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One business is combinedwith another business
Occurs when one company
acquires either the netassets or control of otherbusiness
Definition
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FRS 3: Business Combinations
A business combination is the bringing together
a separate entities or businesses into onereporting entity. The result of nearly all businesscombinations is that one entity, the acquirer,obtains control of one or more other businesses,the acquiree. (para. 4)
Cont.
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The acquirer has to pay aspecific sum to the owner ofthe business purchase
price Purchase price could be
settled by cash, shares,debenture or combination of
them
Cont.
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Friendly Combination The BODs of the potential
combining companies negotiatemutually agreeable terms of aproposed combination
Hostile Combination The BODs of a company targeted
for acquisition resists the
combination Use tender offer to deal directly with
individual shareholders
Nature of the Combination
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Operating Synergies
Vertical combinationelimination of certain costsrelated to negotiation &bargaining
Horizontal combinationpooling of sales forces, facilities& elimination of duplication
costs
REASONS
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Globalisation
Easy to enter new markets
Financial Synergy Take advantage of tax laws
e.g. when an acquisition isfinanced using debt, the interest
payment is tax deductible
Cont.
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Diversification Easy to expand to another
business area
Cont.
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Loss of valuable goodwill
Monopolies conditions
Disadvantages
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Can be classified as: Amalgamations
Absorptions
Merger and Acquisition
Types of Business Combination
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When two or more companies combinedtogether to form a new company
Amalgamations
A Bhd B Bhd
AB Bhd
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Characteristics: New company is formed
Old company will be wound up
New company will acquire the assets andliabilities of the old companies
Consideration given may consist of cash,shares and/or debentures in the newcompany
Shareholders of the old companies canbecome the shareholder of a new
company Suitable for companies in similar size
*Illustration
Cont
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When one dominant company acquiredthe assets and liabilities of anothercompany
Absorptions
B Bhd
A Bhd
A Bhd
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Characteristics: The company that absorbs the small
company will be bigger
The company be acquired will beliquidated
No new company is formed Consideration given may consist of cash,
shares and/or debentures as inamalgamation
Shareholders of the company being
absorbed will become the shareholders ofthe company that absorbed them
*Illustration
Cont.
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In order to take over the assets and liabilitiesof the old business, the new company has topay some amount known as purchaseprice
Refers to the agreed value to be paid by thebuyer (new company) to the seller (oldcompany)
Purchase Price
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Could be settled in the form of: Cash
Shares
Debentures
Combination of the above
Cont.
PurchaseConsideration
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Purchase price = Purchase consideration
Cont.
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Factors to be considered to determine the purchase price:-
(i) The net assets taken over by the buyer
Only valued assets (tangible assets) will be taken over
Fictitious assets (e.g. preliminary expenses, trademarks)will not be acquired by the buyer
All the assets taken over normally will be revalued to thefair values
Cont.
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(ii) Liabilities taken over by the buyer
Sometimes liability is also being acquired by the buyer atthe fair market value
Thus, purchase price = Net assets Taken Over
(Assets Liabilities)
Cont.
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(iii) Goodwill
Refers to the difference between the purchase price and the fairvalue of the net tangible assets taken over by the buyer
Positive goodwill if the purchase greater than the fair value of net
tangible assets taken over
Negative goodwill if the purchase price lesser than the fair valueof net tangible assets taken over
Cont.
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(iv) Liquidation expenses
If an expense is incurred in the conversionprocess and the purchasing company agreed to
pay these expenses, the purchase price willinclude this extra cost incurred
Cont.
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*Refer to Handouts on accounting entries
Accounting Entries
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M&A occurred in a business when an investoracquired the right to exercise control in anothercompany (investee).
If it acquires more than 50% voting shares, theinvestee becomes a subsidiary of the investor.
The investee company is not wound up, only
changes in composition of shareholders.
Merger & Acquisition (M&A)
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If investor acquires more than 20% but lessthan 50% of issued share capital, the investeecompany will become an associate company
Acquisition is the term to describe the processof acquiring the majority of the issued sharecapital (merger).
Cont.
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All entities shall apply this FRS 3when accounting for businesscombination (para 5)
Whats new
All the business combinationshall use the purchase method(para 14)
FRS 3
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New criteria for recognisingidentifiable intangibles (otherthan goodwill)
Additional disclosure
requirements, including:- Reasons for business
combination
Allocation of purchase price paid
to the assets & liabilities
Cont.
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Purchase Method
Purchase Method means to record the businesscombination using the historical cost principle wherethe investor would record the purchase of another
entity in a business combination by the amount ofcash disbursed or by the fair value of other assetsdistributed or securities issued
Cont.
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Cost of business combination
The acquirer shall measure the cost of a business alsocalled purchase consideration as the aggregate:
(a) the fair values, at the date of exchange, of assets given,liabilities incurred or assumed and equity instrumentsissued by the acquirer, in exchange for control of theacquiree; plus
(b) any cost directly attributable to the business
combination (Para 24)
Cont.
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Cost directly attributable to the business combination
Included in the cost of combination direct costs or costdirectly attributable to business combinations such asprofessional fees paid to accountants, legal advisers,finders fees, valuers, liquidation expense and otherconsultants to effect the combination other than those
related cost of shares or securities issued (such asregistration and issuance of equity securities issued).
Cont.
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Issuance costs of equity securities issued in a purchase
combination are charged against the fair value of thesecurities issued. General administrative costs or indirectcosts including the costs of maintaining an acquisitionsdepartment, and other costs that cannot be directlyattributed (such as management, salaries, depreciation,
rent, etc) are expensed to income in the year incurred.
Cont.
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Cost of Acquisition
Old FRS 3 New FRS 3
Internal Costs(i.e. general admin, including acquisitiondepartment)
Expense Expense
Professional fees paid to consultants Cost of acquisition(impact GW)
Expense
Equity raising costs Equity Equity
Debt raising costs Debt Debt
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Different types ofbusiness combination
Roles of FRS 3
Conclusion