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A business eantbination is the term applied to external exparzsion inwhich separate enterprises are brougltt together into orze economic entity as a result af ane enterprise abtainingcontrul svsr llle net assets and operations afanother entepyise. /,4'fiS-t defines basiness combination as a transaction ar event itt which an acquirer obtains cantrol of bne or more businesses. A business is defined as aru integrated set of activittes and assets that is capable of being conducted and managed for the purpose of providing a return directllt to investors or other owners, members or participants. An acquirer ntust be identifiedfor all business combinations. Tircre are increasing trend to expand operations rhrough business cotttbinations ratlter than thraugh internal expansion. This developrnent is laryely due to the eJ.fects of recession, iifiation, and continued uncertainty over the abili4t of the Sovernment to control economic ills. llith business cannbination, both campanies will utilize cammon facilities cnd share fixed costs. In addition, a bisiness combtns.tion may be undertakenfor tlrc possible tax advantages available ta one or tlore parties to the combination.

Howeven business cantbinations involve certain linritations and risks;. Corporate obiectives must be taken into consideration. Only those companies which have the same'or compatible sets of objectives should combine. bn the other hand, successfulfirms are usually not willing to combine. The acquiring enterprise may also-inherit the acquired firmb ineficiencies and problems together with iis inadequate resources. 89

Lhupter i 4





assets of the pfpnother comp?ny maybe achieved by either acquiringthe in the target u controlling interest (usually over 50%) or


""quiArg pdnYs uoting common stock'

assets are acquired directly from the tiuUititiei of ihe acquired bompany also are assumed' ities are assumea, tUe tralsaction is referred to as an

lnanacquisition af assets,atr ol$r9.-c9fPany's


company. fo *ort.irgr, *A fiiUif u"q"i..O"*itting When ass"tr

;"[;irfi* issuance


of ,,net

property' or assels'". Payrnentmaybe qade in cash, exchanged


Business combinations maybe a9lrieyed

Sratutoryconsolidaiion i"g?iiirrf,ne;;#;&"int6riOutionorstatutoivmerger' into one newlegal entity" ;;il't",h"""*Ui*ingoftwo-ormore existinglegal entilies bythe new continuing 'it * i.".,ui""r -t" ai.if""d and ul*tt rdplaced "o*p*i"t absorption of one or more existing legal company. A statut'ofi i"igrrr"f"rs.to the


entities by another


absorbed "o*p""-v company'



the sole surviving legal entity' The but may continue as a division of the surviving

that continues


(typically,'more than 50%) of another stock acqwisition, a ccntrolling interest asthe companfsvotirrg"o*;onstockis a"q"u.g. ftre acquiringcompanyistermed (also a subsidiary as is.termdd parent (also ttre acquire4, and the.acqlired company and entities legal andthe subsidiary remain separate the acquire"). financial However, for extemal maintain tfr"i, o*rr.dnancial records and statements. individual financial statements theil wrll usually cornbine ,qp"nirrg prrp.r*, tt " into a siigie set ofconscllidated staternents' ln


B.ttlth;;;;t **p*"l

METI{ODS OF BUSINESS CGMBIN ATIONS were used to account for business Prior to the issuance sf IFRS 3, two methods method' rlru** *"."ttre purctrase method and the pooling of interests ofthe icquired companyarcusually Underthepurctraseleethod', all assets andliabilities primery method in use' Horvever' the *as f-U rui"*" ffr* pu:ehase methud

;;Li;r;ik. ,;;;;a;;

ofinterests methodwas allowed. Thepooling_of interest recordedth. uu*"iu *rrh:l"Uiiti*t ofthe acquired companyattheirbookvalues'


IFRS 3 elindnatec! the pooling of interest rnethod'






Business Con*inalions


tI' IFRS 3 requires that all-business combinations be accounted for by lqPulq u.[uirition method (called the ]'purchase method!' in the 2004 version of IFRS 3). To in detlrmine whether a transactionbr other event is a business combination, four steps follows: the applicationoftheacquisition method are tobe usedas (1) Identifl'theacquirer. (2) Determinetheacquisitiondate.

(3i Determine the consideration given (price paid) bythe-agQuirer , (4i Recognize andmeasrrre the idEntifia6le asses acquired, the liabilities6ssumed 3d interest) in the acquree. Any ,

n[n-contolling interest (formerly called rninority reiulting goodwill or gain from a bargain purchase should be recogniz-ed. any


Identify theAcquirer.In an asset acquisition, the companytransfening cashor other assets and/or assuming liabiiities is the acquiring company. In a stock acquisitiori, the acquirer is, in most cases, thq company tansferring cash or other.assets for a controlling interestinthevotin!,common stockof the acquiree(companybeingacquired). Some stock acquisitions maybe accomplished by exchanging voting common stock. Usually, the company issuing the voting common stock is the acquirer. ln sbme cases, the acquiree may issue the stock in the acquisition. This "reverse acquisition" may occur when a publicly traded company is acquired by a privately traded company. The appendix at the end of Chapter l5 considers this case and provides the applicable accounting


Determine the Acquisition Date. This is the date on wtrich thc acquirer obtains control of the acquiree. IFRS 3 explains that the date on which the acquirer obtains c*ntrol ofthe acquiree is generally the date on which the acquirer legally transfers the cansideration, acquires the assets and assumes the liabilities ofthe acquiree the closing date. However, the acquirer should consider all pertinent facts and circumstances in identi&ing the acquisition date, and it might be that control is achieved on a date that is earlier or laterthan the closing date. for example, the acquisition date prerledes the closing date if a written agreement provides tiratthe u.quir"r obtain clntrol of the acquiree on a date before the closing date Theacquisition date iscritical because itisthedateusedto establishthe fairvalue ofthe 'dompany acquired, and it is usually the date that fair values are established for the accounts of&e acquired company.

t ttaptct'l4


gaven (price paid) Deteiininethe Coilsideration Given" Generally, the consideration an entity.IFRS 3 as the acquiree of r,'alue fair U" the at fair value. measured to be combination gr"** in u u"uin"ss

ffi#;;ii.ii"usu*eJto I#ir*iiffffi"ftffi;; il;;l;t?l;"t*i"o

astt es,rirr oftlre acquisition-date fairvalues


, , . the a.ssets transferredbythe acquirer' . the equiry interests issued by the acquirer' conside,ration, *"*.*ofconsideration include cast5 other assets, contingent Usual -ordrnary. "* forms ipterests of mutual and member rvarrants *quityi;;;;ils, options, ./


exchange for Cantinsent Consideratior. The eonsideration the acquirertransfers in a contingentconsi
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