AFAR CHAPTER 1
Resistance
often involves various moves by the target company, generally with colorful terms.
statutory consolidation
results when a new corporation is formed to acquire two or more other corporations; the acquired corporations then cease to exist (dissolve) as separate legal entities. X Company + Y Company = Z Company (Stockholders of the acquired companies (X and Y) becomes stockholders of new entity (Z).
Conglomerate Combination
s one involving companies in unrelated industries having little, if any, production or market similarities for the purpose of entering:into new markets or industries.
acquirer
the (blank) is the entity that obtains control of the acquiree
consolidation
the term (blank) will be used in its technical sense to refer for a business, combination in which all the combining companies are dissolved-and a new corporation is formed to take over their net assets.
Horizontal Integration
this type of combination is one that involves companies within the same industry that have previously been competitors.
Vertical Integration
this type of combination takes place between two companies involved in the same industry but at different levels. It normally involves a combination of a company and ifs suppliers or customers.
Statutory Merger
A (blank) entails that acquiring (acquirer) company survives, whereas the acquired (acquire) company (or companies) ceases to exist as a separate legal entity, although it may be continued as a separate division of the acquiring company. Thus, if A Company acquires B Company in a statutory merger, the Combination is often expressed as: X Company + Y Company = X Company or Y Company
acquisition method
(blank) is applied on the acquisition date which is the date the acquire ' obtains control of the acquiree. The acquisition method approaches a business combination from the perspective of the acquirer (not the acquiree), the entity the obtains control of the other entit(ies) in the business combination.
Financial Statements of X Company + financial Statements of Y Company = Consolidated Financial Statements of X Company and Y Company
As a matter of procedure to prepare consolidated financial statements, the business combination defined as stock acquisition is expressed as:
1. is measured at fair value at acquisition date 2. is calculated as the sum of the acquisition date fair values of: a. the assets transferred by the acquirer; b. the liabilities incurred by the acquirer to former owners of the acquiree; and c. the equity interest issued by the acquirer.
Calculating the Fair Value of the Consideration Transferred: Accounting Records of the Acquirer According to PFRS 3 paragraph 37, the consideration transferred:
Circular Combination
entails some diversification, but does not have'a drastic dongs . in operation as a conglomerate.
Consolidation
is also used in accounting which refers to the accounting process g* procedures of combining parent and subsidiary financial statements, such as in the ° expressions "principles of consolidation". "consolidation procedures," and "consolidated financial statements."
mutual entity
is defined as an entity other than an investor-owned entity, that provides dividends, lower costs or other economic benefits directly to its owners, members or participants, e.g., a mutual insurance company, a credit union and a cooperative entity.
PFRS 3
The accounting standard relevant for accounting for business combinations is
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The acquired companies in a statutory consolidation may be operated as separate divisions of the new corporation, just as they may be under a statutory merger. Statutory consolidations require the same type of stockholder approval as statutory mergers do.
Acquisition of Net Assets (Assets less Liabilities)
The acquiree (acquired) company generally distributes to its stockholders the asset or securities or debt instruments received in the combination from the acquirer (acquiring) | - company and liquidates. The acquired (acquiring) company accounts for the combination by recording each asset acquired, each liability assumed, and the consideration given in exchange.
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The acquisition of reputable product lines and markets is usually less risky than developing new products and markets. The threat is especially low when the purpose is diversification
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The definition of acquisition date then relates to the point in time when the net assets of the acquiree become the net assets of the acquirer ~ in essence the date on which the acquirer can recognize the net assets acquired in its own records.
1. focusing on providing goods and services to customers 2. removing the emphasis from providing a return to shareholders 3. removing the reference to lower costs or other economic benefits
The definition of business was narrowed by:
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The structure of a business combination may be determined by a variety of factors, including legal and tax strategies.
merger
The term (blank) in the technical sense of a business combination in which all but one of the combining companies go out of existence.
The Defensive Acquisition Tactic.
When 'a major reason for an attempted takeover is the prospective acquiring {acquirer) company's favorable cash position, the prospective — acquiring (acquirer) company may fry to rid use of this excess cash by attempting to takeover of its own.
Leveraged Buyouts
When management. desires to own the business, it may arrange to ' buy out the stockholders using the company's assets to finance the deal. The bonds . issued often take the form of high-interest, high- -risk "junk" bonds.
The Mudslinging Defense
When the acquiring company offers stock instead of cash, the prospective acquiring (acquirer) company's management may try to convince the , stockholders that the stock would be a bad investment.
Although a number of reasons have been cited the overriding reason is probably growth. Growth is a major objective of many business organizations. A company may grow slowly, may gradually expand its product lines, facilities, or services, or may "skyrocket almost overnight.
