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Business Combination

Discuss about the.

Business combination can be done by the combination between two or more companies for better advancement of resources, achieving economies of scale, to better able to compete with the competitors or to achieve the target of becoming the industry leader (IFRS foundation). Business combination is suggested for a company in forming makeover. It can be exercised between any suitable characteristics like combination between a labor intensive company and capital intensive company. It is usually suggested to a corporation to enable it in targeting big market, and having comparatively bigger market share and forming monopoly in the industry, it can also be done to Witten the goodwill or market share enjoyed by the competitors (Whittington & Delaney, 2010).

Business combination is a practice which is commonly adopted now days by companies. In this a business is acquired by the other company. The business who has acquired the other company is called as the acquirer, whereas the business which is acquired is called as the acquiree. In business combination, there can be combination between two or more that two companies. The business combination can be done by acquisition, merger and takeover (Mc Graw Hill Higher Education, 2013).

For business combination, a business must qualify the characteristics of a business. A business is an entity which is governed by the managers for the purpose of earning profits, providing dividends to its shareholders, and other economic benefits which needs to be distributed between the members, government, owners and participants. It is also required by the law that after business combination the company has to strictly follow the going concern concept that is the company should not liquidate its business just after the combination (Chartered education, 2016).

There are three methods of business combination that are purchase method, acquisition method, and new entity method, turnover.

  • Merger method (pooling of interest method): it is one of the simplest method. In this method the net assets of the acquiree company and the acquiring company are taken at the book value that is the value at which the assets are recorded in its financial statement, they are added together to present the financial statements as consolidated financial statements. Under this method the companies which were under merger process may continue their business after it also.
  • Acquisition method: this method is adopted to have control over the selling company assets and its operations. In this method only one company is in existence after the business combination that is the acquired company. Here the fair value given to the selling company in exchange of its operations, whcih is known as net consideration. If net consideration is greater than the value of the net assets (assets less liabilities excluding share capital), it is termed as goodwill (Business combinations and non controlling interests).
  • New entity method: in the earlier methods discussed that is merger method and acquisition method the values to be entered in the consolidated financial statement is taken at the book value. But in case of new entity method the values taken in the consolidated financial statement are taken by converting them into the fair values that is the value on acquisition date (business combination, 2017).

If business combination is done by acquisition, the steps need to be followed are:

Identification of acquirer: the acquirer is the company who has acquired or purchased the existing business, as after the acquisition, the acquired company will be known by the acquiring company (Lee, 2006). Hence it is very necessary to identify about the acquirer.

  • Determination of acquisition date: this is the date on which the business is acquired or the final settlement between the parties has been done. Apart from this it is also necessary because on this date only the fair value of the assets and liabilities would be calculated. For calculating pre acquisition and post acquisition dividends, acquisition date is required, as calculation is different for both.

The fair value is the sum of money which the purchasing company has to give to selling company for its business. The fair value must be calculated by IAS12 keeping in mind.

Recognition and measurement of asset and liabilities of the acquiree: the information which must be known by the acquirer company, regarding the target company business is the value of asset, liability and non controllable interest in its balance sheet and their fair value in the market if they can be calculated effectively and efficiently. In asset the information must be known are of intangible assets, if they can be identified separately and could be measured with full accuracy. They should be accounted by keeping in consideration of IAS 38. In the calculation of purchasing cost the expected future cost should be excluded because it is not compulsory for the acquirer business to pay them off. Apart from that contingent liability must be taken into consideration by keeping in mind the standards set by IAS 37. This is usually occurred when the selling company is in a legal dispute.

Methods to Business Combination

While in the case of measurement of assets and liabilities, they should be calculated separately by keeping in mind the fair value on acquisition date. While controlling the purchasing price apart from the value of asset, liabilities, share capital, the mentioned things must be known that are, contingent cost that may be in the form of legal charges, profit or loss arose during the process of business combination, deferred cost should also be kept in mind this is the cost which arise due to interest rate on loans, sources of finance available to the selling company (American bar association, 2008).

Recognition and measurement of goodwill: goodwill can be measured by subtracting the value of net assets from the summation of consideration paid and the value of non controlling interest. This can better be understood by quoting an example:

A company p wishes to acquire S on an interest of 80% in S ordinary shares Neuhausen, Schlank & Pippin, 2007). The fair value of S assets and liabilities is estimated at 600, while the fair value of non controlling interest that is (remaining 20% holding of its ordinary shares) is 185. Hence the calculation of goodwill is done as:


NCI on fair value

NCI on net assets

consideration transferred









net assets






Business Combination helps the business to meet the competition from its competitors and from its respective industry.  It enables the company to raise the value of its share capital by increase in its share price in market. It also helps the company in production at large scale, by this economies of scale can be achieved, and the unit price of the goods and services offered would be comparatively less than before. Operating cost can also beget reduced, the acquirer company would be able to run the company as an industry leader, hence price stability can also be followed, standardization in products and services can also be followed ( Dagwell, Wines & Lambert, 2012).

