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Nature Of Business Combinations And The Required Disclosures

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Write essay about the nature of business combination and required disclosures including referencing.


Business combination is a type of merge wherein the two merging companies assets are consolidated as on under the ownership of one single person. Thus the fact that the controlling interest vests in the hands of a single business entity is its main feature. Business combinations generally takes place between entities which are in the same line of business activities so as to derive the benefit of large scale production and thus reduce cost of production. This in turn enables to cut down the competition in the market significantly.  The accounting for business combinations is also very clearly spelt out so as to ensure that the combining entities have the ease to work together while adhering to the statutory requirements as per IFRS3 (Khan, 2015).

Business combinations are of various nature and all have various requirements of disclosures. The disclosure is a mandate as it is through a financial statement of an entity that the end users are made aware of the activities that the organization has undertaken. The various nature of business combination and the disclosures exclusively for the combinations are enumerated as under:

1. Horizontal Combination: In the said nature the entities with similar lines of operation combine their activities so as to achieve economies of production and greater market share. Such as mergers and acquisitions. Merger is a method wherein two entities join hands and acquisition is a method where an entity known as the acquirer takes over the other entity known as acquire for financial benefits. Thus mergers are always friendly in nature whereas acquisitions can be mutual as well as hostile. But both kinds of combinations are done so as to create a monopoly or to gather a larger market share. It is a sort of horizontal combination (Singla, 2011). 


The said type of combination requires entities to disclose the purpose of acquisition, the goodwill it calculated via this association, the purchase price and the forms in which such purchase consideration is being fulfilled (Sai, 2015).

2. Vertical Combination: This nature of business engagement is internal to an organization. It basically thrives towards integrating various departments under the guidance of a single managing authority. This basically leads to a better communication between departments, thus reducing wastages, better co-ordination between the demand and supply chain and thus maximizing the profits. This kind of combinations are generally seen in a more positive manner by the investors as it prevents dilution of their interests and is less costly a method. Its disclosures basically needs to highlight the various departments that have been integrated and the kinds of benefits the entity has or expects to derive from such a combination (Rasel 2014).

3. Circular Combination: This sort of combination is basically to establish a big business empire with varied businesses and none of them are connected to each other but managed by a common business house. The perfect example for the same is that of TATA Group of companies which are engaged in iron and steel production, sugar industry, salt industry, motor vehicles and many more and none of them is dependent on each other for their production, marketing or sales processes. Even the disclosure requirements are different and the accounting standards applicable also varies industry wise (Qureshi, 2016). Thus a combination wherein different industries come together under the same roof of the management is known as circular combination. The disclosure requirements of such a combination is very simple. Individual financial statements are prepared and when the parent group’s results are published then a detail regarding its other businesses are only published. However the annual report of the various industries under one management are different (Bradford, 2013). 


4. Diagonal combination: This type of combination involves the main units of an organization to join hands with its ancillary industries whose services are required for the smooth and a speedy discharge of duties. For example a newspaper industry ties up with a transportation company so as to enable speedy delivery of the newspaper to its customers . This helps the ain industry function smoothly. Thus the disclosure requirements for such type of business combination is very simple. It just needs to disclose the reason for such an acquisition and the benefits with regards the scale of operations as well as monetary gains is to be established. The combination with an ancillary industry may not be a very expensive affair as the organization being acquired may be a small one and hence the cost of purchase may not be too high to effect the main business.

Apart from some specific disclosures required to be made for the various kinds of business combinations that an entity undertakes following are also needed to spelt out:

  1. The name and full description of the firm being acquired.
  2. The date from which such a combination came into effect.
  3. The amount of controlling interest acquired.
  4. The reason for such a combination.
  5. The methodology using which the purchase consideration has been arrived at (Financial Accounting standard Board, 2007).

Thus on a concluding note it is clear that a business combinations leads to a number of important financial as well as operational changes which is very significant to be disclosed for the investors and the users of the financial statement.  Assessing of the effects of a business combination post transaction on the profitability and the cash flows is very crucial. This assessment enables to understand how successful has the said business combination been for the acquirer and what value addition it has done for the shareholders. Lastly it is to be understood if a combination takes place after the reporting year ends but before th financial statement is issued then a disclosure for the same is a must.  It is a very common practice in today’s scenario to keep on acquiring businesses and indulge into various kinds of combinations so as to be able to survive this competition. 



Khan, W., 2015, Business Combination, viewed on 21st May 2016.

Sai, S., 2015, Business Combination: Concept, Causes and Forms, viewed on 21st May 2016.

Rasel, 2014, Different Types of Business Combination, viewed on 21st May 2016.

Financial Accounting standard Board, 2007, Statement of financial Accounting Standards No. 141, Business Combinations, viewed on 20th May 2016.

Bradford, S., 2013, Types of Business Combinations, viewed on 21st May 2016..

Singla, R.K., 2011,Business Organization, VK (India) Enterprises: India

Qureshi, S., 2016, What is Business Combination and its types, viewed on 21st May 2016.


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