1. Chapter 4 Business Combinations Tuesday, July 19, 20161

2. Learning Objectives The economic motivations underlying business combinations The alternative forms of business combinations, from both the legal and accounting perspectives. Introduce concepts of accounting for business combinations Emphasizing the purchase method Tuesday, July 19, 20162

3. 4.1 The Accounting Concept of Business Combinations Business combinations Textbook P58  According to IFRS3 : A business combination is a transaction or other event in which an acquirer obtains control of one or more business. Tuesday, July 19, 20163

4. 4.1 The Accounting Concept of Business Combinations Business combinations  According to FASB Statement No. 141: For purposes of applying this statement, a business combination occurs when an entity acquires net assets that constitute a business or acquires equity interests of one or more other entities and obtains control over that entity or entities. Tuesday, July 19, 20164

5.  企业合并的概念 美国财务会计准则委员 会（ FASB ） 2001 年 6 月 颁布第 141 号公《企业合 并》指出：当一个主体 取得了构成一项业务的 净资产，或者取得了一 个或几个其他主体的权 益并取得对后者的控制 时，就发生了企业合并。 企业合并的实 质是控制，而 不是法律实体 的解散。 中国财政部 2006 年 2 月颁布的《企业会 计准则第 20 号 —— 企业合并》对企业 合并的定义是：企 业合并，是指将两 个或者两个以上单 独的企业合并形成 一个报告主体的交 易或事项。单 独的企业 一个报告主体交 易或事项 国际准则委员会（ IASB ） 2004 年 3 月颁布的第 3 号国 际财务报告准则《企业合 并》对企业合并定义如下： 企业合并就是将几个独立 的企业合并形成一个报告 主体的交易或事项。

6.  Control is the power to govern the financial and operating policies of an or business so as to obtain benefits from its activities. P58-59 a. power over more than one-half of the voting rights of the other entity by virtue of an agreement with other investors. b. power to govern the financial and operating policies of the other entity under a statute or an agreement. c. power to appoint or remove the majority of the members of the board of directors or equivalent governing body of the other entity. d. power to cast the majority of votes at meetings of the board of directors or equivalent governing body of the other entity. Tuesday, July 19, 20166 4.1 The Accounting Concept of Business Combinations

7. 4.2 The Legal Form of Business Combinations Acquisition occurs when Textbook P59 One corporation acquires the productive assets of another business entity and integrates those assets into its own operations, or One corporation obtains operating control over the productive facilities of another entity by acquiring a majority of its outstanding voting stock. Tuesday, July 19, 20167

8.  The term merger and consolidation are often used as synonyms for acquisitions. However, legally and in accounting there is a difference. Textbook P59 The acquired company need not be dissolved. Tuesday, July 19, 20168 4.2 The Legal Form of Business Combinations

9.  However, legally and in accounting there is a difference. (1) A merger occurs when one corporation takes over all the operations of another business entity and that entity is dissolved. For example, Company A purchases the assets of Company B directly from Company B for cash, other assets, or Company A securities (stocks, bonds, or notes). It is merger when Company B goes out of existence. A + B = A Tuesday, July 19, 20169 4.2 The Legal Form of Business Combinations

10. However, legally and in accounting there is a difference. (2) A consolidation occurs when a new corporation is formed to take over the assets and operations of two or more separate business entities and dissolves the previously separate entities. For example, Company D, a newly formed corporation, may acquire the net assets of Companies E and F by issuing stock directly to Companies E and F. Companies E and F may distribute the Company D stock to their stockholders and go out of existence (a consolidation). E+F=D Tuesday, July 19, 201610 4.2 The Legal Form of Business Combinations

11. 4.3 Reasons for Business Combinations Horizontal integration is the combination of firms in the same business lines and markets. Vertical integration is the combination of firms with operations in different, but successive, stages of production or distribution or both. Conglomeration is the combination of firms with unrelated and diverse products or service functions, or both. Tuesday, July 19, 201611

12. (1) Cost Advantage. It is frequently less expensive for a firm to obtain needed facilities through combination than through development. This is particularly true in periods of inflation. (2) Lower Risk. The purchase of established product lines and markets is usually less risky than developing new products and markets. The risk is especially low when the goal is diversification. (3) Fewer Operating Delays. Plant facilities acquired through a business combination are operative and already meet environmental and other governmental regulations. Tuesday, July 19, 201612 4.3 Reasons for Business Combinations

13. (4)Avoidance of Takeovers. Many companies combine to avoid being acquired themselves. (5)Acquisition of Intangible Assets. The acquisition of patents, mineral rights, research, customer databases, or management expertise may be a primary motivating factor in a particular business combination. Tuesday, July 19, 201613 4.3 Reasons for Business Combinations

14. (6) Other Reasons. Firms may choose a business combination over other forms of expansion for business tax advantages (for example, tax-loss carry forwards), for personal income and estate tax advantages, and for personal reasons. (7) Antitrust Considerations: Antitrust laws prohibit business combinations that would be restraint of trade or would impair competition. Proposed business combinations are reviewed by federal agencies. State agencies review business combinations for possible violations of state statutes. Tuesday, July 19, 201614 4.3 Reasons for Business Combinations

15. 4.4 Accounting for Business Combinations Under the Purchase Method There are two method to make consolidated financial statements.  Pooling of interests method  Purchase Method Textbook P60-61 Tuesday, July 19, 201615

16. 4.4 Accounting for Business Combinations Under the Purchase Method Pooling of interest method was eliminated.  Less relevant information ignores transaction value exchanged.  Difficult to compare F/S with others. Pooling of interests method became generally accepted in 1950 when the Committee on Accounting Procedure issued Accounting Research Bulletin (ARB) No. 40. Until 2001, accounting requirements for business combinations were found in APB Opinion No. 16, which recognized both the pooling and purchase methods of accounting for business combinations. Tuesday, July 19, 201616

17. 4.5 The Measurement of Goodwill Textbook P62-64 Tuesday, July 19, 201617