BA 118.

3 / Measurement Period and Contingent Consideration

1. On 1 July 2009 The Magna Company acquired 100% of the net assets of The Natural
Company for a consideration transferred of PHP160 million. At the acquisition date the
carrying amount of Natural's net assets was PHP100 million. At the acquisition date a
provisional fair value of PHP120 million was attributed to the net assets. An additional
valuation received on 31 May 2010 increased this provisional fair value to PHP135 million
and on 30 July 2010 this fair value was finalised at PHP140 million.
1) What amount should Magna present for goodwill in its statement of financial
position at 31 December 2010 according to IFRS3 Business combinations?
2) Journal entries to record the business combination and the necessary adjustments?
2. ABC acquires 100% of XYZ Co. December 31, 2009 when the fair values of assets and
liabilities of XYZ are P7M and P2M respectively. ABC issues 50,000 of its P100 par
unissued shares with fair values of P120 per share. In addition, the combining firms
agreed on the following.
I.
ABC will pay an additional P1M in cash if the combined income of ABC and XYZ
in 2010 exceeds P5M. Assume that as of December 31, 2009 the expected
value of the additional payment is P500,000 reflecting a 50% probability of
payment.
II.
ABC guarantees the fair value of its shares by committing to pay the peso
decline in the value within one year.
1)
2)

The cost of business combination and goodwill on December 31, 2009?

The cost of business combination and goodwill on December 31, 2010?
3) What is the entry needed, if the net income of the combined companies for 2010 is
P7M and the fair value of the shares of ABC at the end of 2010 is P140 per share?
3. ABC acquires 100% of XYZ Co. December 31, 2009 when the fair values of assets and
liabilities of XYZ are P8.5M and P2M respectively. ABC issues 50,000 of its P100 par
unissued shares with fair values of P120 per share. In addition, the combining firms
agreed on the following.
I.
II.

ABC will pay an additional P1M in cash if the combined income of ABC and XYZ
in 2011 exceeds P5M.
ABC guarantees the fair value of its shares by committing to pay the peso
decline in the value within two years.

Information as at date of acquisition indicates that it is probable that combined income

will be over 5 million and it can be measured reliably and as such the contingent
consideration is valued at P 900,000 on acquisition date. On December 31, 2010, the
contingent consideration probability is set to P800,000.
1)
2)

The cost of business combination and goodwill on December 31, 2009?

What is the entry needed, if the net income of the combined companies for 2010 is
P7M and the fair value of the shares of ABC at the end of 2010 is P110 per share?