain market dominance
operation
e

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Determining Control

01What is the purpose and

design of the investee?

02 Is control by voting

04 How are decisions 03 What are the

rights only?

about those relevant activities

activities made? of the investee?

05 The process of determining

control considers all three
Do rights of the investor
give it a current ability to 06 attributes of control:
Power, Ability and Returns.
direct relevant activities? Is the investor exposed to
or have rights to variable
returns from its
involvement with the
investee?

17
Qualitative Factors

• Considers how decision making over the relevant activities is

empowered and which party has the power to make those decisions.
– Decision making (power): e.g. voting rights, contracts, relationships
– Relevant activities: those have the most significant effect on the returns e.g.
selling, purchasing, acquisition of assets, R&D

• Considers if the rights enables an investor to have a current ability to

direct the most relevant activities of the investee.
– Practically able to make decisions without any restriction

• Evaluates if the investor is exposed to or have rights to variable returns

from its involvement with the investee

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 SIA subsidiaries

Aviation
Partnership:
The company is
considered a
subsidiary of
the Group by
virtue of the
management
control over
financial and
operating
policies of the
company
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 Relative voting rights

• Sources of power: voting rights

– The most common and the most persuasive source of power
– Consider evidence beyond absolute voting rights, e.g. relative voting rights, dispersion of
voting rights, the number and likelihood of parties that may act together to outvote the
investor, potential voting rights and voting patterns

Illustration: Relative voting rights

Three investors have each more than 5% ownership interests. The remaining 43% are dispersed over 100
investors, each not owning more than 0.5% interest. The AGM is attended by investors A, B and C and about a
third of other investors.
Voting rights Voting at AGM Relative voting rights
Investor A 40% 40% 57%
Investor B 10% 10% 14%
Investor C 7% 7% 10%
Other investors 43% 13% 19%
100% 70% 100%

Investor A’s relative voting rights = 40% / 70% = 57%

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Potential voting rights
• Sources of power: potential voting rights
– Rights to obtain voting rights from potential ordinary shares, e.g. options, convertible
instruments and forward or future contracts
– Consider the purpose and design, the terms and conditions, the motives for the issue and
the intent to vest control of these instruments

Illustration: Potential voting rights

Investor A, the founding investor, invited Investor B and Investor C to purchase shares in Entity X. B is a strategic
investor who has knowledge of Entity X’s business. A is a financial investor. C is a related party of A. B was
issued options that would allow B to be issued with 40,000 ordinary shares.
Consider: (a) The options are exercisable at current date? (b) exercisable in Year 3?

In scenario A, Investor B has control with 59% ownership, if the options are exercised.
In scenario B, Investor A has control as the options are not currently exercisable. The
intent is for Investor B to continue to “grow” the business of Entity A. 21
Power over key management

• Sources of power: power over key management personnel

– Control arises when an entity is able to make decisions on the activities that are
most significantly impact returns, and these decisions are made by key
management personnel
– The entity that is able to appoint, remove and remunerate these personnel
effectively has the power over these personnel.
– Key management personnel: persons having authority and responsibility for
planning, directing and controlling the activities of the entity, directly or
indirectly, including any director (whether executive or otherwise) of that entity.
(SFRS(I) 1-24)
– Key management personnel may include “shadow directors” or people who
control key management personnel of that entity.

22
Other sources of power

• Sources of power: special relationship

– consider all sources of power including interpersonal and operational links
between an investor and the investee
– May arise from the following situations:
• The key management personnel of the investee are current or previous employees of the
investor;
• The investee’s operations are dependent on the investor (for example, provision of critical
services or specialized knowledge);
• A significant portion of the investee’s activities are conducted on behalf or involve the
investor; or
• The investor’s exposure or rights to returns is proportionately higher than its ownership
interests in the investee.

• Sources of power: Statutory and contractual provisions, rights to veto or enter into
transactions
– Rights: must be “substantive rights” and not “protective rights”
– E.g. if a franchising contract allows the franchisor to intervene to protect the franchise
brand name, the power is protective and is not a sufficient basis to give rise to power to
direct most relevant activities of the entity.
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Ability to affect returns
• In SFRS(I) 10, an investor must demonstrate the ability to use the power
to affect the returns to the investor from its involvement with the
investee.

