Comparison of M A in The View of US GAAP and IAS-IFRS 2012 Part1

Masaryk University
Faculty of Economics and Administration

Field of study: Financial Management
COMPARISON OF MERGERS AND ACQUISITIONS IN VIEW OF

IAS/IFRS AND US GAAP
Diploma work
Thesis Supervisor: Thesis Author:

Ing. Bc. Alois KONEČNÝ Bc. Oleksandra LEMESHKO
Brno, 2012
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Masaryk University
Faculty of Economics and Administration
Department of Finance
Academic year 2010/2011
ASSIGNMENT OF DIPLOMA THESIS
For: Bc. Lemeshko Oleksandra
Field: Financial Management
Title: Comparison of Mergers and Acquisitions in the View of

IAS/IFRS and US GAAP
Principles of thesis writing :
Objective of the thesis:
The object of the research is the accounting procedure of M&A deals in regard of IAS/IFRS
and US GAAP.
The objective of the thesis is the research and comparison of accounting procedures of M&A
deals within IAS/IFRS and US GAAP, introduction of a set of practical recommendations on
efficiency maximization of IAS/IFRS and US GAAP accounting approaches.
Approach and methods used:
Procedure of work:
1. Introduction
2. Theoretical principles and approaches of research of merger and acquisition and of its
processes
3. Theoretical principles and approaches of accounting of mergers and acquisitions
accounting in regard of IAS/IFRS and US GAAP
4. Optimization of overall efficiency of M&A deals accounting in regard of IAS/IFRS and
US GAAP
5. Conclusion
Methods:
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Analysis, comparison, deduction
The extent of graphical works:

according to the supervisor's guidelines, the
assumption is about 10 charts and graphs
The thesis length without appendices: 60 – 70 pages
List of specialist literature:
Damodaran, Aswath. Investment valuation: tools and techniques for determining the
value of any asset. 2nd ed. New York: John Wiley & Sons, 2002. xvi, 992 s. ISBN 0-471-
41490-5.
Brealey, Richard A. - Myers, Stewart C. - Allen, Franklin. Principles of corporate

finance. 8th ed. Boston: McGraw-Hill, 2006. xxviii, 10. ISBN 0-07-295723-9.
Diploma thesis supervisor: Ing. Bc. Alois Konečný
Date of diploma thesis assignment:20/3/2011
Submission deadline for Diploma thesis and its entry in the IS MU is provided in the
valid Academic Calendar.
__________________________ ____________________________
Department Head Dean
In Brno on 20/3/2011
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Name and surname of author: Bc. Oleksandra Lemeshko
Title: Comparison of Mergers and Acquisitions in View of
IAS/IFRS and US GAAP
Department: Finance
Thesis supervisor: Ing. Bc. Alois Konečný
Year of defence: 2013
Annotation
The subject of diploma thesis work is study of reliability and comparability of US GAAP and
IAS/IFRS accounting practices in regard of business combinations. The diploma thesis work
comprises two parts i.e. theory and practice. Both parts tend to luminate the phenomenon of
business combinations from different perspectives of view. The theoretical part is called upon to
build a vertual path made up from academical and legal guidance on common nature of mergers
and acquisitions as business evets in general and particularities of interational accouting for
business combinations in particular. The practical part presents an inquiry into practical aspects
of accounting for business combinations within US GAAP and IAS/IFRS through simulation of
Daimler-Chtysler AG business combination deal.
Keywords
Mergers, acquisitions, business combination, US GAAP, IAS/IFRS, acquisition method, fair value
measurement, consolidation, goodwill impairment.
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Author's statement
"I hereby declare that I worked out the Diploma work Comparison of Mergers and Acquisitions in
View of IAS/IFRS and US GAAP myself, under the supervision of Ing. Bc. Alois Konečný, and that I
stated in it all the literary resources and other specialist sources used according to legislation,
internal regulations of Masaryk University and internal management acts of Masaryk University
and the Faculty of Economics and Administration".
In Brno on October 4th, 2012
______________________________________
author’s signature
6
CONTENT
COMPARISON OF MERGERS AND ACQUISITIONS IN VIEW OF IAS/IFRS AND US GAAP .................... 1

ASSIGNMENT OF DIPLOMA THESIS............................................................................................................................ 3
CONTENT ................................................................................................................................................................................ 7
INTRODUCTION ................................................................................................................................................................... 9
Section 1.1. General concepts and principles of mergers and acquisitions as major business
combination processes...............................................................................................................................................12
Subsection 1.1.1. Major concepts ......................................................................................................................15
Subsection 1.1.2. Members and participants ...............................................................................................16
Subsection 1.1.3. Classification of mergers and acquisitions ...............................................................17
Subsection 1.1.4. Motives .....................................................................................................................................20
Section 1.2. Primary issues of US GAAP and IAS/IFRS accounting for business combinations:
acquisition method ......................................................................................................................................................21
Subsection 1.2.1. Core concepts and principles..........................................................................................23
Subsection 1.2.2. Application of acquisition method ...............................................................................26
Section 1.3. Primary issues of US GAAP and IAS/IFRS accounting for business combinations:
fair value measurement, consolidation, goodwill impairment.................................................................30
Subsection 1.3.1. Fair value measurement ...................................................................................................30
Subsection 1.3.1.1. Core concepts ................................................................................................................31
Subsection 1.3.1.2. Application – fair value measurement approach ..........................................32
Subsection 1.3.2. Consolidation .........................................................................................................................34
Subsection 1.3.2.2. Application – consolidation procedure .............................................................35
Subsection 1.3.3. Goodwill impairment .........................................................................................................37
Subsection 1.3.3.2. Application - Accounting for Goodwill...............................................................38
CHAPTER 2. An insight into practical aspects of US GAAP and IAS/IFRS accounting practices in
regard of business combinations on the basis of diploma thesis simulation of Daimler-Chrysler
AG business combination ...............................................................................................................................................40
Section 2.1. General structure of diploma thesis research .........................................................................41
Subsection 2.1.1. Rresearch design ..................................................................................................................43
Section 2.2. Diploma thesis research of US GAAP and IAS/IFRS accounting for Daimler-
Chrysler AG business combination .......................................................................................................................49
Subsection 2.2.1. Acquisition method and fair value measurement for Daimler-Chrysler AG
business combination ............................................................................................................................................49
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Subsection 2.2.2. Consolidation and goodwill impairment for Daimler-Chrysler AG business
combination................................................................................................................................................................69
Section 2.3. Comparison of US GAAP and IAS/IFRS accounting practices: convergence and
remaining differences. ................................................................................................................................................77
Subsection 2.3.1. Comparison of general accounting practices...........................................................78
Subsection 2.3.2. Comparison of accounting practices for business combinations....................84
CONCLUSION .......................................................................................................................................................................89
LIST OF LITERATURE ......................................................................................................................................................93
LIST OF ABBRAVIATIONS..............................................................................................................................................99
LIST OF APPENDICIES.................................................................................................................................................. 100
APPENDIX A. Statement of financial position ............................................................................................... 100
APPENDIX B. Statement of change in financial position .......................................................................... 100
APPENDIX A. Statement of financial position ............................................................................................... 101
Appendix A1. Statement of financial position of Daimler-Benz AG and
Chrysler Corporation before recognition and measurement. ........................................................... 101
Chrysler Corporation after recognition....................................................................................................... 103
Chrysler Corporation after recognition and measurement................................................................ 106
Appendix A4. Statement of financial position of Daimler-Chrysler AG after consolidation112
APPENDIX B. Statement of change in financial position .......................................................................... 115
Appendix B1. Statement of change in financial position of Daimler-Benz AG and
Chrysler Corporation before recognition and measurement ............................................................ 115
Chrysler Corporation after recognition....................................................................................................... 116
Chrysler Corporation after recognition and measurement................................................................ 118
Chrysler Corporation after consolidation adjustments ....................................................................... 121
Appendix B5. Statement of change in financial position of Daimler-Chrysler AG
after consolidation................................................................................................................................................ 124
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INTRODUCTION
On the doorstep of 21st century the mergers and acquisition or business combinations as
scientists simply call them are becoming one of the predominant features of modern world
economy. The era when business combinations were some exception rather then rule has gone
into the past. Nowadays the world economy is on the edge of the 7th wave of business
consolidation which in circumstance of world financial crisis and subsequent recession has
become of crucial importance. Getting a bit ahead it is even possible to say that according to
growing public confidance business combinations are to become the accelerating way out from
curret global recession.
Such significance of role of business combinations on the modern world economic scene is
determined by general nature of this business phenomenon. Particulary, business combiations
provide a toolkit with two equaly possible outcomes. On the one had combination with another
business player may bring diversification and synergy necessary for further market growth. On
the other hand such consolidation may lead to organizational and, consequently, total
distruction of both combining entities in case of wrong choice of post-combination integration
and collaboration strategy. Essencial is which of two outcomes will come into effect. As business
practice shows to large extant it depends on professional competencies of key participats of the
business combination deal. In the long list of such professional competencies the major ones are
knowledge about general nature and basic priciples of mergers ad acquisitions and knowledge
of appropriate practices of accounting for business combinations. In fact, the necessity to study
these sides of business combination processes has become one of the driving motives for
preparation of this diploma thesis work.
Meanwhile in financial reporting theory there has been a longstanding debate about the
accounting for business combinations and about the determination of whether it is more
informative and meaningful to present the financial statements of multiple entities together, as a
single economic entity. Another point of debate was the question about the accounting language
applied while performing of accounting for business combinations and consolidated entities. For
almost last 40 years in the international accounting system the monopolistic position was held
by American national accounting approach – US GAAP. However in the last 10 years i.e. in 2000s
there has been a growing shift away from pro-American accounting approach to pro-European
one. It was time of initiation of IAS/IFRS as world applicable ones.
Nowadays in times of forthcoming 7th wave of corporate consolidation it is expected that

IAS/IFRS will ultimately become the prevailing set of accounting standards not only for non-
American capital markets but for the US one as well. Within less than 10-year-period in
acknowledging the advancement for IAS/IFRS in terms of quality and widespread acceptance,
more than 100 countries have accepted IAS/IFRS as their national accounting basis.
The development and worldwide acceptance of IAS/IFRS as competing accounting regime for
formerly monopolistic one of US GAAP in general and in regard of business combinations in
particular gives the rise to discussions on the relative quality and comparability of IAS/IFRS and
US GAAP.
Although there is no explicit difference between US GAAP and IAS/IFRS however there is an
implicit one. In the contrary to US GAAP, the IAS/IFRS does not have the industry-specific
guidance, or many of the bright-line tests pervasive in US GAAP; rather, IAS/IFRS emphasizes
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professional judgment in assessing the substance of a transaction. As a result, IAS/IFRS is often
described as more principles-based, while US GAAP is described as bright-line rules based.
Hovewer, relatively little research has been devoted to the subject so far. The most progressive
thoughts in regard of quality of US GAAP and IAS/IFRS accounting practices in general and
thoses designed for business combination in particular can be found in works of accounting
theoreticians and practitioners such as Ampofo and Sellami (2009), Barth et al. (2012), Bragg
(2009, 2011), Churyk et al. (2010), Dorata (2009), Ernsberger and Volger (2008), Reed et al.
(2005, 2007), Rezaee et al. (2010). The study of these works introduced another motive for
preparation of diploma thesis work.
In light of circumstances presented above it is obvious that the subject of diploma thesis work
acquires dual nature. There are business combinations as business phenomena on one hand, and
US GAAP and IAS/IFRS accounting regimes on the other one. The amalgamation of these two
issues into single subject introduces the scientific area of US GAAP and IAS/IFRS accounting for
business combinations.
The specificity of global objective of diploma thesis work is defined by dual nature of the
subject. Due to such complex approach applied within diploma thesis work its main objective
may be stated as the study of reliability and comparability of US GAAP and IAS/IFRS accounting
practices in general and for business combinations in particular.
Subsequently the partial objectives of the diploma thesis work are the following: 1) an inquiry
into general nature and causes of mergers and acquisitions as one of driving processes for world
economy convergence; 2) the study of primary issues of US GAAP and IAS/IFRS accounting
practices for business combinations; 3) the research of practical aspects of US GAAP and
IAS/IFRS accounting for business combinations; and 4) the comparison of US GAAP and
IAS/IFRS accounting practices designed for accounting for business combinations.
In accordance with global and partial objectives the working tasks the diploma thesis work is
called upon to serve are the following:
to study general concepts and principles of mergers and acquisitions
to define members and participants of business combinations
to provide classification of consolidation deals and motives boosting mergers and

acquisitions to occur
to study general concepts and principles of acquisition method and fair value
measurement as primary tool of US GAAP and IAS/IFRS accounting for business
combinations
to study general concepts and principles of consolidation of financial statements and

goodwill impairment as secondary tool of US GAAP and IAS/IFRS accounting for
business combinations
to research practical aspects of US GAAP and IAS/IFRS application of acquisition method

and fair value measurement
to research practical aspects of US GAAP and IAS/IFRS consolidation and goodwill

impairment in context of business combination
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to review the literature dealing with general relevance and comparability of US GAAP
and IAS/IFRS accounting regimes, their mutual convergence and remaining differences
to provide general comparison of common US GAAP and IAS/IFRS accounting practices

within particular working segments
to provide comparison of US GAAP and IAS/IFRS accounting practices designed for

accounting for business combinations within particular working segments
Since among the working tasks serving for reaching the global and partial objectives there is
study of specificity of US GAAP and IAS/IFRS application on practice in context of particular
business combination, so it gives rise to necessity in some accounting simulation. That is why
there has been introduced the supplementary task of simulation of particular business
combination as primary toolkit for study of US GAAP and IAS/IFRS accounting for business
combination in practice. Such need for simulation introduced the following subtasks common
for any research work:
to perform the review of literature dealing with accounting for business combinations
to provide data mining of accounting inputs
to perform research design comprising sample selection and underlying assumptions
In strive to reach the global and partial objectives of diploma thesis work and to fulfill the
working tasks there have been used such methods as analysis and synthesis, comparison and
deduction.
Nowadays US GAAP and IAS/IFRS in general and in regard of business combinations in

particular are passing the massive convergence aimed at elimination existing differences and
incomparabilities. However, some differences continue to remain. Global operations present a
variety of challenges and opportunities for multinational companies caused by differences in
cultural, political, legal, and accounting standards. Differences are not mutually exclusive and
independent. IAS/IFRS are intended to be equally applicable to all public companies worldwide;
however, corporate ownership structure, corporate governance, and financial reporting
processes vary among countries. Corporations in Europe are often owned by a controlling group
of shareholders, as compared to the dispersed-ownership structure in the United States. While
the principles-based IAS/IFRS may well work for European majority-owned corporations,
US GAAP may best serve dispersed-ownership corporations. That is why according to
preliminary estimations under ordinary economic conditions the complete convergence can be
made possible only in 10 years while under extraordinary economic conditions e.g. global
financial crisis and subsequent recession it will take more remote time horizons, and until that
time there will constantly remain some differences between accounting amounts reported under
US GAAP and IAS/IFRS.
In light of all presented above the diploma thesis work is directed toward providing some
exploratory results on the US GAAP and IAS/IFRS comparison in general and in terms of
accounting for business combinations in particular.
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CHAPTER 1. An inquiry into the nature and causes of mergers and
acquisitions as one of driving business processes for world economy
convergence
On the doorstep of 21st century the mergers and acquisition are becoming one of the
predominant features of modern world economy. Nowadays the world economy is on the edge
of the 7th wave of business consolidation which in circumstance of world financial crisis and
subsequent recession has become of crucial importance. Such significance of role of business
combinations on the modern world economic scene is determined by general nature of this
business phenomenon in general and by its accounting procedures in particular.
The diploma thesis work comprises two parts i.e. theory and practice. Both parts tend to
luminate the phenomenon of business combinations from different perspectives of view. The
current part is called upon to build a vertual path made up from academical and legal guidance
on common nature of mergers and acquisitions as business evet in general and particularities of
interational accouting for business combinations in particular.
The general structure of both parts of diploma thesis work assumes the compilation of three
tactical subparts, each one of which is dealig with concrete issue and solving certain working
task fulfilling of which approaches the whole diploma thesis study to its global objective i.e.
research of nature and trends in accounting for business combinations within US GAAP and
IAS/IFRS. So, in such cotext there have been prepared such subparts as general concepts and
principles of mergers and acquisitions, the primary and secondary business combinations
accounting practices.
At more closser look at structure and content of each subpart it is possible to define certain
operating segments. So, the subpart dealing with general concepts and principles of mergers and
acquisitions is broken into such segmets as brief introduction into history of business
consolidation and definition of major meanings; further there are descriptive ad explanatory
notes on key players and of business combination deals and their motives; and, finally, there is
brief classification of business combination deals which by its nature is a challenging attempt to
combine different attitudes into a single system.
The second subpart has such operating segmets as brief introduction into history of
international accounting for business combinations and definition of major concepts such as
objective, scope, core principles; and brief guidance for practical application of such particular
accouting practices.
The third and the last subpart has such operating segmets as fair value measurement,
compilation of consolidated financial statements and goodwill impairment in context of business
combinations.
Section 1.1. General concepts and principles of mergers and acquisitions as major
business combination processes
Nowadays, in times of sever world ressesion followed after global financial crisis the processes
of mergers and acquisition are getting a new look. As it has once been stated according to
growing public confidance business combinations are to become the accelerating way out from
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current world slow-down. As a challenging attempt to provide a response to public call this
diploma thesis work has been prepared. So, before going into deep analysis of primary and
secondary tools of accouting for business combinations, it will be logical to provide brief
description and explanation on the evolution of business conbination process up to its modern
state. In this case some glimpse into the history of business combinations will be useful.
History
The study of correpsondig works dedicated to mergers and acquisitions prepared of Bragg
(2008), Evans and Bishop (2001), Frankel (2005), Gaughan (2007), Krishnamuti (2008), Reed et
al. (2005, 2007), Walter (2004) and many others allows to coclude that world processes of
business combinations tend to occure in certain waves. Such consolidation waves tend to be
caused by a combination of economic, regulatory, and technological shocks. There will be
presented a glimpse into history of merger and acquisition waves taking place in the
United States, the world cradle of business combinations.
The first wave of business combinations occurred in the US after the Depression of 1883,
peaked between 1898 and 1902, and ended in 1904. Although these mergers affected all major
mining and manufacturing industries e.g. primary metals, food products, petroleum products,
chemicals experienced the greatest merger activity. The mergers of the first wave were
predominantly horizontal combinations. Many horizontal mergers often resulted in a nearly
monopolistic market structure. For this reason, this merger period is known for its role in
creating large monopolies e.g. J. P. Morgan, DuPont Inc., Standard Oil, General Electric, Eastman
Kodak, American Tobacco Inc.
As the governmental response for such business consolidation there had been passed the
Sharman Antitrust Act having a great effect on mergers and acquisition of those days.
The formation and initiation of second wave of business combinations also took place in the US.
It was merging for oligopoly. During the second merger wave, several industries were
consolidated. During this second period, the US economy continued to evolve and develop,
primarily because of the post-World War I economic boom, which provided much investment
capital. It was the time of formation of large oligopolies such as Ford Motor Company, General
Motors, Chrysler Corporation.
The antitrust environment of the 1920s had become more stricter. It also had become clear that
the Sherman Act was not an effective deterrent to monopoly. As a result the Clayton Act was
passed.
The third wave of business combinations featured a historically high level of merger activity.
During these years, often known as the conglomerate merger period, it was not uncommon for
relatively smaller firms to target larger companies for acquisition. The conglomerates formed
during this period were more than merely diversified in their product lines. Good examples
were Ling-Temco-Vought (LTV), Litton Industries, and ITT.
As firms with the necessary financial resources sought to expand, they faced tougher antitrust
enforcement. The tightening of antitrust atmosphere of the 1960s was an outgrowth of the
Celler-Kefauver Act of 1950, which had strengthened the antimerger provisions of the
Clayton Act of 1914.
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Although the pace of mergers slowed again in 1982 as the US economy weakened, a strong
fourth wave of business combinations had taken place in 1984. The unique characteristic of the
fourth wave was the significant role of hostile mergers. Hostile mergers had become an
acceptable form of corporate expansion by 1908, and the corporate raid had gained status as a
highly profitable speculative activity. The fourth merger wave period may also be distinguished
from the other three waves by the size and prominence of the targets. The total dollar value paid
in acquisitions rose sharply during this decade. It was the wave of the megamerger e.g. Boone
Pickens, RJR Nabisco.
Starting from 1992 the number of mergers and acquisitios once again began to increase. Large
deals, some similar in size to those that occurred in the fourth merger wave, began to occur once
again. At this time the track record of many LBOs of the fourth wave. During this fifth wave the
consolidation overcrossed US national borderds and swept the whole world making its new
seats in Western Europe and Asia. By 1999, the value of deals in Western Europe was almost as
large as that of deals in the US. Within Europe, Britain accounted for the largest number of deals
followed by Germany and France. In Asia merger value and volume also increased markedly
starting in 1998. The volume of deals was significant throughout Asia, including not only Japan
but all the major nations in Asia.
Although the fifth merger wave featured many large megamergers e.g. Citibank and Travelers,
Chrysler and Daimler Benz, Exxon and Mobil, Boeing and McDonnell Douglas, AOL and Time
Warner, Vodafone and Mannesmann, there were fewer hostile deals and more strategic mergers
occurred.
The sixth wave of business combinations started in 2003 and came to an end approximately in
mid-2007. The drivers of this wave lied primarily in the availability of abundant liquidity, in line
with neoclassical explanations of merger waves. Acquirers were less overvalued relative to
targets and merger proposals comprise higher cash elements. Moreover, the market for
corporate control was less competitive, acquirers were less acquisitive, managers displayed less
over-optimism and offers involved significantly lower premiums indicating more cautious and
rational acquisition decisions. During the sixth wave Royal Dutch Petroleum acquired Shell
Transport & Trading, Pfizer acquired Wyeth, NGMCO acquired General Motors Corporation,
Roche Holding AG acquired Schering-Plough Corporation, Kraft Foods acquired Cadbury.
International practices of accounting for business combinations
Now keeping the history of initiation and development of business combination processes it will
be logical as the next step of diploma thesis study to take a glimpse into appropriate practices of
accouting for this particular business phenomenon.
There has been a longstanding debate in financial reporting theory about the accounting for
business combinations and about the determination of whether it is more informative and
meaningful to present the financial statements of combining entities together, as a single
economic entity rather than as standalone business units within newly organized entity. Another
point of debate was the question about the accounting language applied while performing of
such accounting for business combinations and consolidated entities i.e. US GAAP or IAS/IFRS.
Nowadays in times of forthcoming 7th wave of corporate consolidation it is expected that
IAS/IFRS will ultimately become the prevailing set of accounting standards not only for business
combinations taking place at non-American market but at the US one as well. That is why in
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recent years there is a strong collaboration between both authoritative organizations i.e. FASB
and IASB directed at harmonization of their accounting practices in number of operating
segmets. And the segmet of business combinations is one of those of prime concern. FASB and
IASB launched a long-term project aimed at multilateral harmonization of international
accounting for business combinations and consolidation. The result of the project are
FAS 141 (R) and IFRS 3 (R).
Subsection 1.1.1. Major concepts
To start the diploma thesis study of general nature and concepts of business combinations
whether mergers or acquisitions within US GAAP and IAS/IFRS it will be the best to present the
definition of business combination as it is given by the corresponding internatioal
authoritative bodies i.e. FASB and IASB. As it has been stated earlier on behalf of FASB and IASB
there are international accounting standards FAS 141 (R) and IFRS 3 (R) dealing with issue
Business combinations. Both FAS 141 (R) and IFRS 3 (R) 1 define business combination as the
legal procedure of bringing together of separate entities into one economic entity as a result of
one entity uniting with or obtaining control over the net assets and operations of another.
Further in corresponding literature dealing with this topic i.e. business combination and
presented by such authors as Bragg (2008,), Evans and Bishop (2001), Frankel (2005), Gaughan
(2007), Krishnamuti (2008), Reed et al. (2005, 2007), Walter (2004) 2 and many others there
can be found some explanatory notes describing a business combination as the seismic life-
changing events that fundamentally alter a company. Business combinations usually change not
only the body resposible for controling the company but also the strategic direction the newly
formed business will take.
All business combinations or consolidation transactions may be gathered into two broad
categories. They are acquisitions and mergers.
Following the earlier expresed logic of diploma thesis study of nature of business combinations
there might be preseted the following definition given by FAS 141 (R) and IFRS 3 (R) for
acquisition. Acquisition stands for a business combination that is not a merger. Acquisition
refers to the special deal under which a company buys most, if not all, of the target company's
ownership stakes in order to assume control of the target firm. The study of corresponding
literature allows to discribe an acquisition as a situation when a buyer acquires all or part of the
assets or business of a selling entity, and where both parties are actively assisting in the
purchase transaction.
Likewise in case of acquisition in regard of second broad category of business combinations

called mergers there is authoritative definition, under which a merger stands for a such type of
business combination that results in the creation of a new reporting entity formed from the
combining parties, in which the shareholders of the combining entities come together in a
partnership for the mutual sharing of the risks and benefits of the combined entity. Within
correspoding literature merger is percepted as a situation when when two companies combine
into one entity. All of the combining companies are dissolved and only the new entity continues
to operate.
1 FAS 141 (R) (par. 3, p. 2-3) and IFRS 3 (R) (par. appendix A, p. A152-A153)
2 See for more details BRAGG (2008, ch. 1, p. 1), EVANS and BISHOP (ch. 1, p. 7), FRANKEL (ch. 1, p. 1), GAUGAN
(part 1, p. 12), KRISHNAMUTI (ch. 1, p. 8-36), REED et al. (ch. 1, p. 3-4), WALTER (ch. 1, p. 3).
15
Subsection 1.1.2. Members and participants
For business combination whether merger or acquisition to take place a number of business
players are to be involved. Such players are members and participants of the business
combination deal. In broad attitude expressed in works of such authors as Bragg (2008), Evans
and Bishop (2001), Frankel (2005), Gaughan (2007), Krishnamuti (2008), Reed et al. (2005,
2007), Walter (2004) and many others there is certain slight difference between these two
categories of players. In common business practice the term «members» usually stands for a
buyer and a seller also known as an acquirer and an acquiree. Members usually are general
collective meanings for two parts, combining entities, undertaking a business combination deal.
The terms «participants» usually stands for particular carriers of certain rights and
responsibilities on behalf of combining entities or members of business combination.
Members
To start a brief description of members of the business combination deal it will be the best to
present their definition as they are made by FASB and IASB. As it has been stated earlier on
behalf of FASB and IASB there are corresponding international accounting standards i.e.
FAS 141 (R) and IFRS 3 (R). Both standards define a buyer or an acquirer as the entity that
obtains control of a seller or an acquiree. 3 Likewise both standards define a seller or an
acquiree as a business or businesses that the acquirer obtains control of in a business
combination.
The review of literature dealing with business combination and relevant issues provides us with
further descriptive and explanative notes regarding the members of the business combination.
So, in opinion of such authors as Bragg (2008), Evans and Bishop (2001), Frankel (2005) 4 the
members of business combination are acquirer and acquiree. Theses ones are further divided
into strategic and financial acquirers, and partial and full acquirees.
In public view an acquirer is a corporate entity maximizing its and its shareholders’ best
interests. There are strategic and financial acquirers. Strategic acquirer stands for an entity
making a purchase that it intends to somehow consolidate or integrate with other operations
that it owns. These can be defined broadly as synergies. Financial acquirer in public opinion and
by contrast to strategic acquirer looks at a target acquiree as something it can maintain as a
stand-alone company, but improve, revitalize, or recapitalize and eventually sell at a substantial
gain.
In public view an acquiree is a one-time participant. With some notable exceptions, the decision
to sell is a singular and final decision of the corporation. There are partial and full acquirees.
Partial acquirees stand for a situation when a business combination involve the sale of a part,
but less than all, of a company. In other cases, the acquirer will never acquire the whole
company but only a minority stake. Full acquirees refer to the traditional acquirees of a
company. In this situation the company is being sold in toto.
Participants
The survey of corresponding literature dealing with business combinations and relevant issues,
provides us with further descriptive and explanative notes regarding the participants of the
3 FAS 141 (R) (par. 3, p. 2-3) and IFRS 3 (R) (par. appendix A, p. A152-A153)
4 See for more details BRAGG (ch. 2, p. 41-56), EVANS and BISHOP (ch. 2, p. 36-47), FRANKEL (ch. 2, p. 7-51).
16
business combination. So, in opinion of such authors as Bragg (2008), Gaughan (2007),
Krishnamuti (2008) 5 there are such participants of business combination deal as acquisition
team, attorneys, board of directors, brokers, the chief executive officer, investmet bankers and
lenders.
In general opinion the acquisition team is the team which searches for acquisition targets,
controls most contacts with those targets, and pitches prospective deals to the senior
management team. The group is comprised of employees having considerable acquisition
experience. Because an acquisition is essentially a transfer of legal ownership, it involves
attorneys at nearly every step of the proces – in developing term sheets, reviewing due
diligence documents, and crafting the purchase agreement. Another major participant of
business combination deal is a board of directors. The board has a fiduciary responsibility to
represent the best interests of shareholders, and so should take whatever steps it feels
necessary to become comfortable with the proposed transaction. Brokers work for companies
that are trying to sell themselves. A broker will contact the acquirer’s CEO to see if there is any
interest in acquiring the company that he represents. The chief executive officer (CEO) as
another major participant should not lead the acquisition team. Instead, CEO should delegate the
acquisitions role to a group of professionals who can more dispassionately evaluate target
acquirees. Investment bankers are expected to be highly networked financial experts who
handle debt and equity placements, initial public offerings, acquisitions, and divestitures. They
identify potencial acquirees, determine appropriate purchase valuations, set up meetings
between interested parties, and structure acquisition financing. Lenders play an extremely
important role in business combination deal, and frequently from a negative perspective. In case
of LBO deal it can delay the deal by negotiating at length with other lenders to see whose debt
has a senior position, and can also require extensive additional guarantees.
Subsection 1.1.3. Classification of mergers and acquisitions
The study of appropriate literature allows us to structure the following classification of merger
and acquisition deals depending on the methods used and motives driven, areas of deal
memebers’ business activity and according to deal consideration.
According to methods used and motives driven
According to methods used and motives driven there might be defined two major types of
business combinations. They are friendly deals and hostile deals.
In general terms friendly acquisition refers to a situation in which a target company's