Why do business entities enter into. a business combination?
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A business combination effected through a stock acquisition does not necessarily have to involve the acquisition of all of a company's outstanding voting (common) shares. In those cases, control of another company is acquired,
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A business combination involves the joining together of assets under the control a specific entity. Therefore, the business combination occurs at the date of the assets or net assets are under the control of the acquirer. This date is the acquisition date.
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A business combination may be friendly or unfriendly (hostile takeovers)
White Knight or White Squire
A search for a candidate to be the acquirer in a friendly takeover. This is simply encouraging a third company more acceptable to the target company.
tender offers
Because they are relatively quick and easily executed (often in about a month), (blank) are the preferred means of acquiring public companies.
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Accounting for a group of assets is based on standards such as PAS 16 Property, Plant and Equipment rather than PFRS 3.
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Accounting for business combination by contract under PFRS 3 requires one of the combining entities to be identified as the acquirer, and one to be identified as the acquiree. In reaching the conclusion that combinations achieved by contract alone should not be excluded from the scope of PFRS 3.
1. Costs directly attributable to the combination which includes costs such as legal fees, finder's and brokerage fee, advisory, accounting, valuation and other professional or consulting fees. 2. Indirect, ongoing costs, general costs including the cost to maintain an internal acquisition department (mergers and acquisitions department), as well as: general and administrative costs such as managerial {including the costs of maintaining an internal acquisitions department (management salaries, depreciation, rent, and costs incurred to duplicate facilities), overhead that is allocated to the merger but would have existed in its absence and other costs of which cannot be directly attributed to the particular acquisition. The acquisition-related costs associated with a business combination are accounted for | as expenses in the periods in which they are incurred and the services are received.
Acquisition-related costs are as follows:
excluded
Acquisition-related costs because such costs are (blank) from the measurement of the consideration paid because such costs are not part of the fair value of the acquiree and are not assets
A.Statutory merger B.Statutory consolidation=
Acquisitions of Net Assets (assets less liabilities) are classified into:
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Although tender offers are the preferred method for presenting hostile bids, most tender offers are friendly ones, done with the support of the target company's management. Nonetheless, "hostile takeovers have become sufficiently common that a number of mechanisms have emerged to resist takeover.
Greenmail
An acquisition of common stock presently owned by the prospective acquiring (acquirer) company at a price substantially lower in excess of the prospective acquirer's cost, with the stock thus placed in the treasury or retired. The purchased shares are then held as treasury stock or retired. This tactic is largely ineffective because it may 'result to an expensive excise tax; further, from an accounting perspective, the excess of the price paid over the market price is expensed.
Shark Repellant.
An acquisition of substantial amounts of outstanding common stock for the treasury or for retirement, or the incurring of substantial long-term debt i in exchange : for outstanding common stock.
Poison Pill
An amendment of the articles of incorporation or by-laws to make it more difficult to obtain stockholder approval for a takeover.
Pac-man Defense
Attempting an "unfriendly takeover of the would be acquiring company.
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Business combinations bring together both intangible and tangible resources.
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Business combinations involve financial transactions of immeasurable magnitudes, business empires, triumphant stories and individual fortunes, managerial genius, and management debacles. By their nature, they affect the destiny of entire companies. Each is exceptional and must be evaluated in terms of its economic substance, regardless of its legal form.
1. One based on the structure of the combination, 2. One based on the method used to accomplish the combination, and 3. One based on the accounting method used.
Business combinations may be classified under three schemes:
true (For example, if the managers of merged firm transfer resources to subsidize money-losing segments instead of shutting them down, the result will be a suboptimal allocation of capital. This situation may arise because of reluctance to eliminate jobs or to acknowledge a past mistake.)
Business combinations may destroy value rather than create, in some instances.
1. transferring cash or other assets (including net assets that constitute a business); 2. incurring liabilities; 3. issuing equity instruments; 4. combination of the above; and 5. transaction not involving consideration, such as combination by contract alone (e.g. a dual listed structure)
Economic events that might result in an entity obtaining control include:
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Entities may "choose a fowls combination 'over other forms of. expansion for business tax advantages (for example, tax-loss carry forwards), for personal income and estate-tax advantages, or for personal reasons.
a. The acquirer acquires voting (common) stock from another enterprise for cash or other property, debt instruments, and equity instruments {common or preferred stock), or a combination thereof. b. The acquirer must obtain control by purchasing 50% or more of the voting common ' stock or possibly less when other factors are present that lead to the acquirer gaining - control. The total of the shares of an acquired company not held by the controlling shareholder is called the non-controlling interest. c. The acquired company need not be dissolved; that is, the acquired company does not have to go out of existence. Both the acquirer (acquiring) company and the - acquiree (acquired) company remain separate legal entities.
