Acct 11 - Activity 1

1. Business Combination – It includes transactions in which an acquirer obtains control of one or

more businesses. It also includes transactions that are sometimes referred to as 'true mergers'
or 'mergers of equals'.
2. Merger and Consolidation
 Merger is a contractual and statutory process by which one corporation (the surviving
corporation) acquires all of the assets and liabilities of another corporation (the merged
corporation), causing the merged corporation to become defunct.
 Consolidation is a contractual and statutory process by which, two or more corporations
jointly become a completely new corporation (the successor corporation), the original
corporations cease to exist and to do business, and the successor corporation acquires
all of the assets and liabilities of the original (now defunct) corporations.
3. Separate Financial Statement and Consolidated Financial Statement
 Separate financial statements are those presented in addition to consolidated financial
statements. Separate financial statements could be those of a parent or of a subsidiary
by itself. In separate financial statements, an investor accounts for investments in
subsidiaries, joint ventures and associates either at cost, or in accordance with IFRS 9, or
using the equity method as described in IAS 28.
 Consolidated financial statements is a financial statement of an economic entity in
which the assets, liabilities, net assets/equity, revenue, expenses and cash flows of the
controlling entity and its controlled entities are presented as those of a single economic
entity. Its purpose is to present, primarily for the benefit of the shareholders
and creditors of the parent company, the results of operations and the financial position
of a parent company and its subsidiaries essentially as if the group were a single
company with one or more branches or divisions.
4. Asset Acquisition and Stock Acquisition
 An asset acquisition is the purchase of a company by buying its assets instead of its
stock. An asset acquisition typically also involves an assumption of certain liabilities. It is
accounted for by allocating the cost of the acquisition to the individual assets acquired
and liabilities assumed on a relative fair value basis. Goodwill is not recognized in an
asset acquisition.
 A Stock Acquisition—falling under the broader category of business combinations—
occurs when the buyer acquires the target company by purchasing its stock. This can be
done through peaceful negotiations with management or through a hostile takeover.
After purchasing the target’s stock, the buyer gains control over the assets and liabilities
of the target; however, because only ownership changes, the net assets don’t physically
transfer to the buyer, they remain in the target company.
 In a stock acquisition, although one of the entities owns the other, the two entities
generally retain their separate legal existence. They operate as separate legal entities,
but in a parent-subsidiary relationship. In contrast, a statutory merger results in one
surviving company while the other company is legally dissolved. The transaction is often
taxed as an asset acquisition of the target, with the target being subsequently dissolved.
5. Combination, Vertical Combination and Conglomerate
 Horizontal Combination is the merger of two or more firms, which are engaged in the
same line of business and their activity level is also the same.
 Vertical Combination is the association or merger between two companies producing
different goods or services for one specific finished product. It occurs when two or more
firms, operating at different levels within an industry's supply chain, merge operations.
 Conglomerate is a merger between firms that are involved in totally unrelated business
activities. It brings together companies in unrelated businesses to reduce risk.
6. Parent or Acquirer and Subsidiary or Acquiree
 Parent or acquirer is the entity that obtains control of the acquiree. It is an entity that
has one or more subsidiaries.
 Subsidiary or acquiree is the business or businesses that the acquirer obtains control of
in a business combination.
7. Acquisition Date - is the date on which the acquirer obtains control of the acquiree. In a
combination effected by a sale and purchase agreement, this is generally the specified closing or
completion date when the acquirer legally transfers the consideration,acquires the assets, and
assumes the liabilities.
8. Consideration given or transferred - The consideration transferred in a business combination is
the sum of the acquisition date fair values of assets transferred, liabilities incurred, and equity
issued by the acquirer to the shareholders of the acquiree. This means that consideration
includes cash paid by the acquirer to acquiree's shareholders, the fair value of other assets
transferred, fair value of liabilities incurred, fair value of its equity shares that the acquirer issues
to acquiree's shareholders and the fair value of contingent consideration.
9. Non-controlling interest in the acquiree - A noncontrolling interest (NCI), formerly called as
minority interest, arises in a business combination when the buyer acquires more than a 50
percent interest in the target, but less than 100 percent of the target. For example, if Company
A acquires 70 percent of Company B, and Company A did not previously own any interest in
Company B, there would be a 30 percent NCI in Company B that would be recognized in the
accounting for the business combination and measured at its fair value.Previously held equity
interest in the acquiree
10. Previously held equity interest in the acquiree – An acquirer may obtain control over target in
which it held some equity interest at the time of obtaining control. For example: Acquirer
Company (AC) has 30% interest in Target Company (TC), and then it acquires additional 40%
which in aggregate gives AC a 70% interest and control over TC. This is often referred to as ‘step
acquisition’ or ‘piecemeal acquisition’. In such a case, the 30% interest should be remeasured to
fair value at the acquisition date and any difference between fair value at the date of obtaining
control and carrying value should be recognised as gain/loss in P/L or OCI as if it was sold. The
fair value of previously held equity interest in the target is then derecognised and included in
calculation of goodwill.
11. FV of net identifiable assets acquired - The net identifiable assets are all the assets transferred
to the acquirer as a result of the transaction minus the liabilities taken over by the acquirer. It
includes long-term and short-term assets and is not limited to the assets on the financial
statements of the acquiree. The net identifiable assets acquired are to be determined at fair
 value. This is important in determining the cost of goodwill purchased as the fair value of net
identifiable assets acquired are to be deducted from the aggregate of considerations
transferred, amount of non-controlling interests, and fair value of previously equity interests,
12. Goodwill and Gain on Bargain Purchase
 Goodwill is an asset representing the future economic benefits arising from other assets
acquired in a business combination that are not individually identified and separately
recognized. It is the amount by which the consideration paid in a business combination
exceeds the fair value of identifiable assets acquired. In simple terms, goodwill is
measured as the difference between: the aggregate of (i) the value of the consideration
transferred (generally at fair value), (ii) the amount of any non-controlling interest and
(iii) in a business combination achieved in stages , the acquisition-date fair value of the
acquirer's previously-held equity interest in the acquiree, and the net of the acquisition-
date amounts of the identifiable assets acquired and the liabilities assumed.
 If the difference above is negative, the resulting gain is a bargain purchase in profit or
loss, which may arise in circumstances such as a forced seller acting under compulsion.
Bargain purchase, in a business combination, occurs when the fair value of net assets of
the acquiree exceeds the purchase consideration paid by the acquirer plus fair value of
any non-controlling interest. The difference is recognized as a gain by the acquirer. It is
also called negative goodwill.