A business combination is the joining together of separate entities or business operations into one reporting group by obtaining control by one party (the acquirer and parent company or parent company’s subsidiary) over the other party (the acquiree).
Here are some of the key points for consideration in accounting for a Business Combination:
- Goodwill is the difference between the acquirer’s interest in the net amount of identifiable assets acquired and the cost of the business combination. After initial recognition it is carried at cost less accumulated amortisation and impairments;
- Acquired assets/liabilities etc. are initially measured at fair value except deferred tax and employee benefits;
- The purchase method of accounting is to be used on all acquisition with the exception of certain group reconstructions and public benefit entities;
- Contingent consideration is recognised in the purchase cost if probable that it can be reliably measured with subsequent adjustments going to goodwill (See Adjustments to the cost of a business combination contingent on future events in Business Combinations and Goodwill). Contingent consideration may need to be present valued depending on the time period;
- Adjustments to the estimates of fair values can be made within 12 months of the acquisition however if the adjustment straddles the following year they must be adjusted for retrospectively;
- Measure non-controlling interest at share of net assets;
- Cost of business combination is the total of fair value of assets given, liabilities assumed and equity instruments issued at each stage of the transaction plus directly attributable costs;
- Test for impairment in line with Impairment of Assets only if impairment indicators exist.
- Negative goodwill is firstly allocated against the fair value of the non-monetary assets in period in which non-monetary assets recovered and the balance against the period in which the entity is likely to benefit;
- Less onerous disclosures under Business Combinations and Goodwill;
- Recognise deferred tax on difference between fair values on acquisition and tax base;
- Likely to be more amortisation in the profit and loss account due to more intangibles recognised as criteria not as strict as well as a rebuttable assumption where a useful life cannot be reliably measured of 10 years;
- Direct transaction costs capitalised; and
- Merger accounting permitted for group reconstructions where the ultimate equity holders remain the same. Under this method fair valuing is not required.