Following are the features of a stock acquisition:
1. The acquirer acquires from another enterprise all or most of the net assets of the other enterprise for cash or other property, debt instruments, and equity instruments (common or preferred stock), or a combination thereof. 2. The acquirer must acquire 100% of the net assets of the acquiree (acquired) company. 3. It involves only when the acquirer (acquiring) company survives.
Following are the features of an asset and liabilities acquisition:
Acquisition of net assets or assets or an acquisition of stock, the distinction of which is the Most important at this stage.
From legal perspective, accounting and organizational perspective, the specific Procedures to be used in accounting for a business combination is effected through an
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In a combination achieved by contract alone, two entities enter into a contractual arrangement which covers, for example, operation under a single management and equalization of voting power and earnings attributable to both entities equity investors. Such structures may involve a 'stapling' or formation of a dug listed corporation.
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In a spécific exchange, the consideration transferred to the acquirer could include just one form of consideration, such as cash, but could equally well consist of a number of forms such as cash, other assets, a business or a subsidiary of the acquirer, contingent consideration, equity instruments (common or preferred stock) and debt instruments, options, warrants and member interests of mutual entities.
acquisition-related costs
In addition to the consideration transferred by the acquirer to the acquiree, a further item to be considered in determining the cost of the business combination is the
true
In general terms, business combinations unite previously separate business entities.
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In the event that the overriding principle of "control" in PFRS 3 does not conclusively determine the identity of the acquirer, PFRS 3 provides additional guidance.
unfriendly (hostile) combination
In this kind of combination results when the board of directors of a company targeted for acquisition resists the combination. A formal tender offer enables the acquiring firm to deal directly with individual shareholders. If a sufficient number of shares are not made available, the acquiring firm may reserve the right to withdraw the offer.
friendly combination
In this kind of combination, the board of directors of the potential combining companies negotiates mutually agreeable terms of a proposed combination. The proposal is submitted to the stockholders of the involved companies for approval. Normally, a two thirds or three-fourths positive vote is required by corporate by-laws to bind all stockholders to the combination.
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It is commonly less expensive for a firm'to obtain needed amenities " through combination rather than through development.
Asset Acquisition
It reflects the acquisition by one firm of assets (and possibly liabilities) of another firm, but not its shares. The selling firm may continue to survive as a legal entity, or it may liquidate entirely. The acquirer typically targets key assets for acquisition, or buys the acquiree's assets but does not assume its liabilities. Often the assets acquired are in the form of a division or product line. The acquirer may not buy the entire entity.
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It should be noted that asset acquisition is not within the scope of business combination under PFRS 3
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Many companies combine to evade being acquired themselves. Smaller companies tend to be more susceptible to corporate takeovers; - therefore, many of them adopt forceful buyer aid to defend against take over attempts by other companies.
1. The date the contract is signed 2. The date the consideration is paid; 3. A date nominated in the contract; 4. The date on which assets acquired are delivered to the acquirer; and 5. The date on which an offer becomes unconditional. (These dates may be important but determination of the acquisition date does not depend on the date the acquirer receives physical possession of the assets acquired, or actually pays out the consideration to the acquiree.)
Other dates that are important during the process of business combination may be
transaction or other event in which an acquirer obtains control of one or more businesses. Transactions sometimes referred to as "true mergers" or "mergers of equals" also are business combinations.
PFRS 3 defines "business combination" as
there must be a triggering economic event or transaction and not, for example, merely a decision to start preparing combined or consolidated financial statements for an existing group. Control can usually be obtained either by: 1. Buying the assets themselves (which automatically gives control to the buyer) of 2. Buying enough shares in the corporation that owns the assets to enable the investor (acquirer) to control the investee (acquire) corporation (which makes the purchased corporation a subsidiary)
PFRS 3 defines "business combination" as a transaction or other event in which an acquirer obtains control of one or more businesses. Transactions sometimes referred to as "true mergers" or "mergers of equals" also are business combinations. The first key aspect in this definition is "control". This means that
acquisition date
PFRS 3 defines (blank) as the date on which the acquirer obtains control of the acquiree.
"an integrated set of activities and assets that I capable of being conducted and managed for the purpose of providing goods or services to customers, generating investment income (such as dividends or interest) or generating other income from ordinary activities."
PFRS 3 defines the term "business "as
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Paragraph 6 requires that in each business combination, one of the combining entities should be identified as the acquirer.
Acquisition of Net Assets (Assets less Liabilities)
The books of the acquired (acquiree) company are closed out, and its assets and liabilities are transferred to the books of the acquirer (or the acquiring /surviving company). In this aspect of combination, sometimes one enterprise acquires another enterprise's net assets through direct negotiations with its management.
