DR. MD. HAMID U BHUIYAN

BUSINESS COMBINATIONIFRS 3

BUSINESS COMBINATIONS Conceptually, a business combination occurs when businesses

combine their operations; this can happen in two basic ways:

As an acquisition or purchase of one business by another, where

control is acquired

As a uniting of interest, where two existing businesses join together

to carry out business as one economic entity

Current related Bangladesh Accounting Standard (BFRS 3,

BAS 27, & BAS 28) does not differentiate: all business

combinations by corporations are accounted for as

purchases

BUSINESS COMBINATIONS

A business combination is a transaction or other event in which a

reporting entity (the acquirer) obtains control of one or more

businesses (the acquiree) IFRS 3.

According to the Financial Accounting Standards Board (FASB), a

business combination is an event or a procedure, in which, an entity

acquires net assets that constitute a business or acquires equity

interests of one or more other entities and obtains control over that

entity or entities.

Commonly, business combinations are often referred to as mergers

and acquisitions.

Significance of Size of Investment

The investor can own any amount of shares in the investee, and that

influence varies directly with the amount of shares owned.

When control is acquired, the investor and investee are referred to as

parent and subsidiary. Rather than report using the cost or equity

method, the parent will prepare consolidated financial statements

and combine the accounts of the subsidiary with those of the parent in

the published financial statements.

Control is determined by the facts of the relationship, not by the

exact percentage shareholding

This concept may be referred to as de facto control

Significance of Size of Investment

Investor Ownershipof Investee Shares Outstanding

0%

~20%

~50%

100%

Cost Method

Equity method

Consolidation accounting

Business Combination Range

Control is presumed when the ownership percentage is 50% or more; exact

determination is based on the facts of the relationship between shareholders and the

company

DEFINITIONS

Combined Enterprise: The accounting entity that results from a

business combination.

Constituent Companies: The business enterprises that enter into

a business combination.

Combinor: A constituent company entering into a purchase-type

business combination whose owners as a group end up with

control of the ownership interests in the combined enterprises.

Combinee: A constituent company other than the combinor in a

business combination.

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Classes of Business Combinations

F rien d ly Takeover H os tile Takeover

B u s in ess C om b in a tion s

Classes of Business Combinations

Friendly Takeovers:

The Board of Directors of all constituent companies amicably

determine the terms of the business combination.

The proposal is submitted to share holders of all constituent

companies for approval.

Hostile Takeovers:

In this type of takeovers the target Combinee typically resists

the proposed business combination.

The target Combinee uses one or more of the several defensive

tactics.

TYPES OF BUSINESS COMBINATION

Horizontal: A combination involving enterprises

in the same industry.

Vertical: A Combination involving an enterprise

and its customers or suppliers.

Conglomerate: A combination between

enterprises in unrelated industries or markets.

METHODS OF ARRANGING BUSINESS COMBINATIONS

Statutory Merger: It is executed under provisions of

applicable state laws

Statutory Consolidation: This also is consummated in

accordance with applicable state laws

METHODS OF ARRANGING BUSINESS COMBINATIONS

Acquisition of Common Stock: One corporation (the investor)

may issue preferred or common stock, cash, debt or a combination

thereof to acquire from present stockholders a controlling interest

in the voting common stock of another corporation (the investee).

Acquisition of Assets: A business enterprise may acquire from

another enterprise all or most of the gross assets or net assets of

the other enterprise for cash, debt, preferred or common stock, or a

combination thereof.

Establishing the Price of a Business Combination

This is a very important early step in planning a business

combination.

The price for a business combination consummated for

cash or debt generally is expressed in terms of the total

dollar amount of the consideration issued.

When common stock is issued by the combinor in a business

combination, the price is expressed as a ratio of the number

of shares of the combinor’s common stock to be exchanged

for each share of the combinee’s common stock.

Establishing the Price of a Business Combination

The amount of cash or debt securities, or the

number of shares of common or preferred stock,

to be issued in a business combination generally is

determined by variations of two methods:

1. Capitalization of expected average annual earnings of

the combinee at a desired rate of return.

2. Determination of current fair value of the combinee’s

net assets (including goodwill).

Purchase Method of Accounting for Business Combination

Business combinations in which a company

acquires control of another company can be

considered acquisitions in the sense that they

involve a buyer and a seller with the buyer

paying cash or other consideration either for

shares representing voting control or for net

assets.

Purchase Method of Accounting for Business Combination

Under the purchase method, the acquiring

company's interest in assets acquired and liabilities

assumed is accounted for in the acquiring

company's financial statements at the cost (Fair

Market Value) to the acquiring company.

The reported income of the acquiring company

includes the results of operations of the acquired

company from the date of acquisition only

Business Combination – Pooling of Interest

Business combinations in which the ownership

interests of two or more companies are joined

together through an exchange of voting shares and

in which none of the parties involved can be

identified as an acquirer can be considered pooling

of interests in the sense that the shareholders

combine their resources to carry on in combination

the previous businesses.

Cost of Acquisition – Cost of Combinee

The cost is determined by the fair value of the

consideration given or the acquirer's share of the

fair value of the net assets or equity interests

acquired, whichever is more reliably measurable.

Cost of Acquisition – Cost of Combinee

The Cost of Acquisition is allocated as follows:

all assets acquired and liabilities assumed are assigned

a portion of the total cost of the purchase based on

their fair values at acquisition;

allocations may be made to items previously unrecorded

by the subsidiary

the excess over the net of the amounts assigned is

recognized as an asset, goodwill.

Cost of Acquisition – Cost of Combinee

The interest of any non-controlling shareholders (Minority

Holders)in the identifiable assets acquired and liabilities

assumed should be based on their carrying values in the

accounting records of the company acquired.

This interest should be included in the amount disclosed as non-

controlling interest on the balance sheet (Minority interest is

reported at book value)

IFRS 3 – Minority Interest Fair Value or on the basis of

Carrying Amount

Expenses Related to Acquisition

Expenses directly incurred in effecting a business combination

accounted for as a purchase should be included as part of the

cost of the purchase.

Such expenses will therefore be included in the amounts to be

assigned to the individual assets acquired and liabilities assumed.

Where shares are issued to effect the acquisition, the costs of

registering and issuing such shares would be treated as a capital

transaction.

GOODWILL

IFRS 3

Goodwill (an asset) is measured initially indirectly as the difference

between the consideration transferred excluding transaction costs in

exchange for the acquiree’s identifiable assets, liabilities and

contingent liabilities (measured as set out above)

• If the value of acquired identifiable assets and liabilities exceeds

the consideration transferred, the acquirer immediately

recognizes a gain (bargain purchase)

• Goodwill is not amortized, but is subject to an impairment test.

PRINCIPLE

• Consolidated financial statements present the parent and all its

subsidiaries as financial statements of a single economic

entity

1. Uniform accounting policies

2. Same reporting periods

3. Eliminate intragroup transactions and balances

4. Non-controlling interest (the equity in a subsidiary that is

not attributable, directly or indirectly, to the parent) is

presented within equity, separately from the parent

shareholders’ equity.