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  1. Grant Thornton Philippines
  2. Alerts and Publications
  3. Technical Alerts
  4. Accounting Alerts
  5. 2021
  6. Insights to PFRS 3, Business Combinations

Accounting Alert

15 Feb 2021
  • Accounting Alerts
  • 2021 2021
    • Philippine Interpretations Committee Question and Answer 2020-05
    • Audit Readiness - Preparing your Annual Reports
    • Philippine Interpretations Committee Question and Answer 2020-04
    • Philippine Interpretations Committee Question and Answer 2020-03
    • Philippine Interpretations Committee Question and Answer 2020-02
    • SEC Memorandum Circular No. 35 series of 2020
    • SEC Memorandum Circular No. 34 series of 2020
    • SEC Memorandum Circular No. 33 series of 2020
    • Regulatory Relief on the Non-imposition of Sanction for Breach in Single Borrower's Limit by Certain Foreign Bank Branches
    • Guidelines on the Electronic Submission of Report on Reclassification of Debt Securities Out of Fair Value Category
    • Revised Guidelines on the Declaration and/or Distribution of Dividends for IC-Regulated Entities
    • PIC Q&A 2020-06, Accounting for Payments Between and Among Lessors and Lessees
    • PIC Q&A 2020-07, Accounting for the Proposed Changes in Income Tax Rates under the CREATE Bill
    • Amendments to the Guidelines on Reclassification of Debt Securities Measured at Fair Value to the Amortized Cost Category
    • Guidelines on the Electronic Submission of Requests for Investment Approval, Compliance with Security Deposit Requirements and Filing of Reportorial Requirements for IC-Regulated Entities
    • Insights to PFRS 3, Business Combinations
    • Navigating the Changes to International Financial Reporting Standards
    • COVID-19 Hedge Accounting Insights
    • BSP Circular 1110 Rationalization of Prudential Reporting Requirements
    • SEC Schedule and Procedure for the Filing of AFS, GIS and Other Annual Reports in accordance with MC 03-2021
    • Guidelines on the Electronic Submission of the 2020 Annual Statement of Life Insurance Companies, Life Units of Composite Insurance Companies and Mutual Benefit Associations
    • SEC Extension of Deadline for the Submission of General Information Sheet for 2021
    • Submission of the 2020 Annual Statement for Non-life Insurance and Professional Reinsurers
    • IC Guidelines on the Online Submission of 2020 AFS and Attachments for Insurance and Reinsurance Brokers
    • SEC Extension of the Deadline for the Submission of 2020 Annual Report of Publicly-listed Companies, Issuer of Registered Securities, and Public Companies
  • 2020 2020
    • Extension of Deadline for Submission of Forms/Notices
    • Online and Manual Submission of Forms/Notices Pursuant to SEC MC 28-2020
    • COVID-19 Accounting Implications for CFOs - Debt Modifications
    • Discussion Paper 'Business Combination under Common Control'
    • SEC Memorandum Circular No. 32 series of 2020
    • SEC Memorandum Circular No. 31 series of 2020
    • SEC Memorandum Circular No. 28 series of 2020
    • Insights into PFRS 16 - Lease Incentives
    • IASB issues Interest Rate Benchmark Reform Phase 2
    • IFRIC 23 - Uncertainty Over Income Tax Treatments
    • COVID-19 Going Concern Considerations
    • Extension of Deadlines and Interim Procedures for the Submission of Printed/Hard Copies of Annual Reports
    • IASB Defers the Effective Date of IAS 1 Amendments
    • Guidelines on the Electronic Submission of the Annual Report and Audited Financial Statements to BSP
    • Filing of Annual Reports During the Temporary Closure of the SEC Main Office until July 26, 2020
    • Work Suspension at the SEC Main Office and Extension of Deadlines for Certain Corporations
    • Adjustment of Deadlines for Submission of Annual Reports to the SEC and Other Announcements
    • Amendments to IFRS 17 and IFRS 4
    • Filing of Reports and Other Documents in SEC Main Office during Temporary Closure
    • Options for the Submission of Reports, Applications and Other Documents to the SEC During Community Quarantine
    • COVID-19 Accounting Considerations for CFOs: Revenue Recognition
    • COVID-19 Accounting Considerations for CFOs: Government Grants
    • IASB Amends IFRS 16 to Provide Relief for Lessees Accounting for Rent Concessions during the COVID-19 Pandemic
    • COVID-19 Accounting for Lease Modifications
    • SEC Notice on the Opening of SEC Express System and SEC Express Nationwide Submission
    • Insurance Commission Circular Letters: Regulatory Reliefs, Online Submission of Reports, and Deferral of IFRS 17 Implementation
