BUSINESS

COMBINATION
 INTRODUCTION

BUSINESS COMBINATION ..
 business combine or merger.
 One entity acquiring the net assets of another entity and
incorporating these assets into their operation, OR
 may involve acquiring control over the operations of
another entity by acquiring the issued voting share
capital of that entity.
 Alternatively, two or more business entities may just
join together to form a larger operating entity.
 E.g. two p/ships combining.
 Alternative to internal expansion
 expand by acquiring another business operation,
rather than build up and/ or diversify their business.
BUSINESS COMBINATION
 Business combination
 Horizontal – same line of business
 Vertical – same stream of business
 Unrelated & diverse operation
 E.g. furniture + timber OR manufacturer of
cars + companies marketing cars
 Why businesses combine?
 Enjoys economies of scale - Larger production ,
Cutting out competition or becoming more
competitive.
 Share diverse of knowledge and expertise, share
recourses and capital, spread the business risks
 CONVERSION OF A BUSINESS
ENTITY INTO A COMPANY
 Sole trading or partnership to limited company
 Enjoy limited liability status, have access to capital
market, future market growth, may become public
listed company
 Most accounting treatment similar to most forms of
bussiness combination.
 Classifications
 Amalgamation
 Absorption
 Takeovers/ acquisition
 AMALGAMATION OF LIMITED
LIABILITY COMPANY
 Often refers to the mergers or acquisitions of
many smaller companies into much larger
ones.
 Two or more company combine their
businesses together by selling their business
as a going concerns to a newly formed
company.
 A new company is formed to acquire the assets
and liabilities of the old companies and these
companies are wound up.
AMALGAMATION OF LIMITED LIABILITY COMPANY….

 A consideration may consist of cash, shares

and/ or debentures in a new company.
 Shareholders of old companies may become
shareholders of the new and bigger company,
depending on the consideration given.
 ABSORPTION
 One dominant company acquires the
assets and liabilities of another
company and the company being
acquired is wound up.
 Purchase consideration may be in cash,
shares and/or debentures in the
purchasing company, as in
amalgamation.
 TAKEOVER (ACQUISITION)
 The inventors acquires control in another
company (investee).
 Usually achieved by acquiring the majority of
the voting shares of the acquired company.
 An investor company that controls another
company is referred to as the HOLDING or
PARENT company
 Acquired company = SUBSIDIARY of the
investor.
 TAKEOVER (ACQUISITION)…

 Subsidiary company is not wound up, but a

change in the composition of the shareholders.
 Parent company;
 Major shareholders,
 Able to elect majority of the members of the
BOD (of the subsidiary)
 Controlling the financial and operating policies
of the subsidiary
 TAKEOVER (ACQUISITION)…
 “Takeover” – general term to describe process of
acquiring the majority of the issued share capital of a
company.
 Investing company may acquire through a scheme of
arrangement by the investee company such as:
 Acquired the issued share capital; or
 Investee company may issue sufficient new shares to
the acquiring company to enable the purchasing
company to have majority shareholding.
 Acquiring company make a direct offers to existing
shareholders to acquire their shares.
TAKEOVER (ACQUISITION)…

 Hostile takeovers - the takeovers by acquiring

company being opposed or not favoured by
directors of the company.
 Acquiring shares through open market.
Applicable for public listed companies only.
 Successful takeover means a shareholding of
more than 50% of the voting shares of the
acquired company. Then, it becomes the
holding company or parent company.
 TAKEOVER (ACQUISITION)…
 The parent and its subsidiary form a GROUP.
 Acquired company or SUBSIDIARY:
retain its legal status,
maintaining its own set of books of accounts
;
Preparing its own financial statement.
 Acquiring company/Holding or PARENT
Prepare a set of Consolidated financial
statement.
TAKEOVER (ACQUISITION)…
 Holding more than 20% , less than 50% of
voting right;
Investee = associate company not a
subsidiary
Able to exercise significant influence over
its financial and operating policies, though
not control it.
Representation on the BOD, interchange of
managerial personnel, other material
intercompany transactions.
DETERMINATION OF THE PURCHASE PRICE (PP)

 MFRS 3 (Business Combination) – PP may comprise;

a) Cash and cash equivalent
b) Fair value of other consideration (other than cash)
given by the buyer.
 Factors that determine the purchase consideration
1. The net assets taken over by the buyer
Recognition of assets
- There will be inflow of future economic benefits
Fair value of assets
- Will be revalued professionally
 DETERMINATION OF THE PURCHASE PRICE….

 Factors that determine the purchase

consideration…
2. Goodwill
Good location, good customer relations,
efficient etc.
3. Liabilities taken over
There will be outflow of resources
4. Liquidation expenses (additional cost)
 CONSIDERATION TRANSFERRED

 fair value of the identifiable asset taken over (–)

liabilities and contingent liabilities taken over
 Refer Example 1 [Chapter 8 page 265 – 266] Converting
a partnership into a limited liability company
Example 1 [Chapter 8 page 265 – 266]
 GOODWILL

Fair value of
Total net
Purchased
Goodwill = Purchase Less identifiable
Price assets taken
over
 ACCOUNTING ENTRIES:
Closing the books of the Seller / Vendor
 2 aspects of accounting treatment
1. The winding up (closing) the affairs of the selling
entity
2. Open up the relevant books of the buyer
 Open realisation account
 Transfer balance of the realisation a/c to capital account.
 Debentures outstanding – normally discharged in cash
or exchanging with a fresh debentures in the acquiring
company.
 SHAREHOLDERS’ EQUITY
 Balance of share capital and reserve accounts are
transferred to members’ accounts. Also for
preference shares capital accounts.
 In case, P/Share Capital are to received a premium
on the liquidation of company, it is to be charged
to realisation a/c.
CLOSING THE BOOKS OF THE SELLER
Refer Example 2 page 270-271: Close AB Partnership
 OPENING THE BOOKS OF THE BUYER

 Open a BUSINESS PURCHASE ACCOUNT

(temporary a/c).
 Assets (except goodwill) and labilities taken over
by the buyers’ book at fair value.
 Goodwill is the residual value arrived at in
assigning the fair values of the assets to the
consideration transferred.
 Prepare a statement of financial position
immediately after the business acquisition.
OPENING THE BOOKS OF THE BUYER
Debit Credit
1. To record the agreed consideration
Business Purchase a/c XXX
Company seller XXX
2. Assets acquired at fair value
Relevant assets a/c XXX
Business Purchase a/c XXX
3. Liabilities taken over
Business Purchase a/c XXX
Relevant liabilities a/c XXX
4. to record goodwill or premium paid
Goodwill XXX
Business Purchase a/c XXX
5. Payment of consideration
Company seller XXX
O/share capital XXX
Cash (if any) XXX
Refer Example 3 page 273-274: Opening books of buyer (AB
Sdn.Bhd)
AMALGAMATION OF COMPANIES

 Refer example 4 (page 271-275)

 ABSORPTION

 Refer example 5 (page 280-281)