• Substantive rights
– Substantive rights relate to rights to make decisions on the most significant
activity (activities) that affect an entity’s returns.
– Consider whether there are barriers that prevent the use of the right, e.g.
financial barriers, operational barriers or legal and regulatory barriers

• Protective rights
– Rights must be substantive and not merely protective.
– Protective rights are decision making rights on fundamental changes to an
investee’s activities and are often relating to exceptional events, e.g. the right of
a lender to restrict the payment of dividends by the borrower when lending
covenants are breached
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Ability to affect returns

• Unilateral ability
– When an investor is able to exercise power on another entity without
restrictions from other parties
– Control is therefore different from joint control which requires unanimous
consent from parties.

• An investor has to consider total variable returns that it is exposed or have a right
to as a result of its involvement with an investee.
– Variable returns: not fixed; may be only positive (e.g. option holder), only negative (option
writer) or both positive and negative (e.g. holding ordinary shares)
– Return includes: dividends, changes in fair value, remuneration, synergies, operational
advantages to the investor and etc.
**********************************************************************
SFRS(I) 10 is dynamic. Continually re-assess control when facts and circumstances
change with respect to power, ability and returns.
Power may be gained or lost through events that do not involve the investor.

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SFRS(I) 3 Appendix B

Additional control criteria under SFRS(I) 3 Appendix B

Based on consideration
Based on entity size Based on dominance
transferred

Acquirer is the entity that: Acquirer is the entity: Acquirer is the entity:

• Transfers cash or other assets or • Whose owners hold the largest • Whose owners have the
incurs liabilities to acquire relative voting rights in a ability to elect, appoint or
another entity combined entity remove a majority of
directors
• Issues shares as consideration • Whose owners hold the largest
to acquire shares of another minority voting interest in the • Whose management is
entity combined entity (if no other dominant in the combined
entity has significant voting entity
• Pays a premium over the fair interest)
value of the equity interest • Who initiates the business
• Which is larger in size combination

26
SFRS(I) 3 Business Combinations

• Objective of SFRS(I) 3
– Specifies the requirements governing the method of accounting, disclosure and
presentation of the financial statements of a reporting entity comprising one or
more separate entities that are brought together in a business combination

Purchasing Purchasing
the equity of the net assets of
another entity another entity
Business combinations result from
Transferring its net assets, Purchasing some of the net
together with the net assets of assets of another entity that
other combining entities to a together form one or more
newly formed entity business

27
Scope and aims of the standard
The main principles of SFRS(I) 3 are:

• An entity shall determine whether a transaction or other event is a

business combination by applying the definition in this SFRS(I), which
requires that the assets acquired and liabilities assumed constitute a
business (para 3).
▪ If the assets acquired are not a business, the reporting entity shall
account for the transaction or other event as an asset acquisition

• An entity shall account for each business combination by applying the

acquisition method (para 4).

• Applying the acquisition method requires: (a) identifying the acquirer;

(b) determining the acquisition date; (c) recognising and measuring
the identifiable assets acquired, the liabilities assumed and any non-
controlling interest in the acquiree; and (d) recognising and measuring
goodwill or a gain from a bargain purchase (para 5).
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Business Combinations

Where an acquirer
obtains control of one
Business
or more businesses
combinations
(SFRS(I) 3 App A)

Examples: SFRS(I) 3 App B:B6

Net assets Former

Businesses
Direct acquisition of combining owners of a
become
of net assets of entities transferred combining entity
subsidiaries of
acquired business to a newly-formed obtains control
acquirer
entity of combined entity

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Direct Acquisition of Net Assets of Acquired Business

Transfer net
assets
Acquirer’s separate
Former owners of financial statements
the net assets of will now include the
acquired businesses net assets of the
acquired business
Transfer
consideration

• Business combination does not give rise to a parent-subsidiary relationship.