    • COVID-19 Accounting Implications for CFOs: Impairment of Intangible Assets and Goodwill
    • IASB Issues Narrow Scope Amendments to IFRS Standards
    • Procedures in the Filing of Audited Financial Statements and General Information Sheet after the Enhanced Community Quarantine
    • Extension of Deadline for the Submission of 2020 Annual and Quarterly Reports and AFS of Companies with Fiscal Year Ended January 31 to April 30, 2020
    • Understanding the Impact of COVID-19 on 2020 Deferred Tax Provisions
    • IASB Proposes Relief for Rent Concessions During the COVID-19 Pandemic
    • Extension of Period to File the General or Special Form for Financial Statements and Guidelines on Submission by Electronic Mail
    • Treatment of Net Unrealized Losses in the EFCDU/FCDU Book for Purposes of Determining Compliance with the EFCDU/FCDU Asset Cover Requirement
    • Guidelines on Reclassification of Debt Securities Measured at Fair Value to the Amortized Cost Category for Prudential Reporting to the BSP
    • Reporting the Impact of COVID-19 to your Business
    • Guidelines on Filing SEC Form 17-LC and 17-C Report
    • COVID-19: Financial Reporting and Disclosures
    • Reduction in Reserve Requirements
    • COVID-19 Outbreak: Accounting Implications
    • Guidelines for Filing of Reports through Electronic Mail with the SEC during ECQ Period
    • Application of IFRS 9 in Light of the Coronavirus Uncertainty
    • [UPDATE] Regulatory Relief for Entities Regulated by the Insurance Commission
    • Guidelines on Submission by Electronic Mail of Required Forms and Documents and Recognition of Electronic Signature
    • Guidelines for the Filing of General Information Sheet (GIS) During the COVID-19 Outbreak and Enhanced Community Quarantine
    • Additional Operational Relief for BSFIs Affected by Measures to Manage the Coronavirus Disease (COVID-19) Situation and its Health and Safety Risks
    • Alternative Means of Filing Reports, Communications and Other Documents with the SEC
    • SEC Relaxes the Requirements for Extension in the Filing of Annual Reports and/or Audited Financial Statements
    • Guidelines Covering the Conduct of Business in the Insurance Commission During the Community Quarantine Period
    • SEC Issues Guidelines on the Participation in Regular and Special Meetings through Remote Means of Communication
    • Regulatory Relief for...
    • SEC Extends Deadline for Annual and Quarterly Reports for Companies affected by Covid-19
    • Guidelines on Preventative Measures Against...
  • 2019 2019
    • SEC Extends Deadline for Annual and Quarterly Reports for...
    • Deferral of IFRIC Agenda Decision on Over Time Transfer of Constructed Goods (PAS 23) for Real Estate Industry
    • Implementation of IFRS 17, Insurance Contracts
    • Amendments to Regulations on Financial Audit of Banks and Non-Bank Financial Institutions
    • Navigating the Changes to IFRS 2020
    • SEC Memorandum Circular No. 2 - 2020 Filing of Annual Financial Statements and General Information Sheet
    • IASB issues Classification of Liabilities as Current or Non-current (Amendments to IAS 1)
    • GTI IFRS News Q4 2019
    • Insights into PFRS 3: Definition of a Business
    • IASB issues Interest Rate Benchmark Reform
    • Insights into PFRS 16: Presentation and Disclosure
    • Insights into PFRS 16: Lease Payments
    • Insurance Commission's Guidelines on Lease Accounting for Insurance and Reinsurance Companies
    • GTI IFRS News Q1 2019
    • Application Deferral of PIC Q&A 2018-H and 2018-14
    • Sustainability Reporting Guidelines for Publicly-Listed Companies
    • Insights into PFRS 16: Sale and Leaseback Accounting
    • Insights into PFRS 16: Transition Choices
    • Use of the New General Information Sheet (GIS) Form
    • 2019 Filing of Annual FS and GIS
    • Navigating the Changes to IFRS 18
    • Insights into PFRS 3: Definition of a Business
    • GTI IFRS News Q2 2019
    • Rules on Material Related Party Transactions for Publicly-listed Companies
    • BOA Repealed Resolutions on FS Compilation Services
    • GTI IFRS News Q3 2019
    • 2019
  • 2018 2018
    • Insights into IFRS 16
    • SEC Memorandum Circular 2018-14 – PFRS 15 Implementation Issues Affecting Real Estate Industry
    • Accounting for Client Money
    • Third Quarter Edition of IFRS News
    • Accounting for Crypto Assets
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Insights to PFRS 3, Business Combinations

This Accounting Alert is issued to give insights on the acquisition method under PFRS 3, Business Combinations.

