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LECTURE WEEK ELEVEN. BUSINESS ACQUISITION , TAKEOVERS AND AMALGAMATIONS. Introduction: MASB 21. Acquisition: Is a business combination which is not a merger. When a company acquires the net assets or acquires shares of another company
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LECTURE WEEK ELEVEN BUSINESS ACQUISITION , TAKEOVERS AND AMALGAMATIONS
Introduction: MASB 21 • Acquisition: Is a business combination which is not a merger. When a company acquires the net assets or acquires shares of another company • Business combination or more specifically acquisitions but not a merger. • Business Combination: bringing together of separate enterprises into the one economic enterprise as a result of one enterprise gaining control over another enterprise.
Horizontal combination: enterprise in the same line of combining • Vertical combination: enterprise in the different line of combining but still at the same stream. • All buss. combination entail one business organization acquiring either the net asset or the controlling power of other companies.
Acquisition: Acquirer (pay a sum of money) => owners • The merger: business combination in which the shareholders of the combining enterprises combine control over the whole, or effectively the whole of their net asset and operations.
Types of acquisitions: Continued………
Classification of business combination: • Amalgamation • Absorption • Mergers and takeover The differences between amalgamation (absorption) and merger (takeover) is that for amalgamation the net assets and liabilities is acquired whereas the merger (acquisition) the net assets are not acquired but control is acquired
Amalgamation ABC Bhd Newly firm will be set up B Bhd – old firm will liquidate C Bhd – old firm will be liquidate
Absorption AB Sdn Bhd Acquires the asset and Liabilities of CD Sdn Bhd CD Sdn Bhd Will be wound up
Mergers an Takeovers • Mergers: a companies acquires the right to control in another company • Investor that control another company – parent • Acquired company – subsidiary • Take over: is the term use to describe the process of acquiring the majority of the the issued share capital
Recognition criteria : • Business combination should be classified as merger if: - prior to combination they must have autonomous and independent business enterprise. - fair value of one enterprise is not significantly different from that of the other enterprise - no party can be identified as an acquirer or acquiree - all parties to the combination must participate equally in establishing management structure.
the combination is effected in single transaction or completed within one year. • The substantial majority of voting share are exchanged • The shareholders of each enterprise maintaining substantially the same voting rights.
There have been no separate deals or plans by any of the combining enterprises.
Any business combination does not meet the criteria of a merger should be recognized as an acquisition. • Acquisition: - a transaction by which an acquirer seeks to increase the net assets, including goodwill, under it’s control.
Effective Date of Acquisition or Merger • Acquisition: the date on which control of the net asset and operations of the acquiree is effectively transferred to the acquirer. • Merger: date on which the merger deal is effectively finalized and closed.
Acquisition Accounting • Using the acquisition method: - In income statement & cash flow the result of operations and cash flow of the acquiree. - In balance sheet, the asset and liabilities of the acquiree and goodwill. - Identified the pre- acquisition and post – acquisition
Determination of acquisition cost • In all sales and purchase of business the price is arrived at by negotiation. • MASB 21: purchase price or cost of acquisition comprise of: - cash and cash equivalent - fair value of other consideration (other than cash) given by the buyer - any cost directly attributable to the acquisition
Recognition of Identifiable assets and liabilities acquired • The assets must be identified individually and recognized separately when: - it is probable that the asset will result in an inflow of future economic benefits to acquirer. - the cost or fair value of the asset or liability can be measured reliably
Measuring fair values of assets and liabilities acquired • Fair value: measured the cost of acquirer at the acquisition date. • Equity and marketable securities: at current market prices or valuation • Non – marketable securities: at estimated value based by considerations eg. PE ratio. • Debtors: at present value of the amounts received. • Stocks: cost of disposal (f/g) or cost to complete (wip) and current replacement cost (raw material)
Merger Accounting • Using the merger method: - an internal group reorganization should be accounted for under the merger method. Even though no merger criteria is meet provided: 1. the ultimate shareholder remain the same, the rights are unchanged. 2. the minorities share a net assets of the group is not altered by the transfer
Measuring the cost of merger • Recorded at the aggregate of the nominal value of equity shared issued, cash and cash equivalents and fair values of other consideration. • Expenditure connected with merger is recognized as an expense.
Disclosure: • For all business combination: - names and description of the combination. - the method of accounting - the effective date of combination - any operations resulting from the business combination.
For acquisition (additional information): - the percentage of equity share acquired. - the cost of acquisition and the purchase consideration paid. - the amount of goodwill - nature and amount of provision for restructuring. - adjustment of the provisional fair values
