Understanding Business Combination And Its Accounting Treatment In An Essay.

Companies are continuously changing the composition of their assets and liabilities. Assets such as inventories are acquired on a regular basis while plant and equipment is acquitted less often. In other circumstances groups or bundles of assets or net assets are acquired. In order for AASB 3 to be applied the transaction must be considered to be a ‘business combination’ (Loftus, Leo, Picker, Wise & Clark, 2013, p.772).

Required:

1).With reference to the above statement describewhat is meant by a business combination AASB 3 Business Combinations.

2).Discussthe importance of identifying the acquirer of a business combination. (Consider the levels of control and the members’ rights in your answer).

3).Comment on the fact there may be assets and liabilities that have not been recognised by the acquiree but are recognisable by the acquirer.  Give three examples to support your viewpoint.

Business Combination and its Meaning

MEANING OF BUSINESS COMBINATION

Business is related to the term of the commercial activity in which any trading or manufacturing activity is carried out. In accordance with the AASB 3, business is defined as the set of activities which is conducted on regular basis with the utilization of the assets. The main motive of the business is to provide the benefits to the investors as well as stakeholders of the company including the banks and financial institutions and the employee of the company. The benefits are in the form of dividends, interest, reduction of cost of production and administration; better emoluments to the employee combine with the extra perquisites and other benefits. Thus, in other words, business aims at providing the benefits to their stakeholders and the shareholders with the high figures and that too with the integration of all activities in the company efficiently and effectively (Shalev, 2013).

Now the word combination needs to be discussed. The combination is the generic word which means that the joining of the two or more distinct parts having distinct qualities to have the positive results.

Thus, the term business combination as per common parlance means the joining of two or more businesses to have the attainment of the common business objectives. In accordance with the provisions of the accounting standard number three on the business combination, business combination is defined as the:

• Any type of transaction or the event
• Under which one company takes the control or significant influence over the other company or companies (AASB, 2015)

The business combination thus is an event whereby two or more organizations combine together to have the economic benefits and also to provide the benefits to the society at large including the shareholders of the company.

For having the business combination, two terms are more important, one is the control and second one is the consideration.

The term control is the very important term in the business combination. Without having the control the first company will not be able to combine with the other company. The term control in accordance with the provisions of the relevant accounting standard is defined as the:

• Power which is gained or obtained by the acquirer company and
• Through which the acquirer company takes the charge of financial and the operating policies of the company
• So as to have the benefits in terms of monetary as well as non monetary from the activities of the company  (AASB, 2015).

In other words, the term control helps the acquirer company to have the active participation and effect in the policies of the company relating to the operational and financial matters.

The other term is the consideration. The consideration has been described as the amount which has been paid to the target company for the business combination. The consideration may be through cash or through the issue of equity shares of the company. If there is no consideration involved then there will be no business combination.     

Identification of the Acquirer

Thus, in this manner, the business combination is defined and operates and helps in achieving the economic benefits out of the synergies so created through this event.

Apart from its meaning identifying whether the particular event or the transaction is the business combination or not is also different task. The business combination will be identified only when the one company acquires all the assets of the second company along with that also assumes the liability of said company. If the assets so acquired in any manner do not imply it as for the business then it will be treated as the asset acquisition. Therefore, judging the business combination also plays significant role in its functioning.

IDENTIFYING THE ACQUIRER AND ITS IMPORTANCE

As per paragraph number six of the accounting standard three, in case of any business combination, any of the entity which is combined with other entity will be treated as the acquires under the business combination. Thereafter, paragraph number eight of the accounting standard three, states that the guidance under the accounting standard number 127 shall be considered for identifying the acquired. It states that the entity who acquires the control over the other entity then the same shall be treated as the acquirer company (AASB, 2015).

The accounting standard number three has further stated in case the acquirer is not identified as per the provisions of number one hundred and twenty seven accounting standard then the provisions of paragraph number B 14 to the B 16 shall be taken into account for the purpose of identifying the acquirer.

Paragraph B 14 clearly states that in case the business combination is being effected on the basis of the consideration being paid in cash or by transferring the assets or by having the liabilities then the person who pays the cash, transfers the assets or have the liabilities will be treated as the acquirer in the business combination.

Paragraph B 15 clearly states that in case the business combination is being effected on the basis of the consideration being satisfied through the issue of the equity shares then person who issues the equity shares of the company will be treated as the acquirer in the business combination.

It further states that apart from the equity shares other events are also to be considered because of the fact that there is the concept of the reverse merger under which the other entity issues the share therefore, the decisive criteria as to mention the person as a acquirer who issues the equity shares will not be considered as the valid. Therefore, the following circumstances shall also require to be considered:

• The share that the companies have after the business combination. The company which will have the higher voting right will be the acquirer. It is because of the fact that the acquirer usually has the higher voting right so as to control the financial and the operational matters of the company.
• The company who usually holds the large value of the minority interest will be treated as the acquirer under the business combination.
• The company will be treated as the acquirer only if it has the ability to appoint or remove any of the members of the governing body of the company.
• The company will be treated as the acquirer only if it composes the senior management of the company.
• The company which pays the premium over the defined fair value of the interest of the equity will be treated as the acquirer of the company.

Importance of the Acquirer in Business Combination

Paragraph 16 further states that the company which is greater in size shall be treated as the acquirer under the business combination.

