ACCOUNTING FOR BUSINESS COMBINATION

A business combination is when a buyer takes control of another business by way of a

transaction. It can be defined as a transaction or event in which an acquirer ( an investor entity)
obtains control of one or more businesses.

Businesses may combine their operations in order to achieve mutual sharing of risk and reward
attached to the combined enterprises.

Before now (IFRS) business combination were accounted for using both the Acquisition and the
Merger methods.
Under the Merger methods, the net access and operations of two or more enterprise are combined
in one entity. The basis of transactions or combination is the exchange of common shares. So in
Merger one company acquires another company which becomes the subsidiary through the
exchange of shares either wholly or partially. However with the coming on board of IFRS,
accounting for business combinations can only be done using the Acquisition method.

IFRS 3 requires businesses to apply Acquisition method to all their business combinations.
Basically acquisition method involves

1. Identifying the acquirer (done with reference to the criteria given by IFRS 10 and additional
guidance given by IFRS 3).
2. Determine the acquisition date (this is usually the closing date of the deal when the
consideration is transferred).
3. Identify and measure the identifiable assets transferred, liabilities assumed and the non-
controlling interest.
4. Recognizing and measuring goodwill or gain from bargain purchase
5. Recognizing and measuring identifiable assets and liabilities.

An acquirer recognized items exchanged in a business combination if they meet the relevant
recognition definitions in the framework and they are transferred during the business combinations
and not through a separate transaction.

At acquisition date the acquirer measures assets and liabilities as the acquisition date fair value.

However, the standard allows some exceptions from the general recognition and measurement
principles.

The basic exceptions.

1. Contingent liabilities are required to be recognized even if the acquirer considers that an outflow
of resources and embodying economic benefits are not probable.

2. Deferred tax assets and liabilities and employee benefits are recognized in accordance with
relevant IFRS ie IAS 12 and IAS 19.

3. Any indemnification asset (an asset arising from an acquirer’s commitment to make good any
adverse contingent outcome) are to be recognized on the same basis as the associated indemnified
assets or liability.
4. The acquirer is not required to recognize short-term leases and leases of low-value items. Any
lease liability are to be recognized on the acquisition date present day value of remaining lease
payment.

Where the subsidiary is not wholly owned, the consolidated financial statement separately
represents the share holders equity, net income and other comprehensive income belonging to
minority interest /shareholders. So the consolidated Statement of financial position shows a single
figure titled non-controlling interest which represents the claim of minority shareholders on the
subsidiary’s net asset.
In the consolidated statement of profit or loss and consolidated statement of other comprehensive
income, an amount will also appear showing the net income and other comprehensive income
attributable to NCI / shareholders. But our scope is limited to subsidiaries wholly owned by a
parent company.

Illustrations
1. The summarized Statement of fin position of Unity PLC and Trust PLc whose directors and
share holders have agreed to combine their businesses are as follows.

State of Financial position as at 31 Dec., 2020

Unity Trust
N N
Non Current Asset :
Freehold Property 160 90
Equipment 270 150
Fixtures and Fittings 100 40
Motor vehicle 150 105
680 385

Current Asset:
Inventory 122 85
Receivables 165 80
Bills Receivables 18 -
Bank 85 45
390 210
1070 595
Equities and Liabilities:
Equities .
Ordinary share of N1 700 400
General Reserve 150 30
Retained Profit 100 75
950 500
Liabilities 120 90
1070 595

Unity PLC offered to acquire the entire share capital of Trust PLC by issuing new shares to
shareholders of Trust Plc in a one for two basis. The market value of shares in unity PLC at the
date of the offer was N 2.50.
You are. required to Prepare a Summarized Statement of Financial position of unity PLC
Immediately after The combination on 1st Jan 2021. Using the Acquisition method of accounting
for business combination.
Basic Procedure /Useful steps
No of shares issued
Cost of Acquisition
Share premium determination
Determine goodwill / Capital Reserve
Group State of Financial position

Illustration 1b
The Statement of financial position remain the same as above but the following information
applies
1. Exchange of share is in the ratio of 5 Shares in Unity PLC for 4 in Trust PLC.
2Assets of Trust PLC are revalued as follows: Equip N 190, M/V N100, Receivables N 65.
The fair values of Unity PLC remains N 2.50.

Required: Prepare a group Statement of Financial Position immediately after the combination

Illustration 2
The Summarized Statement of Financial position of Alo PLC and Bello PLC whose Directors
and some of the Shareholders have agreed to combine the two businesses as follows :

Statement of Financial Position as at 31 Dec., 2018

Alo plc Bello PL c

N '000 N'000
Non Current Asset :
Equipment 540 300
Fixtures & Fittings 200 80
Motor vehicle 300 210
1040 590
Current Assets :
Inventory 244 170
Receivable 330 160
Bank 170 90
: 744 420
1784 1010
Equity and Liabilities :
Equity :
Ord share 1000 600
General reserve 340 80
Retained Profit 204 150

Liabilities
Current liabilities 240 180

1784 1010

Additional Information
The market value of Shares in Alo Plc at the date of acquisition was N 2.75. Alo Plc offered to
acquire the whole capital of Bello Plc. The ratio of exchange of shares was one new share in Alo
PLC for every 3 shares held by the share holders of Bello PLC .

You are required to prepare a summarized Statement of financial position immediately after the
business combination on 1st January 2019 using the Purchase method.

Illustration 3
The Statement of financial position remain the same as above but the following information
applies
1. Exchange of share is in the ratio of 1 Share in Alo plc for one in Bello Plc (1:1)
2. In addition to the shares offered, Alo Plc offered to pay 15k per share in cash.
3. 5% of the shareholders are not in support of the combination.
Required: Prepare a group Statement of Financial Position immediately after the combination.