PFRS 3 – BUSINESS COMBINATIONS
PFRS 3 applies to business combinations. Its objective is to enhance the relevance,
reliability, and comparability of an acquirer’s financial reporting by establishing the
recognition and measurement principles and disclosure requirements for a business
combination.
PFRS does not apply the following:
The formation of a joint venture.
The acquisition of an asset or a group of assets and relate liabilities that does not
constitute a business. In such a case of acquirer allocates the lump sum purchase price
to an acquired items based on their relative fair values on purchase date. This
transaction does not give rise to good.
A combination of entities under common control.
Business combinations- occurs when one company acquires another or when two or more
companies merge into one.
- is "a transaction or other event in which acquirer obtains control of one or more businesses."
Transactions referred to as 'true mergers' or 'mergers of equals are also business combinations
under PFRS 3. (PFRS 3. Appendix A)
Parent or Acquirer- the company that obtains control over the other.
Subsidiary or Acquiree- the other company that is controlled.
Essential elements in the definition of a business combinations.
1. Control- Control over an investee is established when an investor has the authority to
dictate the investee's pertinent activities, such as operating and financing policies,
thereby impacting the variability of the investor's returns from the investee. Although
control is typically assumed when the acquirer possesses over 50% (or 51% or more)
interest in the acquiree's voting rights, this presumption can be rebutted as control can
be achieved through alternative means, including:
the acquirer has the power to appoint or remove the majority of the board of directors of
the acquiree; or
the acquirer has the power to cast the majority of votes at board meetings or equivalent
bodies within the acquiree; or
the acquirer has power over more than half of the voting rights of the acquiree because
of an agreement with other investors; or
the acquirer controls the acquiree's operating and financial policies because of a law or
an agreement.
An acquirer may obtain control of an acquiree in a variety of ways, for example:
by transferring cash or other assets (including net assets that constitute a
business);
by incurring liabilities;
by issuing equity interests;
by providing more than one type of consideration; or
without transferring consideration, including by contract alone.
2. Business- Business is "an integrated set of activities and assets that is capable of being
conducted and managed for the purpose of goods or services to customers, generating
investment income providing (such as dividends or interest) or generating other income
from ordinary activities." (PFRS 3. Appendix A)
A business has the following three elements:
Input - any economic resource that results to an output when one or more processes are
applied to it, e.g., non-current assets, intellectual property, the ability to obtain access to
necessary materials or rights and employees.
Process - any system, standard, protocol, convention or rule that when applied to an
input, creates an output, e.g., strategic management processes, operational processes
and resource management processes.
Administrative systems, e.g., accounting, billing payroll, and the like, are not
processes used to create outputs.
Output - the result of 1 and 2 above that provides goods or services to customers,
investment income or other income from ordinary activities.
Identifying a business combination
An entity assesses if a transaction qualifies as a business combination according to PFRS 3's
definition. If the assets acquired (and related liabilities assumed) do not form a business, the
entity treats it as a regular asset acquisition rather than a business combination. Accordingly,
the entity applies other relevant standards (e.g., PAS 2 for inventories acquired, PAS 16 for
property, plant, and equipment acquired, etc.).
Accounting for business combination
Business combinations are accounted for using the acquisition method. This method requires
the following:
Identifying the acquirer;
Determining the acquisition date; and
Recognizing and measuring goodwill. This requires recognizing and measuring the
following:
i. Consideration transferred
ii. Non-controlling interest in the acquiree
iii. Previously held equity interest in the acquiree
iv. Identifiable assets acquired and liabilities assumed on the business combination.
Identifying the acquirer
For each business combination, one of the combining entities is identified as the acquirer.
The acquirer is the entity that obtains control of the acquiree.
The acquiree is the business that the acquirer. obtains control of in a business combination.
Determining the acquisition date
The acquisition date marks the point at which the acquirer gains control of the acquiree, typically
coinciding with the closing date—when the acquirer legally transfers consideration, acquires
assets, and assumes liabilities. However, control may be established earlier or later than the
closing date, as stipulated in written agreements.
Recognizing and measuring goodwill
On acquisition date, the acquirer computes and recognizes goodwill (or gain on a bargain
purchase) using the following formula:
Consideration transferred xx
Non-controlling interest (NCI) in the acquiree xx
Previously held equity interest in the acquiree xx
Total xx
Less: Fair value of net identifiable assets acquired (xx)
Goodwill / (Gain on a bargain purchase) xx