management and board of directors agree to a merger or acquisition by another company. The
main stress here is made on mutual willingnes of combining entities to praticipate in a deal. In
work of Bragg (2008) the target company is interested in the buyer’s offer, and is a willing
participant in the acquisition proces. 6 Likewise Reed et al. (2007) emphasizes that friendly
transactions are negotiated deals struck voluntarily by both buyers and sellers. 7 The vast
majority of acquisitions are of this variety.
5 See for more details BRAGG (ch. 2, p. 41-56), GAUGHAN (part 1, p. 15-24), KRISHNAMUTI (ch. 1, p. 17).
6 BRAGG (ch. 2, p. 41-56)
7 REED et al. (ch. 1, p. 3-6)
17
Usually a hostile acquisition stands for a such business combination when buying of target
company accomplished not by coming to an agreement with the target company's management,
but by going directly to the company’s shareholders or fighting to replace management in order
to get the acquisition approved. Some authors like Bragg (2008), Reed et al. (2007), Gaughan
(2007) 8 define hostile acquisition as an attempt when acquiring company makes a try to
purchase a target company despite the wishes of the target’s management team. The most
common mean of hostile acquisition is a tender offer.
According to areas of deal memebrs’business activity
According to areas of deal members' business aktivity it is possible do define three major types
of business combinations. They are horizontal deals, vertical deals and conglomerate deals.
Horizontal business combination deals refer to consolidation of enteties producing similar

goods or offering similar services with the major aim to achieve economy of scale. As Gaughan
(2007) states the horizontal combination sometimes is the consolidation of two competitors. 9
As exmpales there are Exxon-Mobil and Daimler-Chrysler AG business combinations.
Vertical business combination deals stand for business combination of two entities involved
in different stages of the same production process with the major aim to decrease reliance and
increase profitability. The business position of such combining entites maight be determined as
a buyer-seller relationship. It is a kind of protection of one‘s supply lines lines by acquiring
selected suppliers. The most bright examples of vertical business combination deals are
Carnegie Steel Company and Royal Dutch Shell.
Conglomerate business combination deals stand for a business combinations of entities

involved in totally unrelated business activities with the major aim to diversify and reduce their
risk exposure. In accordance with Gaughan (2007) there is mutual willingness of both combining
entities to achieve one of benefits of integration of their business aktivity such as synergy
and/or diversification in circumstances when such combining entities are not competitors and
do not have a buyer-seller relationship. 10 One example would be Philip Morris, General Foods,
Kraft and Nabisco.
According to deal consideration
Within classification of business combinations based upon their consideration it is possible to

define deals distinguishing by means to structure the consideration, deals distinguishing by time
to settle the consideration and deals distinguishing by composition of their consideration.
By means to structure the consideration there are cash-structured deals, stock-structured

deals and debt-structured business combination deals.
For cash-structured deals cash is likely to come from reserves or borrowings, or by way of an
equity or debt offering. In opinion of many authors like Reuvid (2007), Miller (2008), Gaughan
(2007), Reed et al. (2007) 11 such kind of consideration is rarely unwelcome by target’s
shareholders and in majority of cases it is raised from bank borrowing. In such cases it is usually
8 See for more details BRAGG (Ch. 1, p. 33-39), REED et al. (ch. 1, p. 6), GAUGHAN (part 1, p. 13).
9 GAUGHAN (part 1, p. 13)
10 GAUGHAN (part 1, p. 14)
11 See for more details REUVID (ch. 2.3, p. 75-79), MILLER (ch. 3, p.110-116), GAUGHAN (part 1, p. 13), REED et al.
(Ch. 1, p. 6).
18
a requirement of the lender that the borrower i.e. acquirer provides security over the amounts
borrowed. Also bank loan is popoular source of cash-structed deal however not the single one.
Within stock-structured deals acquirer wish to use its own shares to satisfy part or all of the
purchase price. In accordance with some authors like Reuvid (2007) and Miller (2008) the issue
of shares as consideration is most common where the purchaser is a listed company, as there
will be an established market for its shares and it will be easier to assess their value. 12
As some authors like Reuvid (2007), Miller (2008), Bragg (2008) state that for tax purposes the
acquirees may wish to have a debt-structured deal. 13 Such debt in form of issued note is a
record of the acquirer company’s indebtedness to acquiree in favor of whom the loan notes are
to be issued. Common reason for debt-structured business combination to take place is that such
debt can enhance the return on the equity invested in the acquisition.
By time to settle the consideration there are initial and deferred business combination deals.
In general terms initial business combination deal refers a situation when the consideration
transferred within the deal is to be paid to the acquiree at a clossing date i.e. day of signing the
deal. Opposite to this deferred business combination deal is the term used for a consideration
that is to be paid to the acquiree at a later date. In oppion of many authorts like Reuvid (2007),
Miller (2008), Gaughan (2007) deferred consideration is a popular mechanism to deal with
situations where the final price is not known on completion. 14
By composition of consideration there are simple and compound business combination deals.
By its nature the business combination with simple composition is the same as initial business
combination while the compound business combination to some extent is the same as
deferred one. Within compound business combination it is necessary to distinguish business
combination with partial consideration and earnout and business combination with partial
consideration and indemnification (or escrow).
In accordance with Reuvid (2007) business combination with partial consideration and
earnout is an arrangement whereby at least part of the purchase price is calculated by reference
to the future performance of the target company. 15 This is most relevant in service industries
where the company in question does not have a large number of valuable assets but the majority
of its income is earned through the provision of services to its customers.
In accordance with Miller (2008) business combination with partial consideration and
indemnification (or escrow) means that the acquiree’s shareholders agree to pay the acquirer
for any damages that the acquirer sustains that relate to a misrepresentation or contractual
breach by the acquiree. 16 The escrow serves as a source of reimbursement of the acquirer’s
damages from a misrepresentation or breach.
12 REUVID (ch. 2.3, p. 75-79), MILLER (ch. 3, p. 110-116)

13 REUVID (ch. 2.3, p. 75-79), MILLER (ch. 3, p. 110-116), BRAGG (Ch. 1, p. 33-39).
14 REUVID (ch. 2.3, p. 75-79), MILLER (ch. 3, p. 110-116), GAUGHAN (part 1, p. 13).
15 REUVID (ch. 2.3, p. 75-79)
16 MILLER (ch. 3, p. 110-116)
19
Subsection 1.1.4. Motives
The motives driving the decision to undertake a business combination vary from one case to
another. Although large part of the motives depends on the inner particularities of combining
entities nevertheless it is possible to define certain most common ones and combine them into
two groups depending on the perspective of part of the deal i.e. acquirer and acquire.
From the perspective of both acquirer and acquiree there two major groups of motives to
undertake a business combination i.e. primary and secondary motives. Additionally to these
ones an acquirer has some far minor or other motives.
Among acquirer’s primary motives in opinion of such authors as Bragg (20087), Evans and
Bishop (2001), Frankel (2005), Gaughan (2007) there are business model, growth strategy,
integration, diversification and synergy. 17
In accordance with common attitude the acquiree’s business model may be different from that
of the acquirer, and so generates more profits. The buyer may not be able to recreate this
business model in-house without suffering significant unrest, but can readily buy into it through
an acquisition.
The acquirer’s growth is another popular motive for business combination to occure. In
general terms it assumes the situation when an acquiree is situated in a market that is growing
much faster than that of the acquirer, so the acquirer sees an avenue to more rapid growth.
In regard of integration the general attitude might be expressed by a military term which
sounds as to secure one‘s supply lines’ by acquiring selected suppliers. This is especially
important if there is considerable demand for key supplies, and a supplier has control over a
large proportion of them.
Diversification in accordance with many authors stands for growing outside a company’s
current industry category. Diversification belongs to the motives for business combinations
whereby combining entites seek to lower their risk and exposure to certain volatile industry
segments by adding other sectors to their corporate umbrella.
In accordance with common attitude the term synergy is often associated with the physical
science which in business combinations translates into the ability of a corporate combination to
be more profitable than the combining entitties before they were combined. The anticipated
existence of synergistic benefits allows combining emtities to incur the expenses of the business
combination proces and still be able to afford to give target shareholders a premium for their
shares.
Among acquirer’s secondary motives in opinion of such authors as Bragg (20087), Evans and
Bishop (2001), Frankel (2005), Gaughan (2007), Krishnamuti et al. (2008), Walter (2004) there
are intellectual property, internal development alternatives and the effect of regulatory
environment. 18
17 See for more details BRAGG (ch. 1, p. 1-7), EVANS and BISHOP (ch 4, p.48), FRANKEL (ch. 3, p. 51-82), GAUGHAN
(ch. 4, p. 117-168).
(ch. 4, p. 117-168).
20
The intellectual property as many authors state is not a good reason for an acquisition, but it is
a common one. This is a defensible knowledge base that gives a company a competitive
advantage, and is one of the best reasons to acquire a company.
Internal development alternative in accordance with common oppinion refers to a situation

when potencial acquirer may have an extremely difficult time creating new products, and so
looks elsewhere to find replacement products.
In regard of regulatory environment and taxes the general attitude states that potencial
acquierer may be burdened by a suffocating regulatory environment, such as is imposed on
utilities, airlines, and government contractors.
Among acquirer’s other motives there are cyclicality reduction and executive compensation.
In strive to avoid cyclicality reduction an acquirer may undertake a business combination. It

often happens in a cyclical or seasonal industry, where profitability fluctuates on a recurring
basis. Acquirer’s management team may be in favor of an acquisition for the simple reason that
it will bring them enormous executive compensation. The hubris hypothesis of Roll states that
managers seek to acquire firms for their own personal motives and that the pure economic gains
to the acquiring firm are not the sole motivation or even the primary motivation in the
acquisition, but the pride of management which doesn‘t allows them to believe that their
valuation is superior to that of the market.
Taking a view from perspective of an acquiree among its primary motives in opinion of such
authors as Bragg (20087), Evans and Bishop (2001), Frankel (2005), Gaughan (2007),
Krishnamuti (2008), Walter (2004) and many others the major one is growth which further
assumes rapid growth or stalled growth. 19
The rapid growth of acquire in common attitude refers to a situation when an acquiree may be
growing so fast that it cannot obtain sufficient working capital to support the growth. The
stalled growth of acquire in common attitude refers to a situation when an acquiree may find
that its growth has stalled, for any number of reasons. There is an assumption that a buyer can
re-invigorate growth.
Among acquiree’s secondary motives the major one is competitive environment. Competitive
environment in common sense stands for a number and extent of aggressiveness of acquiree’s
competitors resulting in a current or impending revenue and profit decline. 20
Section 1.2. Primary issues of US GAAP and IAS/IFRS accounting for business
combinations: acquisition method
In response of public concern about US GAAP and IAS/IFRS accounting for business
combinations in this subpart there will be presented a brief descriptive and expanative notes
dealing with primary tool used for accounting of business combinations. So, our study will focus
on the acquisition method. However, before going into analysis of general background and
application particularities of the acquisition method it will be necessary to pay some attention to
(ch. 4, p. 117-168).
(ch. 4, p. 117-168).
21
presentation of core milestones through wich the acquisition method passed evolving up to its
modern state.
History: Business combination project
For a rather long time in financial reporting theory there has been a longstanding debate about
the accounting for business combinations and about the determination of whether it is more
informative and meaningful to present the financial statements of combining entities together,
as a single economic entity rather than as standalone business units within newly organized
entity. Another point of debate was the question about the accounting language applied while
performing of such accounting for business combinations and consolidated entities. For almost
last 40 years in the international accounting system the monopolistic position was held by
American national accounting approach – US GAAP. However in the last 10 years i.e. from the
early 2000s there has been a growing shift away from pro-American accounting approach to
pro-European one. It was time of initiation and world-wide accounting collonization of pro-
British IAS/IFRS accounting standards and their convergence with US GAAP. FASB and IASB had
launched a long-term project aimed at multilateral harmonization of international accounting
for business combinations and consolidation. It was Business Combinations Project and guidace
comprised two statements, regulating accounting for business combinations. They are
FAS 141 (R) and IFRS 3 (R). However, before FAS 141 (R) and IFRS 3 (R) came into life first a
great work had to be done.
From the very beginning accounting for business combinations had been identified as an area of
preeminent importance as well as of significant divergence within and across jurisdictions.
Although an extensive work on this subject had been undertaken in the previous decades by
American and British national standard-setters, however the result was rather poor. That’s why
it was decided to gather the scattered results all together into one legal framework for reaching
completeness, reliability and transparence of accounting for business combinations.
In 1999, the FASB decided that that objective would best be achieved through several phases
focused on specific issues. In the first of those phases, the Board reconsidered the methods of
accounting for business combinations and the accounting for goodwill and other intangible
assets. The first phase ended with the concurrent issuance of FASB’s FAS 141 and FAS 142. In
the second phase of the project, the FASB considered the purchase method of accounting that
FAS 141 carried forward, without reconsideration, from APB Opinion 16 and FASB’s FAS 38.
For IASB the Project became part of its initial agenda when the Board was just formed in 2001.
By the time the IASB was formed, the FASB already was close to the end of the first phase of its
project. It had already finalized SFAS 141, Business Combinations, which removed the merging
of interests method and replaced amortization of goodwill with a goodwill impairment test.
That’s why from the very beginning of its existence the Board undergone a strong attack of
requests from around Europe and Australia to prepare similar changes to the accounting for
goodwill as FASB presented a couple months earlier.
Because of huge work to do IASB decided to split the project into two phases. The first phase
should be short-term, addressing pooling of interests and goodwill impairment and amortization
in a replacement of IAS 22. The second phase should take a broader look at business
combination accounting. Both phases were started by IASB at about the same time, which meant
that they ran in parallel until the first phase was completed. Tight collaboration with the FASB
22
was finally reached on the second phase. Obviously sharing IASB’s and FASB’s resources and
debating the issues together was the best way for each to improve the application of the
acquisition method and to ensure a level playing field by eliminating as many as possible of the
differences between IFRS 3 and FAS 141.
History: results
Today after completion of the Project in 2008 it is possible to indicate its main result. It is the
unprecedented US GAAP’s-IAS/IFRS’s mutual convergence in field of business combinations has
been brought from papers into life. Four major documents constitute the legislative framework
for accounting of all business combinations. They are FAS 141 (R) and FAS 160 from the side of
FASB and IFRS 3 (R) and IAS 27 (R) from the side of IASB. The main progress was achieved in
total convergence of the in three main areas: the recognition and measurement of identifiable
assets acquired, liabilities assumed and any non-controlling interest in the acquiree; the
recognition and measurement of goodwill acquired in the business combination or a gain from a
bargain purchase; and determination what information should be disclosed to enable users of
the financial statements to evaluate the nature and financial effects of the business combination.
Shortly summarizing these three areas of interest it is possible to call them all as acquisition
method.
However it is important to stress that although outstanding degree of convergence between

IAS/IFRS and GAAP has been reached in course of Business Combinations Project nevertheless
certain differences remained. In particular, both FASB and IASB recognize two areas of
difference of particular interest to acquirers and acquirees as they consider structures include
liability/equity classification and consolidation rules. Many of those differences are being
considered in current projects or are candidates for future convergence projects, which is why
the boards allowed those differences to continue at this time.
Subsection 1.2.1. Core concepts and principles
Having a brief glimpse at core milestones of harmonization of international practices of

accounting for business combinations now it will be logical to overview the core concepts
introduced in course of such harmonization undertaken within Business combinations project.
Within this operating segment there will be preseted such core concepts as definition of
business combination as particular type of business deal, the objective and scope of application
of acquisition method of accounting for business combinations.
Both FAS 141 (R) and IFRS 3 (R) 21 define a business combination as a transaction or other
event in which an acquirer obtains control of one or more businesses. In context of both
standards the transactions which are sometimes referred to as “true mergers” or “mergers of
equals” are also cosiedered to be business combinations.
One of the main conditions for such transaction to take place is the transfer of control over
combining entities to controlling entity. Control has the meaning of controlling financial interest
(for FAS 141 (R) with reference to FAS 160, Consolidated financial statements) or power (for
IFRS 3 (R) with reference to IAS 27 (R), Consolidated and separate financial statements) to
govern the financial and operating policies of an entity so as to obtain benefits from its activities.
21 FAS 141 (R) (par. 3, p. 2-3) and IFRS 3 (R) (par. appendix A , p. A152-A153)
23
The combining entities and controlling entity in context of both standards stand for acquirer and
acquiree(s). Both FAS 141 (R) and IFRS 3 (R) 22 define an acquirer as the entity that obtains
control of the acquiree. However, only FAS 141 (R) further specifies that in a business
combination in which a variable interest entity is acquired, the primary beneficiary of that entity
always is the acquirer. Likewise both standards define an acquiree is the business or businesses
that the acquirer obtains control of in a business combination.
The date on which the acquirer obtains control of the acquire in terms of both standards is the
acquisition date. 23
Besides transfer of control another main condition for business combination to take place is
performance of procedure of fair value measurement. Fair value in accordance with
FAS 141 (R) (with reference to FAS 157, Fair Value Measurement) and IFRS 3 (R) (with
reference to IFRS 13, Fair Value Measurement) is the amount for which an asset could be
exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length
transaction.
In result of business combination there may occur goodwill or bargain purchase. Goodwill in
terms of FAS 141 (R) a nd IFRS 3 (R) 24 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. In other words it is excess of consideration transferred after its
complete allocation. Bargain purchase is opposite situation. In terms of FAS 141 and IFRS 3 (R)
refers to the situation when the value of consideration transferred is less than fair value of
assets acquired, liabilities assumed and on-controlling interests transferred in business
combination.
According to FAS 141 (R) 25 accounting for business combinations i.e. acquisition method
should be used for all business combinations and an acquirer should be identified for each
business combination. According to IFRS 3 (R) 26 an acquirer of a business recognizes the assets
acquired and liabilities assumed at their acquisition-date fair values and discloses information
that enables users to evaluate the nature and financial effects of the acquisition.
Core concepts: objective
Both FAS 141 (R) and IFRS 3 (R) 27 define the objective of application of acquisition method of
accounting for business combinations as promotion of the relevance, representational
faithfulness and comparability of the information that a reporting entity provides in its financial
reports about a business combination and its effects.
Core concepts: scope
The acquisition method under both FAS 141 (R) and IFRS 3 (R) 28 is to be applied to a
transaction or other event that meets the definition of a business combination, which under the
standards refers to a transaction or other event in which an acquirer obtains control of one or
25 FAS 141 (R) (p. ii)
26 IFRS 3 (R) (par. IN 5, p. A134)
27 FAS 141 (R) (par. 1, p. 1) and IFRS 3 (R) (par. 1, p. A136)
24
more businesses. However, there are certain exceptions such as formation of a joint venture, an
acquisition of an asset or a group of assets that does not constitute a business, a combination of
entities or businesses under common control.
Core principles
Having a brief glimpse at core concepts of acquisition method as primary tool of accounting for
business combinations it will be ecessary to preset certain core principles of the acquisition
method application. It will be ecessary since the core concepts provided certain description of
acquisition method application while core principles are tend to be some kind of expalantory
notes for application of acquisition method in different situations. There will be presented the
explanatory notes or core principles referring to accounting for assets acuired, liabilities
assumed and non-controlling interest trasferred, accouting for goodwill or gain from bargain
purchase and measurement period.
Core principles: principles referring to accounting for assets acuired, liabilities assumed
and non-controlling interest trasferred.
According to both FAS 141 (R) and IFRS 3 (R) 29 a business combination must be accounted by
applying the acquisition method, unless it doesn’t meet the requirement for business
combination or it is a combination involving entities or businesses under common control.
Further within acquisition method under both standards one of the parties of a business
combination can always be identified as the acquirer, being the entity that obtains control of the
other business.
Within acquisition method according to both FAS 141 (R) and IFRS 3 (R) an acquirer should
recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date, measured at their fair values as of that date. However, according
to both standards certain their guidance may result in not recognizing some assets and
liabilities at the acquisition date, and it also may result in measuring some assets and liabilities
at amounts other than their fair values at the acquisition date.
Both standards states that non-controlling interests in an acquiree that are present ownership
interests and entitle their holders to a proportionate share of the entity’s net assets in the event
of liquidation are measured at either fair value or the present ownership instruments’
proportionate share in the recognized amounts of the acquiree’s net identifiable assets.
Core principles: principles referring to accouting for goodwill or gain from bargain
purchase
Both FAS 141 (R) and IFRS 3 (R) 30 require the acquirer to recognize goodwill as of the
acquisition date, measured as a residual, which in most types of business combinations will
result in measuring goodwill as the excess of the consideration transferred plus the fair value of
any noncontrolling interest in the acquiree at the acquisition date over the fair values of the
identifiable net assets acquired. A bargain purchase in context of FAS 141 (R) and IFRS 3 (R)
stands for a business combination in which the total acquisition-date fair value of the
identifiable net assets acquired exceeds the fair value of the consideration transferred plus any
noncontrolling interest in the acquiree, and it requires the acquirer to recognize that excess in
29 FAS 141 (R) (p. ii-iii) and IFRS 3 (R) (par. IN6, IN8, p. A134)
30 FAS 141 (R) (p. iv) and IFRS 3 (R) (par. IN 10, p. A135)
25
earnings as a gain attributable to the acquirer. Both standards state that if the acquirer has made
a gain from a bargain purchase that gain is recognised in profit or loss.
Core principles: principles referring to measurement period
Both FAS 141 (R) and IFRS 3 (R) 31 state that if the initial accounting for a business combination
is incomplete by the end of the reporting period in which the combination occurs, the acquirer
shall report in its financial statements provisional amounts for the items for which the
accounting is incompleted. During the measurement period, the acquirer shall retrospectively
adjust the provisional amounts recognized at the acquisition date to reflect new information
obtained about facts and circumstances that existed as of the acquisition date that, if known,
would have affected the measurement of the amounts recognized as of that date. During the
measurement period, the acquirer also shall recognize additional assets or liabilities if new
information is obtained about facts and circumstances that existed as of the acquisition date
that, if known, would have resulted in the recognition of those assets and liabilities as of that
date. The measurement period ends as soon as the acquirer receives the information it was
seeking about facts and circumstances that existed as of the acquisition date or learns that more
information is not obtainable. However, the measurement period shall not exceed one year from
the acquisition date.
Both standards state that the acquirer recognizes an increase (decrease) in the provisional
amount recognized for an identifiable asset (liability) by means of a decrease (increase) in
goodwill.
Subsection 1.2.2. Application of acquisition method
For application of acquisition method as primary tool of accounting for business combinations
by authoritative pronouncemets i.e. FAS 141 (R) and IFRS 3 (R) it is called by combining entities
to meet certain preliminary requirement like identifying a business combination, means and
structure of the business combination deal.
Preliminary requirements: identifying a business combination
Within acquisition method both FAS 141 (R) and IFRS 3 (R) 32 require the consolidation deal to
be defined a business combination i.e. as a transaction or other event in which an acquirer
obtains control of one or more businesses.
Under acquisition method the major condition for business combination to take place is meeting
by both potentially combining entities the requirement of being a business. IFRS 3 (R) provides
rather general concept of a business by defining it as a transaction or other event in which an
acquirer obtains control of one or more businesses. On the contrary to this FAS 141 (R) provides
more specified concept by defining a business as an integrated set of activities and assets that is
capable of being conducted and managed for the purpose of providing a return in the form of
dividends, lower costs, or other economic benefits directly to investors or other owners,
members, or participants. The three elements of a business defined by IFRS 3 (R) and
FAS 141 (R) are inputs, outputs and processes.
31 FAS 141 (R) (par. 51-52, p. 16-17) and IFRS 3 (R) (par. 45-46, p. A145-A146)
32 FAS 141 (R) (par. appendix A2-A9, p. 33-36) and IFRS 3 (R) (par. appendix B5-B12, p. A154-A156)
26
Preliminary requirements: means of the business combination
Further within acquisition method FAS 141 (R) and IFRS 3 (R) 33 define the following ways of
business combination to take place: transfer of cash, cash equivalents, or other assets (including
net assets that constitute a business); incur of liabilities; issue of equity interests; providing of
more than one type of consideration; without transfer of consideration.
Preliminary requirements: structure of the business combination deal
In accordance with both FAS 141 (R) and IFRS 3 (R) 34 within acquisition method of accounting
the structure of the business combination may be the following: one or more businesses become
subsidiaries of an acquirer; the net assets of one or more businesses are legally merged into the
acquirer; one combining entity transfers its net assets to another combining entity; one
combining entity transfers its equity interests to another combining entity; all of the combining
entities transfer their net assets to a newly formed entity; roll-up/put-together transaction i.e.
the owners of combining entities transfer their equity interests to a newly formed entity; a
group of former owners of one of the combining entities obtains control of the combined entity.
Acquisition approach
The application of acquisition method is realized through acquisition approach. The application
of acquisition approach is conducted in a sequence of four steps and it comprises such
procedures as the identification of acquirer, determination of acquisition date and what is part
of business transaction as well as the recognition and subsequent measurement of identifiable
assets acquired, liabilities assumed, non-controlling interests transferred, goodwill or gain from
bargain purchase. The four subsequent steps are named after each comprising component
mentioned above except the last one - the recognition and subsequent measurement of
identifiable assets acquired, liabilities assumed, non-controlling transferred, goodwill or gain
from bargain purchase. Due to original complexity and vastness the accounting for this
component is being performed in two sub-steps: first the recognition procedure is carried out,
and then the measurement is performed.
Acquisition approach: step 1. Identifying the acquirer
Both FAS 141 (R) and IFRS 3 (R) 35 state that for each business combination one of the
combining entities shall be defined as an acquirer.
In a business combination effected primarily by transferring cash or other assets or by incurring

liabilities, according to both standards, the acquirer usually is the entity that transfers the cash
or other assets or incurs the liabilities.
In a business combination effected primarily by exchanging equity interests, according to FAS

