topic 2 - business combinations

8/3/2019 Topic 2 - Business Combinations

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One business is combinedwith another business

Occurs when one company

acquires either the netassets or control of otherbusiness

Definition


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FRS 3: Business Combinations

A business combination is the bringing together

a separate entities or businesses into onereporting entity. The result of nearly all businesscombinations is that one entity, the acquirer,obtains control of one or more other businesses,the acquiree. (para. 4)

Cont.


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4

The acquirer has to pay aspecific sum to the owner ofthe business purchase

price Purchase price could be

settled by cash, shares,debenture or combination of

them

Cont.


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5

Friendly Combination The BODs of the potential

combining companies negotiatemutually agreeable terms of aproposed combination

Hostile Combination The BODs of a company targeted

for acquisition resists the

combination Use tender offer to deal directly with

individual shareholders

Nature of the Combination


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Operating Synergies

Vertical combinationelimination of certain costsrelated to negotiation &bargaining

Horizontal combinationpooling of sales forces, facilities& elimination of duplication

costs

REASONS


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Globalisation

Easy to enter new markets

Financial Synergy Take advantage of tax laws

e.g. when an acquisition isfinanced using debt, the interest

payment is tax deductible

Cont.


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Diversification Easy to expand to another

business area

Cont.


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Loss of valuable goodwill

Monopolies conditions

Disadvantages


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Can be classified as: Amalgamations

Absorptions

Merger and Acquisition

Types of Business Combination


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When two or more companies combinedtogether to form a new company

Amalgamations

A Bhd B Bhd

AB Bhd


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Characteristics: New company is formed

Old company will be wound up

New company will acquire the assets andliabilities of the old companies

Consideration given may consist of cash,shares and/or debentures in the newcompany

Shareholders of the old companies canbecome the shareholder of a new

company Suitable for companies in similar size

*Illustration

Cont


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When one dominant company acquiredthe assets and liabilities of anothercompany

Absorptions

B Bhd

A Bhd

A Bhd


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Characteristics: The company that absorbs the small

company will be bigger

The company be acquired will beliquidated

No new company is formed Consideration given may consist of cash,

shares and/or debentures as inamalgamation

Shareholders of the company being

absorbed will become the shareholders ofthe company that absorbed them

*Illustration

Cont.


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In order to take over the assets and liabilitiesof the old business, the new company has topay some amount known as purchaseprice

Refers to the agreed value to be paid by thebuyer (new company) to the seller (oldcompany)

Purchase Price


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Could be settled in the form of: Cash

Shares

Debentures

Combination of the above

Cont.

PurchaseConsideration


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Purchase price = Purchase consideration

Cont.


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Factors to be considered to determine the purchase price:-

(i) The net assets taken over by the buyer

Only valued assets (tangible assets) will be taken over

Fictitious assets (e.g. preliminary expenses, trademarks)will not be acquired by the buyer

All the assets taken over normally will be revalued to thefair values

Cont.


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(ii) Liabilities taken over by the buyer

Sometimes liability is also being acquired by the buyer atthe fair market value

Thus, purchase price = Net assets Taken Over

(Assets Liabilities)

Cont.


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(iii) Goodwill

Refers to the difference between the purchase price and the fairvalue of the net tangible assets taken over by the buyer

Positive goodwill if the purchase greater than the fair value of net

tangible assets taken over

Negative goodwill if the purchase price lesser than the fair valueof net tangible assets taken over

Cont.


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(iv) Liquidation expenses

If an expense is incurred in the conversionprocess and the purchasing company agreed to

pay these expenses, the purchase price willinclude this extra cost incurred

Cont.


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*Refer to Handouts on accounting entries

Accounting Entries


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M&A occurred in a business when an investoracquired the right to exercise control in anothercompany (investee).

If it acquires more than 50% voting shares, theinvestee becomes a subsidiary of the investor.

The investee company is not wound up, only

changes in composition of shareholders.

Merger & Acquisition (M&A)


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If investor acquires more than 20% but lessthan 50% of issued share capital, the investeecompany will become an associate company

Acquisition is the term to describe the processof acquiring the majority of the issued sharecapital (merger).

Cont.


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All entities shall apply this FRS 3when accounting for businesscombination (para 5)

Whats new

All the business combinationshall use the purchase method(para 14)

FRS 3


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New criteria for recognisingidentifiable intangibles (otherthan goodwill)

Additional disclosure

requirements, including:- Reasons for business

combination

Allocation of purchase price paid

to the assets & liabilities

Cont.


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Purchase Method

Purchase Method means to record the businesscombination using the historical cost principle wherethe investor would record the purchase of another

entity in a business combination by the amount ofcash disbursed or by the fair value of other assetsdistributed or securities issued

Cont.


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Cost of business combination

The acquirer shall measure the cost of a business alsocalled purchase consideration as the aggregate:

(a) the fair values, at the date of exchange, of assets given,liabilities incurred or assumed and equity instrumentsissued by the acquirer, in exchange for control of theacquiree; plus

(b) any cost directly attributable to the business

combination (Para 24)

Cont.


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Cost directly attributable to the business combination

Included in the cost of combination direct costs or costdirectly attributable to business combinations such asprofessional fees paid to accountants, legal advisers,finders fees, valuers, liquidation expense and otherconsultants to effect the combination other than those

related cost of shares or securities issued (such asregistration and issuance of equity securities issued).

Cont.


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Issuance costs of equity securities issued in a purchase

combination are charged against the fair value of thesecurities issued. General administrative costs or indirectcosts including the costs of maintaining an acquisitionsdepartment, and other costs that cannot be directlyattributed (such as management, salaries, depreciation,

rent, etc) are expensed to income in the year incurred.

Cont.


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Cost of Acquisition

Old FRS 3 New FRS 3

Internal Costs(i.e. general admin, including acquisitiondepartment)

Expense Expense

Professional fees paid to consultants Cost of acquisition(impact GW)

Expense

Equity raising costs Equity Equity

Debt raising costs Debt Debt


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Different types ofbusiness combination

Roles of FRS 3

Conclusion

topic 2 - business combinations

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