TOPIC SIX:
1.1 MERGERS AND ACQUISITIONS
OVERVIEW
Mergers and acquisitions involve the combination of two or more entities into a larger economic
entity, i.e. the bringing together of separate entities or businesses into one reporting entity. They
are typically motivated by:
• Growth: A merger may occur between companies that sell the same products but compete
in the same or different markets. Companies that engage in a market extension merger seek
to gain access to a bigger market and, thus, a bigger client base. The goal may also be to
create a larger business with greater market share and to gain a foothold in new territories.
• Economies of Scale: The goal may be to elimination duplicate costs through economies of
scale, complementary resources
• Tax Benefit: use of tax losses, unused debt capacity, use of surplus funds, ability to write
up the value of depreciable assets
• Strategic fit: Eliminate competition, acquire a strategic asset etc
• Improve Revenues and Profits: Exploit synergies between two or more companies,
efficiency gains from asset management, coordination of production processesBusiness
combinations can take the form of a merger or acquisition.
Merger
An arrangement involving the voluntary fusion of two companies on broadly equal terms into one
new legal entity. The firms that agree to merge are roughly equal in terms of size, customers, and
scale of operations. In a merger, a new legal entity is formed and none of the predecessor affiliates
remain in existence. A new company is created to take over the net assets of Company A and
Company B.
Company A + Company B = Company C
Acquisition
An acquisition is a business transaction that occurs when one company purchases and gains control
over another company. An acquisition involves the legal continuity of the affiliated companies.
Both companies continue operations, but are now affiliated through a parent–subsidiary
relationship. Both companies are individual entities and keep financial records, but the parent
provides consolidated financial statements in each reporting period. Unlike a merger, the acquiring
company does not need to acquire 100 percent of the target. In fact, in some cases, it may acquire
less than 50 percent and still exert control. If the acquiring company acquires less than 100 percent,
minority (non-controlling) shareholders’ interests are reported on the consolidated financial
statements.
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, Company A + Company B = (Company A + Company B)
IFRS 3 – Business Combinations provides accounting guidance for such business arrangements
and applies to all business combinations. An acquisition that results in the acquirer obtaining
control over any other entity – the acquiree – is referred to as a business combination.
Acquisition of a Business.
An investor shall determine whether a transaction or other event is a business combination by
assessing whether the assets acquired and liabilities assumed constitute a business. A business is
an integrated set of activities and assets that is capable of being conducted and managed for the
purpose of providing a return to its investors or other owners, members or participants.
A business consists of inputs and processes applied to those inputs that have the ability to create
outputs (although outputs are not required for an integrated set of assets to qualify as a business).
An input is any economic resource that creates – or has the ability to create – outputs when one or
more processes are applied to it. Examples of inputs in a business include: non-current assets,
including intangible assets and rights to use non-current assets; intellectual property; and the ability
to obtain access to necessary materials, rights and/or employees.
A process is a system that, when applied to an input or inputs, creates or has the ability to create
outputs. These processes are generally documented but, for example, a workforce with the
necessary skills following rules may provide the necessary processes that are capable of being
applied to inputs to create outputs. Examples of processes in a business include: strategic
management processes; operational processes; resource management processes; and an organized
workforce with necessary skills and experience. Note that accounting, billing, payroll and other
administrative systems typically are not processes used to create outputs.
An output is the result of inputs and processes applied to those inputs that provide or have the
ability to provide a return to owners. Examples of outputs from a business include returns in the
form of: dividends; lower costs; and other economic benefits.
Furthermore, a business need not include all the inputs and processes that the seller used in
operating that business if the acquirer can continue to produce outputs without them, for example,
by integrating the business with its own inputs and processes. Established businesses often have
many different types of input, process and output, whereas new businesses often have few inputs
and processes and sometimes only a single output
In case they do not constitute a business, the investor shall account for the transaction as an asset
acquisition. Under these circumstances, the cost of the purchase is allocated to the individual
identifiable assets and liabilities purchased in proportion to their relative fair values at the purchase
date and no goodwill is recognized.