141 (R) and IFRS 3 (R), the acquirer usually is the entity that issues its equity interests.
However, in some business combinations, commonly called reverse acquisitions, the issuing
entity is the acquiree.
FAS 141 (R) and IFRS 3 (R) state that a new entity formed to effect a business combination is not
necessarily the acquirer. If a new entity is formed to issue equity interests to effect a business
35 FAS 141 (R) (par. 8, appendix A10-A15, p. 36-37) and IFRS 3 (R) (par. 6, appendix B14-B18, p. A156-A157)
27
combination, according to standards one of the combining entities that existed before the
business combination shall be identified as the acquirer by applying the special guidance in
paragraphs.
Acquisition approach: step 2. Determining the acquisition date, determining the

acquisition costs and what is part of the business combination transaction
FAS 141 (R) and IFRS 3 (R) 36 require the acquirer to identify the acquisition date, which is the
date on which it obtains control of the acquiree. According to both standards the date on which
the acquirer obtains control of the acquiree generally is the date on which the acquirer legally
transfers the consideration, acquires the assets, and assumes the liabilities of the acquire - the
closing date. However, as FAS 141 and IFRS 3 (R) state, the acquirer might obtain control on a
date that is either earlier or later than the closing date. For example, the acquisition date
precedes the closing date if a written agreement provides that the acquirer obtains control of the
acquiree on a date before the closing date.
In regard of acquisition costs both FAS 141 (R) and IFRS 3 (R) 37 define them as costs the
acquirer incurs to effect a business combination. Those costs include finder’s fees, advisory,
legal, accounting, valuation, and other professional or consulting fees, general administrative
costs, including the costs of maintaining an internal acquisitions department, and costs of
registering and issuing debt and equity securities.
Both FAS 141 (R) and IFRS 3 (R) 38 presume the fact that between an acquirer and an acquire
there may be a pre-combination relationship or other arrangement before negotiations for the
business combination began, or they may enter into an arrangement during the negotiations
that is separate from the business combination. In either situation, the acquirer shall identify
any amounts that are not part of what the acquirer and the acquiree exchanged in the business
combination.
Acquisition approach: step 3. Recognition of the identifiable assets acquired, the

liabilities assumed, and any non-controlling interest transferred
As of the acquisition date, according to FAS 141 (R) and IFRS 3 (R) 39, the acquirer shall
recognize, separately from goodwill, the identifiable assets acquired, the liabilities assumed, and
any non-controlling interest in the acquire transferred.
Under both standards there are certain recognition conditions. First of all to qualify for
recognition as part of applying the acquisition method, the identifiable assets acquired and
liabilities assumed must meet the definitions of assets and liabilities in relevant standards 40 at
the acquisition date.
Further both standards require the identifiable assets acquired and liabilities assumed to be part
of what the acquirer and the acquiree exchanged in the business combination transaction rather
than the result of separate transactions.
36 FAS 141 (R) (par. 10-11, p.4) and IFRS 3 (R) (par. 8-9, p. A137)
37 FAS 141 (R) (par. 59, p. 18-19) and IFRS 3 (R) (par. 53, p. A147)
39 FAS 141 (R) (par. 12-15, p. 5) and IFRS 3 (R) (par. 10-13, p. A137-A138)
40 FAS Concepts Statement No. 6, Elements of Financial Statements and IASB’s Framework for the Preparation and
Presentation of Financial Statements
28
Both FAS 141 (R) and IFRS 3 (R) state that the acquirer’s application of the recognition principle
and conditions may result in recognizing some assets and liabilities that the acquiree had not
previously recognized as assets and liabilities in its financial statements.
Acquisition approach: step 4.1. Measurement of identifiable assets acquired, the

liabilities assumed, any non-controlling interests transferred
Both FAS 141 (R) and IFRS 3 (R) 41 tate that the acquirer should measure the identifiable assets
acquired and the liabilities assumed at their acquisition-date fair values.
In regard to measuring the non-controlling interests within two accounting systems there are
some differences. In particular, FAS 141 (R) requires any non-controlling interest in the acquiree
to be measured at their acquisition-date fair values. On the contrary to this, IFRS 3 (R) states that
for each business combination, the acquirer shall measure at the acquisition date components of
non-controlling interests in the acquiree that are present ownership interests and entitle their
holders to a proportionate share of the entity’s net assets in the event of liquidation at either fair
value or the present ownership instruments’ proportionate share in the recognized amounts of
the acquiree’s identifiable net assets.
Further FAS 141 (R) and IFRS 3 (R) 42 with reference to corresponding standards on fair value
measurement43 require the acquirer to measure the acquisition-date fair value of its interest in
the acquiree using one or more valuation techniques that are appropriate in the circumstances
and for which sufficient data are available.
Acquisition approach: step 4.2. Measuring goodwill or gain from bargain purchase
Both FAS 141 (R) and IFRS 3 (R) 44 require the acquirer to recognize goodwill as of the
acquisition date, measured as the excess of the aggregate value of the consideration transferred
measured in accordance with these standards and/or the fair value of any non-controlling
interest in the acquire and/or in case of a business combination achieved in stages the
acquisition-date fair value of the acquirer’s previously held equity interest in the acquire over
the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities
assumed measured in accordance with these standards.
Further FAS 141 (R) and IFRS 3 (R) state that an acquirer will make a bargain purchase, which is
a business combination in which the value of the net of the acquisition-date amounts of the
identifiable assets acquired and the liabilities assumed measured in accordance with these
standards exceeds the aggregate of the amounts of the consideration transferred measured in
accordance with these standards and/or the fair value of any non-controlling interest in the
acquire and/or in case of a business combination achieved in stages the acquisition-date fair
value of the acquirer’s previously held equity interest in the acquire.
41 FAS 141 (R) (par. 20-21, 59-60, p. 7, 18-19) and IFRS 3 (R) (par. 18, B41-B45, p. A139, A163-A164)
42 FAS 141 (R) (par. A66, p. 52) and IFRS 3 (R) (par. B43, p. A164)
43 FAS 157 (par. 18-20, p. 7-8) and IFRS 13 (par. 38-40, p. 23-25)
44 FAS 141 (R) (par. 34-38, p.11-12] and IFRS 3 (R) (par. 32-36, p. A142-A143)
29
Section 1.3. Primary issues of US GAAP and IAS/IFRS accounting for business
combinations: fair value measurement, consolidation, goodwill impairment
After study of the primary tool of accouting for business combiatios i.e. acquisition method
desiged, inacted and regulated by international authoritative organizations i.e. FASB and IASB it
will be within current logic of the diploma thesis study to take a brief look at selected secondary
tools i.e. derivative approaches of accounting for business combinations. Among the great
variety of all derivative approaches in the curret subpart of the diploma thesis work there will
be briefly presented such approaches as fair value measuremet, compilation of consolidated
financial statemets and goodwill impairmet in regard of business combinations.
Subsection 1.3.1. Fair value measurement
Likewise in case of acquisition method described earlier the diploma thesis study, in regard of
fair value measurement as derivative tool of accounting for business combinatios there will be
presented a brief analysis of its general background and application particularities. However, for
the beginning first of all there will be indicated some facts on core milestones within two
international accounting systems through which the fair value measurement passed evolving up
to its modern state.
History
Historically, fair value guidance was spread across various standards and it was incomplete in
certain places, while silent in other situations. This created the potential for inconsistency and
differences in interpretation when arriving at an estimate of fair value. There was urgent need
for single source of guidance regarding fair value accounting.
In order to be a single source of guidance and a precise definition of fair value, such accounting
standard should meet the following criteria: it should assist in improving consistency and
comparability; it should help preparers and auditors in fulfilling their role; and it should
contribute to users’ understanding of what fair value represents. A key point to highlight is that
within such standard there should be shown how to measure fair value. In practice, this means
that not an increase in items reported at fair value is expected, but changes to how fair value has
been historically measured and disclosed.
History: the Fair value measurement project
Prior to IFRS 13 and FAS 157 different definitions of fair value existed in global accounting
system. These disparate definitions supplemented with limited implementation guidance, often
resulted in inconsistecies among items measured at fair value. And it reached just tremendous
scale in case of accouting for business combiations.
The Fair value measurement project became the second experience of Boards‘ tight
collaboration and mutual convergence after the Business combinations project undertaken just
4 years earlier. So, the project was launched in 2005 as part of our joint efforts with the US
national standard-setter, the FASB, to create a common set of high quality global accounting
standards.
On May 12, 2011, the IASB issued IFRS 13, Fair value measurement. This was the culmination of
a convergence project undertaken with the FASB, which spanned a number of years and entailed
30
significant consultation with interested parties. The FASB and the IASB have achieved the goal of
establishing a single set of global accounting standards to measure fair value.
Subsection 1.3.1.1. Core concepts

accounting for fair value measuremet in context of business combinations now it will be logical
to overview the core concepts introduced in course of such harmonization. Within this operating
segment there will be preseted such core concepts as definition of fair value in regard of
consolidation deal and the objective of application of fair value measurement method of
accounting for business combinations.
Both FAS 157 and IFRS 13 45 define fair value as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. As the main condition for such price to take place are existence of most
advantageous market and market participants, definition highest and best use and application
special valuation techniques.
According to both standards 46 the objective of fair value measurement is to define fair value, to
establish a framework for measuring fair value and to expand disclosures about fair value
measurements.
Core principles
Having a brief glimpse at core concepts of fair value measurement as one of major derivative
tool of accounting for business combinations it will be necessary to preset certain core
principles of the procedure of faor value measurement since core principles are tend to be some
kind of expalantory notes for realization the procedure of fair value measurement in different
situations.
Core principles: application to assets
Both FAS 157 and IFRS 13 47 state that a fair value measurement assumes the highest and best
use of the asset by market participants, considering the use of the asset that is physically
possible, legally permissible, and financially feasible at the measurement date. So, in broad
terms, highest and best use refers to the use of an asset by market participants that would
maximize the value of the asset or the group of assets within which the asset would be used.
Highest and best use is determined based on the use of the asset by market participants, even if
the intended use of the asset by the reporting entity is different.
Core principles: application to liabilities
Both FAS 157 and IFRS 13 48 state that the liability is transferred to a market participant at the
measurement date.
45 FAS 157 (par. 5, p. 2) and IFRS 13 (par. appendix A, p. 32-33)

46 FAS 157 (par. 5, p. 2) and IFRS 13 (par. appendix A, p. 32-33)
47 FAS 157 (par. 12-14, p. 5) and IFRS 13 (par. 17-24, p. 17-19)
48 FAS 157 (par. 15, p. 6) and IFRS 13 (par. 25-31, p. 19-31)
31
Further both standards state that in most cases there will not be an observable market price for
the transfer of a liability. In such cases, an entity shall measure the fair value of a liability using
the same methodology that the counterparty would use to measure the fair value of the
corresponding asset.
Further standards continue that if there is no corresponding asset for a liability, an entity shall
estimate the price that market participants would demand to assume the liability using present
value techniques or other valuation techniques.
Core principles: application to equity instruments
As with assets and liabilities in accordance with IFRS 13 49 the objective of a fair value
measurement of an equity instrument is to estimate an exit price at the measurement date.
However, as IFRS 13 further states, although the objective is the same, the issuer of an ekvity
instrument can exit from that instrument only if the instrument ceases to exist or if the entity
repurchases the instrument from the holder. For this reason, an entity shall measure the fair
value of its equity instrument from the perspective of a market participant who holds the
instrument as an asset.
Subsection 1.3.1.2. Application – fair value measurement approach
For realization of fair value measurement procedure as derivative tool of accounting for
business combinations by FAS 157 and IFRS 13 it is called by combining entities to meet certain
preliminary requirement like application of fair value measurement to assets or liability,
application of hypothesis of market price, existance of principal (or most advantageous) market
and market participants in context of a business combination deal.
Preliminary requirements: the asset or liability
Both FAS 157 and IFRS 13 50 state that the procedure of fair value measurement should be
applied for a particular asset or liability. Therefore, the measurement should consider attributes
specific to the asset or liability, for example, the condition and/or location of the asset or liability
and restrictions, if any, on the sale or use of the asset at the measurement date.
Preliminary requirements: the price
Both FAS 157 and IFRS 13 51 assume under fair value measurement that the asset or liability is
exchanged in an orderly transaction between market participants to sell the asset or transfer the
liability at the measurement date. According to the standards an orderly transaction is a
transaction that assumes exposure to the market for a period prior to the measurement date to
allow for marketing activities that are usual and customary for transactions involving such
assets or liabilities.
In the absence of an actual transaction to sell the asset or transfer the liability at the
measurement date according to both standards a fair value measurement assumes a
hypothetical transaction at that date, considered from the perspective of a market participant
that holds the asset or owes the liability. That hypothetical transaction notion establishes a basis
49 IFRS 13 (par. 32-33, p. 21-22)

50 FAS 157 (par. 6, p. 2) and IFRS 13 (par. 5-6, p. 14)
51 FAS 157 (par. 7, p. 3) and IFRS 13 (par. 8-12, p. 14-15)
32
for estimating the price to sell the asset or to transfer the liability. Because the transaction is
hypothetical, it is necessary to consider the characteristics of market participants who would
enter into a transaction for the asset or liability.
Preliminary requirements: the principal (or most advantageous) market
In accordance with both FAS 157 and IFRS 13 52 a fair value measurement assumes that the
transaction to sell the asset or transfer the liability occurs in the principal market for the asset or
liability or, in the absence of a principal market, the most advantageous market for the asset or
liability. The principal market is the market in which the reporting entity would sell the asset or
transfer the liability with the greatest volume and level of activity for the asset or liability.
Preliminary requirements: market participants
According to FAS 157 and IFRS 13 53 market participants are buyers and sellers in the principal
(or most advantageous) market for the asset or liability that are independent of the reporting
entity; knowledgeable i.e. having a reasonable understanding about the asset or liability and the
transaction based on all available information, including information that might be obtained
through due diligence efforts that are usual and customary; able to transact for the asset or
liability; willing to transact for the asset or liability; that is, they are motivated but not forced or
otherwise compelled to do so.
Initial recognition and valuation techniques
The realization of fair value procedure in context of a business combination deal requires to
perform the initial recognition as one thing and to use specilly designed for this purpose
valuation techniques as the second thing.
Initial recognition and valuation techniques: initial recognition
When an asset is acquired or a liability by FAS 157 and IFRS 13 54 it is assumed in an exchange
transaction for that asset or liability, the transaction price represents the price paid to acquire
the asset or received to assume the liability. In contrast, the fair value of the asset or liability
represents the price that would be received to sell the asset or paid to transfer the liability .
Conceptually, entry prices and exit prices are different. Entities do not necessarily sell assets at
the prices paid to acquire them. Similarly, entities do not necessarily transfer liabilities at the
prices received to assume them.
IFRS 13 prescribes that if an any of IAS/IFRS standards requires or permits an entity to measure
an asset or liability initially at fair value and the transaction price differs from fair value, the
entity recognises the resulting gain or loss in profit or loss unless the IAS/IFRS standards
require otherwise.
Initial recognition and valuation technique: valuation techniques
According to FAS 157 and IFRS 13 55 valuation techniques consistent with the market approach,
income approach, and/or cost approach shall be used to measure fair value. Market approach
uses prices and other relevant information generated by market transactions involving identical
53 FAS 157 (par. 10-11, p. 4.) and IFRS 13 (par. 13-14, p. 15)
33
or comparable assets or liabilities. One example of such valuation approach is matrix pricing.
Income approach uses valuation techniques to convert future amounts to a single present
amount. The measurement is based on the value indicated by current market expectations about
those future amounts. Cost approach is based on the amount that currently would be required to
replace the service capacity of an asset.
Both standards stress that there should be used those valuation techniques that are appropriate
in the circumstances and for which sufficient data are available.
Subsection 1.3.2. Consolidation
Likewise in case of acquisition method and fair value measurement described earlier the
diploma thesis study in regard of consolidated financial statements as derivative tool of
accounting for business combinatios there will be presented a brief analysis of its general
background and application particularities. However, for the beginning first of all there will be
indicated some facts on core milestones within two international accounting systems through
which the consolidation of financial statements passed evolving up to its modern state.
History: the Consolidation project
In aftermath of Business Combinations Project and Fair Value Measurement Project on March 1,
2010 FASB and IASB jointly launched the new project aimed at further general harmonization of
international accounting and for accounting or consolidation in particular. It was Consolidation:
Policy and Procedures. The objective of this project was to consider comprehensive guidance for
consolidation of all entities, including entities controlled by voting or similar interests. This
includes an evaluation of guidance for determining the capacity of a decision maker. The basis
for consolidation is expected to focus on control of an entity, likely to be defined in terms of who
has the power to direct the most significant activities together with the right to benefits or losses
in the entity. The objective of the project was to increase transparency and consistency of
financial reporting about consolidations. Within the Project at the present day by FASB and IASB
there have been issued two updates i.e. Principle versus Agent Analysis and Parent’s Accounting
for the Cumulative Translation. The effectiveness of such updates as well as the whole project
has yet to be determined.

accounting for consolidation of financial statements in context of business combinations now it
will be logical to overview the core concepts introduced in course of such harmonization
undertaken within Consolidation project. Within this operating segment there will be preseted
such core concepts as definition of consolidation in regard of business combination deal, the
objective and scope of application of consolidation method of accounting for business
combinations.
In accordance with IAS 27 and FAS 160 56 consolidated financial statements are the financial
statements of a group presented as those of a single economic entity. The basic condition for
compilation of consolidated financial statements is presence of control over the entities
56 IAS 27 (par 4, p. A707) and FAS 160 (par. appendx B1, p. 160 -28)
34
combining the group. The standards i.e. IAS 27 and FAS 160 define control as the power to
govern the financial and operating policies of combining entities so as to obtain benefits from
their activities.
The objective of compilation of consolidated financial statements which is stated in both

standards 57 in context of business combinations is to enhance the relevance, reliability and
comparability of the information that a controlling entity provides in its separate financial
statements and in its consolidated financial statements for a group of combining entities under
its control primarily for the benefit of the shareholders and creditors of the controlling company
about the results of operations and the financial position of a controlling company and all
combining entities under its control .
The consolidation of financial statements in regard of business combinations under IAS 27 58

shall be applied in the preparation and presentation of consolidated financial statements for a
group of combining entities under the control of acquirer. However this IAS/IFRS’s statement
does not deal with particular methods of accounting for business combinations and their effects
on consolidation, including goodwill arising on a business combination. On the contrary to this
FAS 160 59 applies to all combining entities that prepare consolidated financial statements with
exception of nonprofit organizations. Both standards provide general guidance for consolidation
in event of business combination.
Subsection 1.3.2.2. Application – consolidation procedure
Having a brief glimpse at core concepts of consolidation as one of major derivative tool of
accounting for business combinations it will be necessary to preset certain core principles of the
consolidation procedure. It will be necessary to do so since the core concepts provided certain
description of consolidation procedure. There will be presented the explanatory notes referring
to realization of consolidation procedure through uniform accounting, accounting of control,
elimination of double accounts, and compilation of separate and combined financial statements.
Core principles: uniform accounting
Both IAS 27 and FAS 160 60 state that a group of combining entities must use uniform accounting
policies for reporting like transactions and other events in similar circumstances. The
consequences of transactions, and balances, between entities within the group must be
eliminated.
Further IAS 27 61 states that if a member of the group uses accounting policies other than those
adopted in the consolidated financial statements for like transactions and events in similar
circumstances, appropriate adjustments are made to its financial statements in preparing the
consolidated financial statements. Likewise IAS 2762 states that the income and expenses of a
57 IAS 27 (par. IN4, p. A 705) and FAS 160 (par. 1, p. 160 -6, 160-8)
58 IAS 27 (par. 1-2, p. A707)
59 FAS 160 (par. 2, p. 160-6)
60 IAS 27 (par. IN6, 16-17, 24 p. A706, A710) and FAS 160 (par. 2, p. 160-8)
61 IAS 27 (par. 25 p. A710)
62 IAS 27 (par. 26 p. A711)
35
combining entity are included in the consolidated financial statements from the acquisition date
as it is defined in IFRS 3 (R).
Core principles: consolidation and control
Both IAS 27 and FAS 160 63 state that consolidated financial statements shall include all
combining entities of the group. Further the standards define the main condition of such
consolidation i.e. presence of control which is presumed to exist when the parent or controlling
entity owns, directly or indirectly through subsidiaries or combining entities, more than half of
the voting power of such entities unless, in exceptional circumstances, it can be clearly
demonstrated that such ownership does not constitute control.
Likewise both IAS 27 and FAS 160 64 state that in preparing consolidated financial statements,
there are combined the financial statements of the controlling entity and combining entities line
by line by adding together like items of assets, liabilities, equity, income and expenses.
Core principles: elimination
Both IAS 27 and FAS 16065 state that all intragroup balances, transactions, income and expenses
shall be eliminated in full. This includes intercompany open account balances, security holdings,
sales and purchases, interest, dividends, etc. Profits and losses resulting from intragroup
transactions that are recognized in assets, such as inventory and fixed assets, are eliminated in
full. Intragroup losses may indicate an impairment that requires recognition in the consolidated
financial statements.
Core principles: separate financial statements
In accordance with IAS 27 66 a controlling entity need to separate financial statements if and only
if: the controlling entity is itself a wholly-owned combining entity, or is a partially-owned
combining entity of another entity and its other owners, including those not otherwise entitled
to vote, have been informed about, and do not object to, the controlling entity not presenting
consolidated financial statements; the controlling entity’s debt or equity instruments are not
traded in a public market; the controlling entity did not file, nor is it in the process of filing, its
financial statements with a securities commission or other regulatory organization for the
purpose of issuing any class of instruments in a public market; the ultimate or any intermediate
controlling entity of the controlling entity produces consolidated financial statements available
for public use that comply with IAS/IFRS.
Core principles: combined financial statements
To justify the preparation of consolidated financial statements, the controlling financial interest
should rest directly or indirectly in one of the entities companies included in the consolidation.
However, as FAS 160 67 states there are circumstances, where combined financial statements of
commonly controlled companies are likely to be more meaningful than consolidated. For
example, combined financial statements would be useful where one individual owns a
controlling financial interest in several entities which are related in their operations. Combined
63 IAS 27 (par. 12-13, 16-17, p. A708-A709) and FAS 160 (par. 2, p. 160-8)
64 IAS 27 (par. 18, p. A709) and FAS 160 (par. 11, p. 160 -10)
65 IAS 27 (par. 20-21, p. A710) and FAS 160 (par. 6, p. 160-9)
66 IAS 27 (par. 10, p. A708)
67 FAS 160 (par. 22-23, p. 160-10-11)
36
financial statements would also be used to present the financial position and the results of
operations of a group of unconsolidated combining entities.
Subsection 1.3.3. Goodwill impairment
Unlike to all other primary and secondary tools of accounting for business combinations e.g.
acquisition method, fair value measurement, consolidation which were earlier reviwied in the
diploma thesis work in regard of goodwill impairment as another important derivative tool of
accounting for business combinations there will be presented only a brief analysis of its general
background and application particularities. For today the whole history of initiation and further
development of speacial accounting designed for goodwill impairment in general and goodwill
impairment in regard of business combinations in particular may be summarized in adoption of
two accounting standards - FAS 142 and IAS 36. No further projects yet have been launched.
In context of both IAS 36 and FAS 142 68 goodwill can be defined as the excess of the cost of an
acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed.
The amount recognized as goodwill includes acquired intangible assets that do not meet the
criteria in IFRS 3 (R) and FAS 141, Business Combinations, for recognition as an asset apart from
goodwill. Such assets acquired and liabilities assumed in their turn should be assigned to
particular cash-generating units (under IAS/IFRS) and reporting units (under US GAAP).
While talking about goodwill impairment there should be mentioned the impairment loss in
value which in accordance with IAS 36 and FAS 142 69 is the amount that exceeds the amount of
an asset to its recoverable amount. Recoverable amount of an asset is the higher of its fair value
less costs to sell and value in use. Useful life is the period during which the assets are expected to
be used by the entity or the number of production or similar units that are expected of it by the
entity.
Both standards 70 and are aimed at providing guidance on financial accounting and reporting for
intangible assets acquired individually or with a group of other assets at acquisition.
Both IAS 36 and FAS 142 71 state that the initial recognition and measurement provisions of
intangible assets apply to intangible assets acquired individually or with a group of other assets
(but not those acquired in a business combination). Furthre the standards state that the
remaining provisions of their content apply to goodwill that an entity recognizes in accordance
with stndards IFRS 3 (R) and FAS 141 and to other intangible assets that an entity acquires,
whether individually, with a group of other assets, or in a business combination.
68 IAS 36 (par. 6) and FAS 142 (par. appendix F, p. 105)

69 IAS 36 (par. 6) and FAS 142 (par. appendix F, p. 105)
70 FAS 142 (par. 1, p.8) and IAS 36 (par. 2, p. 5)
71 IAS 36 (par. 2) and FAS 142 (par. 4, p. 8)
37
Subsection 1.3.3.2. Application - Accounting for Goodwill
The goodwill impairment is realized through special goodwill impairment approach. The
application of goodwill impairment approach is conducted in a sequence of one step undre
IAS/IFRS and two steps undre US GAAP. Within US GAAP at the first step there is performed
goodwill allocation, at the second – goodwill impairment. However there are certain cases when
it is impossible to allocate existing goodwill. For this reason the first step of goodwill
impairment approach comprises two scenarios leading to transition or nor transition to next
step of the approach i.e. recognition whether goodwill may or may not be allocated. In its turn
second step i.e. goodwill impairment comprises a goodwill impairment test, which assumes
performance of two procedures. They are recognition and measurement of an impairment loss
i.e. the comparison of the fair value of a cash-generating/reporting unit with its carrying amount,
including goodwill, and the measurement of the amount of impairment loss, if any.
Goodwill impairment approach: goodwill allocation
Undre FAS 142 72 by implying the fair value measurement to goodwill its fair value shall be
determined in the same manner as the amount of goodwill recognized in a business combination
is determined. That is, an entity shall allocate the fair value of a reporting unit to all of the assets
and liabilities of that unit as if the reporting unit had been acquired in a business combination
and the fair value of the reporting unit was the price paid to acquire the reporting unit. The
excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities
is the implied fair value of goodwill.
Both IAS 36 and FAS 142 73 state that for the purpose of impairment the goodwill acquired in a
business combination is allocated, from the date of acquisition, between each of the cash-
generating /reporting units or groups of them, which is expected to benefit from the synergies of
the business combination if both of the following criteria are met: the asset will be employed in
or the liability relates to the operations of a cash-generating unit/reporting unit; the asset or
liability will be considered in determining the fair value of the cash-generating unit/reporting
unit.
Goodwill impairment approach: impossibility of goodwill allocation
IAS 36 74 states that goodwill acquired in a business combination represents a payment made by
the purchaser, by way of the future economic benefits arising from assets that cannot be
individually identified and recognized separately. Goodwill does not generate cash flows
independently from other assets or groups of assets. Sometimes the goodwill may not be
distributed, based on criteria that are not arbitrary, between the individual cash-
generating/reporting units, but only between groups of them. As a result, the lowest level within
the entity to which the goodwill is monitored for internal management purposes.
Goodwill impairment approach: goodwill impairment
In accordance with IAS 36 and FAS 142 75 goodwill shall not be amortized. Goodwill shall be
tested for impairment at a level of reporting referred to as a cash-generating/reporting unit. A
72 FAS 142 (par. 21, p. 13)

