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19.1.1 Extracts from FRS102-Sections 19.2
19.2 Business combinations defined
19.2.1 Extracts from FRS 102 – Section 19.3
19.2.2.1 Definition of a business combination
19.2.2.1.1 Definition of a business
19.3 Structure of a business combination
19.3.1 Extracts from FRS 102 – Section 19.4–19.5A
19.4.1 Extracts from FRS102 – Section 19.6-19.7
19.5 Purchase method – Identifying the acquirer
19.5.1 Extracts from FRS102 – Section 19.8 – 19.10 and 19.17
19.5.2.3 New entity formed to effect a business combination where equity issued.
19.5.2.3.1 Control obtained but little or no substance to it
19.5.2.3.2 Identifying the acquirer – where substance to it.
19.5.2.4 Determining the acquistition date for the purpose of Section 19
19.6 Purchase method – Cost of a business combination
19.6.1 Extracts from FRS102 – Section 19.11-19.11A
19.6.2.2.1 Purchase on deferred payment terms
19.6.2.3 Liabilities incurred or assumed
19.6.2.4 Costs directly attributable to the acquisition/ business combination
19.6.2.4.1 Examples of directly attributable cost
19.6.2.4.2 Example of costs not directly attributable
19.6.2.5 Equity issued as consideration for the acquisition
19.6.2.6 Cost where control achieved in stages
19.7 Adjustments to the cost of a business combination contingent on future events
19.7.1 Extracts from FRS102 – Section 19.12-19.13
19.7.2.1 Contingent consideration and change in estimate
19.7.2.1.1 Contingent consideration – probable at the date of acquisition.
19.7.2.1.3 Changes in contingent consideration – change in estimate
19.7.2.1.4 Contingent consideration – No provision booked in year 1
19.7.2.2 Contingency payments relating to further services
19.8 Allocating of the cost of a business combination to the asset acquire and liabilities assured.
19.8.1.1 Extracts from FRS102 – Section 19.14-19.15, 19.18 and 19.20-19.21
19.8.1.2.2 Definition of assets and liabilities
19.8.1.2.2 Determining fair value
19.8.1.2.2.1 Fair value – intentions of acquirer ignored
19.8.1.2.2.1.1 Restructuring provisions
19.8.1.2.2.2 Measurement of contingent liabilities
19.8.1.2.2.2.1 Contingent liability – right of reimbursement
19.8.1.2.2.2.2 Fair valuing contingent consideration
19.8.1.2.2.3 Future losses – non-recognition of liabilities in determining allocation of cost
19.8.1.2.2.5 Determining fair value of intangible assets
19.8.1.2.2.6 Determining fair value of inventory
19.8.1.2.2.8 Determining fair value of investment in associate and joint ventures
19.8.1.2.2.9 Determining fair value of deferred revenue
19.9 Measurement of deferred tax, employee benefit and share based payments
19.9.1 Extracts from FRS102 – Section 19.15A-19.15C
19.10 Purchases method – Subsequent adjustment to fair value and accounting for Goodwill
19.10.1 Extracts from FRS102 – Section 19.16-19.17 and 19.22-19.23
19.10.2.1 Adjustments to fair value of identified assets and liabilities
19.10.2.2 Accounting for calculating goodwill including a journal to reflect business combination.
19.10.2.2.1 Initial recognition of goodwill
19.10.2.2.2 Subsequent recognitions of goodwill
19.10.2.2.3 Journals to reflect the business combination
19.10.2.2.4 Useful life of goodwill
19.10.2.2.4.1 Change in useful economic life
19.11 Business combination achieved in stages
19.11.1 Extracts from FRS102 – Section 19.11A
19.11.2.1.1 Acquiring a further controlling interest
19.11.2.1.2 Disposing of controlling interest but controlling interest retained
19.12.1 Extracts from FRS102 – Section 19.24
19.13.1 Extracts from FRS 102 section 19.27-19.32
19.13.2.1 Group reconstruction defined
19.13.2.4 Group reorganisations and merger accounting
19.14.1 Extracts from FRS 102 section 19.25 – 19.26A
19.14.2.1 Accounting policies positive goodwill – Consolidated financial statements.
19.14.2.2 Example from the notes to the accounts
19.14.2.2.1 Contingent consideration note
19.14.2.3 Parent entity accounting policies
19.14.2.3.1 Extract from notes to the financial statements
19.14.2.5 Profit and Loss Account for parent entity
19.14.2.6 – Negative Goodwill for the financial year
19.15 Disclosures – Group reconstructions
19.15.1 Extracts from FRS 102-Section 19.33
19.15.2.2 Extract from notes to the financial statements
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19.13 Group Reconstructions
19.13.1 Extracts from FRS 102 section 19.27-19.32
19.27 Group reconstructions may be accounted for by using the merger accounting method provided:
(a) the use of the merger accounting method is not prohibited by company law or other relevant legislation;
(b) the ultimate equity holders remain the same, and the rights of each equity holder, relative to the others, are unchanged; and
(c) no non-controlling interest in the net assets of the group is altered by the transfer.
19.28 The provisions of paragraphs 19.29 to 19.33, which are explained by reference to an acquirer or issuing entity that issues shares as consideration for the transfer to it of shares in the other parties to the combination, should also be read so as to apply to other arrangements that achieve similar results.
Merger accounting method
19.29 With the merger accounting method the carrying values of the assets and liabilities of the parties to the combination are not required to be adjusted to fair value, although appropriate adjustments shall be made to achieve uniformity of accounting policies in the combining entities.
