Step Acquisition.docx

ACCOUNTING FOR BUSINESS COMBINATIONS
Consolidated FS – Step Acquisitions
Business Combination Achieved in Stages (Step Acquisitions)
Prior to control being obtained, an acquirer accounts for its investment in the equity interests of an acquiree in
accordance with the nature of the investment by applying the relevant standard, e.g. IAS 28 Investments in
Associates and Joint Ventures, PFRS 11 Joint Arrangements, IAS 39 Financial Instruments: Recognition and
Measurement or PFRS 9 Financial Instruments. As part of accounting for the business combination, the
acquirer remeasures any previously held interest at fair value and takes this amount into account in the
determination of goodwill as noted above [PFRS 3.32] Any resultant gain or loss is recognized in profit or loss
or other comprehensive income as appropriate. [PFRS 3.42]
Illustrative Problems: Step Acquisitions
PROBLEM 1
TANJIRO Company's stockholder's equity as of December 31, 2019 is P7,308,000. On January 1, 2020,
TANJIRO acquires 30% of INOSUKE Company's ordinary shares for P540,000 cash and by issuing its own
shares with a fair value of P1,350,000. TANJIRO acquired significant influence over INOSUKE as a result of
the stock acquisition. On May 1, 2020, TANJIRO purchases another 60% of INOSUKE's ordinary shares for a
cash payment of P3,942,000. On this date, INOSUKE reports identifiable assets with carrying value of
P6,480,000 and fair value of P11,520,000 and it has liabilities with a book value and a fair value of P3,240,000.
At the date of acquisition of 60%, net loss reported by INOSUKE for the four-month ended April 30, 2020
amounted to P900,000. The fair value of the 10% non-controlling interest is P1,296,000. Non-controlling
interest is valued using the proportionate basis. TANJIRO also paid the following: P90,000 for legal fees,
P72,000 for finder's fee, P77,400 for accountant's fee, P64,800 for audit fee for SEC registration of stock
issued and P19,800 for printing of stock certificates.
Immediately after business combination, how much is the consolidated total equity?
BOOKS OF TANJIRO:
January 1, 2020:
Investment in Associate P 1,890,000
Cash P 540,000
Share Capital/APIC 1,350,000
April 30, 2020:
Investment Loss (P900,000 x 30%) 270,000
Investment in Associate 270,000
May 1, 2020:
Investment in Subsidiary 5,913,000*
Investment in Associate 1,620,000
Cash 3,942,000
Gain on remeasurement of Investment* 351,000**
Expenses (90k + 72k+ 77.4k) 239,400

APIC (64,800 + 19,800) 84,600
Cash 324,000
*Price paid:
Implied FV of subsidiary’s NA:
Price paid for 60% 3,942,000
÷ 60% 6,570,000
x Controlling Interest 90%
Initial Cost of Investment in Subsidiary 5,913,000
**Gain on remeasurement:
Implied FV of subsidiary’s NA P 6,570,000
x % of ownership (Investment in Associate) 30%
FV of Investment in Associate P 1,971,000
BV of Investment in Associate (1,890,000 – 270,000) 1,620,000
Gain on remeasurement P 351,000
GOODWILL/GAIN COMPUTATION:
Aggregate of:
Price paid 5,913,000*
NCI (@ prop. share): P8.28M* x 10% 828,000 6,741,000
FVNA 8,280,000**
Gain 1,539,000
** FV of Inosuke’s Net Assets (11,520,000 – 3,240,000 – 0.9M) P 8,280,000
Consolidated SHE:
Tanjiro’s SHE, DOA:
Before investment in assoc. P 7,308,000
Shares issued 1,350,000
Share in net loss (270,000)
Gain on remeasurement 351,000
Expenses – Acquisition (324,000) P 8,415,000
Gain on acquisition 1,539,000
NCI 828,000
Consolidated SHE, DOA P 10,872,000
PROBLEM 2
On January 1, 2020, NEZUKO Corporation acquired 40% interest of ZENITSU Company for P24million.
NEZUKO has already held a 25% interest which had been acquired for P8million. The fair market value of the
non-controlling interest on this date amounted to P12million and the fair market value of the net assets of
ZENITSU was P42million.
What is the result of business combination?

Aggregate of:
Price paid (24M / 40% x 65%) 39,000,000
NCI (prop. share) 42M x 35% 14,700,000 53,700,000
FVNA 42,000,000
Goodwill 11,700,000