73 IAS 36 (par. 80-90) and FAS 142 (par. 34-35, p. 16-17)
74 IAS 36 (par. 80-90)
75 IAS 36 (par. 80-90) and FAS 142 (par. 18, p. 12)
38
unit to which goodwill has been distributed, shall be subject to verification of the deterioration
in value annually, and also if there are indications that the unit may have deteriorated, by
comparing the amount of the unit, including goodwill, the recoverable amount of the same. If the
recoverable amount of the unit exceeds its book value, unity and goodwill attributed to that unit
is considered not impaired. If the amount of the unit exceeds its recoverable amount, the entity
shall recognize the impairment loss in value.
39
CHAPTER 2. An insight into practical aspects of US GAAP and IAS/IFRS
accounting practices in regard of business combinations on the basis
of diploma thesis simulation of Daimler-Chrysler AG business
combination
On the doorstep of 21st century business combinations are becoming one of the predominant
features of modern world economy. The crucial importance to study this business phenomenon
as from the theoretical point of view so from the practical one has become one of the major
driving motives to prepare this diploma thesis work. The current part is called upon to study the
practical aspects of accounting for business combinations within US GAAP and IAS/IFRS through
simulation of Daimler-Chtysler AG business combination deal.
Likewise the study of common nature of mergers and acquisitions presented in the first part, the
research of practical aspects of accounting for business combinations presenetd in the second
part is realized in sequence of three consequential subparts. They are general structure of
diploma thesis research, the diploma thesis research by itself with corresponding calculations,
and the comparison of US GAAP and IAS/IFRS accounting in general and for business
combinations in particular.
At more closser look at structure and contence of each subpart it is possible to define certain
operating segments of research. The first subpart dealing with general structure of diploma
thesis research is broken into two operating segmets. They are discriptive segment and
expanatory segment. The discriptive segment is dedicated to review of corresponding literature
both of academic and authoritative character as well as search of financial database comprising
relevant information available for general public, submitted to governmental agencies and
provided for specialized database agencies. The explanatory segment is dedicated to issues of
research design made up for simulation of Daimler-Chrysler AG business combination. Such
issues were legal basis and database of research, choice of the target company, general structure
of research, calculations, and underlying factors and circumstances.
The second subpart is dealing with the simulation of Daimler-Chrysler AG business combination.
There is general framewotk of practical accounting for Daimler-Chrysler AG business
combination, the realization of acquisition method procedure and fair value measurement for
Daimler-Chrysler AG business combination, and consolidation and goodwill impairment for
Daimler-Chrysler AG business combination.
Within the third and the last subpart which is dealing with and the comparison of US GAAP and
IAS/IFRS accounting for business combinations, there is comparison of US GAAP and IAS/IFRS
accounting in general and for business combinations in particular.
It is necessary to stress that, the whole approach applied for practical application of
international accounting principles while accounting for Daimler-Chrysler AG business
combination deal spreads through the whole procedure of accounting for business
combinations. It is aimed at bringing fair value accounting for assets acquired, liabilities
assumed and goodwill received while preparing the consolidated statements of Daimler-
Chrysler AG business combination under US GAAP and IAS/IFRS.
40
Section 2.1. General structure of diploma thesis research
Under the given aim of the diploma thesis study i.e. research of nature and trends in accounting
for business combinations within US GAAP and IAS/IFRS this tactical subpart is dealing with two
operating segments aimed at creation the framework of diploma thesis research. These
operating segments are the review of specialized financial databases and the review of broad
area of literature dealing with practical aspects of accounting for business combinations within
two international accounting systems i.e. US GAAP and IAS/IFRS. The first operating segment
has descriptive character while the second one to large extent has explanatory character.
Further the second operating segment i.e. the review of literature can be divided into review of
general literature on business combinations and review of literature dealing with accounting for
business combinations in particular. Both issues are closely interconnected. Moving a little bit
further the survey of literature on international accounting for business combinations can be
divided into two major components – academic literature i.e. scientific articles and authoritative
pronouncements i.e. non-governmental pronouncements (conceptual framework) and
governmental pronouncements (legislative basis).
Review of literature: literature on business combinations
Before to perform the literature review certain particularities of the topic of diploma thesis
research should be presented. That will help to understand general problematics of literature
dedicated to the chosen topic. The general field of diploma thesis research is business
combinations; the strategic area of diploma thesis research is international accounting for
business combinations; the target area is comparison of US GAAP and IAS/IFRS approaches to
accounting for business combinations. That is why it will be possible to divide all literature
reviewed within diploma thesis into the literature dedicated to general questions of business
combinations and into the literature dealing with international accounting for business
combinations. In regard of general problematics of business combinations there is abundance of
works of academicians and practitioners in field of mergers and acquisitions. Many such works
have been mentioned in the first part of the diploma thesis. Among the most prominent ones
there is «The Merger and Acquisition Buyout Guide» by Reed et al. (2005, 2007), providing the
answers to such important question as performance of due dilligance procedure. Also there can
mention fundamental works «Mergers & Acquisitions: A Condensed practitioner’s Guide» and
«The Wiley GAAP 2011: Interpretation and Application» by Bragg (2008, 2011), where such
issues as valuation techniques, preparation of merger report and accounting for business
combinations within GAAP are studied. Another prominent work dedicated to synergy effect
received in course of business combinations is «Valuation for M&A: Building Value in Private
Companies» by Evans and Bishop (2001). Other works are «Mergers, Acquisitions and Corporate
Restructuring» by Gaughan (2007), «Mergers and Acquisitions: A Practical Guide for Private
Companies» by Reuvid (2007) etc.
Although such literature is a great contribution into the study of general nature and concepts of
business combinations, however the majority of books are dealing mainly with general,
managerial aspects like planning and organization of the deal, control over its realization and
post-deal integration. And the issue of accounting for business combinations remains practically
uncovered.
41
Review of literature: literature on accounting for business combinations
The lack of academic literature dedicated to international accounting for business combinations
and comparison of US GAAP and IAS/IFRS corresponding approaches in particular might be
explained by high complexity and sophisticated nature of this topic. The chosen subject of
diploma thesis study in general and diploma thesis research in particular i.e. US GAAP and
IAS/IFRS practices of accounting for business combinations nowadays among academicians and
practitioners belongs to one of the most debated and disordered topics in accounting. It will not
be an exaggeration to say that it has even become the subject of international politics. It will be
enough to mention that in strive to reduce local fractions in accounting practices applied for
business combinations to common global denominator three bold projects (i.e. Business
combinations, Fair value measurement and Consolidation) have been launched. The most
helpful works providing some guidance into accounting for business combinations are in papers
of Churyk et al. (2010), Blanco et al. (2004), Detzen and Zülch (2009), Dorata (2009), Georgiou
and Jack (2011), Gwilliam and Jackson (2008), Rezaee et al., (2010).
It is necessary to say that all these authors in their works are making an attempt to put legal
basis provided by FASB and IASB into practice for accounting of business combinations.
Although massive attempts in this direction have already been undertaken, nevertheless not
much success yet has been reached. The point is that there has been formed such a great
diversity of legal acts, rules, principles and standards designed for regulation of accounting for
business combinations that it has become scarcely possible to fulfill all the requirements while
accounting for one and the same case. In fact such diversity and disputability of regulative
measures have been the main reason for launching of international accounting projects aimed at
harmonization of separate legal acts. That is why while conducting literature review for diploma
thesis study in general and diploma thesis research in particular there appeared the same
problem of defining which ones out of all legislative acts to use as major guidance for accounting
for Daimler-Chrysler AG business combination.
It is necessary to stress that diploma thesis accounting for Daimler-Chrysler AG business

combination will be built mainly upon original sources of legislative information regulating
accounting for business combinations i.e. upon the authoritative pronouncements made by FASB
and IASB. However, for certain calculations there will be used some cases and examples
designed by practitioners of corresponding accounting standards and presented in works of
Churyk et al. (2010), Detzen and Zülch (2009), Dorata (2009), Gwilliam and Jackson (2008),
Rezaee et al., (2010), Deloitte (2009), KMPG (2007, 2009), PwC (2009, 2012).
Review of literature: authoritative pronouncements on accounting for business

combinations
Within survey of authoritative pronouncements made by authorized non-governmental

organizations and representing the conceptual framework of diploma thesis study in general
and diploma thesis research in particular there has been built an imaginary circle with two
pronouncements in its center. They are FAS 141 and IFRS 3 (R). These accounting standards are
results of 10 years of intensive work and collaboration within global project launched by
American FASB and pro-European IASB. Although these standards contain the major guidance
for accounting of business combinations, nevertheless they do not cover all aspects. That is why
there had been launched another global project called Fair value measurement, which brought
into life FAS 157 and IFRS 13. These four standards – FAS 141 (R), IFRS 3 (R), FAS 157 and
42
IFRS 13 – compound the core guidance for accounting for Daimler-Chrysler AG business
combination. Moving outward from the core of imaginary circle as less major but still rather
important guidance there have been chosen another two standards. They are FAS 167 (ASC 810)
and IAS 27 regulating the procedure of compilation of consolidated financial statements, and
FAS 142 and IAS 36 regulating the procedure of goodwill impairment. While moving further
from the center of the circle toward its outer layer there have been chosen other less important
but still relevant standards i.e. FAS 200 (205-235), IAS 1, IAS/IFRS 1, IAS 27, ASC 300 (305-320,
350, 360), IAS 16, IAS 32, IAS 36-39, ASC 400 (405, 430, 470), ASC 505, ASC 605, ASC 700 (705,
710, 740). These were the chosen legal acts regulating international accounting for business
combinations designed by non-governmental international organizations.
Although the list of authoritative pronouncements compiled at the current moment is already
rather large nevertheless it is still not full since there are not included legal acts regulating
accounting for business combinations designed by national and international governmental
organizations (i.e. Federal Trade Commission, Antitrust Division in USA and European
Commission, Department of Competition in EU). Among the major legal governmental acts for
diploma thesis research there has been chosen the Hart-Scott-Rodino Antitrust Improvements
Act operating in USA and referring to Notification and Report Form. As the relevant legal act
operating in EU there has been chosen the Council Regulation (EC) No. 139/2004 of 20 January
2004 on the control of concentrations between undertakings referring to Notification and
Economic evidence.
Database search
Within database search for simulation of Daimler-Chrysler AG business combination the data
from three major databases were used. They were quarterly and annual reports announced by
Daimler-Benz AG and Chrysler Corporation to general public at their official web-sites; financial
statements prepared in accordance with strict rules (i.e. Form 10-Q, Form 10-K, Proxy
solicitation materials, Notification and Report Form, Notification and Economic evidence) and
submitted to respective governmental agencies (i.e. U.S. Securities and Exchange Commission,
Federal Trade Commission, European Commission); financial statements prepared in
standardized form for specialized databases (i.e. Bloomberg, Thomson Reuters). Due to
differences in methodologies applied for preparation of financial statements submitted to
particular users (i.e. public, government, professional users) there were certain differences in
values of some components of financial statements prepared for the same company for the same
period. That introduced some element of uncertainty and forced homogenization of all financial
data form all sources into single unit. However, it would be unjustifiable optimisms to expect
zero deviation while having such a complex subject of research.
Subsection 2.1.1. Rresearch design
In this subpart there is presented the research design made up for simulation of Daimler-
Chrysler AG business combination. The research design refers to expanatory notes and it
introduces general framework of simulation. It comprasises such operating segments as legal
basis and databasis of research, sample selection, general structure of research, calculations, and
specific factors and circumstances. The sample selection was based upon two criteria and
performed in a sequence of two steps i.e. choice of the target industry and choice of the target
deal.
43
Legal basis of the research
As it has been mentioned above the methodology applied in second part of the diploma thesis
work is based upon legislative basis briefly presented in the first part i.e. FAS 141 (R) and FAS
167 for US GAAP and IFRS 3 (R) and IFRS 13 for IAS/IFRS. However, to meet the requirements
imposed by these standards for diploma thesis research there have been used other US GAAP
and IAS/IFRS standards e.g. ASC 810, FAS 160 and IAS 27, FAS 142 and IAS 36, FAS 200 and IAS
1, IAS/IFRS 1 etc.
Database of the research
As the major sources of financial information for diploma thesis research there have been used
resources of three databases mentioned earlier i.e. Investors relation section of official web-
sites; publicly available archives of electronic databases of governmental agencies e.g.
US Securities and Exchange Commission, Federal Trade Commission, European Commission;
data from Bloomberg and Thomson Reuters. As the major sources of financial information there
have been used the following reports, statements, forms and notes:
Public information - quarterly report (financial information i.e. Financial Statements;

managerial information e.g. Management’s discussion and Analysis of Financial Condition),
annual reports (financial information i.e. Financial Statements and Supplementary Data;
managerial information e.g. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure; other information e.g. Principal Accounting Fees and Services)
Information submitted to governmental agencies - Form 10-Q (financial information i.e.

Financial Statements and Notes to Financial Statements; managerial information e.g.
Management’s Discussion and Analysis of Financial Condition, Quantitative and Qualitative
Disclosures About Market Risk; other information e.g. Legal Proceedings, Risk Factors),
Form 10-K (financial information i.e. Financial Statements, Notes and Supplementary Data;
managerial information e.g. Management’s Discussion and Analysis of Financial Condition;
other information e.g. Principal Accounting Fees and Services), Proxy solicitation materials
(Form DEF 14A, Reconciliation Report, Notes to major differences between US GAAP and
IAS/IFRS in terms of reconciliation), Merger report (Notification and Report Form, Economic
evidence)
Information submitted to Bloomberg and Thomson Reuters – Financial Statements and

Notes.
Sample selection
In accordance with goal of the diploma thesis research for simulation of Daimler-Chrysler AG
business combination the sample selection was based on two basic criteria. They were the
certain companies which undertook business combination and the original reporting system of
such companies should be of US GAAP and/or IAS/IFRS kind. Further there had been applied the
following approach for sample selection - determining the target industry and identifying the
target business combination within it.
44
Sample selection: choice of the target industry
According to global surveys conducted by world consulting and analytical agencies 76 the triad of
economy sectors with highest scale (by volume and value) of business combinations is made up
by financial and banking sector, energy and mining, automotive industry and engineering.
Further detailed analysis of determined industries led us to certain conclusions having an effect
on the choice of target one.
In regard of financial and banking sector there had been found too sophisticated legislative basis
i.e. there is too much of specialized governmental and non-governmental regulations in regard
of accounting for such business and its business combinations, which cannot be neglected.
While studying the energy and mining sector as potential field of business activity for chosen
combining companies there had been found low access to input research data i.e. inaccessibility
of financial reports submitted to governmental agencies (e.g. Form 10-Q, Form 10-K etc. for e.g.
British Energy, Gazprom, Royal Dutch Shell etc.) and fragmentarily of those presented to general
public and database agencies (i.e. quarterly separate reports of some affiliates instead of
consolidated annual reports etc. for such consolidating companies as Gas Natural and Union
Fenosa, British Energy and Electricile de France, Atel Holding and Gazprom, Royal Dutch Shell
and Duvernay Oil Corp etc.).
While studying the companies of automotive industry and engineering there have been found
several of interesting cases fulfilling the criteria of diploma thesis research on the one hand
(i.e. accounting under US GAAP and/or IAS/IFRS) and scientific research by itself on the other
(i.e. availability of input data i.e. financial information submitted to public, governmental and
professional users).
Due to these reasons as the target industry for diploma thesis research there has been chosen
the automotive and engineering industry.
Sample selection: choice of the target business combination
Within sample selection the study of appropriate professional publications 77 helped to compile
a list of potential target business combinations – Vollkswagen-Porsche, Daimler-Chrysler, Ford-
Volvo, Renault-AvtoVAZ, Toyota-Daihatsu. From this list there had been chosen two cases i.e.
Vollkswagen-Porsche business combination and Daimler-Chrysler AG business combination. The
main reason of such choice was distinction of these two cases from the rest ones.
On the contrary to one-side acquisitions (Ford-Volvo, Renault-AvtoVAZ, Toyota-Daihatsu),

Vollkswagen-Porsche deal is the mutual, two-side acquisition undertaken into two stages (i.e.
Vollkswagen acquisition of 49,9% in Porsche and Porsche acquisition of 50,73% in Vollkswagen).
The particularity of Daimler-Chrysler AG business combination was its merger with creation of a
new company but not acquisition as in case of all the rest ones (one-side or two-side one). While
studying the particularities of Vollkswagen-Porsche deal there had been discovered high
76 See for more details: (1) BCG annual reports on M&A for 2000-2012 at
https://www.bcgperspectives.com/corporate_development_and_finance; (2) McKinsey quarterly reports on M&A
for 1996-2012 at http://www.mckinseyquarterly.com/Corporate_Finance/M_A; (3) Thompson Economic Impact
Studies on M&A for 2007-2012 at http://www.reuters.com/finance/deals/mergers.
77 See for more details: (1) Deloitte Insights on M&A in Automotive industry for 2009 -2012; (2) PwC Automotive
M&A Insights for 2009-2012.
45
complexity of structure of the deal and, respectively, accounting procedures for it. The deal
should be structured in two stages corresponding to two companies’ acquisition operations.
Thus, there should be compiled two sets of financial statements – by one for each stage. Each set
should comprise compilation of financial statements for both participants of the deal. If the
compilation of first set of consolidated financial statements with some deviation would
correspond to the reality, so the second set of financial statement should be based upon those,
compiled at the first stage. Thus all possible mistakes and deviation emerged at first stage would
be transferred and parallely geometrically increased in the second set of financial statements
compiled. That would distort the objectivity of research and its deviation from reality up to
unallowable degree.
While studying the particularities of Daimler-Chrysler AG deal so it can be structured as

common merger which corresponds to compilation of one set of financial statements i.e.
consolidated financial statements for new company organized after the merger. Although a
number of specific accounting procedures designed for accounting of business combinations
(e.g. fair value measurement, compilation of merger report, consolidation and goodwill
impairment) is required to be done nevertheless the general objectivity and compliance with
reality of such ones in case of Daimler-Chrysler AG deal should be of much better quality rather
that of Vollkswagen-Porsche deal.
Thus, the relative simplicity of the deal due to its transparency and common character, in
combination with access to wide range of financial information made the choice of Daimler-
Chrysler AG deal as the target business combination for diploma thesis research completely
justified and validate.
Sample selection: brief history of chosen business combination
The story of growth and fall of Daimler-Chrysler AG business combination is now very familiar
territory and it is necessary to trace it only in outline here. In the mid-1990s, Chrysler
Corporation was the most profitable automotive producer in the world. By record of van and
large sedan sales company’s revenues were at an all-time high. With USD 7.5 billion in cash on
hand and a full range of best-selling products Chrysler Corporation had become an excellent
target for hostile takeover. That forced company management to take protective measures and
undertake merger or acquisition by its own.
Daimler-Benz AG, meanwhile, was looking for a soul-mate. Despite a booming US economy, its
luxury vehicles had captured less than 1% of the American market. Its vehicle production
method was particularly labor intensive. It recognized that it could benefit from an economy of
scale in this capital-intensive industry. With USD 2.8 billion in annual profits, low design costs
and an extensive American dealership network, Chrysler appeared to be the perfect match.
On May 7th, 1998, Bob Eaton, Chrysler Corporatopn CEO, and Jürgen Schrempp, Daimler-Benz
AG CEO officially announced about the Daimler-Chrysler merger, the agreement on which had
been signed one day before. The deal was called as a merger of equals. It was believed that the
new company, with 442,000 employees and a USD 100 billion market capitalization should take
advantage of synergy savings in retail sales, purchasing, distribution, product design, and R&D.
46
General structure of research
The general structure of diploma thesis research corresponds to the general logic of primary and
secondary tools of US GAAP and IAS/IFRS accounting for a business combination presented in
the first part of the diploma thesis work. So, general structure of research of accounting for
Daimler-Chrysler AG business combination corresponds with general approaches of practical
application of the acquisition method, realization of fair value measurement procedure,
consolidation and realization of goodwill impairment procedure. Due to such complex and
systematic approach to accounting for Daimler-Chrysler AG business combination it was
desirable to break it into particular stages. There were defined two stages comprising the closely
interconnected accounting procedures. At the first stage there had been applied acquisition
method and performed the procedure of fair value measurement. At the second stage there had
been performed consolidation and goodwill impairment.
The application of acquisition method constitutes the major part of accounting for Daimler-
Chrysler AG business combination. The fair value measurement procedure is its supplementary
component. The application of acquisition method and fair value measurement for Daimler-
Chrysler AG business combination had been divided into two steps. As the first step there had
been performed the procedure of recognition of assets acquired, liabilities assumed and equity
instruments transferred within Daimler-Chrysler AG business combination in accordance with
FAS 141 (R) and IFRS 3 (R), and ASC 810, FAS 160 and IFRS 13. As the second step there have
been performed subsequent measurement of earlier recognized assets acquired, liabilities
assumed and equity instruments transferred at fair value within Daimler-Chrysler AG business
combination.
The compilation of consolidated financial statements has become another major part of
accounting for Daimler-Chrysler AG business combination. The compilation of the consolidated
financial statements for Daimler-Chrysler AG business combination has been divided into two
steps. As the first step there had been accounted the fair value adjustments resulting from the
realization of the previous step of diploma thesis research as well as special consolidation
adjustments which usually occur in case of accounting for combining entities. As the second step
there had been performed some basic merger modeling designed for accounting for transfer of
consideration and subsequent goodwill impairment.
Underlying assumptions
The whole simulation of Daimler-Chrysler AG business combination had been based upon
certain assumptions. Such underlying assumptions contained specific factors and circumstances.
They are
Factor of time – the deal took place in 1998 when older and less flexible laws and
regulations differing from the currently valid ones were in practice (e.g. pooling-of-
interest). Now there will be applied to certain extent different rules and regulations which
may influence the accuracy and identity and authenticity of results received.
Regulation – the whole diploma thesis study and subsequent research is subjected to
double international regulation i.e. FASB and IASB on the one side and US Trade
Commission & EU Commission, Competition Department and other governmental agencies
on the other side.
47
Limitation of publicly available information – the hypothesis of moderately strong market
is put into effect within diploma thesis i.e. usage of all publicly available information and
certain, but rather limited publicly unavailable information, however without any insider
information.
Application of indirect accounting method – direct method consists of using journal

entries, ledger accounts (T- accounts) and work sheets to record, adjust and eliminate
transactions. All these accounting elements belong to internal accounting or insider
information which is restricted to external users. That is why within diploma thesis
research there had been applied indirect accounting method of so-called accounting
reconstruction i.e. the reconciliation of all publicly available financial reports and
statements officially compiled for accounting of Daimler-Chrysler AG business
combination into the ones appropriate for diploma thesis research.
General lack of educational programs specialized in US GAAP and IAS/IFRS accounting for
business combinations - according to widespread opinion (Churyk et al. (2010), Detzen
and Zülch (2009), Dorata (2009), Georgiou and Jack (2011), Rezaee et al., (2010)) the
majority of educational programs have not yet developed full curricula or integrated case
studies to compare and contrast how US GAAP and IAS/IFRS would record and present
major accounting transactions. The situation is far more worst in regard of US GAAP and
IAS/IFRS accounting for business combinations.
Neglacting the industry particularities for accounting for business combinations - this
work does not lustrate any of US GAAP and IAS/IFRS practices of accounting designed
especially for particular industries (e.g. banking and finances, mining, engineering etc.).
These accounting rules and procedures are too specific and complicated to fit into diploma
thesis work.
Application of financial modeling toolkit – the application of certain accounting tools of

merger modeling for compilation of consolidated financial statements for Daimler-
Chrysler AG business combination.
Non-reconcilation from IAS/IFRS into US GAAP – in accordance with SEC releases № 33-
8879 and 34-57026, US GAAP release № 1306, file № S7-13-07 from 2007 on cancellation
of requirement for reconcilation of financial statements prepared under IAS/IFRS into US
GAAP i.e. cancellation of Form 20-F. That is why for simplification of accounting
procedures and calculation diplome thesis research doesn’t deal with reconciliation.
Pro-forma pre-merger and consolidated financial statements – the preparation of

unaudited financial statements compiled only for purposes of diploma thesis research and
aimed to reflect a proposed change appeared in course and after business combination.
All calculations presented in the practical part of the diploma thesis work are based upon
corresponding accounting approaches described in the theoretical part of the work as well
as upon particular cases described in literature introduced by the leading auditors,
financial analysts and general users like investors, managers and academicians dealing
with issues of US GAAP and IAS/IFRS accounting in general and accounting for business
combination in particular.
48
Due to these limitations some readers may have some questions the answers to which they will
not find here. The author has limited access to financial statements and accounting data of
reviewed companies. As it has been mentioned above all available data used in the diploma
thesis research can be divided into three groups i.e. publicly available information, information
submitted to governmental agencies and standardized information prepared for specialized
database agencies. In light of such reasons the author of this diploma thesis work explicitly
declares that this work is not an authoritative pronouncement of Daimler-Chrysler AG business
combination. That is why the author does not disclose any information that could be considered
as confidential.
Section 2.2. Diploma thesis research of US GAAP and IAS/IFRS accounting for
Daimler-Chrysler AG business combination
The general structure of diploma thesis research corresponds to the general logic of primary and
secondary tools of international accounting for a business combination. So, general structure of
research of practical application of US GAAP and IAS/IFRS accounting for accounting for
Daimler-Chrysler AG business combination corresponds to practical application of acquisition
method and fair value measurement, consolidation and goodwill impairment.
Due to such complexity and systematic approach to accounting for Daimler-Chrysler AG

business combination simulated within diploma thesis work it was desirable to break it into
particular stages. There were defined two stages comprising the closely interconnected
accounting procedures. At the first stage there had been applied acquisition method and fair
value measurement. At the second stage there had been performed consolidation and goodwill
impairment.
Subsection 2.2.1. Acquisition method and fair value measurement for