• There is no distinction between legal entity and enlarged economic entity
• Thus no consolidation is required and no NCI arisen

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Businesses Become Subsidiaries of Acquirer

Acquirer’s Group

Former owners
transfers equity of
subsidiary

Former
owners of a Acquirer Subsidiary
subsidiary
Acquirer transfers
consideration

• Business combination gives rise to parent-subsidiary relationship

• Goodwill is recognized in the consolidated financial statements
• Consolidated financial statements are required
• NCI is recognized in the consolidated financial statements
31
Net Assets of Combining Entities Transferred to a
Newly Formed Entity

Acquirer Acquiree

New legal
entity is the
Net assets of acquirer are economic Net assets of acquiree, including
recognized at pre- entity goodwill and identifiable net assets,
combination carrying are recognized at their acquisition
amounts date fair values

32
Net Assets of Combining Entities Transferred to a
Newly Formed Entity

• Acquirer and acquiree transfer their assets and liabilities to a newly

formed entity
– Controlling entity is the acquirer, and the other entity is the acquiree

• Legal entity incorporates the assets and liabilities of the enlarged

economic entity

• This business combination would give rise to goodwill to be recognized

in the newly formed entity’s financial statements

• Consolidation is not required as separate legal entities of acquirer and

acquiree cease to exist

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Former Owners of a Combining Entity obtains Control
of the Combined Entity

• Business combination involves a Reverse Takeover (RTO)

• Former owners of legal subsidiary obtains control over the enlarged

economic entity

• Reason for reverse takeovers:

– Raising public funds without having to undergo a more costly process of raising
funds through an Initial Public Offering (IPO)

• RTO will be covered in ACC2007 Company Accounting module

34
 To summarize…
• Business Combinations may take different forms; however two
characteristics are present:

Acquirer has • 3 main attributes of control (SFRS(I) 10)

• Power over acquiree
control of business • Exposure or rights to variable returns of acquiree
• Ability to use power to affect acquiree’s returns.
acquired

• 2 vital characteristics of a business (SFRS(I) 3)

Target of • Integrated set of activities and assets
acquisition is a • Capable of being conducted and managed to provide
returns (i.e. dividends) to investors and other
business stakeholders.

Business Combinations involving entities under common control is outside of scope of

SFRS(I) 3
35
The Acquisition Method
• SFRS(I) 3 requires all business combinations to be accounted for using the
acquisition method from the perspective of an acquirer.

• An acquirer can obtain control in an acquiree through:

1. Acquisition of assets and assumption of liabilities of acquiree
▪ Include assets and liabilities not previously recognised by acquiree: contingent liabilities,
brand name, in-process R&D etc.
2. Acquisition of controlling interest in the equity of acquiree
▪ Deemed to be effective acquisition of assets and assumption of liabilities of acquiree
▪ Control over an acquiree in substance means that acquirer has control over net assets of acquiree
▪ Effects: (2) accounted for as if they are effects of (1)
3. Combination of (1) and (2)
▪ Effects: Accounted for as if they are effects of (1)

• This is because through the control exercised by an acquirer over an

acquisition, the acquirer is deemed to also have control over the net assets of
the acquiree.

36
Two important issues to consider..

Acquirer’s Group

Issue 1: Acquirer
transfers
consideration

Former
owners of a Acquirer Subsidiary
subsidiary
Issue 2: Former
owner transfers
equity of subsidiary

• Issue 1: What is the fair value amount of consideration transferred?

• Issue 2: What is the fair value amount of consideration received in
exchange for the consideration transferred? 37
Sometimes it is straightforward…

In this takeover offer, the acquirer will pay $2.06 cash for every share of M1 38
Cash consideration

Being accounting for acquisition of M1

Dr Investment in M1 $103 million
Cr Cash $103 million
(Being payment to acquire 50 million shares of M1)
39
Sometimes it gets complicated…

40
 Determine the Amount of Consideration Transferred

Consideration Fair value of Fair value of

transferred* = Fair value of + Fair value of + equity
+ contingent
assets liabilities
transferred incurred interests consideration
by the issued by
acquirer acquirer

• Issue 1: What is the fair value (FV) of the consideration transferred?

