IFRS 3 Business Combinations outlines the accounting when an acquirer obtains business control (e.g., an acquisition or merger). Such business combinations are 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.
Businesses have utilised mergers and acquisitions as a significant growth, restructuring, and diversification method. This process involves various stakeholders, including acquirers (buyers), targets (sellers), investment bankers, lawyers, and regulatory bodies. Additionally, these transactions can take place between firms within the same industry (horizontal mergers), firms at varying production stages (vertical mergers), and firms within unrelated industries (conglomerate unions). As a result, these transactions represent considerable economic transactions that have the potential to generate or eliminate value on a large scale.
Mergers and Acquisitions have been the subject of extensive research for several decades. Researchers have delved into many different aspects of mergers by focusing on several fundamental questions, including when these transactions occur, why they occur, mechanisms on how they occur, and their consequences for stakeholders such as shareholders, creditors, managers, and employees.
How to record an acquisition:
- Identify the acquirer.
- Determining the acquisition date – closing date
- Recognition and measurement on the acquisition date – all identifiable assets and liabilities
Tangible assets + Intangible assets – Liabilities = Acquired net assets
- Recognising and measuring goodwill
Total consideration transferred – Acquired net assets = Goodwill
Advantages of Mergers and Acquisitions:
- Improved Economic Scale
- Increased Market Share
- More Financial Resources
Disadvantages of Mergers and Acquisition:
- Job Losses
- Less competition for customers leads to higher prices.
Effect on Financial Statements
In general, acquisitions shouldn’t affect your business’s income statement as the transaction will be confined to the balance sheet. However, specific assets you obtain as part of the acquisition may have to be depreciated or amortised, which means at least part of their cost will make its way to the income statement.
In a merger transaction, two separately owned companies become one jointly owned company. On the other hand, an acquisition happens when one company, usually a more prominent company, takes over another, usually a smaller company, and runs the establishment with its identity.
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Article by Terence Agius