The application of acquisition method constitutes the major part of accounting for Daimler-
Chrysler AG business combination. The fair value measurement is its supplementary component.
In accordance with general framework of acquisition approach and procedure of fair value
measurement the application of acquisition method while accounting for Daimler-Chrysler AG
business combination had been divided into four steps. So, in accordance with FAS 141 (R) and
IFRS 3 (R), and FAS 157 and IFRS 13 there had been performed such accounting operations for
Daimler-Chrysler AG business combination as identifying the acquirer, determining the
acquisition date, determining the acquisition costs, recognition of the identifiable assets
acquired and liabilities assumed, measurement of identifiable assets acquired, liabilities
assumed and any non-controlling interests transferred.
Before the above mentioned accounting operations took place there had been met certain
preliminary requirements imposed by both procedures in accordance with FAS 141 (R) and
IFRS 3 (R). Likewise the major assumptions which constituted the general framework of
simulation for accounting for Daimler-Chrysler AG business combination have been introduced.
Preliminary requirements
As it has already been presented in the second subpart of the first part of the diploma thesis
work, before applying core procedures of acquisition method and fair value measurement
49
certain preliminary requirements imposed by FAS 141 (R) and IFRS 3 (R), and FAS 157 and IFRS
13 should be met. Since there are two procedures i.e. acquisition method procedure and fair
value measurement procedure, so there are two groups of preliminary requirements introduced
by each procedure. From the side of acquisition method there are such FAS 141 (R) and IFRS 3
(R) requirements as identification of a business combination, and identification of means and
structure of the deal. From the side of fair value measurement there are such FAS 157 and IFRS
13 preliminary requirements as identification of asset or liability, identification of the price,
principle or most advantageous market and market participants.
It is necessary to say that within simulation of Daimler-Chrysler AG business combination there

will be presented only preliminary requiremets imposed by acquisition method approach. The
requirements imposed by fair value measurement i.e. FAS 157 and IFRS 13 are believed to be
met automatically since the simulated business combination is dealing with real accounting
elements (assets, liabilities, equity) which have already been put into acquirees’ official pre-
merger balance-sheets as well as into their official Merger report during their initial recognition
which comprised such procedures as the identification of their price, principle market and
market participants. 78
Preliminary requirements: identification of a business combination
The identification of Daimler-Chrysler consolidation deal as a kind of business combination was

done on the basis of FAS 141 (R) and IFRS 3 (R) 79. Under these statements the major condition
for Daimler-Chrysler AG business combination to take place was meeting by both Daimler-Benz
AG and Chrysler Corporation the requirement of being businesses. That was done through
identification of Daimler-Benz’s and Chrysler Corporation’s business atributes exisiting in the
pre-merger period such as inputs, outputs and productive processes. The information about
Daimler-Benz’s and Chrysler Corporation’s inputs, outputs and productive processes was
derived from companies’ official pre-merger financial statements (Appendices A1 and B1).
Preliminary requirements: identification of means and structure of the deal
The identification of means and structure of Daimler-Chrysler AG business combination was

done in accordance with FAS 141 (R) and IFRS 3 (R) 80. Daimler-Chrysler AG business
combination took place by means of stock swap under which there were issued DaimlerChrysler
ordinary shares and converted at exchange rate of 1:1.005 for Daimler-Benz ordinary shares and
1:0.6235 for Chrysler Corporation common stocks. Hence the structure of the Daimler-Chrysler
AG business combination was the one of roll-up transaction i.e. owners of Daimler-Benz AG and
Chrysler Corporation exchanged their equity in the stock swap into equity interests of
DaimlerChrysler AG (Appendices A4, B4 and B5).
Core assumptions
In line with preliminary requirements there should be mentioned core assumptions upon which
the simulation of accounting for Daimler-Chrysler AG business combination. There were core
assumptions referring to classification and designation of identifiable elements of financial
statements, to mixed attribute model, to increment and decrement of book value, and valuation
techniques.
79 FAS 141 (R) (par. appendix A2-A9, p. 33-36) and IAS/IFRS 3 (R) (par. appendix B5-B12, p. A154-A156)
80 FAS 141 (R) (par. appendix A2-A9, p. 33-36) and IAS/IFRS 3 (R) (par. appendix B5-B12, p. A154-A156)
50
Core assumptions: classification and designation of identifiable elements of financial
statements
In accordance with requirements imposed by FAS 141 (R), IFRS 3 (R), FAS 157, IFRS 13,
FAS 160, IAS 27 and other relative international accounting standards at the acquisition date
while preparing the pro-forma merger report and further pro-forma consolidated financial
statements all the classifications and designations of recognized and measured identifiable
components were made on the basis of the contractural terms, economic conditions, pre-merger
acquirees’ accounting policies and other pertinent conditions as they existed at the acquisition
date.
Core assumptions: mixed attribute model
The acquirees‘ pre-merger accounting policies and other pertinent conditions reflected in the
acquirees’ official and, consequently, pro-forma pre-merger financial statements are subjected
to the so-called mixed attribute model. The mixed attribute model refers to the state of
presenting assets, liabilities, and equity by applying a disjointed, inconsistent assortment of
accounting methods. Although there is certain degree of disorder, nevertheless the financial
statements presented by such model are in complete accordance as with major standards
regulating accounting for business combinations 81 as well as in accordance with other
longstanding US GAAP and IAS/IFRS. 82
Within mixed attribute model some elements of acquirees‘ official and, consequently, pro-forma
pre-merger financial statements were initially presented at fair value, while the others were
presented in net book value, in estimated net realizable value, in value of historical or average
cost etc. That is why while preparing the pro-forma merger report the porcedure of fair value
measurement was applied not to all elements of acquirees‘ financial statements. The elements
which were initially presented at fair value were excluded from the procedure performed.
Core assumptions: increment and decrement of book value
Under FAS 141 (R), FAS 157, FAS 159, FAS 205, IFRS 3 (R), IFRS 13, IAS 21 while recognizing
and measuring the fair value of acquiree’s balance sheet components it is required to account
the incremental or decremental values recognized and measured together with the balance
sheet component to which it relates. That is why in order to get the fair value the book value of
recognized assets, liabilities, equity and non-controlling interests will be adjusted by referring
incremental or decremental values in accordance with FAS 157 and IFRS 13. 83 Within
interconnection of financial statements this change in value of particular components
recognized and measured in statement of financial position will be accounted as revenue or cost
in statement of change in financial position.
Core assumptions: valuation techniques
From the range of valuation techniques introduced by FAS 157 and IFRS 13 84 for realization of
fair value measurement for Daimler-Chrysler AG business combination there has been applied
81 See for more details FAS 141 (R), IAS/IFRS 3 (R), FAS 157, IFRS 13, FAS 160, IAS 27.
82 See for more details FAS 205, IAS 21, FAS 210, FAS 225.
51
the cost approach in which the main accent was made on adjustments of book value of particular
balance-sheet elements for obsolescence. The obsolescence encompassed physical deterioration,
functional obsolescence, and economic obsolescence (e.g. disposals, currency changes etc.) and
is broader than depreciation for financial reporting purposes or tax purposes. The particular
valuation approach was chosen among other ones due to availability of sufficient data used to
measure fair value.
Core assumptions: acquisition method
It is necessary to stress that originally for accounting of Daimler-Chrysler AG business

combination in November 1998 there was applied pooling-of-interests method, which was
presented in the official Merger Report. However, under effective requirements for accounting
for Daimler-Chrysler AG business combination there had been applied the acquisition method
under FAS 141 (R) and IFRS 3 (R) 85. Thus, all the official reports prepared while accounting for
Daimler-Chrysler on the basis of pooling-of-interest method had been reconciliated into the ones
based upon the acquisition method.
Core assumptions: simplification of consolidated accounting
The last important fact which more refers to second stage of diploma thesis accounting for
Daimler-Chrysler AG business combination rather than to the first one is that on the contrary to
original consolidated accounting reports prepared for Daimler-Chrysler AG business
combination while meeting the requirements of effective accounting for business combinations
86 within the diploma thesis work there were not prepared the consolidated financial statements
for prior years as if Daimler-Chrysler had always been a combined company. The set of prepared
financial reports which are obligatory in accordance with acquisition method comprises the pre-
merger financial statements of both acquirees rerecognized and remeasured at their fair value
and the consolidated financial statements of acquirer prepared on the closing date (Appendices
A2-A4, B2-B5).
Acquisition method and fair value measurement
As it has been stated earlier the basis of two procedures undertake at the first stage of
accounting for Daimler-Chrysler AG business combination i.e. acquisition method and fair value
measurement under FAS 141 (R), IFRS 3 (R), FAS 157 and IFRS 13 is made up by a sequence of
four steps of accounting operations. They are identifying the acquirer, determining the
acquisition date, determining the acquisition costs, recognition of the identifiable assets
acquired and liabilities assumed, measurement of identifiable assets acquired, liabilities
assumed, any non-controlling interests transferred and goodwill assumed in accordance with
FAS 141 (R) and IFRS 3 (R). 87
Acquisition method and fair value measurement: step 1. Identifying the acquirer for
accounting of Daimler-Chrysler AG business combination
Since according to FAS 141 (R) and IFRS 3 (R) 88 for each business combination one of the
combining entities shall be identified as acquirer, so even for such merger of equals as Daimler-
85 FAS 141 (R) (par. 2, p. 1) and IAS/IFRS 3 (R) (par. 2, p. A136)

86 FAS 141 (R), IFRS 3 (R), FAS 157 and IFRS 13
87 FAS 141 (R) (p. ii-iii) and IAS/IFRS 3 (R) (par. IN6, IN8 p. A134)
88 FAS 141 (R) (p. ii-iii) and IAS/IFRS 3 (R) (par. IN6, IN8 p. A134)
52
Chrysler deal was initially designed to be by applying certain paragraphs of FAS 141 and
IFRS 3 (R) it is possible to identify the acquirer and acquiree(s). However, there are certain
particular aspects.
On the one hand, according to FAS 141 and IFRS 3 (R) 89 in a business combination effected by
exchanging equity interests, the acquirer usually is the entity that issues its equity interests. In
case of Daimler-Benz AG and Chrysler Corporation merger it was the newly-organized company
Daimler-Chrysler AG, that issued its shares and converted them to Daimler-Benz AG ones at
exchange ratio set of 1:1 in favor of both, and to Chrysler Corporation shares at exchange ratio
set of 0,547 Daimler-Chrysler AG shares for each Chrysler Corporation share.
One the other hand, further paragraphs of FAS 141 and IFRS 3 (R) 90 state that while identifying
the acquirer it is necessary to take into consideration the relative size of combining entities
measured by assets, revenues or earnings. Also a new entity i.e. Daimler-Chrysler AG, formed to
effect a business combination is not necessary the acquirer and one of the combining entities
that existed before Daimler-Chrysler AG occurred shall be identified. With respect to fair value of
assets and revenue owed and generated by Daimler-Benz AG in pre-merger years (Daimler-Benz
AG – USD 118 539 million of total assets and USD 6 083 million of net income; Chrysler
Corporation – USD 53 497 million of total assets and USD 3 491 of net income) 91 it is possible to
define Daimler-Benz as acquirer and Chrysler Corporation as acquire.
Following this logic the assumption of acquirer’s role of Daimler-Benz and acquiree’s role of
Chrysler Corporation in accordance with FAS 141 and IFRS 3 (R) 92 can be proved by the fact
that in the board of directors of Daimler-Chrysler there were given 2/3 of executive position to
former directors of Daimler-Benz and 1/3 to former directors of Chrysler Corporation.
Taking into consideration above expressed approaches in this particular case it is possible to
define legal and actual acquirer. In accordance with primary legal prescriptions of both FAS 141
and IFRS 3 (R)93 the legal acquirer is Daimler-Chrysler AG and legal acquirees are Daimler-Benz
AG and Chrysler Corporation. When we are talking about actual acquirer, so in accordance with
FAS 141 and IFRS 3 (R) 94, so as the actual acquirer there is the Daimler-Benz AG, and,
consequently, Chrysler Corporation is an acquiree and their merger tends to be a stock swap
acquisition.
Acquisition method and fair value measurement: step 2. Determining the acquisition date
and the acquisition costs for accounting of Daimler-Chrysler AG business combination
Within the definition of acquisition date introduced by FAS 141 and IFRS 3 (R) 95 it is possible to
determine as such date May 6, 1998, when Daimler-Benz AG´s CEO Jürgen Schrempp and
Chrysler Corporatopn´s CEO Bob Eaton officially signed the merger agreement in London on
May 6, 1998 to build the new entity – Daimler-Chrysler AG, granting to it the whole rights of
both acquirees. However, as it is obvious from consolidated financial reports prepared by new
entity, the acquisition date was not the same as closing date i.e. the date, on which both
acquirees i.e. Chrysler Corporation and Daimler-Benz AG legally transferred their consideration,
89 FAS 141 (par. appendix A12, p. 36) and IFRS 3 (R) (par. appendix B15, p. A156)
90 FAS 141 (pr. appendix A13, A15, p. 37) and IFRS 3 (R) (par. 15a, p. A156-A157)
91 Appendices A1, B1
92 FAS 141 (pr. appendix A13, A15, p. 37) and IFRS 3 (R) (par. 15c, p. A156-A157)
93 FAS 141 (par. 10, p. 4) and IFRS 3 (R) (par. 8, p. A137)
94 FAS 141 (pr. appendix A13, A15, p. 37) and IFRS 3 (R) (par. 15a, 15c, p. A156-A157)
95 FAS 141 (par. 3, p. 2-3) and IFRS 3 (R) (par. appendix A, p. A152-A153)
53
assets and liabilities in favor of acquirer i.e. Daimler-Chrysler AG. According to legal and
financial documents it took another 200 days to complete the deal in regard of legal settlement.
That is why the closing date is assumed to be November 12, 1998 when the initial consolidated
financial report was completed on occasion of Daimler-Chrysler AG’s placement on NYSE 5 days
later i.e. on November 17, 1998.
In regard of acquisition costs of Daimler-Chrysler AG business combination on the basis of

FAS 141 (R) and IFRS 3 (R) 96 there were such costs as finder’s fees, advisory, legal, accounting,
valuation, and other professional or consulting fees, general administrative costs of Daimler-
Benz AG and Chrysler Corporation in amount of USD 350 million and USD 200 million
(Appendices B4-B5).
Acquisition method and fair value measurement: step 3. Recognition of the identifiable
assets acquired, the liabilities assumed, and any non-controlling interest transferred for
accounting of Daimler-Chrysler AG business combination
Since earlier Daimler-Chrysler AG has been defined as the legal acquirer, so the recognition of
the identifiable elements of financial statements (i.e. assets acquired and liabilities assumed
within statement of financial position; revenues and expences within statement of change in
financial position) will refer to both combining entities i.e. to Daimler-Benz AG and to Chrysler
Corporation.
While evaluating the pre-merger acquirees’ financial statements components prepared on

closing date November 12, 1998 with respect FAS 141 and IFRS 3 (R) 97 all the identifiable
assets, liabilities, noncontrolling interests, revenues and expenses transfered from both Daimler-
Benz AG and Chrysler Corporation in favor of Daimler-Chrysler AG primarily should meet the
requirements implied by FASB Concepts Statement and IASB Framework in terms of both
recognition and measurement. This conclusion was made on the basis of pre-merger due
diligence procedure performed by independent auditor. 98 Hence the components of acquirees’
financial statements are assumed to be eligible input units for further accounting of Daimler-
Chrysler AG business combination i.e. for further fair value and consolidation in accordance with
concept of initial recognition of FAS 157 and IFRS 13. 99
The diploma thesis accounting referring to recognition and subsequent measurement of the
identifiable assets acquired, the liabilities assumed, and any non-controlling interest transferred
within Daimler-Chrysler AG business combination will be presented in a form of general
approach. All recognitions have been made in accordance with FAS 141 (R), IFRS 3 (R), FAS 157
and IFRS 13 as primary source of accounting regulation applied for business combinations and
some supplementary standards indicated within each group.
96 FAS 141 (R) (par. 59, p. 18-19) and IFRS 3 (R) (par. 53, p. A147)
97 FAS 141 (par. 12-13, p. 36-37) and IFRS 3 (R) (par. 10-11, p. A136-A137)
98 Credit Suisse First Boston, Goldman Sachs Investment Research and KPMG Deutsche Treuhand -Gesellschaft
Aktiengesellschaft Wirtschaftsprüfungsgesellschaft
54
Acquisition method and fair value measurement: step 3. Recognition of the identifiable
accounting of Daimler-Chrysler AG business combination. General recognition approach.
The general approach applied for recognition of Daimler-Benz AG and Chrysler Corporation pre-
merger assets and liabilities for their further measurement at fair value for Daimler-Chrysler AG
business combination comprised such groups of elements as long-term and short-term non-
financial and financial assets, long-term and short financial liabilities, stakeholders’ equity,
derivative instruments, and revenues and expenses. All changes were introduced in pro-forma
Merger report on November 10, 1998, Statement of financial position after recognition
(Appendix A2) and Statement of change in financial position after recognition (Appendix B2),
and subsequent pro-forma Consolidated financial statements November 12, 1998, Statement of
financial position after consolidation (Appendix A4) and Statement of change in financial
position after consolidation (Appendix B5).
General recognition approach: long-term and short-term non-financial assets
Information about Groups’ pre-merger long-term and short-term non-financial assets was
derived from such official reports as Financial Statements and Supplementary Data, Statement of
financial position and Notes to it 100, 101 and the further classification at fair value for preparation
Daimler-Chrysler closing date pro-forma Merger report and for subsequent pro-forma
Consolidated financial statements, so such classification was compiled through depreciated and
non-depreciated per non-financial asset classes in accordance with corresponding authoritative
pronouncements102 and has following general structure:
o Long-term Daimler-Benz AG and Chrysler Corporation non-financial assets
 Intangible assets – Assets under capital lease, Patents and copyrights, Goodwill
 Property, plant and equipment – Land, Buildings, Machinery and equipment, Assets
under capital leases, Leasehold improvements
o Short-term Daimler-Benz AG and Chrysler Corporation non-financial assets
 Inventories - Finished goods, Work in process, Raw materials
General recognition approach: long-term and short-term financial assets
Information about Groups’ pre-merger long-term and short-term financial assets was derived
from Financial Statements and Supplementary Data, Statement of financial position and Notes to
it 103,104 and the further classification at fair value for preparation Daimler-Chrysler closing date
pro-forma Merger report and for subsequent pro-forma Consolidated financial statements, so
such classification was compiled through profit or loss, available-for-sale or held-to-maturity per
100 Sections: Intangible Assets and Property, Plant and Equipment, net; Equipment on Operating Lease, net;
Inventories; Fixed Assets Schedule.
101 Reports: Daimler-Benz AG and Chrysler Corporation public quarter and annual reports, Forms 10-Q, Forms 10-K,
Forms 20-F, Forms DEF 14A, Daimler-Chrysler Merger report.

102 FAS 141 (R), IFRS 3 (R), FAS 157 and IFRS 13 as primary source and FAS 330, FAS 350, FAS 360, IFRS 5, IAS 2, IAS
16, IAS 17, IAS 38 as secondary sources.

103 Sections: Trade receivables; Receivables from Financial Services; Other Receivables; Securities, Investments and
Long-term Financial Assets; Cash and Cash Equivalents; Additional Cash Flow Information .
104 Reports: Daimler-Benz AG and Chrysler Corporation public quarter and annual reports, Forms 10-Q, Forms
10-K,Forms 20-F, Forms DEF 14A, Daimler-Chrysler Merger report.
55
security classes in accordance with corresponding authoritative pronouncements105 and has
following general structure:
o Long-term Daimler-Benz AG and Chrysler Corporation financial assets
 Investments & LT financial assets – Investments in equity securities , Investments in

bonds, Investments in unused land and facilities, Sinking fund for bond retirement,
 Other long-lived assets – Deposits made to purchase equipment, Deferred income tax
assets, Bond issue costs, Noncurrent receivables
o Short-term Daimler-Benz AG and Chrysler Corporation financial assets
 Cash & cash equivalents

 Assets held for sale – Debt and equity securities, Loans, Receivables acquired,
 Refundable income taxes
 Accounts receivable – Receivables from sale of goods/services
 Notes receivable – Interest receivable, Creditors’ accounts with debit balances,
 Deferred income taxes
 Prepaid expenses – Prepaid rent, Prepaid insurance
General recognition approach: long-term and short financial liabilities
Information about Groups’ pre-merger long-term and short financial liabilities was derived from
Financial Statements and Supplementary Data, Statement of financial position and Notes to it
106,107 and the further classification at fair value for preparation Daimler-Chrysler AG closing date
pro-forma Merger report and for subsequent pro-forma Consolidated financial statements, so
such classification was compiled through profit or loss per security class in accordance with
corresponding authoritative pronouncements 108 and has following general structure:
o Long-term Daimler-Benz AG and Chrysler Corporation financial liabilities
 Bonds outstanding
 Obligations under capital lease
 Mandatorily redeemable shares
 Contingent liabilities
 Other noncurrent liabilities – Defined benefit pension obligations, Postemployment
obligations, Postretirement obligations
o Short-term Daimler-Benz AG and Chrysler Corporation financial liabilities
 Accounts payable
 Trade notes payable
 Dividends payable
 Advances and deposits – Advance rentals, Customer deposits
 Agency collections and withholdings – Tax withholdings, Sales taxes, Wage
garnishments
 Current portion of long-term debt
105 See for more details FAS 141 (R), IFRS 3 (R), FAS 157 and IFRS 13 as primary source and FAS 115, FAS 305, FAS
310, FAS 320, FAS 325, IFRS 5, IFRS 7, IFRS 9, IAS 32 as secondary ones.
106 Sections: Accrued Liabilities; Financial Liabilities; Trade Liabilities; Other Liabilities.
107 Reports: Daimler-Benz AG and Chrysler Corporation public quarter and annual reports, Forms 10-Q, Forms 10-
K,Forms 20-F, Forms DEF 14A, Daimler-Chrysler Merger report.

430, FAS 450, FAS 470, IAS 37 as secondary ones.
56
 Accrued expenses – Salaries, Vacation pay, Retirement plan contributions
General recognition approach: stakeholders’ equity
Information about Groups’ pre-merger stakeholders’ equity was derived from Financial
Statements and Supplementary Data, Statement of financial position and Notes to it 109,110 and
the further classification at fair value for preparation Daimler-Chrysler AG closing date pro-
forma Merger report and for subsequent pro-forma Consolidated financial statements, so such
classification was compiled through owner and non-owner change per equity class in
accordance with corresponding authoritative pronouncements 111 and has following general
structure:
o Daimler-Benz AG and Chrysler Corporation equity
 Capital stock – Common stock at par, Preferred stock at par

 Additional paid-in capital - Paid-in capital in excess of par/stated value - Additional
paid-in capital - common stock, Additional paid-in capital - preferred stock; Paid-in
capital from other transactions - Treasury stock, Retirement of stock etc.
 Retained earnings
General recognition approach: derivative instruments
Information about Groups’ pre-merger derivative instruments was derived from Financial
Statements and Supplementary Data, Statement of financial position and Notes to it 112,113 and the
further designation of a derivative as a hedging instrument at fair value for preparation Daimler-
Chrysler AG closing date pro-forma Merger report and subsequent pro-forma Consolidated
financial statements, so such designation was compiled through asset and liability per
instrument class in accordance with corresponding authoritative pronouncements 114 and has
following general structure:
o Long-term Daimler-Benz AG and Chrysler Corporation derivative instruments
 Written put options on the option writer’s (issuer’s) equity shares

 Forward contracts to purchase an issuer’s equity shares
 Contingent obligations – Product warranty obligations, Guarantees of indebtedness
General recognition approach: revenues and expenses
Information about Groups’ pre-merger revenues and expenses was derived from Financial
Statements and Supplementary Data, Statement of changes in financial position and Notes to it
115, 116 and the further classification at fair value for preparation Daimler-Chrysler AG closing
109 Sections: Stockholders’ Equity; Statement of Changes in Stockholders’ Equity.

110 Reports: Daimler-Benz AG and Chrysler Corporation public quarter and annual reports, Forms 10 -Q, Forms
10-K,Forms 20-F, Forms DEF 14A, Daimler-Chrysler Merger report.
111 See for more details FAS 141 (R), IFRS 3 (R), FAS 157 and IFRS 13 as primary source and FAS 505, IFRS 1, IAS 1,
IFRS 2 as secondary.
112 Sections: Stockholders’ Equity; Statement of Changes in Stockholders’ Equity; Other Liabilities; Securities,
Investments and Long-term Financial Assets.

113 Reports: Daimler-Benz AG and Chrysler Corporation public quarter and annual reports, Forms 10 -Q, Forms 10-K,
Forms 20-F, Forms DEF 14A, Daimler-Chrysler Merger report.

114 See for more details FAS 141 (R), IFRS 3 (R), FAS 157 and IFRS 13 as primary source and FAS 133, IFRS 7, IAS 32,
IFRS 9 as secondary.
115 Sections: Income of continuing operations, Income before financial income and Income taxes; Financial Income,
net; Income before Income taxes; Income Taxes; Functional Costs an d Other Expences.
57
date pro-forma Merger report and subsequent pro-forma Consolidated financial statements, so
such classification was compiled through continuing operations, discontinued operations,
extraordinary items and comprehensive income classes in accordance with corresponding
authoritative pronouncements117 and has following general structure:
o Daimler-Benz AG and Chrysler Corporation revenues and expenses
 Gross margin
 Income from ordinary activity
o Income from continuing operations
Income from operating items
Income from non-operating items
Income from unusual and infrequent items
o Income from discontinued operations
 Income from extraordinary activity
 Income from other ordinary activity or other comprehensive income
 Comprehensive income
Acquisition method and fair value measurement: step 4. Measurement of the identifiable
accounting of Daimler-Chrysler AG business combination. Recognition and measurement
of particular balance components.
Within diploma thesis simulation in course of compiling the pro-forma Merger report and
subsequent pro-forma Consolidated financial statements for Daimler-Chrysler AG at the closing
date by Group’s management there has been taken a decision to recognize and, consequently,
measure some specific balance components within Daimler-Chrysler AG business combination.
There were recognized and measured some intangible assets, lease contracts, assets with
uncertain cash flow and non-controlling interest. All changes were introduced in pro-forma
Merger report on November 10, 1998 118 and subsequent pro-forma Consolidated financial
statements November 12, 1998 119. All changes have been made in accordance with FAS 141 (R),
IFRS 3 (R), FAS 157 and IFRS 13 as primary source of accounting regulation applied for business
combinations and supplemented with practical instructions from FAS-IASB educative course.
Recognition of particular balance components: recognition of intangible assets not

previously recognized and assets with uncertain cash flow.
Within diploma thesis simulation in course of compiling the pro-forma Merger report and
subsequent pro-forma Consolidated financial statements for Daimler-Chrysler AG at the closing
date by Group’s management there has been taken a decision to recognize and, consequently,
measure some intangible assets existing beyond the pre-merger financial statements of
combining entities (Appendix A). That was done in accordance with FAS 141 and IFRS 3 (R)120
which allows the recognition of some intangible assets that the acquirees had not previously
116 Reports: Daimler-Benz AG and Chrysler Corporation public quarter and annual reports, Forms 10 -Q, Forms
10-K, Forms 20-F, Forms DEF 14A, Daimler-Chrysler Merger report.
710, FAS 740, IFRS 1, IAS 1, IAS 12, IAS 18 as secondary ones.
118 Statement of financial position after recognition and measurement (Appendix A3)
119 Statement of financial position after consolidation (Appendix A4)
120 FAS 141 (par. 15, p. 5) and IFRS 3 (R) (par. 13, p. A138)
58
recognized as assets in their financial statements such as Daimler’s and Chrysler’s brand names,
and customer and depositor relationship.
 Intangible assets
o Patents and copyrights – brand names
o Other intangible assets – customer and depositor relationship
In regard of recognition of assets with uncertain cash flow so there are certain particularities.
Within official pre-merger statements of financial position of Daimler-Benz AG and Chrysler
Corporation compiled on March 31, 1997 there were recognized and measured such assets with
uncertain cash flow as restricted cash, long-term deferred income tax, log-term uncollectible and
doubtful receivables. In accordance with FAS 141 and IFRS 3 (R) 121 these articles were not
recognized and, consequently, measured within pro-forma Merger report of Daimler-Benz AG
and Chrysler Corporation and subsequent pro-forma consolidated financial statements of
Daimler-Chrysler AG.
Recognition of particular balance components: non-controlling interest
Before official merger agreement between Daimler-Benz AG and Chrysler Corporation was
signed on May, 8 1998 in course of preliminary negotiation held on March 10, 1998 there had
been signed an agreement on providing the non-controlling interest on mutual basis in capital of
both combining entities in favor of each. Later after signing the official contract on May 8, 1998
and compilation of consolidated financial statements for Daimler-Chrysler AG on November 12,
1998 these non-controlling interest will be canceled. That is why within pro-forma Merger
report Daimler-Benz AG and Chrysler Corporation minority interest was recognized and
measured in accordance with FAS 141 (R) and IFRS 3 (R) 122 within subsequent consolidation it
was cancelled. For pro-forma report it was recognized and measured in values derived from
companies’ official pre-merger financial statements.
Recognition of particular balance components: lease contracts
First of all while accounting for operating lease within Daimler-Chrysler AG business
combination in accordance with FAS 141 (R) and IFRS 3 (R) 123 it is necessary to distinguish the
operating lease from capital lease. In case of Daimler-Chrysler AG business combination the
classification of a lease contracts as operating lease but not financial one at the closing date was
based on factors at the inception of the lease i.e. contractual terms, which was before the closing
date confirmed in the corresponding pre-acquisition financial statements of Daimler-Benz and
Chrysler on September 31, 1998.
The capital lease contracts i.e. long-term assets under capital lease and obligations under capital
lease at accounting date of preparation pro-forma Merger report on November 10, 1998 were
recognized and measured within general acquisition approach applied to the rest of acquirees’
assets and liabilities transferred without any particular accounting procedures.

