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Business Combinations: Advantages Disadvantages T Y E P

PFRS 3 outlines standards for accounting for business combinations using the acquisition method. Under this method, assets acquired and liabilities assumed are measured at their fair values at the acquisition date. Goodwill arises as the difference between the consideration transferred for the business plus any non-controlling interests, less the net assets recognized.

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95 views1 page

Business Combinations: Advantages Disadvantages T Y E P

PFRS 3 outlines standards for accounting for business combinations using the acquisition method. Under this method, assets acquired and liabilities assumed are measured at their fair values at the acquisition date. Goodwill arises as the difference between the consideration transferred for the business plus any non-controlling interests, less the net assets recognized.

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Princess
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PFRS 3: Business Combinations

A transaction or other event in which an acquirer obtains control of one or more businesses.
It is accounted for using the ACQUISITION METHOD, which generally requires assets acquired
and liabilities assumed to be measured at their FAIR VALUES at the acquisition date.

Acquisition Method Essential Elements Ways


Identification of the 'acquirer' CONTROL Asset Acquisition
+
BUSINESS Merger: A+ B = A or B
Consolidation: A + B = C
Determination of the
acquisition date Stock Acquisition
Goodwill Formula Parent-Subsidiary relationship
Recognition and measurement Consideration Transferred
identifiable assets acquired, the liabilities +
assumed and any non-controlling interest in Amount of Non-Controlling
the acquiree Interest
+
Recognition and measurement Fair Valuie of Previous Equity
Interests
Goodwill and Gain on Bargain Purchase
-
Net Assets Recognized

T HORIZONTAL
similar businesses
ADVANTAGES DISADVANTAGES
Y VERTICAL
Lessens competition
Creates synergy
Creates monopoly

P different levels in Loss of sense of identity


Increases opportunites
marketing chain Complex management
Utilizes economies of scale

E
Overcapitalization
Cost savings
CONGLOMERATE Stricter government rules
Reduces operating costs
dissimilar
S businesses

Recognizable Recognition Principle Contingent Consideration


Intangibles
Identifiable assets acquired, liabilities Contingent consideration must be
Separability Criterion assumed, and non-controlling interests in measured at fair value at the time of the
Contractual-legal criterion the acquiree, are recognised separately business combination and is taken into
from goodwill account in the determination of goodwill

Measurement Principle
All assets acquired and liabilities Contingent Liabilities
assumed in a business combination are
measured at acquisition-date fair value Until a contingent liability is settled,
cancelled or expired, a contingent liability
Acquisition Costs that was recognised in the initial
accounting for a business combination is
All costs associated with an acquisition measured at the higher of the amount the
must be expensed, including liability and the amount less accumulated
reimbursements to the acquiree for amortisation
bearing some of the acquisition costs

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