Acquisition of Common Stock (Stock Acquisition)
The books of the acquirer (acquiring) company and acquiree (acquired) company remain intact and consolidated financial statements are prepared periodically. In such cases, the acquirer (acquiring) company debits an account "Investment in subsidiary", the stock of the acquired company is recorded as an inter-corporate investment; rather than 'transferring the underlying assets and liabilities onto its own books.,
1. Inputs - an economic resource (e.g. non-current assets, intellectual property) - that merely need to have the ability to contribute to the creation of outputs. 2. Process — a system, standard, protocol, convention or rule that when applied to an input or inputs, creates outputs (e.g. strategic management, operational processes, resource management) 3. Output - the result of inputs and processes applied to those inputs The result of inputs and processes applied to those inputs that provide goods or services to-customers, generate investment income (such as dividends or interest) or generate other income from ordinary activities.
The business combination must involve the acquisition of a business, which generally has three elements:
1. Cash or Other Monetary Assets 2. Non-monetary Assets. 3. Equity Instruments. 4. Liabilities Undertaken. 5. Contingent Consideration. 6. Share-based payment awards
The consideration transferred includes the following items:
what is the effect of determining the acquisition date?
The effect of determining the acquisition date Is that the financial position of the combined entity on acquisition date should report the assets and liabilities of the acquiree on that date and any profits reports as.a result of the acquiree's operation within the business combination should reflect profits earned after the acquisition date.
1. Combinations involving mutual entities. 2. Combinations achieved by contract alone (dual listing stapling).
The following transactions ore within the scope of PFRS 3:
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The purpose of defining a business is to distinguish between the acquisitions of a group Of assets such as number of chairs, bookshelves, and filing cabinets - and the acquisition of an entity that is capable of producing some form of output.
1. Identify the acquirer, 2. Determine the acquisition date: 3. Calculate the fair value of the purchase consideration transferred {i.e., the cost of purchase) 4. Recognize and measure the identifiable assets and liabilities of the business, and 5. Recognize and measure either goodwill or a gain from a bargain purchase, if either exists in the transaction.
The required method of accounting for a business combination under paragraph 4 of PFRS 3 is the acquisition method. Under the acquisition method, the general approach to accounting business combinations is a five step process:
"Selling the. Crown Jewels" or "Scorched Earth".
The sale of valuable assets to others to | make the firm less attractive to the "would be acquirer". The negative aspect is that the firm, if it survives, is left without some important assets.
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The terms merger and consolidation are often' used. synonymously for acquisitions. However, legally and in accounting, there is a difference. The distinction between these categories is largely a technicality, and the terms mergers, consolidations, and acquisitions are popularly used interchangeably.
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The use of control as the key criterion to determine acquisition date ensures that the substance of the transaction determines the accounting rather than the form of the transaction.
1. The identifiable assets acquired and liabilities assumed by the acquirer are measured at the fair value on the acquisition date. The choice of fair value is affected by the choice of the acquisition date. 2. The consideration paid by the acquirer is determined as the sum of the fair values of assets given, equity issued and/or liabilities undertaken in an exchange for the net assets or shares of another entity. The choice of date affects the measure of fair value. 3. The acquirer may acquire only some of the shares of the acquiree. The owners of the balance of the shares of the acquiree are called the non-controlling interest ~ defined in the Appendix A as the equity in a subsidiary not attributable, directly "or indirectly, to a parent. This non-controlling interest is also measured at fair value on acquisition date. (This concept will be discussed and illustrated in Chapter 2) 4. The acquirer may have previously held an equity interest in the acquiree prior to obtaining control of the acquiree. For example, entity X may have previously acquired 20% of the shares of entity Y, and now acquires the remaining 80% giving it control of entity Y. The acquisition date Is the date when entity X acquired the 80% interest. The 20% shareholding will be recorded as an asset in the records of entity X. On acquisition date, the fair value of this investment is measered., (This concept will be discussed and illustrated in Chapter 2)
There are four main areas where the selection of the date affects the accounting for a business combination:
1. Acquisition of Net Assets (Assets less Liabilities). 2. Acquisition of Common Stock (Stock Acquisition). 3. Asset Acquisition 4. Acquisition of Net Assets (Assets less Liabilities).
There are four types of combination which can be identified from legal organizational perspectives.
acquisition or construction of new amenities or through business combination.
There are several ways of business expansion; it may either be through
1. What is acquired (net assets, stock or assets) and 2. what is given up (the consideration for the combination).
There are two independent issues related to the consummation of a combination:
acquisition method
Under the (blank), all assets and liabilities are identified and reported at their fair values.