 Property, plant and equipment
121 FAS 141 (par. appendix A57, p. 49) and IAS/IFRS 3 (R) (par. B41, p. A163)
122 FAS 141 (R) (par. A60, p. 50) and IAS/IFRS 3 (R) (par. B44, p. A164)
123 FAS 141 (R) (par. appendixes A16, A58, p. 37, 49) and IAS/IFRS 3 (R) (par. appendix B42, p. A163)
59
o Assets under capital leases
While accounting for operating lease contracts i.e. operating payments on lease within Daimler-
Chrysler deal it was necessary to distinguish two types of contracts with subsequent accounting
approaches. They were contracts in which Daimler-Benz AG and Chrysler were lessors and
lessees.
Meeting the requirements of FAS 141 and IRS 3 (R) 124 for Daimler-Chrysler AG deal there had
not been recognized and, consequently, measured any assets acquired or liabilities assumed
from Daimler-Benz AG and Chrysler Corporation related to operating lease in which the
combining entities were lessees. It followed the idea that any lease incentive that was being
amortised by Daimler-Benz AG and Chrysler Corporation should not be recognised by Daimler-
Chrysler AG.
On the contrary to this and in accordance with FAS 141 and IFRS 3 (R) 125 for Daimler-Chrysler
AG business combination there had been recognized and measured at accounting date of
compilation of pro-forma Merger report on November 10, 1998 at fair value the assets which
were subjects to operating leases in which Daimler-Benz AG and Chrysler Corporation were the
lessors. Data on such contracts was derived from official pre-merger financial reports on
September 31, 1998.

 Property, plant and equipment
o Machinery and equipment for operating lease
Further meeting the requirement of FAS 141 and IFRS 3 (R) 126 Daimler-Chrysler AG had
recognized the amount of favorable or unfavorable aspect of an operating lease in which
Daimler-Benz AG and Chrysler Corporation were lessors and/or lessees separately as an
intangible asset or liability.

 Other long-term assets
Acquisition method and fair value measurement: step 4. Measurement of identifiable

assets acquired, the liabilities assumed, any non-controlling interests transferred and
goodwill assumed for accounting of Daimler-Chrysler AG business combination
As it has already been stated the basis of fair value measurement is statement of financial
position and changes of its values received in course of such accounting procedure (i.e. increases
and/or decreases) should be transferred into statement of changes in financial position. That is
the nature of fair value measurement of business entity.
The core requirement for measurement of elements of statement of financial position is stated in
FAS 141 (R) and IFRS 3 (R) 127 i.e. the measurement of identifiable assets acquired, liabilities
assumed and noncontrolling interests at the acquisition date should be only in terms of fair
values. For measurement of Daimler-Chrysler AG balance sheet elements at fair value on the
closing date on November 12, 1998 as the accounting basis there were used pre-merger Q3
124 FAS 141 (par. appendix A16, p. 37) and IRS 3 (R) (par. appendix B28, p. A160)
125 FAS 141 (par. appendixes A17, A58, p. 37, 49) and IFRS 3 (R) (par. appendixes B29, p. A160)
126 FAS 141 (par. appendix A18, p. 38) and IFRS 3 (R) (par. appendix B30, p. A160)
60
financial reports prepared by Daimler-Benz AG and Chrysler Corporation at their fair values on
September 31, 1998 and Merger report prepared by independent auditor on November 10,
1998. 128 Both the official pre-merger financial reports of combining entities and the official
Merger report were checked for meeting the requirement implied by FASB Concepts Statement
6 and IASB Framework in terms of recognition and measurement by independent auditor on
November 10, 1998. That is why it is believed that preliminary requirements of recognition and
measurement for Daimler-Chrysler AG business combination have been met automatically.
At further stage the official pre-merger Daimler-Benz AG and Chrysler Corporation balance sheet
values for preparation of pro-forma Merger report on November, 10 and subsequent
compilation of pro-forma Consolidated financial statements on November 12, 1998 were further
adjusted under above indicated general and specific measurement approach (e.g. recognition
and subsequent measurement of assets not previously recognized etc.).
Likewise in case of recognition the diploma thesis accounting referring to measurement of the
identifiable assets acquired, the liabilities assumed, and any non-controlling interest transferred
within Daimler-Chrysler AG business combination will be presented in a form of general
approach.
All measurements have been made in accordance with FAS 141 (R), IFRS 3 (R), FAS 157 and
IFRS 13 as primary source of accounting regulation applied for business combinations
supplemented with practical instructions from FAS-IASB educative course and some secondary
standards indicated earlier within each group.
Acquisition method and fair value measurement: step 4. Measurement of identifiable

assets acquired, the liabilities assumed, any non-controlling interests transferred and
goodwill assumed for accounting of Daimler-Chrysler AG business combination. General
measurement approach
The general approach applied for measurement of Daimler-Benz AG and Chrysler Corporation
pre-merger assets and liabilities at fair value for accounting for Daimler-Chrysler AG business
combination comprised such elements as long-term and short-term non-financial and financial
assets, long-term and short financial liabilities, stakeholders’ equity, derivative instruments, and
revenues and expenses. All changes were introduced in pro-forma Merger report on November
10, 1998 129 and subsequent pro-forma Consolidated financial statements on November 12,
1998. 130
General measurement approach: long-term and short-term non-financial assets
The measurement at fair values has been done through depreciated and non-depreciated per
non-financial asset classes and thus it contained general fair value adjustments and/or fair value
adjustments referring to accumulated depreciation.
Intangible assets – the net book values calculated at the end of the accounting period within
official pre-merger Daimler-Benz AG and Chrysler Corporation financial statements on
September 31, 1998 (Appendix A1) were adjusted by operations taken place within end of
128 KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft

129 Statement of financial position after measurement (Appendix A3) and Statement of change in financial position
after measurement (Appendix B3).
130 Statement of financial position after consolidation (Appendix A4) and Statement of change in financial position
after consolidation (Appendix B5).
61
accounting period and pro-forma Merger report date i.e. November 10, 1998 (Appendix A2).
They were external purchases, internal development costs and general accumulated
amortization. Further these obtained values were adjusted at general fair value adjustments
(Appendix A3). They were write-offs, disposals and transfers. General accumulated amortization
was further adjusted at fair values by amortization charges, disposals of assets and translation
adjustments (Appendices A3 and A5).
Property, plant and equipment - the net book values calculated at the end of the accounting
period within official pre-merger Daimler-Benz AG and Chrysler Corporation financial
statements on September 31, 1998 (Appendix A1) was adjusted by operation taken place
within end of accounting period and pro-forma Merger report date i.e. November 10, 1998
(Appendix A2). It was general accumulated amortization. Further these obtained values were
adjusted at general fair value adjustments (Appendix A3). They were additions, disposals and
translation adjustments. General accumulated amortization was further adjusted at fair values
by additional depreciation, disposal of assets, translation adjustments (Appendix A3 and A5).
Inventories - the net book values calculated at the end of the accounting period within official
pre-merger Daimler-Benz AG and Chrysler Corporation financial statements on September 31,
1998 (Appendix A1) were adjusted by operations taken place within end of accounting period
and pro-forma Merger report date i.e. November 10, 1998 (Appendix A2). They were external
purchases and current consumption. Further these obtained values were adjusted at general fair
value adjustments (Appendix A3). They were advance payments to suppliers, allowances
received thereof relating to long-term contracts and programs in process (Appendices A3 and
A5).
General measurement approach: long-term and short-term financial assets
The measurement at fair values has been done through profit or loss, available-for-sale or held-
to-maturity per security classes and it contained only general fair value adjustments.
Cash & cash equivalents – although the net book values calculated at the end of the accounting
statements on September 31, 1998 (Appendix A1) were adjusted by operations taken place
within end of accounting period pro-forma Merger report date, nevertheless into pro-forma
Merger report (Appendix A2) they were transferred without such operating adjustments. The
occurred operating adjustments like cash receipts and cash expenses were reflected in the
acquirees’ statements of cash flow which are not presented within diploma thesis research.
Further these values were adjusted at general fair value adjustments (Appendices A3 and A5). It
was restricted cash, which was deducted from measurement since it was recognized as asset
with uncertain cash flow.
Assets held for sale – the net book values calculated at the end of the accounting period within
September 31, 1998 (Appendix A1) were accepted as appropriate ones for transferring into
Merger report on November 10, 1998 (Appendix A2). Further these obtained values were
adjusted at general fair value adjustments. They were additions, reclassification, disposals and
translation adjustments (Appendices A3 and A5).
Refundable income taxes – the net book values calculated at the end of the accounting period
within official pre-merger Daimler-Benz AG and Chrysler Corporation financial statements on
62
Merger report on November 10, 1998 (Appendices A2-A3) and subsequent Consolidated
financial statements (Appendix A5).
Accounts receivable - the net book values calculated at the end of the accounting period within
adjusted at general fair value adjustments. It was allowance for uncollectible accounts and
advance payments received. The uncollectible receivables were deducted from measurement
since they were recognized as asset with uncertain cash flow (Appendices A3 and A5).
Notes receivable - the net book values calculated at the end of the accounting period within
adjusted at general fair value adjustments. They were discounts on notes receivable (Appendices
A3 and A5).
Deferred income taxes – the net book values calculated at the end of the accounting period
adjusted at general fair value adjustments. They were log-term deferred income tax which was
deducted from measurement since it was recognized as asset with uncertain cash flow
(Appendices A3 and A5).
Prepaid expenses - the net book values calculated at the end of the accounting period within
Investments & LT financial assets - the net book values calculated at the end of the accounting
statements on September 31, 1998 (Appendix A1) were accepted as appropriate ones for
transferring into Merger report on November 10, 1998 (Appendix A2). Further these obtained
values were adjusted at general fair value adjustments. They were acquisitions, additions,
reclassification, disposals and translation adjustments (Appendices A3 and A5).
Contingent assets - the net book values calculated at the end of the accounting period within
Other long-lived assets - the net book values calculated at the end of the accounting period
63
General measurement approach: long-term and short financial liabilities
The measurement at fair values has been done through profit or loss per security class and it
contained only general fair value adjustments.
Accounts payable - the net book values calculated at the end of the accounting period within
adjusted at general fair value adjustments. They were imputed interest and discounts
Trade notes payable - the net book values calculated at the end of the accounting period
adjusted at general fair value adjustments. They were imputed interest and discounts
Dividends payable - the net book values calculated at the end of the accounting period within
Advances and deposits - the net book values calculated at the end of the accounting period
adjusted at general fair value adjustments. They were advance rentals and customer deposits
Agency collections and withholdings - the net book values calculated at the end of the
accounting period within official pre-merger Daimler-Benz AG and Chrysler Corporation
financial statements on September 31, 1998 (Appendix A1) were accepted as appropriate ones
for transferring into Merger report on November 10, 1998 (Appendix A2). Further these
obtained values were adjusted at general fair value adjustments. They were tax withholdings,
sales taxes and wage garnishments (Appendices A3 and A5).
Current portion of long-term debt - the net book values calculated at the end of the accounting
transferring into Merger report on November 10, 1998 (Appendices A2-A3) and subsequent
Consolidated financial statements (Appendix A5).
Accrued expenses - the net book values calculated at the end of the accounting period within
64
adjusted at general fair value adjustments. They were salaries, vacation pay and retirement plan
contributions (Appendices A3 and A5).
Bonds outstanding - the net book values calculated at the end of the accounting period within
adjusted at general fair value adjustments. It was premium (Appendices A3 and A5).
Obligations under capital lease - the net book values calculated at the end of the accounting
transferring into Merger report on November 10, 1998 (Appendix A2). Further these obtained
values were adjusted at general fair value adjustments. It was premium (Appendices A3 and A5).
Mandatorily redeemable shares - the net book values calculated at the end of the accounting
Contingent liabilities - the net book values calculated at the end of the accounting period
Other noncurrent liabilities - the net book values calculated at the end of the accounting
General measurement approach: stakeholders’ equity
The measurement at fair values has been done through owner and non-owner change per equity
class and it contained only general fair value adjustments.
Capital stock - the net book values calculated at the end of the accounting period within official
pre-merger Daimler-Benz AG and Chrysler Corporation financial statements on September 31,
1998 (Appendix A1) were accepted as appropriate ones for transferring into Merger report on
November 10, 1998 (Appendices A2-A3) and subsequent Consolidated financial statements
(Appendix A5).
Additional paid-in capital - the net book values calculated at the end of the accounting period
65
Retained earnings - the net book values calculated at the end of the accounting period within
adjusted at general fair value adjustments. They were cumulative distributions to shareholders
either directly (dividends) or indirectly (treasury stock) (Appendices A3 and A5).
Accumulated non-owner changes in equity - the net book values calculated at the end of the
accounting period within official pre-merger Daimler-Benz AG and Chrysler Corporation
financial statements on September 31, 1998 (Appendix A1) were accepted as appropriate ones
for transferring into Merger report on November 10, 1998 (Appendix A2). Further these
obtained values were adjusted at general fair value adjustments. They were accumulated other
comprehensive income, foreign currency translation adjustments, pension liability adjustment,
unrealized gains on securities (Appendices A3 and A5).
General measurement approach: derivative instruments
The measurement at fair values has been done through asset and liability per instrument class
and only general fair value adjustments had been done.
Contingent obligations - the net book values calculated at the end of the accounting period
Written put options on the option writer’s (issuer’s) equity shares - the net book values
calculated at the end of the accounting period within official pre-merger Daimler-Benz AG and
Chrysler Corporation financial statements on September 31, 1998 (Appendix A1) were accepted
as appropriate ones for transferring into Merger report on November 10, 1998 (Appendices A2
and A3) and subsequent Consolidated financial statements (Appendix A5).
Forward contracts to purchase an issuer’s equity shares - the net book values calculated at
the end of the accounting period within official pre-merger Daimler-Benz AG and Chrysler
Corporation financial statements on September 31, 1998 (Appendix A1) were accepted as
appropriate ones for transferring into Merger report on November 10, 1998 (Appendices A2 and
A3) and subsequent Consolidated financial statements (Appendix A5).
General measurement approach: revenues and expenses
Under corresponding authoritative pronouncements 131 the measurement of Daimler-Benz AG

and Chrysler Corporation revenues and expenses at fair values had been done through
operations referring to ordinary extraordinary and other ordinary acquirees’ activities, in
particular through continuing operations and discontinued operations within ordinary activity.
Further among continuing operations which had been adjusted at fair value there were defined
operating and non-operating items, unusual and infrequent items. It is important to mention
that introduced fair value adjustments within operating items were of double nature. Firstly,
there were general adjustments referring to restructuring of statement of changes in financial
131See for more details FAS 141 (R), IFRS 3 (R), FAS 157 and IFRS 13 as primary source and FAS 605, FAS 705, FAS
710, FAS 740, IFRS 1, IAS 1, IAS 12, IAS 18 as secondary ones.
66
position prepared at the end of the accounting period (i.e. September 31, 1998) by itself in
accordance with currently valid US GAAP and IAS/IFRS fair value requirements. Secondly, there
were transfers of certain fair value adjustments obtained within US GAAP and IAS/IFRS fair
value reconciliation of statement of financial position. All changes were introduced in pro-forma
Merger report on November 10, 1998 and subsequent pro-forma Consolidated financial
statements on November 12, 1998. 132, 133
Gross margin - the values calculated at the end of the accounting period within official pre-
merger Daimler-Benz AG and Chrysler Corporation financial statements on September 31, 1998
(Appendix B1) were accepted as appropriate ones for transferring into Merger report on
November 10, 1998 (Appendices B2-B3) and subsequent Consolidated financial statements
(Appendices B5-B5).
Income from ordinary activity – the values calculated at the end of the accounting period
September 31, 1998 (Appendix B1) were subjected to fair value adjustments for compilation of
Merger report on November 10, 1998 (Appendices B2-B3). There were two types of fair value
adjustments i.e. adjustments referring to general structure and to particular sections. As it has
already been mentioned above the fair value adjustments referring to general structure assumed
the restructuring the Income from ordinary activity into the income from continuing operations,
comprising operating, non-operating and unusual and infrequent items, and the income from
discontinued operations. Further sectional fair value adjustments assumed certain fair value
adjustments within each section i.e. in particular within income from operating and non-
operating items resulting from relevant fair value adjustments introduced in statement of
financial position. It is important to mention that such fair value adjustments referring to income
from operating items were of double nature i.e. revenue or expense resulting from general
revaluation at fair value of particular balance sheet element and revenue or expense resulting
from revaluation at fair value of accumulated depreciation referring to given balance sheet
element. Within Income received from continuing operations there were the following fair value
adjustments reefing to income from operating and non-operating items, transferred from
reevaluated at fair value particular elements of statement of financial position (in accordance
with unified US GAAP and IAS/IFRS charts of accounts):
Result from revaluation of acquirees’ intangible assets – for both acquirees i.e. Daimler-Benz
AG and Chrysler Corporation there was revenue in course of general fair value adjustments i.e.
activation of fixed intangible assets (US GAAP 6820 - 1 Unrealized gain (loss) – intangible assets;
IAS/IFRS 680 Revenues from the adjustments of the intangible assets value) and for both
acquirees there were expanses in course of fair value adjustments of accumulated amortization
i.e. clearing of accumulated amortization (US GAAP 5490-X Misc revenue – adjustments to
accumulated amortization; IAS/IFRS 679 Other not mentioned revenues - adjustments to
accumulated amortization).
Result from revaluation of acquirees’ property, plants and equipment – for both acquirees
there was revenue in course of general fair value adjustments i.e. activation of fixed intangible
assets (US GAAP 6820-2 Unrealized gain (loss) – fixed assets; IAS/IFRS 681 Revenues from the
adjustments of the value of property, plants and equipment) and for both acquirees there were
expanses in course of fair value adjustments of accumulated amortization i.e. clearing of
132 Statement of change in financial position after measurement (Appendix B3)

133 Statement of change in financial position after consolidation (Appendix B4-B5.
67
accumulated depreciation (US GAAP 8590-X Other expenses - adjustments to accumulated
depreciation; IAS/IFRS 532 Adjustments to accumulated depreciation).
Result from revaluation of acquirees’ assets held for sale - for both acquirees there was
revenue in course of general fair value adjustments i.e. revenues from revaluation of equity
securities (US GAAP 5490-X Misc revenue – revaluation of equity securities; IAS/IFRS 669 Other
financial revenue - revaluation of equity securities).
Result from revaluation of acquirees’ accounts receivable - for both acquirees there was
revenue in course of general fair value adjustments i.e. revenues from revaluation of short-term
financial assets (US GAAP 5490-X Misc revenue – revaluation of financial assets; IAS/IFRS 669
Other financial revenue - revaluation of financial assets).
Result from revaluation of acquirees’ notes receivable – for both acquirees there were
expenses in course of general fair value adjustments i.e. costs on revaluation of short-term
financial assets (US GAAP 8670-X Corporate expenses - revaluation of financial assets; IAS/IFRS
569 Other financial expenses - revaluation of financial assets).
Result from revaluation of acquirees’ investments and long-term financial assets – for both
acquirees there was revenue in course of general fair value adjustments i.e. revenues from
revaluation of equity securities (US GAAP 5490-X Misc revenue – revaluation of equity
securities; IAS/IFRS 669 Other financial revenue - revaluation of equity securities).
Result from revaluation of acquirees’ deferred income taxes - for both acquirees there were
expenses in course of general fair value adjustments i.e. creation and clearing of reserves for
income tax (US GAAP 8670-X Corporate expenses - revaluation of deferred taxes; IAS/IFRS 569
Other financial expenses - revaluation of deferred taxes).
Result from revaluation of acquirees’ accounts payable – for Daimler-Benz there were expenses
in course of general fair value adjustments i.e. other financial costs (US GAAP 8670-X Corporate
expenses - revaluation of liabilities; IAS/IFRS 569 Other financial expenses -revaluation of
liabilities). On the contrary to this for Chrysler Corporation there was revenue in course of
general fair value adjustments i.e. other financial revenue (US GAAP 5490-X Misc revenue –
revaluation of liabilities; IAS/IFRS 669 Other financial revenue - revaluation of liabilities).
Result from revaluation of acquirees’ trade notes payable - for both acquirees there was
revenue in course of general fair value adjustments i.e. other financial revenue (US GAAP 5490-X
Misc revenue – revaluation of liabilities; IAS/IFRS 669 Other financial revenue - revaluation of
liabilities).
Result from revaluation of acquirees’ bonds outstanding - for both acquirees there were
expenses in course of general fair value adjustments i.e. other financial costs (US GAAP 8670-X
Corporate expenses - revaluation of liabilities; IAS/IFRS 569 Other financial expenses -
revaluation of liabilities).
Result from revaluation of acquirees’ obligations of capital lease - for both acquirees there
were expenses in course of general fair value adjustments i.e. other financial costs (US GAAP
8670-X Corporate expenses - revaluation of liabilities; IAS/IFRS 569 Other financial expenses -
revaluation of liabilities)
68
Result from revaluation of acquirees’ accumulated non-owner changes in equity - for both
acquirees there were expenses in course of general fair value adjustments i.e. other financial
costs (US GAAP 8670-X Corporate expenses ; IAS/IFRS 569 Other financial expenses)
Within income from discontinued operations there were no operations at the end of pre-merger
period, however this section was included intentionally for further accounting of consolidated
financial statements.
Income from extraordinary activity - the values calculated at the end of the accounting period
September 31, 1998 (Appendix B1) were accepted as appropriate ones for transferring into
Merger report on November 10, 1998 (Appendices B2-B3) and subsequent Consolidated
financial statements (Appendices B5-B5).
Net income - the values calculated at the end of the accounting period within official pre-merger
Daimler-Benz AG and Chrysler Corporation financial statements on September 31, 1998
(Appendix B1) were subjected to fair value adjustments for compilation of Merger report on
November 10, 1998 (Appendices B2-B3). Likewise Income from ordinary activity there were
two types of fair value adjustments i.e. adjustments referring to general structure and to
sections. The fair value adjustments referring to general structure assumed the restructuring the
Net income into Comprehensive and Other comprehensive income. Within Other comprehensive
income there were the following structural fair value adjustments: foreign currency
adjustments, gains/losses on cash-flow hedging items, gains/losses on hedges of forecasted
foreign-currency-denominated transactions. Such adjustments had no effect on original value of
net or comprehensive income. On the contrary to this there were certain fair value adjustments
assuming certain changes in values of income tax related to continuing operations since the
original value of such income had been changed due to performed fair value adjustments i.e.
income from operating and non-operating items. Further it effected the original value of net or
comprehensive income.
Subsection 2.2.2. Consolidation and goodwill impairment for

The second stage of diploma thesis research is dealing with the compilation of consolidated
financial statements of combining entities. That is why by significance the consolidation
procedure is in line with the procedure of acquisition method. The subsequent procedure of
goodwill impairment is its supplementary component.
Both FAS 160 and IAS 27 define consolidated statements as financial statements of a group
presented as those of a single entity or single enterprise. Within diploma thesis research there
have been compiled two major pro-forma consolidated financial statements for Daimler-Benz
business combination. They are pro-forma consolidated statement of financial position and pro-
forma consolidated statement of change in financial position of Daimler-Chrysler AG. Such
consolidated financial statements are of pro-forma kind i.e. likewise in case of compilation of
unofficial, pro-forma Merger report there were compiled unaudited financial statements aimed
to reflect a proposed change appeared in course and after business combination.
On the contrary to general accounting for consolidation there have been faced special
particularities imposed by the nature of unit for which the consolidation has been performed. It
69
is the merger of two units which generated the need to encompass into the consolidated
financial statements the fair value adjustments performed at the previous stage of diploma
thesis research as well as special consolidation adjustments which usually occur in case of
accounting for combining entities e.g. cancellation of non-controlling interest, transaction costs,
tax benefits, consolidation and goodwill. In light of this the procedure of consolidation while
accounting for Daimler-Chrysler AG business combination has been divided into two steps. They
were preparation of consolidation adjustments comprising the fair value adjustments and
originally consolidation adjustments in accordance with FAS 160 and IAS 27 as the first step and
realization of merger modeling comprising the determination of exchange ratio, determination
of purchase price and its allocation with subsequent goodwill impairment in accordance with
FAS 142, IAS 36 and FASB-IASB educative course as the second step.
The compilation of pro-forma consolidated financial statements for Daimler-Chrysler AG

business combination within diploma thesis research has been be done by two means. Firstly,
there were applied theoretical guidance derived from FAS 160 and IAS 27. Secondly, there were
applied practical instructions derived from general principals of consolidation and financial
modeling (FASB-IASB educative course) with respect to authoritative framework for accounting
for business combinations.
Core assumptions
Likewise at the first stage of simulation of accounting for Daimler-Chrysler AG business

combination there have to be presented some assumptions such as advanced financial
accounting techniques, accounting period and basis for consolidation under FAS 160, IAS 27,
FAS 142, IAS 36.
Core assumptions: application of advanced financial accounting
While compiling the pro-forma consolidated financial statements for Daimler-Chrysler AG

business combination at the second stage of diploma thesis research there had been applied
general principles of consolidation in combination with merger modeling approach. Within
consolidation approach there have been encompassed into pro-forma consolidated financial
statements compiled on November 12, 1998 two components. The first and major component
was reevaluated at fair value original assets, liabilities and business results transferred from
Daimler-Benz AG and Chrysler Corporation to Daimler-Chrysler the information about which
was derived from original pre-merger financial statements and pro-forma Merger report on
November 12, 1998 (Appendices A1-A3) . This component was adjusted for acquisition
accounting for particular balance components such as assets with uncertain cash flow, some
intangible assets not previously recognized, lease contracts and minority interest. The second
component was represented by purely consolidation adjustments. They were adjustments
referring to acquirees and adjustments referring to acquirer e.g. cancelation of double accounts,
cancelation of non-controlling interest, transaction costs and tax benefits, consolidation
transferred and goodwill acquired. All these consolidation adjustments were called upon to
provide the harmonization of drafts of the pro-forma accounts in the individual and consolidated
financial statements by accounting at fair value, excluding double accounts and charging all
transaction costs while accounting for consideration transferred at fair value. The application of
merger modeling assumed the determination of the exchange ratio and purchase price with its
further allocation, identifying, measuring and impairment of goodwill created in course of
70
business combination. All these adjustments have been introduced in corresponding pro-forma
Consolidated financial statements (Appendices A4, B4-B5).
Core assumptions: accounting period for consolidation
The unaudited pro-forma combined statement of financial position at November 12, 1998 was
prepared as if the transactions were consummated as of such date and the unaudited pro-forma
consolidated statement of change in financial position for one month ended November 12, 1998
was prepared as if the transactions were consummated as of December 1, 1998. 134
Core assumptions: basis for consolidation
The unaudited pro-forma consolidated financial statements are based on the historical financial
statements of Daimler-Benz AG and Chrysler Corporation prepared on September 31, 1998,
official and unaudited pro-forma Merger reports prepared on November 10, 1998 (Appendices
A1-A3, B1-B3) giving effect to the transactions under assumptions and adjustments described
within diploma thesis research under the acquisition method of accounting. The unaudited pro-
forma statement of income (Appendices B3-B5) does not give effect to certain nonrecurring
charges that may be incurred with the transactions. 135
Consolidation and goodwill impairment: step 1. Consolidation adjustments for Daimler -

Chrysler AG pro-forma consolidated financial statements
Under FAS 141 (R), IFRS 3 (R), FAS 157, IFRS 13, FAS 160 and IAS 27 the major part of the pro-
forma consolidated financial statements of Daimler-Benz business has been comprised of
original assets, liabilities and results derived from original pre-merger financial statements and
official Merger report and reevaluated at fair value at the first stage of current diploma thesis
research. Further there will be presented adjustments referring to fair value and consolidation
in case of merger which had been encompassed while accounting for Daimler-Benz business
combination.
Consolidation and goodwill impairment: step 1. Consolidation adjustments for Daimler -

Chrysler AG pro-forma consolidated financial statements. Fair value adjustments.
While preparing the consolidation adjustments for compilation of Daimler-Chrysler AG pro-

forma consolidated financial statements there have been made such adjustments in accordance
with FAS 141 (R), IFRS 3 (R), FAS 157 and IFRS 13 referring to intangible assets not previously
recognized, assets with uncertain cash flow and lease contracts of combining entities.
Fair value adjustments: assets not previously recognized and measured by acquirees
While compiling the consolidated financial statements of Daimler-Chrysler there had been
encompassed some intangible assets existing beyond the official pre-merger financial
statements of combining entities as acquirees’ brand names, and customer and depositor
relationships (Appendices A2-A4). Their fair values have been determined by independent
auditors. 136
134See for more details FAS 160, IAS 27 and FASB-IASB educative course.
135See for more details FAS 160, IAS 27 and FASB-IASB educative course.
71
Fair value adjustments: lease contracts
As it has been mentioned for preparation of pro-forma consolidated financial statements there
have been recognized and measured acquirees’ capital lease contracts i.e. long-term assets
under capital lease (Appendices A2-A4). Such contracts of Daimler-Benz AG and Chrysler
Corporation reevaluated at fair value have been encompassed into pro-forma consolidated
financial statements of Daimler-Chrysler AG business combination. In the pro-forma
consolidated financial statements of Daimler-Benz business combination there had not been
encompassed the operating lease contracts in which Daimler-Benz AG and Chrysler Corporation
were lessees. On the contrary to this there had been encompassed operating lease contracts in
which Daimler-Benz AG and Chrysler Corporation were the lessors. Data on both types of
contracts was derived from official pre-merger financial reports of both combining entities on
September 31, 1998. Also into pro-forma consolidated financial statements there had been
encompassed the fair value amount of favorable or unfavorable aspect of an operating lease in
which Daimler-Benz AG and Chrysler Corporation were lessors and lessees separately within
other intangible assets (Appendices A2-A4).
Consolidation and goodwill impairment: step 1. Consolidation adjustments for Daimler-

Chrysler AG pro-forma consolidated financial statements. Consolidation adjustments.
Into pro-forma consolidated financial statements there had been encompassed consolidation
adjustments in accordance with FAS 160, IAS 27 FASB-IASB educative program and referring to
acquirees i.e. Daimler-Benz AG and Chrysler Corporation and acquirer i.e. Daimler-Chrysler AG.
All these adjustments have been introduced in Appendices A4, B4 and B5.
Consolidation adjustments: consolidated financial statements adjustments of acquirees
For preparation of Daimler-Chrysler AG pro-forma consolidated financial statements on

November 12, 1998 in accordance with currently valid US GAAP and IAS/IFRS rules there were
performed certain adjustments of Daimler-Benz AG and Chrysler Corporation statements of
financial position and statements of change in financial position derived from pro-forma Merger
report prepared on November 10, 1998 within diploma thesis research. There were cancellation
of double accounts, minority interests and some restructuring adjustments.
Consolidation adjustments: consolidated financial statements adjustments of acquirees.