19.30 The results and cash flows of all the combining entities shall be brought into the financial statements of the combined entity from the beginning of the financial year in which the combination occurred, adjusted so as to achieve uniformity of accounting policies. The comparative information shall be restated by including the total comprehensive income for all the combining entities for the previous reporting period and their statement of financial position for the previous reporting date, adjusted as necessary to achieve uniformity of accounting policies.
19.31 The difference, if any, between the nominal value of the shares issued plus the fair value of any other consideration given, and the nominal value of the shares received in exchange shall be shown as a movement on other reserves in the consolidated financial statements. Any existing balances on the share premium account or capital redemption reserve of the new subsidiary shall be brought in by being shown as a movement on other reserves. These movements shall be shown in the statement of changes in equity.
19.32 Merger expenses are not to be included as part of this adjustment, but shall be charged to the statement of comprehensive income as part of profit or loss of the combined entity at the effective date of the group reconstruction.
19.13.2 OmniPro comment
19.13.2.1 Group reconstruction defined
Appendix 1 of FRS 102 defines a group reconstruction as any one of the following arrangements:
(a) the transfer of an equity holding in a subsidiary from one group entity to another;
(b) the addition of a new parent entity to a group;
(c) the transfer of equity holdings in one or more subsidiaries of a group to a new entity that is not a group entity but whose equity holders are the same as those of the group’s parent; or
(d) the combination into a group of two or more entities that before the combination had the same equity holders.
19.13.2.2 Even where group reconstruction definition is met when can merger accounting be applied and what are the rules
Where the conditions for merger accounting are met it results in considerable less work for the acquiring entity. No fair value valuations are required to be performed and no goodwill needs to be calculated. The net assets as per the acquired entity is the amount that is recognised in the consolidated financial statements. Section 19.27 of FRS 102 describes the conditions for the relief to be claimed and these are :
(a) the use of the merger accounting method is not prohibited by company law or other relevant legislation;
(b) the ultimate equity holders remain the same, and the rights of each equity holder, relative to the others, are unchanged; and
(c) no non-controlling interest in the net assets of the group is altered by the transfer.
Merger accounting differs from the purchase method of accounting as follows:
- Under merger accounting, the results, balance sheet and cashflows of the acquiree are shown in the current and comparative financial year of the parent consolidated accounts regardless of what period in the year this was acquired as per Section 19.30 of FRS 102. Under purchase method accounting, the results are only shown from the date of acquisition and the comparative figures on first acquisition does not include the acquirees results.
- Merger accounting does not require the net assets of the acquiree to be fair valued (AS PER Section 19.29 of FRS 102) whereas purchase accounting does, and any fair value adjustments must be accounted for in the parent.
- Merger accounting does not require goodwill to be calculated whereas purchase accounting does.
As per Section 19.31 of FRS 102, the difference between the fair value of the consideration given and the normal value of the shares in the acquiree entity is recognised within equity as a movement in other reserves and shown in the statement of changes in equity
19.13.2.3 Merger expenses
As per Section 19.32 of FRS 102, all costs directly attributable to the merger must be expensed.
See application of merger accounting in example 20 below at 19.13.2.2.
Note where inter group sales are made the normal rules with regard to intergroup balances/sales/profits are applied to eliminate these.
19.13.2.4 Group reorganisations and merger accounting
Example 20: Group reorganisations
Company A who is a member of a group with Parent A, acquires Company B from Parent A on 1 March in return for the issuance of 100 CU1 ordinary shares for CU1,801 each i.e.CU180,100. This CU180,100 is equivalent to the net assets of Company B. Company A applies merger accounting and the year end is 31 December. The profit for the 9-month period to 31 December in Company B was CU20,000 and the profit made for the full year is CU60,000.
In the consolidated financial statements of Company A the following would be shown assuming the below results. Note the profit made for the full year is included, the date of acquisition is irrelevant. If in the below analysis, the nominal value of shares issued in Company B was less than the actual amount issued to Company B, the other reserve would be reduced to a negative by the difference and therefore on occasion there can be a debit balance in the other reserve.
The above example assumes shares were acquired, merger accounting can also apply when an entity acquires the trade and net assets as opposed to shares (i.e. the acquisition of a business in return for their issuance of shares in itself.) Applying this to the above example the journals would be:
| CU | CU | |
| Dr Net Assets | 180,100 | |
| Cr Ordinary Share Capital | 100 | |
| Cr Merger Reserve | 180,000 |
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Examples
Example 1: Determining a Business.
Example 2: Determining a Business.
Example 3: Identifying the Acquiring Company.
Example 4: Identifying the acquirer
Example 5: Determining cost where control achieved in stages.
Example 6: Changes in contingent consideration – change in estimate.
Example 7: Contingent consideration – No provision booked in year 1.
Example 8: Valuing work in progress.
Example 10: Favorable/unfavorable contract
Example 11: Deferred tax on business combinations
Example 13: Journals to reflect the business combination.
Example 14: Revising the useful life of goodwill
Example 15: Business combination achieved in stages.
Example 16: Acquiring a further controlling interest
Example 17: Acquiring a further controlling interest
Example 18: Disposing of controlling interest but controlling interest retained.
Example 20: Group reorganisations.
Example 23: Extract from notes to the financial statements – contingent consideration note.
Example 29: Extract from the consolidated Balance Sheet for negative goodwill
Example 30: Extract from the accounting policy notes – Group reconstruction and merger accounting.
Example 31: Extract from notes to the financial statements – Merger Method.
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