ADVANCED FINANCIAL ACCOUNTING AND REPORTING 2

BUSINESS COMBINATION

What are the three (3) types of Business Combinations?

- Business combinations unite previously separate business entities.

1. Horizontal integration – same business lines and markets.

2. Vertical integration – operations in different, but successive stages of production

or distribution, or both.

3. Conglomeration – unrelated and diverse products or services

What are the six (6) of some reasons for combinations?

1. Cost advantage
2. Lower risk
3. Fewer operating delays
4. Avoidance of takeovers
5. Acquisition of intangible assets
6. Other: business and other tax advantages, personal reasons

What are the two (2) legal form of Combination?

1. Merger – Occurs when one corporation takes over all the operations of another
business entity and that other entity is dissolved.

2. Consolidation – Occurs when a new corporation is formed to take over the assets
and operations of two or more separate business entities and dissolves the
previously separate entities.

Example mergers: A + B = A

1. Company A purchases the assets of Company B for cash, other assets, or Company A
debt/equity securities. Company B is dissolved; Company A survives with Company
B’s assets and liabilities.

2. Company A purchases Company B stock from its shareholders for cash, other assets,
or Company A debt/equity securities. Company B is dissolved. Company A survives
with Company B’s assets and liabilities.
4
Example consolidations: E + F = “D”

1. Company D is formed and acquires the assets of Companies E and F by issuing

Company D stock. Companies E and F are dissolved. Company D survives, with the
assets and liabilities of both dissolved firms.

2. Company D is formed acquires Company E and F stock from their respective

shareholders by issuing Company D stock. Companies E and F are dissolved.
Company D survives with the assets and liabilities of both firms.

What is business combination?

- “A business combination is a transaction or other event in which an acquirer obtains
control of one or more businesses. Transactions sometimes referred to as ‘true
mergers’ or ‘mergers of equals’ also are business combinations…”

A parent – subsidiary relationship is formed when:

– Less than 100% of the firm is acquired, or
– The acquired firm is not dissolved.

What are the three (3) Net Assets to Acquired:

1. Tangible assets acquired,
2. Intangible assets acquired, and
3. Liabilities assumed Include:
• Identifiable intangibles resulting from legal or contractual rights, or separable
from the entity
• Research and development in process
• Contractual contingencies
• Some non-contractual contingencies

Assign Fair Values to Net Assets

- Use fair values determined, in preferential order, by:

1. Established market prices

2. Present value of estimated future cash flows, discounted based on observable
measures
3. Other internally derived estimations

5
What is Goodwill?
• The sum of:
– Fair value of the consideration transferred,
– Fair value of any non-controlling interest in the acquiree, and
– Fair value of any previously held interest in acquiree,
• Over the net assets acquired.

What is acquisition date?

- It is the date on which the acquirer obtains control of the acquiree.

What is acquirer?
- It is the entity that obtains control of the acquire.

What is acquiree?
- It is the business or businesses that the acquirer obtains control of in a business
combination.

Scope
IFRS 3 must be applied when accounting for business combinations, but does not apply to:

3. The formation of a joint venture

4. The acquisition of an asset or group of assets that is not a business, although general
guidance is provided on how such transactions should be accounted for

5. Combinations of entities or businesses under common control (the IASB has a

separate agenda project on common control transactions)

6. Acquisitions by an investment entity of a subsidiary that is required to be measured

at fair value through profit or loss under IFRS 10 Consolidated Financial Statements.

6
Determining whether a transaction is a business combination

- IFRS 3 provides additional guidance on determining whether a transaction meets

the definition of a business combination, and so accounted for in accordance with its
requirements. This guidance includes:

- Business combinations can occur in various ways, such as by transferring cash,

incurring liabilities, issuing equity instruments (or any combination thereof), or by
not issuing consideration at all (i.e. by contract alone)

- Business combinations can be structured in various ways to satisfy legal, taxation or

other objectives, including one entity becoming a subsidiary of another, the transfer
of net assets from one entity to another or to a new entity

The business combination must involve the acquisition of a business, which

generally has three elements.

- Inputs – an economic resource (e.g. non-current assets, intellectual property) that

creates outputs when one or more processes are applied to it

- Process – a system, standard, protocol, convention or rule that when applied to an

input or inputs, creates outputs (e.g. strategic management, operational processes,
resource management)

- Output – the result of inputs and processes applied to those inputs.

Acquired assets and liabilities

IFRS 3 establishes the following principles in relation to the recognition and measurement
of items arising in a business combination:

Recognition principle - Identifiable assets acquired, liabilities assumed, and non-

controlling interests in the acquiree, are recognised separately from goodwill.

Measurement principle - All assets acquired and liabilities assumed in a business

combination are measured at acquisition-date fair value.
7