– Determined on the acquisition date
– Acquisition date is the date when the acquirer obtains control and not the date when
consideration is transferred
– Acquisition-related costs are not included (e.g. legal fees are expensed off)

• Types of consideration transferred:

– (1) FV of assets transferred: Cash or non-monetary assets
– (2) FV of liabilities incurred: Deferred settlement of consideration
– (3) FV of equity interests issued to former owners: Share swap
– (4) FV of contingent consideration: Terms of payment that are contingent on the
occurrence or non-occurrence of certain specified events in the future.
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Fair Value of Assets Transferred or Liabilities
Assumed

• If assets transferred or liabilities assumed are not carried at fair value in

the acquirer’s separate financial statements:
– Acquirer has to remeasure the transferred assets or assumed liabilities to fair
value first and recognize a gain or loss in its separate financial statements

• If transfer of monetary assets or liabilities are deferred, the time value

of money should be recognized:
– The fair value will be the present value of the future cash outflows
– E.g. Future cash settlement of $1,000,000 is due 3 years later and 3% interest is
levied
Present value to be recognised = $1,000,000 / (1+0.03)^3
= $915,142

42
Illustration: Fair Value of Assets Transferred

• An acquirer plans to transfer its property to the former owners of an

acquiree (Co A) in settlement of the purchase price.
– If the property is carried in the acquirer’s separate financial statements at $18 million
but has a fair value of $20 million, the acquirer must recognize a gain of $2 million in
its own books before transferring the asset.

• Effectively, the fair value gain represents the gain that would have arisen if
the acquirer had sold the property at fair value and used the proceeds from
the sale to settle the purchase of price.

Being accounting for acquisition of Co A

Dr Property 2,000,000
Cr Remeasurement gain 2,000,000

Dr Investment in Co A 20,000,000
Cr Property 20,000,000 43
Fair Value of Equity Interests Issued by the Acquirer

• Fair value of equity interests issued is measured:

– (1) By market price (e.g. published quoted prices of shares)
– (2) With reference to either the fair value of the acquirer OR acquiree, whichever is more
reliable (if market price is not available or not reliable for the acquiree, use the fair value
of the acquirer).

• Illustration of (2) Issues X number of shares (e.g. 2 million)

Acquirer Conveys A number of shares to acquirer

Owners of Acquiree
(e.g. 10 million)
Total number of
shares after
issue: Y (e.g. 10 Gains control over acquiree
million)

FV of acquirer’s Acquiree
equity: $Z (e.g. FV of equity issued is either:
$100 million) • X/Y multiplied by $Z; or Total number of shares:
• A/B multiplied by $C B (e.g. 10 million)

FV of acquiree’s equity:
44
$C (e.g. $18 million)
Illustration: Fair Value of Equity Issued

P Ltd acquires 100% of S Co. through an issue of 5,000,000 shares to

the owners of S Co.

P Ltd S Co
Number of existing shares 10,000,000 2,000,000
Number of new shares issued 5,000,000 –
Market price per share $2.00 –
Fair value of equity 30,000,000 9,000,000

45
Illustration: Fair Value of Equity Issued

Situation 1: P Ltd’s market price is a reliable indicator

Consideration transferred = 5,000,000 shares x $2.00
= $10,000,000

Alternative computation:
(5,000,000 shares / 15,000, 000 shares) x $30 million = $10 million

Situation 2: Fair value of S Co. is a better estimate

Consideration transferred = $9,000,000

Explanation: Since P Ltd is acquiring 100% of S Co, the fair value of the
equity (FV of S Co. as a whole including the implicit goodwill) acquired by
P is $9 million.
46
Fair Value of Contingent Consideration

• Contingent consideration
– Obligation (right) of the acquirer to transfer (receive) additional assets or equity
interests to (from) acquiree’s former owner if specific event occurs
• E.g. Event A: acquirer gets a refund of part of the consideration transferred if the
acquiree does not achieve the target profit
• Fair value of contingent consideration or refund will change as new information arises

