○ All assets and liabilities of J & J
○ Recorded at fair values
● J & J no longer shows these items (it’s liquidated)
a. Statement of Comprehensive Income
● Acquirer, Inc. includes only J & J’s income earned AFTER the acquisition date
● Income before the acquisition stays with J & J
Simple rule:
“You only report income for the period you own the company.”
What is a stock acquisition?
● The buyer (P Company) buys shares from the shareholders of another company
● The buyer does not buy the assets directly
● The acquired company (S Company) continues to exist
Ownership changes, but the company itself does not disappear.
What happens in P Company’s books?
Example
● P Company buys 100% of S Company’s shares
● Price paid = ₱2,000,000 cash
● Professional fees = ₱100,000
✔ Professional fees are expensed immediately
✔ They are not added to the investment cost
Why aren’t assets, liabilities, or goodwill recorded yet?
On P Company’s own books:
● No individual assets or liabilities of S Company are recorded
● No goodwill or gain is recorded
Why?
- Because P Company only bought shares, not assets directly.
- Goodwill and fair value adjustments are recorded only in consolidated financial
statements, not in the parent’s separate books.
What happens to S Company?
● S Company is not dissolved
● It keeps its own accounting records
● A parent–subsidiary relationship now exists:
○ P Company = Parent
○ S Company = Subsidiary
Separate vs. consolidated financial statements
a. Separate financial statements (P Company only)
● Shows:
○ Investment in Subsidiary as a long-term investment
● This is allowed only if consolidation is not required
b. Consolidated financial statements (required when control exists)
● P Company and S Company are treated as one economic entity
● Assets, liabilities, income, and expenses are combined
● Prepared:
○ At acquisition date
○ After acquisition
Consolidation is where:
● Goodwill is recognized
● Fair value adjustments are made
Basic goodwill formula (IFRS 3)
Goodwill = What the acquirer gives up -
Fair value of identifiable net assets acquired
More completely:
Goodwill = (A) − (B)
(A) includes:
1. Fair value of consideration transferred (cash + shares)
2. Fair value (or share) of non-controlling interest (NCI)
Fair value of any previously owned interest (for step acquisitions)
(B) includes:
● Fair value of identifiable assets − liabilities at acquisition date
Bargain purchase (negative goodwill)
Illustration 13-5 (explained simply)
Given facts
● PP Inc buys 75% of SS Inc
● Cash paid = ₱50 million
● Shares issued = 50 million × ₱2 = ₱100 million
● Total consideration = ₱150 million
● Fair value of SS Inc net assets = ₱100 million
● Market value of SS Inc shares = ₱4 per share
● Total shares = 50 million
● Fair value of SS Inc as a whole = ₱200 million
Revised IFRS 3 (new rule)
The big change: NCI can be measured in two ways.
(a) NCI measured at proportionate share of net assets
This gives the same result as the original IFRS 3.
● NCI = 25% × 100 m = 25 m
● Goodwill = 75 m
Only the parent’s share of goodwill is recognized.
(b) NCI measured at fair value (full goodwill method)
Step 1: Fair value of NCI
● Total value of SS Inc = ₱200 m
● NCI (25%) = 50 m
Impairment of goodwill (very important!)
After goodwill is recorded:
●
●
❌
✅ No amortization
Test for impairment every year
● Also test when there are signs of loss in value