Accounting for Business Combinations

1. In a business combination, call it a merger, an acquisition takeover; we normally have the parent company, which becomes the entity after the combination.

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2. The Fair value increment is accounted for and Goodwill should be determined and allocated.
3. The parent view; The parent company consolidates 100% of the book value of the acquiree’s net assets but only the parents percentage share of the fair value increment and good will.
4. Goodwill being the difference between the fair value of the acquiree as a whole and the fair value allocated to its identifiable assets and liabilities.
5. High quality Accounting Standards should be emphasized because with high quality standards every single operation and transaction will be catered for.
6. In trademarks and brand names for the consumer and Industrial acquisitions there is a lot of value as per economic reality because assets don’t diminish in value.
7. More research has its cost and benefit implications. Costs include more accounting and Auditing staff.

Focus on the Fair value:

In a business combination, call it a merger, an acquisition takeover; we normally have the parent company, which becomes the entity after the combination. Accounting for this should be taken with caution because some considerations have to be considered.

Summary

Focus of the Accounts and auditing team is concentrated in determining an accurate fair value and they need to qualified and given good remuneration in order to motivate them. Benefits realized are, relevance and accountability. The increased inclusion of unrealized gains and losses in the income statement yields more substantive financial statements and a little more transparency. Cases of transparency will be reduced and there will be a link between the conceptual framework and accounting standards.

According to (Pamela. A Smith 2007),the Fair value increment is accounted for and Goodwill should be determined and allocated. Fair value is the excess of fair value over the book value of the acquiree’s identifiable net Assets. Goodwill is the amount paid by the acquirer in excess of the fair value of the identifiable net assets. For example if the purchase price =$400, the fair value of the identifiable net Assets =$320 the book value of Net Assets=$200; then the fair value increment=$120(320-200) and Goodwill=$80(400-320). Currently Accounting Standards are consistent with the parent view of the consolidated entity.

The parent view; The parent company consolidates 100% of the book value of the acquiree’s net assets but only the parents percentage share of the fair value increment and good will. The Non Controlling Interest (NII) share of the acquiree’s original book value with no fair value increment or goodwill allocation.

Very Important; The consolidated entity should recognize only the percentage of the Fair value increment and goodwill that was actually purchased by the acquirer.

SFAS 141 R , Proposes that accounting for business combination and subsequent consolidation follow the entity view under which the parent company consolidates 100% of the book value of the acquiree’s net assets places 100% of the Fair value increment. Goodwill is accounted for and dived between the Holding Company and the subsidiary interest. Basically this view requires a full Fair value measurement of the goodwill associated with the Acquisition/merger.

Goodwill being the difference between the fair value of the acquiree as a whole and the fair value allocated to its identifiable assets and liabilities. The entity view is of interest because it presumes that an acquisition results in the acquirer’s full control of the fair market value of the acquirees assets and liabilities even if the acquisition is less than 100%. The Entity view suggests that if the acquired company is controlled 100% of the net assets and liabilities should be reported at full fair value. The parent view presumes control of 100% of the net assets but recognizes only the parent share of the fair value increment.

Pamela A Smith. (2007). Implication of the Joint FASB and IASB Proposal on Accounting for Business Combinations. ABI/INFORM GLOBAL Pg.16

High quality Accounting Standards should be emphasized because with high quality standards every single operation and transaction will be catered for. According to,

Implication of the Joint FASB and IASB proposal on Accounting for Business Combinations, by Pamela. A Smith, on the CPA journal; Apr 2007:77,4:ABI/INFORM GLOBAL pg.16

Both Financial Accounting Standards Board (FASB) and the International Accounting Board (ISAB) published an exposure draft containing Joint proposals to improve the accounting and reporting of business combinations. According to,

FASB, IASB Published Joint proposals on Business Combination, by Kathy Williams on Strategic Finance; August 2005; 87,2;ABI/INFORM GLOBAL pg 19

In trademarks and brand names for the consumer and Industrial acquisitions there is a lot of value as per economic reality because assets don’t diminish in value.

