Paper Example on Business Combinations

Introduction

A business combination is primarily the process in which a company (the acquirer) takes control over another business (the Acquiree). The transaction acts as a way for organizations to grow in through an external expansion which goes a long way compared to internal growth through organic activities. Whenever a consolidation occurs between companies, the acquirer provides consolidated results which consist of a financial statement of both companies who are part of the combination (Tan & Lim 2017).

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According to the combination agreement, the acquirer is limited to provide only financial statements that occur after the acquisition date within the consolidation. Such business combinations under the IFRS are accounted for through the acquisition method which primarily requires that both companies measure their liabilities as well as assets acquired at fair values during the acquisition signing date (Tan & Lim 2017). The essay aims at providing information on the framework of a business combination with its primary analysis being how the process is carried out under the IFRS.

Business Combinations According to IFRS

The IFRS plays a significant role in defining the reliability, relevance, and compatibility of data provided during business combinations and their effects on both parties (Tan & Lim 2017). It gives principles on the measuring of acquired liabilities and assets, the goodwill determination and disclosure that are necessary for the merger.

Types of Business Combinations

A business combination can be managed through many approaches. The main models for acquisition include by way of merger which acts as a voluntary takeover or a hostile takeover. Alliances are the most common approaches applied. In this approach enterprises voluntarily agree to combine their assets to form a new company that is capable of increasing their competition and strength within the market compared to when the two functions individually.

The approach is favorable in that; it allows each company to retain clientele that already exists within its system while still providing it with the power to pursue and attract new customers. Goods and services offered by merged companies may produce and market a revamped product line that allows them to reach out to the best seller of each and couple them with products that they provide within the new entity (Tan & Lim 2017). They can also choose to market a combined product line of each business individually.

On the other hand, a hostile takeover is defined as a forced merger whereby one enterprise takes action to acquire control over another business. Usually, the acquisition can be hostile or voluntary whereby the owners agree to sell the company to another organization.in a hostile takeover the acquirer takes over another business with or without agreement from the other store.

Consolidation Process

IFRS lays down the principles of consolidation during a business combination. The steps included in the procedure include; 1. The combination of like liabilities, assets, income, equity cash flow, and expenses. 2. Elimination of the acquirer's investment carrying amount included in each subsidiary and equity portion between the two subsidiaries. 3. Exclusion of all liabilities and assets, income, cash flow, and expenses through intergroup concerning the transaction that occurs between different entities of the group (Dickinson, Wangerin & Wild 2016)

Combination

After ensuring that all the liabilities and assets of the involved subsidiaries have been stated at equal or fair values and all conditions laid down by IFRS have been met, the companies are the allowed to add up like items and combine. Initial goodwill might arise on initial recognition. The goodwill is calculated through the fair amount of consideration transferred, the addition of any non-controlling interest during the acquisition and deduction of any net assets by the lesser company at acquisition.

Eliminate

The offset procedure is initiated after all like items have been combined. The elimination involves getting rid of the carrying amount of the acquirer's investment in each subsidiary as well as the portion of equity to each subsidiary. To finalize the process the companies are expected to recognize any non-controlling goodwill or interest. It's also essential that during consolidation both companies eliminate all transactions that have occurred between the two companies.

Financial Instruments

Financial instruments are all assets defined as packages of capital with the ability to be traded. Most financial instruments depict an efficient transfer and flow of money to investors globally. The assets include cash, right under the contract to receive or deliver cash, or any other type of evidence of ownership towards an entity. They can also be defined as real or virtual papers that represent a valid agreement concerning all kinds of monetary value. Major types of financial instruments include; 1. Equity-based instruments which represent asset ownership, 2. Debt based devices were representing loans applied for by an investor to the assets owner, 3. Instruments fo foreign exchange which tend to compromise a unique type of financial instrument. Each financial device is further categorized into different subcategories such as common share equity and preferred share equity.

Classes of Financial Assets

Major classifications financial assets include:

Equity shares

They give the shareholder authority to have a dividend on all profits made by the company as well as right to vote. They are entitled to dividends only if the company makes a profit and incase a loss is incurred no dividends are paid (Sedlacek 2016). They also have the power to sell their share within the stock market in case they want to leave the company.

Fixed deposits

It allows the fixed depositor right to interest along with a principal amount once the fixed deposit matures (Sedlacek 2016). For example, if fixed depositor deposits $100000 at a simple interest of 8% annually then, once it develops the depositor receives $108000 making interest of $8000.

Preference shares

The shares give the shareholder power to receive dividends but cannot contribute to voting. They earn their payment before equity investors regardless of whether the company makes a profit or a loss (Sedlacek 2016). However, in the case of preference shares, their scope of appreciation of capital becomes unavailable.

Mutual funds

They are financial institutions that invest money in financial markets of mutual fund holders and collect cash from upcoming investors. Some of the mutual fund holders include the debt market, equity market, and commodity. The mutual fund holders receive units in exchange for investments they make which can be bought or sold at prevailing market prices.

Impact of Financial Assets on Financial Statements

Although financial assets may meet the requirements for them to be classified as FVOCI, at initial recognition an entity has the power to designate the asset as estimated and measured at FTVPL (Sedlacek 2016). Designation of an asset can significantly eliminate or reduce recognition inconsistency or measurement which would have otherwise risen from measuring liabilities and assets, or recognizing the profits or losses made on them. On the other hand, even though most gains and losses designated from FVOCI are recognized in OCI, all dividends will be accepted in losses unless they assist in the recovery of part of costs incurred by the investment (White, Sondh & Fried 2005).

How Should an Acquirer Treat Its Investments?

An acquirer should not have a day to day role in any of the investments. They acquirer company should allow finances to run on their management teams. For example, in case of a merger, the company should act in the equity interests of its Acquiree, the acquirer's job is an executive oversight, setting risk management parameters and ensuring that people are situated in the right places and that the positions align with the corporate strategy that has been put in place. As a result, when dividends are paid to them, they can invest the money in other opportunities enabling them to take money from a growing operation and sow it for a more promising subsidiary. The relationship will exhibit a positive profit on equity and assets which is very promising within the financial statements.

Conclusion

In conclusion, a business combination plays a significant role in expanding companies externally. The different types of business combination processes provide procedures for the merger and acquisition of companies by main organizations making them vital for investors who aim at expanding their production boundaries.

References

Dickinson, V., Wangerin, D.D. and Wild, J.J., 2016. Accounting Rules and Post-Acquisition Profitability in Business Combinations. Accounting Horizons, 30(4), pp.427-447.

Sedlacek, J. (2016). Financial Statements in the Financial Decision Making. European Financial Systems 2016, 678.

Tan, P. and Lim, C.Y., 2017. Heineken's Acquisition of Asia Pacific Breweries: Accounting for Business Combinations and Changes in Ownership Interests. Issues in Accounting Education, 32(4), pp.101-127.

White, G.L., Sondh, A.C. and Fried, D., 2005. Analysis of Financial Statements. Analysis.