Cancellation of double accounts.
In accordance with US GAAP and IAS/IFRS while consolidating financial statements for business
combination special attention should be paid to cancellation of double accounts. The
consolidation of financial statements for business combination basically involves summing up
the amounts for various financial statement items across the separate acquirees’ statements
reevaluated at fair value i.e. statement of financial position and statement of change in financial
position. While such consolidated accounting it is necessary to adjust the amounts resulting
from the summation, in order to eliminate double-counting resulting from intercompany
transactions like movements of cash, revenue, assets, or liabilities from one entity to another
within business combination etc. In practice for cancelation of double accounting there should
be compiled special eliminating journal entries for accounts not reported on the financial
statements. That is done with two goals. Firstly, it provides additional fair value measurement
since certain consolidation eliminating entries are prepared by recording a debit for the account
balances of the acquirees’ common stocks, paid in capital and retained earnings accounts. The
72
sum of these three accounts is the acquirees’ fair value. Secondly, it provides elimination of
certain entries e.g. the entry must include a credit to the investment in acquirees’ accounts for its
balance and such credit eliminates the account.
For all such transactions there should be prepared special internal accounting elements i.e.
journal entries, ledger accounts, work sheet and working notes designed particularly for
compilation of consolidated financial statements for business combination. Within diploma
thesis research there was the obvious absence of such supplementary internal accounting
elements. That is why while preparing the consolidated financial statements of Daimler-Chrysler
AG business combination there have been used the already made cancelation adjustments
derived from official Merger report and original consolidated financial statements prepared by
group of independent auditors. There were cancelled certain movements of cash taken place in
pre-merger period between Daimler-Benz AG and Chrysler Corporation, which could be
reflected in the consolidated statement of cash flow.

Cancellation of minority interest.
Within compilation of consolidated financial statements for Daimler-Chrysler AG business

combination there have been provided adjustments under FAS 160 and IAS 27 referring to
cancellation of USD 1 441 million of minority interest account assuming the title of Daimler-Benz
AG and Chrysler Corporation to share in capital of each other. That resulted in corresponding
changes within Daimler-Chrysler consolidated statement of financial position (Appendix A4) i.e.
minority interest, and statements of change in financial position i.e. discontinued operations137.

Restructuring adjustments.
There had been done some restructuring adjustments for Daimler-Chrysler AG business
combination138. There had been provided adjustments referring to the cancellation of
USD 4 043 million ordinary shares of Daimler-Benz AG and Chrysler Corporation held in
treasury. That resulted in corresponding acquirees’ statements of financial position (Appendix
A4) i.e. capital stock, treasury stock.
There had been provided adjustments referring to accounting of acquisition costs and
compensation costs due to change in control of USD 550 million. That resulted in corresponding
changes within acquirees’ statements of financial position (Appendix A4) i.e. consideration, and
statements of change in financial position (Appendices B4) i.e. discontinued operations. 139
There have been provided adjustments referring to accounting of USD 1 158 million tax benefit
of Daimler-Benz AG and Chrysler Corporation. That resulted in corresponding changes within
acquirees’ statements of financial position (Appendix A4) i.e. consideration, and statements of
change in financial position (Appendix B4) i.e. discontinued operations. 140
137 GAAP account №5490-X, Misc revenue; IAS/IFRS account №669, Other financial revenue
138 See for more details FAS 160 and IAS 27 and FASB-IASB educative program.
139 GAAP account № 8670-X, Corporate expenses; IAS/IFRS account №569, Other financial expenses.
140 GAAP account №5490-X, Misc revenue; IAS/IFRS account №669, Other financial revenue.
73
Consolidation adjustments: consolidated financial statements adjustments of acquirer
Further for preparation of Daimler-Chrysler consolidated financial statements on November 12,

1998 in accordance with currently valid US GAAP and IAS/IFRS rules there were performed
certain adjustments referring Daimler-Benz AG business combination transaction. They were
adjustment referring to statement of financial position and statement of change in financial
position derived from pro-forma Merger report prepared on November 10, 1998 within diploma
thesis research. So, under FAS 160 and IAS 27 and FASB-IASB educative program there had been
provided adjustments referring to conversion of USD 9 298 million treasury stocks of Daimler-
Chrysler AG held in treasury into common stocks. That resulted in corresponding changes within
acquirer’s consolidated statement of financial position (Appendix A4) i.e. capital stock, treasury
stock. Also there had been provided adjustments referring to purchase price allocation i.e.
accounting of USD 44 642 million excess considerations transferred of Daimler-Chrysler AG.
That resulted in corresponding changes within acquirer’s consolidated statement of financial
position (Appendix A4) i.e. consideration, goodwill.
Consolidation and goodwill impairment: step 2. Merger modeling for Daimler-Chrysler AG

business combination
While accounting for Daimler-Chrysler AG business combination the merger modeling

comprised the determination of exchange ratio and purchase price with its further allocation
and subsequent goodwill impairment. 141

business combination. Determining the exchange ratio
In a stock swap merger as Daimler-Chrysler AG business combination turned out to be the

exchange ratio should be determined. The exchange ratio could be determined according to the
firms’ book values, market values, sales, earnings, or some other characteristic. The exchange
ratio for Daimler-Chrysler AG business combination had been determined on the basis of
acquirees’ market capitalization on the date of Merger report preparation. The market value of
Daimler-Benz on November 10, 1998 was USD 58.1 billion, whereas Chrysler’s market value was
about half that value at USD 26,8 billion. With certain adjustments in favor of Chrysler
Corporation the actual exchange ratios for the Daimler-Chrysler AG shares were set at 1:1.005
for Daimler-Benz AG shareholders and 1:0,6235 for Chrysler shareholders. Splitting
DaimlerChrysler among the former Daimler and Chrysler shareholders according to these
exchange ratios put Chrysler’s share of the new company at 41,4% (instead of 31,6%).

business combination. Determining the purchase price
For a merger the purchase price can be determined as the market value of capital shares of
combining entities converted into shares issued by new entity emerged after business
combination of two earlier existing entities. For determination of Daimler-Chrysler purchase
price there had been used calculations derived from official Merger report prepared by a group
of independent auditors 142. So, by experts’ calculations the levered consideration (including the
cost of options and new shares to be issued by Daimler-Benz AG and Chrysler Corporation to
141See for more details FAS 160 and IAS 27 and FASB-IASB educative program.
74
qualify for acquisition accounting treatment) to be paid by Daimler-Chrysler AG in the business
combination transaction based on a per share price for Daimler-Benz Ordinary Shares and
Chrysler Common Stock of USD 89,45 and USD 26,37 respectively. In case of Chrysler
Corporation the estimated per share price represented a 30% premium over the USD 20,28
price per share of Chrysler Common Stock on October 31, 1998. Such per share price
consideration of Daimler-Benz AG and Chrysler Corporation was calculated as a multiple of (i)
sales revenues (based on estimates of Daimler-Benz AG and Chrysler Corporation
managements), (ii) EBITDA, (iii) earnings before interest and taxes (EBIT) and (iv) net income
(based on estimates of Daimler-Benz AG and Chrysler Corporation managements).
Hence taking into account the total number of shares of Daimler-Benz AG and Chrysler
Corporation the assumed net value of consideration transferred within Daimler-Chrysler AG
deal was USD 251 698 million. To get the total value of consideration transferred it is necessary
to add to net value the value of transaction costs and deduct the tax benefit received. Hence the
estimated total value of consideration transferred in Daimler-Chrysler AG deal is considered to
be USD 251 090 million.
Chrysler Common Stock outstanding: 1 743 580 366

Daimler-Benz Ordinary Shares outstanding: 2 300 101 207
Market per share price for Chrysler common USD 26,37

stocks:
Market per share price for Daimler-Benz ordinary USD 89,45

shares:
Net consideration transferred: USD 251 698 000 000
Estimated Daimler-Chrysler acquisition costs: USD 350 000 000
Estimated Daimler-Chrysler compensation costs: USD 200 000 000
Tax benefit: USD 1 158 000 000
by Daimler-Benz USD 856 000 000
by Chrysler Corp USD 304 000 000
Total consideration transferred: USD 251 090 000 000

business combination. Purchase price allocation
The purchase price allocation for Daimler-Chrysler AG business combination assumes the
determination of consideration transferred within combination with further comparison of its
value with estimated fair value of assets acquired from Daimler-Benz AG and Chrysler
Corporation in course of business combination. 143 The excess is considered as goodwill
(Appendices A4, B4-B5). The ultimate operation is impairment of goodwill created.
143 See for more details FAS 141 (R), IFRS 3 (R), FAS 157, IFRS 13, FAS 160, IAS 27, FAS 142 and IAS 36.
75
In practice there are two ways how to measure goodwill created in course of business
combination – direct way through consolidated statement of financial position(i.e. comparison of
consideration transferred and fair value estimated) or indirect way through consolidated
statement of change in financial position (i.e. comparison of EPS before and after merger). For
simplification of research there will be applied direct way i.e. the goodwill acquired in course of
Daimler-Chrysler AG business combination will be evaluated as difference between
consideration transferred by Daimler-Chrysler AG and fair value of Daimler-Benz AG and
Chrysler Corporation total assets.
Total consideration transferred: USD 251 090 000 000
Fair value of total assets acquired: USD 206 448 000 000
Daimler-Benz USD 143 384 000 000
Chrysler Corporation USD 63 063 000 000
Excess of purchase consideration or USD 44 642 000 000

purchase price over fair value of net assets
acquired
Consolidation and goodwill impairment: step 2. Merger modeling for

Daimler-Chrysler AG business combination. Impairment of goodwill
For purposes of the unaudited pro-forma consolidated statement of financial position the
unallocated excess purchase price, as determined above, has been defined as goodwill resulting
from Daimler-Chrysler AG business combination. It has been done in accordance with FAS 141
(R) and IFRS 3 (R) 144 which require the acquirer i.e. Daimler-Chrysler AG to recognize goodwill
as of the acquisition date, measured as the excess of the aggregate value of the consideration
transferred over fair value of assets acquired from Daimler-Benz AG and Chrysler Corporation.
Likewise in accordance with IAS 36 and FAS 142 145 goodwill received in result of Daimler-
Chrysler deal shall not be amortized, however it should be tested for impairment. Under
standards if the fair value of business combination exceeds its book value, which is the case of
Daimler-Chrysler deal, so the business combination and goodwill received is considered not
impaired. Since goodwill received in course of Daimler-Chrysler AG business combination meets
the requirements imposed by the standards, so while pro-forma accounting for goodwill and its
subsequent impairment for Daimler-Chrysler AG deal there have to be done no further
adjustments and calculations. It is necessary to note that within official consolidated financial
statements of Daimler-Chrysler AG deal the goodwill received had been subjected to
amortization. That was done due to original accounting approach applied for accounting for
Daimler-Chrysler AG deal in 1998 i.e. pooling of interest method and goodwill amortization
undre prior accounting standards valid till 2001 when they were replaced by FAS 141 (R),
FAS 142, IFRS 3 (R) and IAS 36.
145 IAS 36 (par. 80-90) and FAS 142 (par. 18, p. 12)
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Section 2.3. Comparison of US GAAP and IAS/IFRS accounting practices:
convergence and remaining differences.
For almost 40 years nearly all business transactions in the world were subjected to American
accounting procedures. US GAAP turned out to be so good among other existing national
accounting practices that it quickly gained the worldwide acceptance. However, some 10 years
ago the situation began to change when Europe declared about its potential to become a strong
competitor in the global race for monopolistic position in international accounting practices. So,
IAS/IFRS were brought into life. The introduction of IAS/IFRS led to a discussion on the relative
quality and comparability of both accounting regimes. However, until now relatively little
research has been devoted to this subject. Although such research is yet rather fragmental and
lacks some systematization but it already allows to make some preliminary conclusions. So
findings based on works of Ampofo and Sellani (2009), Barth et al. (2012), Ernsberger and
Vogler (2008), Gergiou and Jack (2011), Meulen et al. (2007), Rezaee et al. (2010), Zeff (2009)
indicate that US GAAP and IAS/IFRS accounting amounts generally have high value of relevance
and comparability.
The main driver of such harmonization in terms of both quality and comparability is the
extensive convergence of the two accounting systems which had been and still is being
performed by FASB and IASB. Convergence in this context can be defined as a process of the
gradual elimination of differences between IAS/IFRS and US GAAP, as contemplated in formal
agreements, such as the Norwalk Agreement of 2002 between FASB and IASB. This process
entails changes in both US GAAP and IAS/IFRS to eliminate differences, collaboration in
establishing accounting standards and ultimate adoption of IAS/IFRS in place of US GAAP
(Rezaee et al., 2010).
For today several studies have addressed harmonization and convergence in global accounting
standards. Earlier studies, such as Anderson (1993), present the advantages of convergence to a
global accounting system. Saudagaran (2009) examines impediments to the harmonization of
accounting, including cultural and political barriers. This study argues that harmonization
provides several advantages, such as improving the comparability of international accounting
information, enabling the flow of international investments, and making consolidation of
divergent financial reporting more cost-effective.
Studies reporting improvements in financial reporting quality following voluntary IAS/IFRS

adoption mainly focus on comparison of accounting amounts received by German firms that
were permitted to apply either US GAAP or IAS/IFRS. Such studies include Barth, Landsman and
Lang (2007), Verrecchia and Leuz (2000). Verrecchia and Leuz compared measures of
information asymmetry for German firms and found little evidence of differences in bid/ask
spreads, trading volume, and stock price volatility for firms that apply US GAAP relative to those
that apply IAS/IFRS. Bartov et al. documented that earnings response coefficients are highest for
German firms applying US GAAP, followed by those applying IAS/IFRS, and followed by those
applying German standards.
More recent studies (Barth et al., 2012, Charabarty and Shaw, 2012, Kim and Haidan, 2012,
Rezaee et al., 2010) examine the feasibility of convergence to IAS/IFRS, including the potential
advantages of producing more accurate, timely, and complete financial information, eliminating
international differences in accounting standards, and removing barriers to the global capital
markets. Barriers to US GAAP and IAS/IFRS convergence addressed in these studies are the
77
persistence of international differences under IAS/IFRS, the existence of market, legal, and
political differences, and IAS/IFRS enforcement issues.
As the result of such works there might be indicated the cancellation of form 20-F adopted by
SEC which had become the practical evidence of high comparability of both accounting systems.
However, some differences continue to remain. Global operations present a variety of challenges
and opportunities for multinational companies caused by differences in cultural, political, legal,
and accounting standards. IAS/IFRS are intended to be equally applicable to all public
companies worldwide; however, corporate ownership structure, corporate governance, and
financial reporting processes vary among countries. Corporations in Europe are often owned by
a controlling group of shareholders, as compared to the dispersed-ownership structure in the
USA. While the principles-based IAS/IFRS may well work for European majority-owned
corporations, US GAAP may best serve dispersed-ownership corporations. That is why according
to preliminary estimations under ordinary economic conditions the complete convergence can
be made possible only in 10 years while under extraordinary economic conditions e.g. global
financial crisis and subsequent recession it will take more remote time horizons, and until that
time there will constantly remain some differences between accounting amounts reported under
US GAAP and IAS/IFRS.
In light of all presented above the diploma thesis work is directed toward providing some
exploratory results on the US GAAP and IAS/IFRS comparison in general and in terms of
accounting for business combinations in particular.
Subsection 2.3.1. Comparison of general accounting practices
The more deep and sophisticated research based on wide sample of US and non-US companies
regulated by US GAAP and IAS/IFRS in time period from 1995 till 2012 and operation with such
accounting outputs as stock price and stock return definitely would give more precise results as
those of Barth et al. (2012), Charabarty and Shaw (2012), Kim and Haidan (2012), Rezaee et al.
(2010). However, such research belongs to much higher level of academic work then that to
which this diploma thesis belongs. That is why from such modest perspective of view as this
diploma thesis work has in its general and its practical part in particular it is possible to perform
the comparison of US GAAP and IAS/IFRS in general and their accounting policies referring to
business combinations in particular only in terms of comparability of their accounting standards
but not in terms of accounting amounts as it could be in case of more advanced accounting
research.
As it has been mentioned above today convergence continues to be a high priority on the
agendas of both FASB and IASB. However, the convergence process is designed to address only
the most significant differences and areas that the Boards have identified as having the greatest
need for improvement. While the converged standards will be more similar, differences will
continue to exist between US GAAP as promulgated by FASB and IAS/IFRS as promulgated by
the IASB (EY, 2011). It is necessary to stress that the two sets of standards are generally more
alike than different for most commonly encountered transactions, with IAS/IFRS being largely,
but not entirely, grounded in the same basic principles as US GAAP. The general principles and
conceptual framework are often the same or similar in both sets of standards, leading to similar
accounting results. This subpart focuses on differences most commonly found in present
78
practice and, when applicable, provides an overview of how and when those differences are
expected to converge.
Segmental comparison
Before going into detailed analysis of existing similarities and differences between US GAAP and
IAS/IFRS accounting practices across their segmental components like presentation of financial
statements, inventory, long-lived assets, debt and income tax it would be important to present
some overall fundamental differences.
For the first, IAS/IFRS contains broad principles to account for transactions across industries,
with limited specific guidance and stated exceptions to the general guidance. IAS/IFRS does not
contain specific guidance that corresponds to a detailed US GAAP requirement. However, while
potentially noted as a difference in the text of the two sets of standards, the absence of specific
IAS/IFRS guidance may not indicate a complete absence of guidance under IAS/IFRS. Often
IAS/IFRS contains general principles for recognition, measurement and disclosure – either in a
standard specific to that type of transaction, in a general standard such as IAS 1, Presentation of
Financial Statements, or in the IAS/IFRS Framework – that may result in a particular transaction
or activity being accounted for in a manner similar to US GAAP or in a manner that differs from
US GAAP. Therefore, identification of such differences is based on the fact that text exists in US
GAAP that does not exist in IAS/IFRS in the same manner.
For the second, fundamental differences exist between the FASB and IASB conceptual
frameworks. The FASB’s Statements of Financial Accounting Concepts and the IASB’s
Framework for the Preparation and Presentation of Financial Statements differ with respect to
the underlying concepts and the authority of the concepts in application. The Boards often are
guided by the conceptual frameworks in their development of standards and in their review of
existing standards and, thus, differences in the frameworks can contribute to differences in the
recognition and measurement guidance incorporated at the standards level.
Examples of the basic differences that currently exist between the conceptual frameworks
include the level of authority and definition and recognition of assets and liabilities.
In regard of level of authority IAS/IFRS’s Conceptual Framework is authoritative guidance, and

the concepts are applied when there is no standard or interpretation that specifically applies to a
transaction, other event, or condition. US GAAP’s Concept Statements were not included in the
ASC and, thus, are not FASB authoritative guidance.
US GAAP’s Concept Statements define an asset or a liability in terms of a “probable” future event
(i.e., economic benefit for an asset and economic sacrifice for a liability) with “probable” defined
in a general-use context, referring to that which can be reasonably expected or believed on the
basis of available evidence. IAS/IFRS does not include the concept of probability in the definition
of an asset or a liability, rather considering the probability of occurrence in the recognition
requirements, though “probable” is not defined. But IAS/IFRS has an additional recognition
criterion that requires an entity to be able to measure reliably the cost or value before
recognition.
Segmental comparison: presentation of financial statements
There are many similarities in US GAAP and IAS/IFRS guidance on financial statement
presentation. Under both frameworks, the components of a complete set of financial statements
79
include: balance sheet, income statement, other comprehensive income, cash flows and notes to
the financial statements. Both US GAAP and IAS/IFRS also require that the financial statements
be prepared on the accrual basis of accounting (with the exception of the cash flow statement)
except for rare circumstances. Differences between the two sets of standards tend to arise in the
level of specific guidance provided. There are the following significant differences:
o Financial periods required
US GAAP – generally, comparative financial statements are presented; however, a

single year may be presented in certain circumstances. Public companies are required
balance sheets for the two most recent years, while all other statements must cover
the three-year period ended on the balance sheet date.
IAS/IFRS – comparative information must be disclosed with respect to the previous
period for all amounts reported in the financial statements.
o Layout of balance sheet and income statement
US GAAP – no general requirement within US GAAP to prepare the balance sheet and
income statement in accordance with a specific layout; however, public companies
must follow the detailed requirements in Regulation S-X.
IAS/IFRS – IAS 1, Presentation of Financial Statements, does not prescribe a standard
layout, but includes a list of minimum items. These minimum items are less
prescriptive than the requirements in Regulation S-X.
o Presentation of debt as current versus non-current in the balance sheet
US GAAP – debt for which there has been a covenant violation may be presented as
non-current if a lender agreement to waive the right to demand repayment for more
than one year exists prior to the issuance of the financial statements.
IAS/IFRS – debt associated with a covenant violation must be presented as current
unless the lender agreement was reached prior to the balance sheet date.
o Income statement – classification of expenses
US GAAP – SEC registrants are required to present expenses based on function

IAS/IFRS – entities may present expenses based on either function or nature.
However, if function is selected, certain disclosures about the nature of expenses must
be included
o Income statement – extraordinary items
Restricted to items that are both unusual and infrequent.