Applying new M & A accounting rules by Alfred M King, on the Strategic Finance; Nov 2001; 83,5; ABI/INFORM GLOBAL pg33

The business combination structure transactions give the accounting method to be used because the way in which the combination is carried out determine how the figures are. According to,

The Art of MA: A merger Acquisition buyout Guide by Stanley Foster Reed on Pg 318

All material facts should be stated on the financial statements because this leads to a better understanding of the financial statements and readers and interested parties will not left wondering or with questions but will fully understand the combined entity. According to,

Takeovers and Freeze outs by Martin Lipton on Pg 16.

Proposed GAAP should be as follows for the combine entity;

The Fair value increment is assigned to the acquirer’s and non controlling interests share of the Acquiree’s net assets. Goodwill is the difference between the Fair value of the entity as a whole and the fair value of the Acquiree’s net assets. Goodwill is assigned to both the controlling and non controlling interests.

Proposed GAAP on acquisition value is as follows; Fair value of the acquired company as a whole independent of acquisition costs. Direct costs are expensed. Fair value is based on valuation models or independent valuation techniques.

“A replacement of FASB statement No.141 (SFAS 141) on June 30,2005, with a commencement deadline of October 28,2005. SFAS (141) R is a significant step forward in the relationship of the two standard setting bodies. Impact on the perception of the success of the convergence of international and U.S accounting standards. National accounting standards, which include the IASB and FASB. On June 30,2005, FASB also issued an Ed, consolidated Financial statements which addresses accounting after the date of acquisition. Description and examples of conceptual views of the Post acquisition entity are addressed in understanding the different views of consolidation”

High quality Accounting Standards is more important than uniformity in efforts to achieve convergence in accounting standards. The SFAS 141(R) draft reflects this report with its attention to underlying concepts long advocated by accounting standard setters and already evident in the convergence projects mapped out in the memorandum”

Pamela A Smith (2007) Implication of the Joint FASB and IASB Proposal on Accounting for Business Combinations.Pg.19

The transaction of any business endeavor is summarized into financial statements, which include the Profit and Loss Account, Balance sheet, and the Cash flow statement. The production of these statements is guided by certain principles, which are contained in the accounting standards. These standards provides for common thinking where by all financial statements are in a standard form.

These Accounting standards should be revised from time to time in order to match with current trends, which match with high quality. This will provide a better understanding of the statements by interested parties because complications occur after business combinations. The operations of the combining companies may not be similar and this calls for extra professional advice and consultation. The way in which the combination is carried out determines how the figures are to be accounted for. Future research should come up with computerized accounting packages, which give, break down of transactions depending on how the combination took place at the touch of a button.

Accounting standards emphasize on:

Continued expansion of Fair Value Accounting. Fair value being the excess of fair value over the book value of the acquiree’s identifiable net assets should have a note of its own at the end of the Balance sheet. Readers, shareholders and interested parties in the company need a detailed breakdown of figures appearing on the financial statements. This is the only way that they can understand the transactions before and after the business combination.

A new company is now part of the entity and analysts need to understand its impact on the finances and operations of the acquiring company. More recognition Assets and liabilities. The value of Net assets is the difference between assets and liabilities and this is in attention when we talk about the fair value. Failure of disclosure leads to lack of transparency and may be questionable. Increased inclusion of unrealized gains and losses in the income statement and correspondingly reduced use of other comprehensive income. Unrealized gains and losses is an example of accrued income/loss and this may determine the net assets of the company.

More research has its cost and benefit implications. Costs include more accounting and Auditing staff. Readers of the financial statements will be interested in amounts associated with the fair value. All related transactions and figures need to be talked by a qualified accountant so that disclosure is comprehensive and accurate. Auditors need to be qualified in order to ensure that mischievous transactions never occurred during the combination.

References:

Alfred M. King. (2001). Applying New M & A Accounting Rules. New York.83, 5:

ABI/Inform Global

Kathy Williams. (2005). FASB, IASB Published Joint Proposals On Business

Combinations. New York. 87,2:ABI/Inform Global

Martin Lipton. (2001). Takeovers and Freeze outs. New York

Pamela A. Smith. (2007). Implications of the Joint FASB and IASB Proposal for

Accounting for Business Combinations. The CPA Journal; Apr 2007

Stanley Foster Reed. (2000). A Merger Acquisition Buy out Guide. New York

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