Business Combination
Chapter
3
Business
Combinations
Introduction
In the previous chapter, we pointed out that a corporation can obtain a subsidiary either by establishing a new corporation (a parent-founded subsidiary) or by buying an existing corporation (through a business combination). We also demonstrated the preparation of consolidated financial statements for a parent-founded subsidiary. When a subsidiary is purchased in a business combination, the consolidation process becomes significantly more complicated. The purpose of this chapter is to explore the meaning and the broad accounting implications of business combinations. First, we will examine the general meaning of business combination, which can mean a purchase of assets as well as a purchase of a subsidiary. Next, we will look more closely at the issues surrounding purchase of a subsidiary and at consolidation at the date of acquisition. The procedures for consolidating a purchased subsidiary subsequent to acquisition are the primary focus of Chapters 4 to 7.
Definition of a Business Combination
A business combination occurs when one corporation obtains control of a group of net assets that constitutes a going concern. A key word is control—control can be obtained either by:
1. buying the assets themselves (which automatically gives control to the buyer), or 2. buying control over the corporation that owns the assets (which makes the purchased corporation a subsidiary).
A second key aspect of the definition of a business combination is that the purchaser acquires control over “net assets that constitute a business” [ED
1980.03]1—i.e., a going concern. Purchasing a group of idle assets is not a business combination.
A third aspect is the phrase net assets—net assets means assets minus liabilities. Business combinations often (but not always) require the buyer to assume some or all of the seller’s liabilities. When the purchase is accomplished by buying control over another corporation,
3
Business
Combinations
Introduction
In the previous chapter, we pointed out that a corporation can obtain a subsidiary either by establishing a new corporation (a parent-founded subsidiary) or by buying an existing corporation (through a business combination). We also demonstrated the preparation of consolidated financial statements for a parent-founded subsidiary. When a subsidiary is purchased in a business combination, the consolidation process becomes significantly more complicated. The purpose of this chapter is to explore the meaning and the broad accounting implications of business combinations. First, we will examine the general meaning of business combination, which can mean a purchase of assets as well as a purchase of a subsidiary. Next, we will look more closely at the issues surrounding purchase of a subsidiary and at consolidation at the date of acquisition. The procedures for consolidating a purchased subsidiary subsequent to acquisition are the primary focus of Chapters 4 to 7.
Definition of a Business Combination
A business combination occurs when one corporation obtains control of a group of net assets that constitutes a going concern. A key word is control—control can be obtained either by:
1. buying the assets themselves (which automatically gives control to the buyer), or 2. buying control over the corporation that owns the assets (which makes the purchased corporation a subsidiary).
A second key aspect of the definition of a business combination is that the purchaser acquires control over “net assets that constitute a business” [ED
1980.03]1—i.e., a going concern. Purchasing a group of idle assets is not a business combination.
A third aspect is the phrase net assets—net assets means assets minus liabilities. Business combinations often (but not always) require the buyer to assume some or all of the seller’s liabilities. When the purchase is accomplished by buying control over another corporation,