Prohibited.
o Income statement – discontinued operations presentation
US GAAP – discontinued operations classification is for components held for sale or

disposed of, provided that there will not be significant continuing cash flows or
involvement with the disposed component.
IAS/IFRS – discontinued operations classification is for components held for sale or
disposed of that are either a separate major line of business or geographical area or a
subsidiary acquired exclusively with an intention to resell.
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The Boards’ joint project on financial statement presentation may ultimately result in significant
changes to the format of the financial statements under both US GAAP and IAS/IFRS, but further
action is not expected in the near term.
Segmental comparison: inventory
ASC 330, Inventory, and IAS 2, Inventories, are based on the principle that the primary basis of
accounting for inventory is cost. Both define inventory as assets held for sale in the ordinary
course of business, in the process of production for such sale or to be consumed in the
production of goods or services. Further, under both sets of standards, the cost of inventory
includes all direct expenditures to ready inventory for sale, including allocable overhead, while
selling costs are excluded from the cost of inventories, as are most storage costs and general
administrative costs. There are the following significant differences:
o Costing methods
US GAAP – LIFO is an acceptable method. Consistent cost formula for all inventories
similar in nature is not explicitly required.
IAS/IFRS – LIFO is prohibited. Same cost formula must be applied to all inventories
similar in nature or use to the entity.
o Valuation restriction
US GAAP – no restriction.
IAS/IFRS – requires that an entity use the same formula for all inventories having a
similar nature and use to the entity
o Measurement
US GAAP – inventory is carried at the lower of cost or market. Market is defined as

current replacement cost, but not greater than net realizable value and not less than
net realizable value reduced by a normal sales margin.
IAS/IFRS – inventory is carried at the lower of cost or net realizable value. Net
realizable value is defined as the best estimate of the net amount inventories are
expected to realize.
o Recognition of impairment reversals
US GAAP – any write-down of inventory to the lower of cost or market creates a new
cost basis that subsequently cannot be reversed.
IAS/IFRS – previously recognized impairment losses are reversed up to the amount of
the original impairment loss when the reasons for the impairment no longer exist.
No further convergence is planned at this time.
Segmental comparison: long-lived assets
IAS 16 and ASC Topic 360, both titled Property, Plant and Equipment, require initial
capitalization of property, plant, and equipment at an amount based on cost and generally
require subsequent depreciation of the capitalized asset. Both IAS/IFRS and US GAAP require
the performance of impairment tests when there is an indicator of impairment.
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Both US GAAP and IAS/IFRS have similar recognition criteria, requiring that costs be included in
the cost of the asset if future economic benefits are probable and can be reliably measured.
Neither model allows the capitalization of start-up costs, general administrative and overhead
costs. Depreciation of long-lived assets is required on a systematic basis under both accounting
models. US GAAP and IAS/IFRS both treat changes in residual value and useful economic life as a
change in accounting estimate requiring prospective treatment.
Assets held for sale criteria are similar in the both US GAAP and IAS/IFRS. Under both standards,
the asset is measured at the lower of its carrying amount or fair value less costs to sell, the assets
are not depreciated and they are presented separately on the face of the balance sheet.
There are the following significant differences:
o Depreciation of asset components
US GAAP – component depreciation permitted but not common;

IAS/IFRS – component depreciation if asset components have differing benefit
patterns
o Measurement of borrowing costs
US GAAP – eligible borrowing costs do not include exchange rate differences. Interest
earned on the investment of borrowed funds cannot offset interest costs incurred;
IAS/IFRS – eligible borrowing costs include exchange rate differences from foreign
currency borrowings. Such costs are offset by investment income earned on those
borrowings.
o Impairment
US GAAP – requires that entities use a two-step approach to measure impairment. In

the first step, entities are required to perform a recoverability test by comparing the
expected undiscounted future cash flows to be derived from the asset with its
carrying amount. If the asset fails the recoverability test, the second step is triggered,
under which the entity must record an impairment loss calculated as the excess of the
asset’s carrying amount over its fair value;
IAS/IFRS – requires that an impairment loss is calculated as the excess of the asset’s
carrying amount over its recoverable amount. The recoverable amount is the higher
of the asset’s fair value less costs to sell and value in use.
The FASB issued a proposal that would require an entity that meets certain criteria to measure
its investment properties at fair value as it is already required by IAS/IFRS.
Segmental comparison: debt
IAS 39, Financial Instruments: Recognition and Measurement, and ASC Topic 470, Debt, have
generally similar requirements for accounting for debt. Both standards require most financial
liabilities to be measured at amortized cost on the balance sheet, although a fair value option is
available for qualifying instruments. There are the following significant differences:
o Arrangement-specific guidance
82
US GAAP – provides specific guidance for recognition, measurement, derecognition,
presentation, and disclosure of financing arrangements, including participating
mortgage debt and product financing arrangements.
IAS/IFRS – does not have corresponding guidance for these specific types of
arrangements.
o Debt extinguishments
US GAAP – require an exchange of debt instruments with “substantially different

terms” to be treated as an extinguishment. This threshold generally is met if there is a
change in the present value of cash flows before and after the modification of at least
10%. However, if the change is less than 10%, US GAAP requires the use of qualitative
considerations and professional judgment to consider the effects of contingent
payments or unusual interest rates and the addition or elimination of substantive
conversion factors in assessing whether a modification or extinguishment has
occurred.
IAS/IFRS – there is no corresponding incremental considerations. It means that
require an exchange of debt instruments with “substantially different terms” to be
treated as an extinguishment if there is a change in the present value of cash flows
before and after the modification of at least 10%.
o Refinancing of current obligations
US GAAP – an entity with the intent and ability to refinance on a long-term basis at the
balance sheet date is permitted to classify the debt as noncurrent.
IAS/IFRS – if an entity expects and has the discretion to refinance or roll over an
obligation under an existing loan facility for at least 12 months after the reporting
period, it classifies the obligation as noncurrent. IAS/IFRS does not permit an entity to
consider the potential to refinance the obligation in its assessment if there is no
arrangement in place.
It is expected that the Boards’ ongoing Financial instrument project may have an effect on nearly
all aspects of accounting for debt instruments and related costs.
Segmental comparison: income taxes
ASC 740, Income Taxes, and IAS 12, Income Taxes, require entities to account for both current
tax effects and expected future tax consequences of events that have been recognized using an
asset and liability approach. Deferred taxes for temporary differences arising from non-
deductible goodwill are not recorded under both US GAAP and IAS/IFRS, and tax effects of items
accounted for directly in equity during the current year are allocated directly to equity. There
are the following significant differences:
o Tax basis
US GAAP – tax basis is a question of fact under the tax law. For most assets and
liabilities, there is no dispute on this amount
IAS/IFRS – tax basis is generally the amount deductible or taxable for tax purposes.
The manner in which management intends to settle or recover the carrying amount
affects the determination of tax basis.
o Taxes on intercompany transfers of assets that remain within a consolidated group
83
US GAAP – requires taxes paid on intercompany profits to be deferred and prohibits
the recognition of deferred taxes on differences between the tax bases of assets
transferred between entities/tax jurisdictions that remain within the consolidated
group.
IAS/IFRS – requires taxes paid on intercompany profits to be recognized as incurred
and requires the recognition of deferred taxes on differences between the tax bases of
assets transferred between entities/tax jurisdictions that remain within the
consolidated group.
o Initial recognition exemption
US GAAP – does not include an exemption like that under IAS/IFRS for non-
recognition of deferred tax effects for certain assets or liabilities.
IAS/IFRS – deferred tax effects arising from the initial recognition of an asset or
liability are not recognized when (1) the amounts did not arise from a business
combination and (2) upon occurrence, the transaction affects neither accounting nor
taxable profit
While the Boards have abandoned plans for a joint convergence project, the IASB may consider a
fundamental review of the accounting for income taxes as part of its agenda consultation process
during 2012.
Subsection 2.3.2. Comparison of accounting practices for business combinations
As it has been stated earlier the more deep and sophisticated research based on wide sample of
US and non-US companies regulated by US GAAP and IAS/IFRS in their business transactions in
general and business combinations in particular in time period from 1995 till 2012 and
operation with such accounting outputs as stock price and stock return definitely would give
more precise results as those of Barth et al. (2012), Detzen and Zulch (2012), Georgiou and Jack
(2011), Gwillian and Jack (2011), Dorata (2009), Rezaee et al. (2010). However, such research
belongs to much higher level of academic work then that to which this diploma thesis belongs.
That is why from such modest perspective of view as this diploma thesis research based on the
simulation of accounting for Daimler-Chrysler deal it is possible to perform the comparison of
US GAAP and IAS/IFRS accounting referring to business combinations only in terms of
comparability of their accounting standards but not in terms of accounting amounts as it could
be in case of more advanced accounting research. That is why this subpart focuses on
differences most commonly found in present practices of accounting for business combinations
with brief overview of how and when those differences are expected to converge.
Segmental comparison
Likewise in case of general comparison there should be defined certain core segments within US
GAAP and IAS/IFRS accounting practices applied for business combinations. There are such
segments as business combinations, consolidation and joint venture accounting, intangible
assets and, impairment of long-lived assets, goodwill and intangible assets.
Segmental comparison: business combinations
The principal guidance for business combinations in US GAAP (FAS 141 (R)) and IAS/IFRS
(IFRS 3 (R)) represents the culmination of the first major convergence project between the IASB
and the FASB. Pursuant to FAS 141 (R) and IFRS 3 (R), all business combinations are accounted
84
for using the acquisition method. Upon obtaining control of another entity, the underlying
transaction is measured at fair value, establishing the basis on which the assets, liabilities and
non-controlling interests of the acquired entity are measured. Although the new standards are
substantially converged, certain differences still exist. For example, aspects of IFRS 3 (R) and
FAS 141 (R) refer to “control,” which is defined differently under IAS/IFRS as compared to U.S.
GAAP. Additionally, both IFRS 3 (R) and FAS 141 (R) exclude the formation of joint ventures
from their scope; however, joint ventures are defined differently under IAS/IFRS and US GAAP,
which could result in different accounting. There are the following significant differences:
o Measurement of non-controlling interest
US GAAP – non-controlling interests are measured at fair value.

IAS/IFRS – entities have an option, on a transaction-by-transaction basis, to measure
non-controlling interests at fair value, including goodwill, or at the non-controlling
interest’s proportionate share of the fair value of the identifiable net assets, excluding
goodwill.
o Contingencies
US GAAP – at initial recognition the liabilities arising from contingencies to be

recognized at fair value on the acquisition date if fair value can be determined. If fair
value cannot be determined reliably, US GAAP requires that the contingency is
recognized at acquisition pursuant to ASC 450. Also US GAAP requires that contingent
assets acquired in a business combination are recognized at fair value. At subsequent
measurement if contingent assets and liabilities are initially recognized at fair value.
IAS/IFRS – at initial recognition the liabilities arising from contingencies to be
recognized at fair value on the acquisition date if fair value can be determined. If fair
value cannot be determined reliably, the contingent obligation is not recognized. At
subsequent measurement the liabilities to contingencies are subsequently measured
at the higher of the amount that would be recognized in accordance with IAS 37, or
the amount initially recognized less, if appropriate, cumulative amortization
recognized under IAS 18.
o Contingent consideration
US GAAP – contingent consideration in a business combination is recognized at fair

value as an asset, liability, or equity. US GAAP requires that existing contingent
consideration arrangements of an acquiree that are assumed by an acquirer be
recognized initially at fair value and subsequently measured under guidance for
contingent consideration.
IAS/IFRS – contingent consideration in a business combination is recognized at fair
value as an asset, liability, or equity and there are no explicit requirements.
o Combination of entities under common control
US GAAP - the receiving entity records the net assets at their carrying amounts in the
accounts of the transferor (fair value).
IAS/IFRS – outside the scope of IAS/IFRS 3(R). In practice, either follow an approach
similar to US GAAP or apply the acquisition method if there is substance to the
transaction
Other differences may arise due to different accounting requirements of other existing US GAAP
and IAS/IFRS literature (e.g. identifying the acquirer, definition of control, definition of fair
85
value, replacement of share-based payment awards etc.), however, no further convergence is
planned at this time.
Segmental comparison: consolidation
The principal guidance for consolidation of financial statements, including variable interest
entities, under US GAAP is ASC 810, Consolidation and IAS 27 (R), Consolidated and Separate
Financial Statements contains the IAS/IFRS guidance. Under both US GAAP and IAS/IFRS, the
determination of whether entities are consolidated by a reporting entity is based on control,
although differences exist in the definition of control. Generally, all entities subject to the control
of the reporting entity must be consolidated with some limited exceptions. Further, uniform
accounting policies are used for all of the entities within a consolidated group, with certain
exceptions under US GAAP. Under both sets of standards, the consolidated financial statements
of the parent and its subsidiaries may be based on different reporting dates as long as the
difference is not greater than three months. However, under IAS/IFRS, a subsidiary’s financial
statements should be as of the same date as the financial statements of the parent unless it is
impracticable to do so. There are the following significant differences:
o Consolidation model
US GAAP – focus is on controlling financial interests. All entities are first evaluated as
potential VIEs. If a VIE, ASC 810 is followed. Entities controlled by voting rights are
consolidated as subsidiaries, but potential voting rights are not included in
consideration.
IAS/IFRS – focus is on the power to control, with control defined as the parent’s
ability to govern the financial and operating policies of an entity to obtain benefits.
Control is presumed to exist if the parent owns more than 50% of the votes, and
potential voting rights must be considered. Notion of de facto control must also be
considered.
o Variable interest entities (VIE)
US GAAP – requires the primary beneficiary to consolidate the VIE. For certain
specified VIEs, the primary beneficiary is determined quantitatively based on a
majority of the exposure to variability.
IAS/IFRS – VIEs are consolidated when the substance of the relationship indicates
that an entity controls the SPE.
o Preparation of consolidated financial statements — general
US GAAP – certain industry-specific exceptions exist;

IAS/IFRS – there is a limited exemption from preparing consolidated financial
statements for a parent company that is itself a wholly owned subsidiary, or is a
partially owned subsidiary.
The FASB and the IASB have issued proposals to establish consistent criteria for determining
whether an entity is an investment company. While proposals would largely converge the
definitions of an investment company in US GAAP and IAS/IFRS, differences in accounting and
reporting would remain.
86
Segmental comparison: intangible assets
Both US GAAP (FAS 141 (R) and FAS 144) and IAS/IFRS (IFRS 3(R) and IAS 38) define intangible
assets as nonmonetary assets without physical substance. The recognition criteria for both
accounting models require that there be probable future economic benefits and costs that can be
reliably measured, although some costs are never capitalized as intangible assets. Goodwill is
recognized only in a business combination in accordance with FAS 141 (R) and IFRS 3 (R).
Internally developed intangibles are not recognized as assets under both US GAAP and IAS/IFRS.
There are the following significant differences:
o Impairment testing
US GAAP – a cash-generating unit is not to be larger than an operating segment. Under

US GAAP, goodwill is allocated to reporting units. A reporting unit is an operating
segment (i.e. a top-down approach), and components with similar characteristics are
aggregated.
IAS/IFRS – goodwill is allocated to CGUs for purposes of performing impairment
testing. CGUs are the smallest groups of assets that generate cash inflows that are
largely independent from those of other assets (i.e. a bottom-up approach)
o Development costs
US GAAP – development costs are expensed as incurred..

IAS/IFRS – development costs are capitalized when technical and economic feasibility
of a project can be demonstrated in accordance with specific criteria, including:
demonstrating technical feasibility, intent to complete the asset, and ability to sell the
asset in the future.
o Impairment – reversal of loss
US GAAP – reversal of impairment losses is prohibited.

IAS/IFRS – intangible assets, other than goodwill, must be reviewed for any indication
that a previously recognized impairment loss no longer exists or has decreased. If an
impairment loss has decreased, it should be reversed up to the newly estimated
recoverable amount, not to exceed the initial carrying amount adjusted for
amortization.
No further convergence is planned at this time.
Segmental comparison: impairment of long-lived assets, goodwill and intangible assets
Under both US GAAP and IAS/IFRS, long-lived assets are not tested annually, but rather when
there are similarly defined indicators of impairment. Both standards require goodwill and
intangible assets with indefinite lives to be reviewed at least annually for impairment and more
frequently if impairment indicators are present. In addition, both US GAAP and IAS/IFRS require
that the impaired asset be written down and an impairment loss recognized. There are the
following significant differences:
o Method of determining impairment – long-lived assets
US GAAP – two-step approach requires that a recoverability test be performed first If

it is determined that the asset is not recoverable, impairment testing must be
performed.
87
IAS/IFRS – one-step approach requires that impairment testing be performed if
impairment indicators exist.
o Impairment loss calculation – long-lived assets
US GAAP – the amount by which the carrying amount of the asset exceeds its fair
value
IAS/IFRS – the amount by which the carrying amount of the asset exceeds its
recoverable amount; recoverable amount is the higher of: fair value less costs to sell
and value in use.
o Allocation of goodwill
US GAAP – goodwill is allocated to a reporting unit, which is defined as an operating

segment or one level below an operating segment (component).
IAS/IFRS – goodwill is allocated to a CGU or group of CGUs that represents the lowest
level within the entity at which the goodwill is monitored for internal management
purposes and cannot be larger than an operating segment as defined in IAS/IFRS 8.
o Method of determining impairment — goodwill
US GAAP – companies have the option to qualitatively assess whether it is more likely
than not that the fair value of a reporting unit is less than its carrying amount. If so, a
two-step approach requires a recoverability test to be performed first at the reporting
unit level. If the carrying amount of the reporting unit exceeds its fair value, then
impairment testing must be performed.
IAS/IFRS – one-step approach requires that an impairment test be done at the CGU
level by comparing the CGU’s carrying amount, including goodwill, with its
recoverable amount.
No further convergence is planned at this time. The FASB has a project to simplify how an entity
tests indefinite-lived intangible assets (other than goodwill) for impairment.
88
CONCLUSION
On the doorstep of the 21st century business combinations are becoming one of the predominant
features of modern economy and core drivers of world economic development.
The diploma thesis work comprises two parts i.e. theory and practice. The theoretical part
provides some inquiry into general nature and causes of business combinations as well as
general introduction into international accounting practices designed for accounting for
business combinations. The practical part takes an insight into some practical aspects of
US GAAP and IAS/IFRS accounting for business combinations on the basis of diploma thesis
simulation of Daimler-Chrysler AG business combination as well as subsequent comparison of
international accounting practices in general and the ones introduced and applied within
diploma thesis simulation in particular.
An inquiry into general nature and causes of business combinations deals with general concepts
and principles of mergers and acquisitions, members and participants of business combinations,
multiple-criteria classification of consolidation deals and wide range of motives for
consolidation.
Primary issues of US GAAP and IAS/IFRS practices designed for accounting for business
combinations comprise such topics as business combinations in general and their segmental
parts e.g. fair value measurement, consolidation and goodwill impairment. Further the issues of
business combinations are represented by brief introduction into general accounting concepts
and principles and acquisition method in particular. Similar structure the issue of fair value
measurement has i.e. introduction into general accounting concepts and principles with
subsequent description of fair value measurement approach. The last two issues i.e.
consolidations and goodwill impairment have rather simplified scope which is limited with brief
presentation of their core concepts and principles with some supplementary notes on their
practical application.
Practical aspects of US GAAP and IAS/IFRS accounting practices designed for business
combinations on the basis of diploma thesis simulation of Daimler-Chrysler AG business
combination comprises brief introduction into general structure of diploma thesis research and
diploma thesis research by itself. Within general structure of diploma thesis research there are
presented general principles such as review of literature and data mining as well as research
design comprising sample selection, general structure, calculations and underlying assumptions.
The diploma thesis research by itself is divided into two major parts which correspond to
realization of accounting procedures for acquisition method and fair value measurement for
Daimler-Chrysler AG business combination as the first part, and realization of accounting
procedures for consolidation of financial statements and goodwill impairment for Daimler-
Chrysler AG business combination as the second part of the research.
Comparison of US GAAP and IAS/IFRS accounting practices comprises brief introduction into
general issues such as relevance and comparability of US GAAP and IAS/IFRS accounting
regimes, their mutual convergence and remaining differences. Further there is presented
comparison within two blocks. They general comparison of US GAAP and IAS/IFRS within such
segments as framework, presentation of financial statements, long-lived assets, inventory, debt
and income taxes, and comparison of US GAAP and IAS/IFRS in regard of business combinations
89
in particular through such segments as business combinations, consolidation, intangibles and
impairment.
Such complex approach applied to diploma thesis study allows to draw the following brief
conclusions summarizing the essence of every subsection of diploma thesis work, which are
presented below.
The primary concepts of business combinations are mergers and acquisitions within which
acquirers through their management, executives and financial intermediaries receive control
over acquirees in friendly debt-structured deals aimed at vertical and conglomerate integration
in strive for business growth and diversification. The primary tool of US GAAP and IAS/IFRS
accounting for business combinations is acquisition method supplemented with fair value
measurement approach while the consolidation supplemented with goodwill impairment is the
secondary one. All methods and approaches are applied through a set of principles and
requirements, and in a sequence of steps among which recognition and measurement are the
predominant ones.
The simulation of accounting for Daimler-Chrysler AG business combination was based on

corresponding US GAAP and IAS/IFRS accounting practices i.e. FAS 141 (R), FAS 157, IFRS 3 (R)
and IFRS 13 as well as review of works dealing with issues of business combinations and
relevant accounting practices e.g. Lajoux and Reed (2005, 2007), Barth et al. (2012), Churyk et
al. (2009), Dorata (2009) and database search i.e. Daimler-Benz AG and Chrysler Corporation
annual reports, Forms 10-Q and 10-K, and companies’ financial statements submitted to
Bloomberg and Thompson Reuters. Within financial, energetic and automotive industries there
had been made a sample of Vollkswagen-Porsche, Daimler-Chrysler AG, Ford-Volvo, Renault-
AvtoVAZ and Toyota-Daihatsu business combinations with ultimate choice in favor of Daimler-
Chrysler as target one. Number of assumptions e.g. indirect pro-forma accounting, mixed
attribute model effected the simulation. Daimler-Chrysler AG has been identified as equity-
structured deal taken place on May 6, 1998 with Daimler-Chrysler AG as legal acquirer and
Daimler-Benz AG as actual one. The recognition and measurement of Daimler-Benz’s and
Chrysler-Corporation’s long-term assets and liabilities at fair value and corresponding revenues
and expenses made up the core of the first stage of the simulation. At the second stage the
accounting for Daimler-Benz’s and Chrysler Corporation’s specific assets, cancellation of
acquirees’ ordinary shares and common stocks, accounting of acquisition costs and tax benefit
led to final merger modeling. Simulation was completed with identification and measurement of
goodwill received from Daimler-Chrysler AG business combination as excess of consideration
transferred over fair value of total assets acquired.
Contemporary high relevance and comparability of US GAAP and IAS/IFRS had been reached
through their extensive 10-year-convergence. The study of remaining differences had been
performed within two blocks: through study of frameworks, presentation of financial
statements, accounting for long-lived assets, inventory, debt and income taxes as general
comparison of US GAAP and IAS/IFRS and through accounting for business combinations,
intangibles and their impairment, and consolidation of financial statements as comparison of
US GAAP and IAS/IFRS in regard of business combinations. The summary of US GAAP and
IAS/IFRS general comparison may be presented as following:
Frameworks as IAS/IFRS’s authoritative and US GAAP’s non-authoritative

pronouncements provide definitions of assets and liabilities in terms of probability
90
within which the latter is defined by US GAAP and although not directly defined by
IAS/IFRS but containing some test measuring of the reliability of future cost or value.
Financial statements are presented on IAS/IFRS’s annual and US GAAP’s 2- or 3-year

basis under US GAAP’s strict prescriptive requirements and enjoying more loose
IAS/IFRS’s ones, and supplemented with disclosures in form of certain headings and
subtotals as prescribed by US GAAP and not defined by IAS/IFRS.
In regard of inventories IAS/IFRS’s prohibition to use LIFO as costing method and

restriction to use a single formula for all inventories as valuation technique disputes
with US GAAP’s freedom of choice, and IAS/IFRS’s measurement at cost or realizable
amount opposes to US GAAP’s cost or market value.
US GAAP’s optional and IAS/IFRS’s compulsory depreciation of asset components as well

as US GAAP’s exclusion and IAS/IFRS’s inclusion of exchange rate differences into
borrowing cost value in line with IAS/IFRS’s measurement of impairment as excess of
carrying amount over recoverable amount as opposite to US GAAP’s two-step approach
for measurement of impairment provide regulation for long-term assets accounting.
In regard of debt obligations there US GAAP’s specific guidance on mortgage debt and
product financial arrangements supplemented with guidance on increment
considerations for exchange of debt instruments substantially differing in terms oppose
to IAS/IFRS’s absence of relevant regulations.
IAS/IFRS’s recognition opposite to US GAAP’s prohibition on recognition regulates

accounting for income taxes on intercompany transaction.
The summary of US GAAP and IAS/IFRS comparison in regard of business combinations may be
presented as following:
US GAAP’s measurement at fair value opposite to IAS/IFRS’s optional one of either fair
value or proportionate share in total fair value regulates measurement of non-
controlling interest.
IAS/IFRS’s measurement of contingent consideration at fair value is supplemented with

US GAAP’s explicit requirements.
IAS/IFRS’s measurement of contingent liabilities at fair value or non-recognition at all

opposes to US GAAP’s recognition in accordance with other standards in case of
impossibility liability’s recognition at fair value.
US GAAP’s recognition of combination of entities under common control fills the gap of
IAS/IFRS under which such combination exceeds its scope.
IAS/IFRS’s emphasis on power to control and US GAAP’s emphasis on controlling

financial interest in combination with IAS/IFRS’s absence and US GAAP’s abundance of
industry specific exceptions as well as IAS/IFRS’s adjustments and US GAAP’s disclosure
of significant events regulate preparation of consolidated financial statements.
91
US GAAP’s equity method of accounting for joint ventures is extended by IAS/IFRS’s
option of proportionate consolidation method.
Impairment testing of intangibles is performed on IAS/IFRS’s basis of cash-generating

unit which is opposite to US GAAP’s basis of reporting unit with subsequent IAS/IFRS’s
possibility to reverse the loss and prohibition on it under US GAAP.
The impairment of long-lived assets, goodwill and intangibles is performed on the basis
of IAS/IFRS’s one-step and US GAAP’s two-steps approach with calculation of
impairment loss as excess over fair value fair value under IAS/IFRS and excess over
recoverable amount under US GAAP, and allocation of goodwill to IAS/IFRS’s cash-
generating units and US GAAP’s reporting units.
92
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98
LIST OF ABBRAVIATIONS
[1] ASC - Accredited Standards Committee
[2] CEO - Chief Executive Officer
[3] CGU - Cash generating unit
[4] FAS - Financial accounting standard
[5] FASB - Financial Accounting Standards Board
[6] LIFO - Last In First Out
[7] IAS - International accounting standard
[8] IASB - International Accounting Standards Board
[9] IAS/IFRS - International Accounting Standards / International Financial

Reporting Standards
[10] US GAAP - United States Generally Accepted Accounting Principles
[11] VIE - Variable interest entity
99

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Masaryk University

Faculty of Economics and Administration

COMPARISON OF MERGERS AND ACQUISITIONS IN VIEW OF

Thesis Supervisor: Thesis Author:

Faculty of Economics and Administration

Academic year 2010/2011

ASSIGNMENT OF DIPLOMA THESIS

For: Bc. Lemeshko Oleksandra

Field: Financial Management

Title: Comparison of Mergers and Acquisitions in the View of

Principles of thesis writing :

Objective of the thesis:

Approach and methods used:

The extent of graphical works:

The thesis length without appendices: 60 – 70 pages

List of specialist literature:

Brealey, Richard A. - Myers, Stewart C. - Allen, Franklin. Principles of corporate

Diploma thesis supervisor: Ing. Bc. Alois Konečný

Date of diploma thesis assignment:20/3/2011

Department Head Dean

In Brno on October 4th, 2012

COMPARISON OF MERGERS AND ACQUISITIONS IN VIEW OF IAS/IFRS AND US GAAP .................... 1

Nowadays in times of forthcoming 7th wave of corporate consolidation it is expected that

to study general concepts and principles of mergers and acquisitions

to define members and participants of business combinations

to provide classification of consolidation deals and motives boosting mergers and

to study general concepts and principles of consolidation of financial statements and

to research practical aspects of US GAAP and IAS/IFRS application of acquisition method

to research practical aspects of US GAAP and IAS/IFRS consolidation and goodwill

to provide general comparison of common US GAAP and IAS/IFRS accounting practices

to provide comparison of US GAAP and IAS/IFRS accounting practices designed for

to provide data mining of accounting inputs

to perform research design comprising sample selection and underlying assumptions

Nowadays US GAAP and IAS/IFRS in general and in regard of business combinations in

International practices of accounting for business combinations

Subsection 1.1.1. Major concepts

Likewise in case of acquisition in regard of second broad category of business combinations

Subsection 1.1.3. Classification of mergers and acquisitions

According to methods used and motives driven

In general terms friendly acquisition refers to a situation in which a target company's

According to areas of deal memebrs’business activity

Horizontal business combination deals refer to consolidation of enteties producing similar

Conglomerate business combination deals stand for a business combinations of entities

According to deal consideration

Within classification of business combinations based upon their consideration it is possible to

By means to structure the consideration there are cash-structured deals, stock-structured

12 REUVID (ch. 2.3, p. 75-79), MILLER (ch. 3, p. 110-116)

Internal development alternative in accordance with common oppinion refers to a situation

In strive to avoid cyclicality reduction an acquirer may undertake a business combination. It

History: Business combination project

However it is important to stress that although outstanding degree of convergence between

Subsection 1.2.1. Core concepts and principles

Having a brief glimpse at core milestones of harmonization of international practices of

Core concepts: objective

Core concepts: scope

Core principles: principles referring to measurement period

Subsection 1.2.2. Application of acquisition method

Preliminary requirements: identifying a business combination

Preliminary requirements: structure of the business combination deal

Acquisition approach: step 1. Identifying the acquirer

In a business combination effected primarily by transferring cash or other assets or by incurring

In a business combination effected primarily by exchanging equity interests, according to FAS

Acquisition approach: step 2. Determining the acquisition date, determining the