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BUSCOM

A business combination occurs when one company gains control over another, forming a single entity through mergers, acquisitions, or consolidations, governed by IFRS 3 and ASC 805. The accounting for these combinations follows the Acquisition Method, which includes identifying the acquirer, measuring consideration, and valuing acquired assets and liabilities. Post-combination, financial statements reflect increased assets and liabilities, with implications for amortization and goodwill impairment testing.

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20 views2 pages

BUSCOM

A business combination occurs when one company gains control over another, forming a single entity through mergers, acquisitions, or consolidations, governed by IFRS 3 and ASC 805. The accounting for these combinations follows the Acquisition Method, which includes identifying the acquirer, measuring consideration, and valuing acquired assets and liabilities. Post-combination, financial statements reflect increased assets and liabilities, with implications for amortization and goodwill impairment testing.

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heartyheart173
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Notes on Business Combination

1. Definition

A business combination occurs when one company acquires control over another entity,
forming a single economic entity. This can be through mergers, acquisitions, or
consolidations. The process is governed by IFRS 3 (Business Combinations) and ASC
805 (US GAAP).

2. Types of Business Combinations

1.​ Merger – Two or more companies combine to form a new entity, and the old
companies cease to exist.
2.​ Acquisition – One company acquires another, which may continue to operate as a
subsidiary.
3.​ Consolidation – Multiple companies merge into a completely new entity.
4.​ Statutory Merger – One company absorbs another, and only one survives.
5.​ Statutory Consolidation – Both companies dissolve, forming a new entity.

3. Accounting for Business Combinations (IFRS & GAAP)

Business combinations are accounted for using the Acquisition Method, which involves:

a) Identifying the Acquirer

●​ The company that gains control over the acquired entity.


●​ Control usually means owning more than 50% of voting rights.

b) Measuring Consideration Transferred

●​ The price paid for the acquisition, including cash, shares, or other assets.

c) Identifying and Valuing Acquired Assets and Liabilities

●​ Assets (tangible & intangible) and liabilities are recognized at fair value at the
acquisition date.

d) Goodwill or Bargain Purchase Gain

●​ Goodwill: If the purchase price exceeds the fair value of net assets acquired.
●​ Bargain Purchase: If the purchase price is lower than the fair value of net assets
(recognized as a gain).
4. Recognition and Measurement of Assets & Liabilities

●​ All identifiable assets (including intangible assets) and liabilities must be measured at
fair value.
●​ Contingent liabilities are recognized if they meet specific conditions.
●​ Deferred tax assets/liabilities may arise due to fair value adjustments.

5. Non-Controlling Interest (NCI)

●​ The portion of the acquired company not owned by the acquirer.


●​ Measured either at fair value or as a proportionate share of net assets.

6. Post-Combination Accounting Considerations

●​ Amortization of Intangible Assets: Certain intangibles (e.g., customer lists,


patents) are amortized over their useful lives.
●​ Goodwill Impairment Testing: Goodwill is not amortized but tested for impairment
annually.
●​ Fair Value Adjustments: Adjustments in subsequent periods may impact earnings.

7. Financial Statement Impact

●​ Balance Sheet: Assets, liabilities, and goodwill increase.


●​ Income Statement: Higher depreciation/amortization due to fair value adjustments.
●​ Cash Flow Statement: Cash flows related to acquisitions are classified under
investing activities.

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