Lesson 8 P2: Business Combination - Notes

Classification of Business Combination
1. Acquisition of Assets
     a. Statutory Merger (merge-Retain one) => A+B=A;  A+B=B
     b. Statutory Consolidation (consolidatio-New corp.) => A+B=C

2. Stock Acquisition => Parent-Subsidiary Relationship
     Matrix
     *Less than 20% = Investment in Stocks (Cost Method)
     *20% - 50% = Investment in Associate (Equity Method)
     *More than 50% = Investment in Subsidiary

*1. Accounting for Acquisition of Assets
     a. Measure Acquired Assets (and Liabilities) at Fair Value

     b. Recognize Goodwill or Gain on Acquisition(Bargain Purchase)
               If Consideration Transferred > Net Fair Value of Interest , GOODWILL
               If Consideration Transferred < Net Fair Value of Interest, GAIN ON ACQUISITION

     c. Expenses in Acquisition
               Direct/Indirect Costs = Expense outright
               Liability Issue Transaction = Liability (Bond Issue Costs)
               Equity Issue Transaction = Deduct from Share Premium or APIC


*2. Accounting for Stock Acquisition(Investment in Subsidiary in Parent's Books)
     a. Parent and Subsidiary maintain separate records

     b. Recognize Goodwill or Gain on Acquisition(Bargain Purchase)
               If Consideration Transferred > Net Fair Value of Interest , GOODWILL
               If Consideration Transferred < Net Fair Value of Interest, GAIN ON ACQUISITION
               *Partial Goodwill = Parent recognizes its share in the Goodwill only.
               *Full Goodwill = Parent recognizes its share
                                             plus non-controlling interest's share in Goodwill.
     c. Expenses in Acquisition
               Direct/Indirect Costs = Expense outright
               Liability Issue Transaction = Liability (Bond Issue Costs)
               Equity Issue Transaction = Deduct from Share Premium or APIC

     d. Consolidation of Financial Statements
           Eliminate INTERCOMPANY Transactions (Either downstream or upstream)
               *Upstream/Downstream Sales
               *Upstream/Downstream Cost of Sales
               *Unrealized Gross Profit, year end (Adjust based on end inventory)
               *Dividend Income from Subsidiary
               *Gain/Loss on Upstream/Downstream Sale of Plant Assets
               *Depreciation Expense (Adjust by eliminating gross profit from sale of plant assets)

*Consider: Consolidated = Interest of Parent (NIATOP) + Non-controlling Interest (NCINAS)

*Consolidated Accumulated Profits = Accumulated Profits of Parent + NCINAS (non-controlling)

*Consolidated Accumulated Profits on the Financial Statement = Accumulated Profits of Parent only

*Test Cash Generating Unit (CGU) for Impairment of Goodwill, but carrying value of an item in the CGU must not be below its recoverable amount.