AC 3103 – PURCHASE PRICE ALLOCATION AND INTANGIBLE ASSESTS • Definition of Business Combination under IFRS 3 Appendix A • Business Combination – is a transaction or other event in which an acquirer obtains control of one or more businesses. In general terms, business combinations unite previously separate business entities. The overriding objective of business combinations must be increasing profitability. Transactions sometimes referred to as “true mergers” or “mergers of equals” also are business combinations. • Control – means that there must be a triggering economic event or transaction and not merely a decision to start preparing combined or consolidated financial statements for an existing group. Control can usually be obtained either by: • 1. buying the assets themselves (which automatically gives control to the buyer), or • 2. buying enough shares in the corporation that owns the assets to enable the investor (acquirer) to control the investee (acquiree) corporation (which makes the purchased corporation a subsidiary). • Structure of Business Combination • Combinations are classified by structure into four types: • 1. Horizontal integration – this type of combination is one that involves companies within the same industry that have previously been competitors. • 2. Vertical integration – this type of combination takes place between two companies involved in the same industry but at different levels. It normally involves a combination of a company and it suppliers or customers. • 3. Conglomerate combination – is one involving companies in unrelated industries having little, if any, production or market similarities for the purpose of entering into new markets or industries. • 4. Circular combination – entails some diversification, but does not have a drastic change in operation as a conglomerate. • Methods/Legal Forms of Effecting Business Combinations • From an accounting perspective, the specific procedures to be used in accounting for business combination is effected through an acquisition of assets or an acquisition of stocks, the distinction of which is most important: • 1. Acquisition of assets. The books of the acquired (acquiree) company are closed out, and its assets and liabilities are transferred to the books of the acquirer (the acquiring/surviving company). • Following are the features of an asset acquisition: • a) The acquirer acquires from another enterprise all or most of the gross assets or net assets of the other enterprise for cash or other property, debt instruments, and equity instruments (common or preferred stock), or a combination thereof. • b) The acquirer must acquire 100% of the net assets of the acquired (acquiree) company. • c) It involves only when the acquirer (acquiring) company survives. • 2. Acquisition of Common stock (Stock Acquisition). The books of the acquirer (acquiring) company and acquiree (acquired) company remain intact and consolidated financial statements are prepared periodically. A business combination effected through a stock acquisition does not necessarily have to involve the acquisition of all the company’s outstanding voting (common) shares. • Following are the features of a stock acquisition: • a) The acquirer voting (common) stock from another enterprise for cash or other property, debt instruments, and equity instruments (common or preferred stock), or a combination thereof. • b) The acquirer must obtain control by purchasing 50% or more of the voting common stock or possibly less when other factors are present that lead to the acquirer gaining control. • c) The acquired company need not be dissolved; that is , the acquired company does not have to go out of existence. Both the acquirer (acquiring) company and the acquiree (acquired) remain as separate legal entity. • Acquisition of Assets • The term merger and consolidation are often used synonymously for acquisitions. However, legally and in accounting, there is a difference. The term mergers, consolidations, and acquisitions are popularly used interchangeably • Statutory merger – entails that acquiring company survives, whereas the acquired company (or companies) ceases to exist as a separate legal entity, although it may be continued as a separate division of the acquiring company. Thus, if X company acquires Y company, the combination is often expressed as: X Company + Y Company = X Company or Y Company • Statutory consolidation – results when a new corporation is formed to acquire two or more other corporations; the acquired corporations then cease to exist (dissolve) as separate legal entities. For example, if Z company is formed to consolidate X Company and Y Company, the combination is generally expressed as: • X Company + Y Company = Z Company • Stockholders of the acquired companies (X and Y) become stockholders in the new entity (Z). The acquired companies in a statutory consolidation may be operated as separate divisions of the new corporation. • The term merger in the technical sense of a business combination in which all but one of the combining companies go out of existence. Similarly, the term consolidation is used in its technical sense to refer to a business combination in which all the combining companies are dissolved and a new corporation is formed to take over their net assets. Consolidation is also used in accounting which refers to the accounting process or procedures of combining parent and subsidiary financial statements such as the expressions “principles of consolidation”, consolidation procedures” and “consolidated financial statements”. • The Acquisition Method • The acquisition method is applied on the acquisition date which is the date the acquirer obtains control of the acquiree. The acquisition approaches a business combination from the perspective of the acquirer (not the acquiree), the entity that obtains control of the other entity in the business combination. Under the acquisition method, all assets and liabilities are identified and reported at their fair values. PFRS 3 states that the acquirer is the entity that obtains the control of the acquiree. • Calculating the Fair Value of the Consideration Transferred: Accounting Records of the Acquirer • In a specific exchange, the consideration transferred to the acquirer could include just one form of consideration