Thus, in this manner under the business combination, the acquirer is identified. The identification of acquirer plays very significant role under the process of the business combination. Without the identification of the acquirer following circumstances may happen:

• The accounting entries in the books of accounts of both of the companies will go futile. It is because the accounting treatment in both the companies will be different (Chalmers, 2012).
• The provisions of the accounting standard will be applied in true and fair manner only when the acquirer company will be identified in the correct manner.
• The arrangement will not be classified as the business combination, if the acquirer is not identified.
• The synergies that may be created with the business combination will not have the true effect because of the non identification of the acquirer.
• The acquirer is the person who will after the combination controls the financial and operational matters of the company. If the identification has not been made in the proper manner then the financial and operational matters cannot be controlled in any manner.
• The acquirer will have the right to have the rights of the members as in the company and have the right to vote (AASB, 2015).

Thus, in this manner, it is important to identify the acquirer first in the business combination.     

ASSETS AND LIABILITIES REC OGNISED BY ACQUIRER

In the business combination, the acquirer company takes all the assets and assumes all the liabilities of the acquiree company. Acquirer company purchase all the assets and liabilities of the acquiree company and accordingly recognizes all the assets and liabilities thereon belonging to the later company in the books of accounts of the former company. But there are some assets and liabilities, which are recognized by the acquirer company but are not recognized by the acquiree company (Roulstone, 2015). These are as follows:

• Goodwill – Goodwill is generally generated on the business combination. It is the situation when the purchase consideration exceeds the net assets value of the company as acquired. If the goodwill is already present in the books of accounts of the acquiree then the acquirer is required to create additional goodwill for the same (AASB, 2010; Chauvin, 2014).
• Non controlling interest – Non controlling interest is portion of the equity shares of the company which are not linked to the acquirer company and instead is linked to the acquiree company. Non-controlling is not accounted for in the books of the acquiree company and will be reflected in the books of the acquirer company only after the business combination (Deegan, 2012).  
• Acquirer has some costs which includes the cost of the termination of any activity of the acquiree company in the future or to terminate the acquiree company’s employee, etc. Such types of costs are not mentioned in the books of accounts of Acquiree Company rather it is reported in the post combination books of accounts (Fridson, 2015).  

CONCLUSION AND RECOMMENDATION

Business combination plays a very significant role in the current scenario of the business world. It is because of the reason that the business combination not only helps in figuring out the problems of sick companies but also helps in creating the synergies of two companies which will work so as to generate the higher profits. In this report, meaning of business combination has been detailed, than the importance of identifying the acquirer has been detailed. Along with that the assets and liabilities which have not been recognized by the acquiree have been mentioned. To conclude, the business combination is very important concept in accounting.

It is recommended to identify the acquirer in the beginning so as to avoid any kind of discrepancy in accounting treatment and related areas.  

The title of the report is to analyze the business combination. As the title suggests, the report will revolve around the business combination and its related concepts. Business combination is the concept which has waved many companies across the globe at one single line. The business combination includes not only the mergers and amalgamations but also the acquisition where one company acquires the other company. Business combination is the path for the companies to grow instead of engaging the companies within their internal processes to grow. It helps the company to grow in one go instead of waiting for the success of internal processes and its progress thereon. Some companies have even failed with the major acquisitions like HIH Insurance and depend on the circumstance and situation of each case. The report has started with the meaning and the form of business combination and how this term has been evolved. After determining the meaning, the acquirer identification and its importance has been analyzed through the analysis of the relevant accounting standard. Thereafter, the accounting treatment of the assets and liabilities have been detailed majorly with reference to those assets and liabilities which are not recognized by the acquire but are majorly reported by the acquirer. The report has then ended up with the conclusion and recommendation.      

Reference: 

AASB, (2010), “AASB 1013 Accounting for Goodwill” retrieved from https://www.aasb.gov.au/admin/file/content102/c3/AASB1013_6-96.pdf  on 05-05-2018.

AASB, (2015), “AASB 3 Business Combination” retrieved from https://www.aasb.gov.au/admin/file/content105/c9/AASB3_08-15.pdf   accessed on 05-05-2018.

Chalmers, K, (2012), “Adoption of international financial reporting standards: impact on the value relevance of intangible assets” Australian Accounting Review, 18(3), pp.237-247.

Chauvin, K.W., (2014), “Goodwill, profitability, and the market value of the firm”, Journal of Accounting and Public Policy, 130(2) pp.32-45

Deegan, C., (2012), “Calculating non-controlling interest in the presence of goodwill impairment” Accounting Research Journal, 23(2), pp.213-233.

Fridson M, (2015), “Financial Statement Analysis”, retrieved from https://books.google.co.in/books?id=Iha4OzyPN48C&printsec=frontcover&dq=online+free+books+on+presentation+of+financial+statements&hl=en&sa=X&redir_esc=y#v=onepage&q&f=false accessed on 05-05-2018.

Roulstone, D.T., (2015), “Acquirer valuation and acquisition decisions: identifying mispricing using short interest” Journal of Financial and Quantitative Analysis, 50(1-2), pp.1-32.

Shalev, R., (2013), “The information content of business combination disclosure level” The Accounting Review, 84(1), pp.239-270.