Acquisition or Purchase Method
An investor shall account for each business combination by applying the acquisition method. In
the past, business combinations could be accounted for either as a purchase transaction or as a
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1.1 MERGERS AND ACQUISITIONS
OVERVIEW
Mergers and acquisitions involve the combination of two or more entities into a larger economic
entity, i.e. the bringing together of separate entities or businesses into one reporting entity. They
are typically motivated by:
• Growth: A merger may occur between companies that sell the same products but compete
in the same or different markets. Companies that engage in a market extension merger seek
to gain access to a bigger market and, thus, a bigger client base. The goal may also be to
create a larger business with greater market share and to gain a foothold in new territories.
• Economies of Scale: The goal may be to elimination duplicate costs through economies of
scale, complementary resources
• Tax Benefit: use of tax losses, unused debt capacity, use of surplus funds, ability to write
up the value of depreciable assets
• Strategic fit: Eliminate competition, acquire a strategic asset etc
• Improve Revenues and Profits: Exploit synergies between two or more companies,
efficiency gains from asset management, coordination of production processesBusiness
combinations can take the form of a merger or acquisition.
Merger
An arrangement involving the voluntary fusion of two companies on broadly equal terms into one
new legal entity. The firms that agree to merge are roughly equal in terms of size, customers, and
scale of operations. In a merger, a new legal entity is formed and none of the predecessor affiliates
remain in existence. A new company is created to take over the net assets of Company A and
Company B.
Company A + Company B = Company C
Acquisition
An acquisition is a business transaction that occurs when one company purchases and gains control
over another company. An acquisition involves the legal continuity of the affiliated companies.
Both companies continue operations, but are now affiliated through a parent–subsidiary
relationship. Both companies are individual entities and keep financial records, but the parent
provides consolidated financial statements in each reporting period. Unlike a merger, the acquiring
company does not need to acquire 100 percent of the target. In fact, in some cases, it may acquire
less than 50 percent and still exert control. If the acquiring company acquires less than 100 percent,
minority (non-controlling) shareholders’ interests are reported on the consolidated financial
statements.
1
, Company A + Company B = (Company A + Company B)
IFRS 3 – Business Combinations provides accounting guidance for such business arrangements
and applies to all business combinations. An acquisition that results in the acquirer obtaining
control over any other entity – the acquiree – is referred to as a business combination.
Acquisition of a Business.
An investor shall determine whether a transaction or other event is a business combination by
assessing whether the assets acquired and liabilities assumed constitute a business. A business is
an integrated set of activities and assets that is capable of being conducted and managed for the
purpose of providing a return to its investors or other owners, members or participants.
A business consists of inputs and processes applied to those inputs that have the ability to create
outputs (although outputs are not required for an integrated set of assets to qualify as a business).
An input is any economic resource that creates – or has the ability to create – outputs when one or
more processes are applied to it. Examples of inputs in a business include: non-current assets,
including intangible assets and rights to use non-current assets; intellectual property; and the ability
to obtain access to necessary materials, rights and/or employees.
A process is a system that, when applied to an input or inputs, creates or has the ability to create
outputs. These processes are generally documented but, for example, a workforce with the
necessary skills following rules may provide the necessary processes that are capable of being
applied to inputs to create outputs. Examples of processes in a business include: strategic
management processes; operational processes; resource management processes; and an organized
workforce with necessary skills and experience. Note that accounting, billing, payroll and other
administrative systems typically are not processes used to create outputs.
An output is the result of inputs and processes applied to those inputs that provide or have the
ability to provide a return to owners. Examples of outputs from a business include returns in the
form of: dividends; lower costs; and other economic benefits.
Furthermore, a business need not include all the inputs and processes that the seller used in
operating that business if the acquirer can continue to produce outputs without them, for example,
by integrating the business with its own inputs and processes. Established businesses often have
many different types of input, process and output, whereas new businesses often have few inputs
and processes and sometimes only a single output
In case they do not constitute a business, the investor shall account for the transaction as an asset
acquisition. Under these circumstances, the cost of the purchase is allocated to the individual
identifiable assets and liabilities purchased in proportion to their relative fair values at the purchase
date and no goodwill is recognized.
Acquisition or Purchase Method
An investor shall account for each business combination by applying the acquisition method. In
the past, business combinations could be accounted for either as a purchase transaction or as a
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