It is necessary to know about the acquirer company’s ownership, its operations and management style, because it is the only one who will be running the organization on behalf of the acquired company, all the assets and liabilities would be transferred to the acquirer’s company, the shareholding would be transferred to the new company that is the purchasing company, and by this voting rights of both the companies (majorly of selling company) would also be changed.  Apart from that after business combination it will be the acquiring company mangers and board of directors who would be controlling the board (Deliotte, 2017).

Steps to Business Combination

Control can be exercised by buying the assets; by this it will give the asset control to the buyer. Or it can be exercised by having control on all over the corporation, by this the purchased company can be termed as subsidiary and the acquirer company can be termed as holding company. Control can be termed as when acquiring company has control over the financial and operations of the purchasing company.  It can be said when the purchasing company can exercise the powers like control over 50% of its shareholding, control over the finance and operations of the selling company as required by the law, authority to remove or appoint the board of directors (Burton & Jermakowicz, 2015). ). Hence examples of level of control can be assets, by having control over operations in finance and operations.

Before indulging into business combination, the board of members and directors must take the approval of the shareholders, and especially those who have at least two third of the stock holding. It is required that the company must inform its shareholders that they are thinking of merger and acquisition with mentioning the target company (Complied Accounting Standard, 2006). After the shareholders consent only the proceedings can go further. The members or shareholders can exercise their voting rights in the meetings conducted by the board of directors, or annual general meeting, as the case may be. There should be at least 75% shareholders in favor of the company’s decision (Tong, 2013).They must agree to all the terms and conditions set for the merger and acquisition. There should also be consent taken for the protection and payment to the liability holders. It is the right given to shareholders that either they can transfer their shares into the purchasing company or they can take payment in exchange for their share holding (Business combinations: comptroller’s licensing manual 2006). It is the liability of the directors and board to comply with this requirement, and if they got failed in compliance they personally should be liable to the company stockholders and creditors. All the rights which are exercised by the shareholder must be followed by the rules and regulations formed by the law, and there should be benefit as a whole to shareholders and the company (Lambert & Gerhard,2017).

In case of business combination, the things to be known by the acquirer regarding acquiree are the time it has been into the industry, the net consideration to be calculated, as it would be the exchange price of the business of acquiree, it is suggested that business combination must be done between those companies which can lead to strategic fit that is which can generate values to both the acquirer and acquiree. These are the assets that can be named as non controllable assets. A company presents non controllable assets in its consolidated financial statements in equity that is when the company separates the equity from its owners. When the company has deficit balance it is also termed as non controllable assets.

Following are the examples of some companies:

Examples of intangible assets in business combination are those which give future benefits like goodwill, licensing, third party contract.


The motive which can be derived from the business combination is to fill in the gap between the expected and the actual performance of the company. Corporate managers must ensure that the result of business combination results into positive for the companies involved, that is strategic fit should be achieved. It can be any form whether it is resources, technology, and market. There is not any suggested business combination given by the law, but it is required that all the parties related to the combination whether it is shareholders, owners, creditors, and other stakeholders, all should be benefited. Apart from that it is also suggested that combination should not be done by threatening or at the gun point, rather there should be consent of all the related members.


AFN staff writers.(2014). Food and beverage mergers and acquisition in Australia in 2014. Retrieved by

American bar association. (2008). Model business corporation act annotated, edition 4th, volume 1

Burton,G,F & Jermakowicz,E,K,.(2015). International financial reporting standards: a framework based perspective, Routledge,

Business combination, chapter 3.(2017). Retrieved from

Business combinations and non controlling interests: application of the U.S. GAAP and IFRS standards.(2014). accessed from

Business combinations: comptroller’s licensing manual,(2006). Retreived from

Chartered education, 2016, The 4 step acquisition method for business combinations under IFRS3. Retrieved from

Complied Accounting Standard,(2006), AASB 3, Business Combinations, commonwealth of Australia.  retrieved from

Dagwell,R,. Wines,G,. & Lambert,C,.(2012). Corporate accounting in Australia, Pearson Higher Education, Australia

Deliotte, (2017), IFRS 3- Business Combination. retrieved at

IFRS foundation: TraiMethods to business combinationning material for the IFRS for SMEs, Module 19- Business combinations and goodwill, London. Retreived from

Lambert,C & Gerhard,F,.(2017), what form do the business combination take, retrieved from

Lee,C,F,.(2006), Encyclopedia of finance, Springer science & business media, USA

Mc Graw Hill Higher Education, (2013), Modern Advance Accounting in Canada. Retrieved from

Neuhausen,B,S,. Schlank,R,. & Pippin,R,G,. (2007). CCH accounting for business combination, goodwill and other intangible assets, CCH, Chicago

Tong,T.L, (2013), consolidated financial statements, international edition, CCH Asia Pte Ltd

Whittington,O,R & Delaney,P,R.(2010 ).wiley CPA exam review, American institute of certified public accountants, inc, New Jersey

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