The joining of two or more businesses into one new organization is known as a business combination. This could manifest as a consolidation, merger, or acquisition. In a merger, two businesses consent to combining their business activities to form a new company. An acquisition occurs when one business purchases another and integrates it into its operations. In a consolidation, two or more businesses come together to create a brand-new, independent firm. For instance, the acquisition of Company B by Company A would be seen as a commercial combination. The balance sheet of Company A would list Company B’s assets and liabilities, and Company B’s financial outcomes would be disclosed in Company A’s financial statements. Process of accounting for business combination can be complex, and it generally involves revaluing the assets and liabilities of companies involved in transaction.
The accounting for a business combination generally involves the following steps:
- Identify the acquirer: An acquirer is a business that is buying another business. The assets and liabilities of the acquired firm will be included on this business’s balance sheet.
- Determine consideration transferred: Value that the acquiring party pays to the target firm is the consideration transferred. It may take the shape of money, stocks, or other assets.
- Measure fair value of assets acquired and liabilities assumed: The obligations taken on and the assets acquired in a business combination must be evaluated at their fair market value on the acquisition date. Third-party appraisers frequently carry out this task.
- Recognize and measure any non-controlling interest: In business mergers, the acquiring party often does not hold 100% of the target company. Non-controlling interest is the part of the business that is not held by the buyer. The acquirer’s balance sheet must be adjusted to reflect the measurement and recognition of the non-controlling interest’s value.
- Measure and recognize any goodwill: Goodwill is an intangible asset that develops when the acquirer pays more than the fair value of the assets they are buying and the liabilities they are taking on. Measurement and recognition of goodwill are required on the acquirer’s balance sheet.
Here is an illustration of how these procedures may be used in a company merger:
- The fair value of the assets bought and liabilities assumed is $450,000.
- Company A buys all of Company B’s outstanding shares for $500,000.
- The non-controlling interest is worth $50,000, while the acquisition’s goodwill is worth $100,000 ($500,000 – $450,000 – $50,000).
In this case, the acquisition would be noted in the journal with the following entry:
Debit: Cash ($500,000) Debit: Assets acquired ($450,000) Credit: Stock of Company B ($500,000) Credit: Liabilities assumed ($450,000) Debit: Goodwill ($100,000) Credit: Non-controlling interest ($50,000) This journal entry shows that the acquirer, Company A, paid $500,000 to acquire the assets and liabilities of Company B, and that $100,000 of goodwill was recognized on the balance sheet as a result of the acquisition. The non-controlling interest is also recognized on the balance sheet.