Introduction

As one of the most referred to accounting standards, PFRS 3 has been in place for more than 15 years and has undergone a post-implementation review by the International Accounting Standards Board. In this accounting alert, we provide a high-level overview of PFRS 3 and explain key steps in accounting for business combinations.

Mergers and acquisitions (business combinations) can have a fundamental impact on the acquirer’s operations, resources and strategies. For most entities such transactions are infrequent, and each is unique. PFRS 3 contains the requirements for these transactions, which are challenging in practice.  This insight summarizes the key areas of the standard, highlighting aspects that are more difficult to interpret and revisiting the most relevant features that could impact a business.

This article provides a high-level overview of PFRS 3 and explains the key steps in accounting for business combinations in accordance with this standard. It also highlights some practical application issues dealing with:

  • deal terms and what effect they can have on accounting for business combinations and,
  • how to avoid unintended accounting consequences when bringing two businesses together.

The Acquisition Method

PFRS 3 establishes the accounting and reporting requirements (known as ‘the acquisition method’) for the acquirer in a business combination. The key steps in applying the acquisition method are summarized below:

STEP 1: Identifying a business combination

Many transactions or other events involving the purchase of another entity or groups of assets require further analysis to determine whether: (a) what was acquired constitutes a business; (b) control, as defined by PFRS 10, has been obtained and (c) the combination is within the scope of PFRS 3.

STEP 2: Identifying the acquirer  

PFRS 3 requires an in-substance approach to identify the party that obtained control (i.e. the acquirer). This approach looks beyond the legal form of the transaction and considers the rights of the combining entities and their former owners.

STEP 3: Determining the acquisition date
The acquisition date is the date the acquirer obtains control of the acquiree, usually the specified closing or completion date of the business combination.

STEP 4: Recognizing and measuring identifiable assets acquired and liabilities assumed

The most complex and time-consuming step which requires the acquirer to:

  • recognize identifiable assets acquired and liabilities assumed at the acquisition date, including some intangible assets that may not have been previously recognized in the acquiree’s financial statements;
  • measure identifiable assets acquired and liabilities assumed at fair value, with a few exceptions;
  • determine the applicability of some specific recognition and measurement provisions; and,
  • classify or designate the assets acquired and liabilities assumed.

STEP 5: Recognizing and measuring any non-controlling interest (NCI)

The acquirer has a choice to measure present ownership-type NCI at either fair value or the proportionate interest in the acquiree’s recognized identifiable net assets.  The measurement of NCI affects the amount of goodwill that can be recognized and it can also impact post-combination reported results.

STEP 6: Determining the consideration transferred

Consideration transferred can include cash and other assets transferred, liabilities incurred, and equity interests issued by the acquirer.  Some considerations may be deferred or be contingent on future events. In addition, consideration transferred in exchange for the acquired business may be different from the contractual purchase price if the overall transaction includes elements that are not part of the business combination exchange.

STEP 7: Recognizing and measuring goodwill or a gain from a bargain purchase

Goodwill or gain from a bargain purchase is measured as a residual amount.

Effect of Deal Terms on the Accounting for Business Combinations

The terms and structures of sales and purchase agreements vary extensively, and they will determine how a business combination should be accounted for. It is important that management is aware of the financial reporting consequences of putting in place certain terms and conditions into sale and purchase agreements.  Each deal term or structure have effects on the financial reporting for business combination and it is important that management is aware of the financial reporting consequences of putting in place certain terms and conditions into sale and purchase agreements.

Reporting Business Combinations and Avoiding Surprises

A considerable amount of time and effort usually needs to be put into gathering, assembling and evaluating all the information required to be reported in the financial statements under PFRS 3.  There are certain matters that need to be considered on the planning stage and knowing how to implement these will be a big help.

 

See attached Accounting Alert for further details. 

.

Insights into PFRS 3
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