– Fair value of the contingent consideration has to be estimated through

determining the present value of the probability-weighted outcome; if the
contingent event leads to a refund (For example, event A) the fair value of the
refund (probability-weighted outcome) is deducted from consideration
transferred

47
Computing Fair Value of Contingent Consideration

• Assuming 2 outcomes
o Expected value = (Probability of contingent event occurring *

consideration) + (Probability of contingent event not occurring * 0)

o Fair value = Present value of expected value
= PVFi,n x Expected value

• An acquirer undertakes to pay an additional $2 million to the vendor at the

end of 3 years from acquisition date if the annual profit of the subsidiary
does not fall below $5 million over a 3-year period. Probability that annual
profit will be at least $5 million over the 3-year period = 0.60. Present value
factor at 5% at the end of 3 years = 0.8638.

❖ Fair value of contingent consideration

= 0.8638 x [($2,000,000 x 0.60) + (0 x 0.40)]
= $1,036,560
48
Contingent Liabilities & Provisions

• Contingent liabilities are recognized by acquirer if they are:

– Present obligations arising from past events and
– Reliably measurable, even if outcome is not probable (SFRS(I) 3:23)

• Example: Provisions for restructuring & termination costs are

recognized if they are:

Probable
outflow of
Reliably
economic
resources measurable

Present
constructive or
legal obligations
arising from past
events
49
Indemnification Assets

• Contractual indemnity
– Provided by the former owners of the acquiree to the acquirer to make good
any subsequent loss arising from contingency or an asset or a liability

• Treatment for indemnity

– The acquirer has to recognize an “indemnification asset” at the same time the
indemnified asset or liability is recognized
– The indemnification asset is measured on the same basis as the indemnified
asset or liability

• Example: An acquiree is exposed to a contingent liability. Based on probabilistic

estimation, the FV of the contingent liability is $100,000. The former owners
provide a contractual guarantee to indemnify the acquirer of the loss.
– In the consolidated balance sheet, the acquirer recognizes contingent liabilities
and an indemnification asset of $100,000 at FV

50
Acquisition-Related Costs

• All acquisition-related costs are expensed off

• Costs of issuing debt are recognized in accordance with SFRS(I) 9
– Costs of issuing debt are deemed as yield adjustment to the cost of borrowing
and are amortized over the tenure of the loan
– Costs to raise debt to finance an acquisition increase the effective interest rate
– Journal entry for the payment of debt issuance cost

Dr Unamortized debt issuance costs

Cr Cash

• Costs of issuing equity are recognized in accordance with SFRS(I) 1-32

– Costs of issuing equity are deducted from equity issued
– Debit entry to equity effectively reduces the proceeds from the issue of shares
– Journal entry to record the payment of cost of issuing equity

Dr Equity
Cr Cash
51
 Comprehensive Example
Determining the fair value of consideration transferred
Transfers consideration
P Co. V Co. (Ex-owner of
(Acquirer) Conveys a number of shares to acquirer Acquiree)

Gains control over acquiree

S Co. (Acquiree)

Number of ordinary shares issued by P Co (acquirer) to V Co 2,000,000

Fair value per share of P Co at date of acquisition, reliably measured $2
Undiscounted cash payment payable to V Co at the end of five years $1,000,000
Interest payable to V Co for deferred payment 6% p.a.
Present value of deferred cash payment $747,258
Legal fees to execute sales agreement with V Co. Exp: $10,000
Cash paid by P Co to V Co. $1,000,000
Stamp duties and other incidentals of share issue to V Co Reduce equity: $10,000
52
 Comprehensive Example
(1) Determine the fair value of consideration transferred:

Fair value of shares issued (2m x $2) $4,000,000

Deferred payment to V Co 747,258
Cash paid $1,000,000
Consideration transferred $5,747,258

(2) Prepare the journal entries by P Co to record consideration transferred and

transaction costs:
Dr Investment in S $5,747,258
Dr Unamortized discount on loan $252,742
Cr Share capital (equity) $4,000,000
Cr Loan payable to V Co $1,000,000
Cr Cash $1,000,000

Dr Acquisition-related expenses $10,000

Dr Equity $10,000
Cr Cash $20,000
53