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Accounting For Business Combinations

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56 views3 pages

Accounting For Business Combinations

Notes

Uploaded by

joybeja56
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Accounting for Business Combinations

Definition and Key Considerations

- Business combination is defined as the bringing together of separate entities or businesses into one
reporting entity[1][2]

- Three key elements must be present:

1. Acquirer- the entity that obtains control

2. Acquiree - the entity that is being controlled

3. Control - the power to dominate or rule over the acquiree[2]

- Acquiring a controlling stake in another company is the most common way to achieve a business
combination[2]

- Companies involved are treated as a single economic entity for reporting purposes[2]

Types of Business Combinations

1. Merge- two companies combine to form a new entity, dissolving the original companies[2]

2. Acquisition - one company acquires a controlling stake in another company[2]

Accounting for Business Combinations

The four key steps in accounting for a business combination are:[3]

1. Identifying the acquirer

2. Determining the acquisition date

3. Recognizing and measuring assets, liabilities, and non-controlling interests

4. Measuring goodwill or gain from a bargain purchase

The acquirer must:[3]

- Disclose information about the reasons for the acquisition and its impact

- Disclose adjustments recognized

- Disclose factors accounting for any goodwill

Accounting Standards

- **IFRS 3** provides guidance on accounting for business combinations[3]


- Requires the acquirer to recognize all assets and liabilities of the acquiree at fair value on the
acquisition date[3]

- Consideration given by the acquirer is also recorded at fair value[3]

- Business combinations often result in goodwill being recorded on the acquirer's balance sheet[3]

Accounting for Contingencies

- Acquiree may have recorded liabilities for contingencies like product warranties[5]

- Acquirer must recognize these contingent liabilities at fair value on the acquisition date[5]

- Contingent consideration payable by the acquirer is also recognized at fair value[3][5]

Accounting for Goodwill

- Goodwill is calculated as the excess of consideration paid over the fair value of net assets acquired[3]

- Goodwill is recorded as an asset on the acquirer's balance sheet[3]

- Goodwill is not amortized but tested for impairment annually[3]

Disclosure Requirements

- Acquirer must disclose information about the acquisition in the period it occurs[4]

- Disclosures include reasons for the acquisition, impact on the acquirer, and factors accounting for any
goodwill[3][4]

- Segment information must also be disclosed in each period presented[4]

Citations:

[1] https://www.studocu.com/ph/document/far-eastern-university/accountancy/accounting-for-
business-combination/16742933

[2] https://www.studocu.com/ph/document/university-of-the-east-philippines/accountancy/business-
combination/12533831

[3] https://study.com/academy/lesson/what-is-a-business-combination-definition-international-
implications.html

[4] https://corporatefinanceinstitute.com/course/accounting-business-combinations/

[5] https://www.iasplus.com/de/binary/dttpubs/0705applyingfas141and142.pdf
[6] https://www.iasplus.com/en/standards/ifrs/ifrs3

[7] https://www.cpdbox.com/ifrs-3-business-combinations/

[8] https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/business_combination/
business_combination__28_US/chapter_1_scope_US/11_chapter_overview__1_US.html

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