Business combination is the third standard of IFRS. As per this standard, we do the accounting of any type of business combination. Business combination means merger or merge of two or more companies. In combination, following is the process of accounting.
1. Identification of Acquirer
A company who buy other company's business will be acquirer. Identification is necessary because, in his books, number of assets and liabilities will be increased by adding these.
2. Determination of the 'acquisition date'
To know the acquisition date is important because correct fair value of assets and liabilities will be calculated on the basis of acquisition date. There are some assets like shares and mutual funds whose value will change every day. So, correct date should be noted.
3. Calculate the fair Value of Assets and liabilities Acquired
First of all all assets measured by counting of their quantity. Now by multiplying their fair value acquisition cost is calculated. In this acquisition cost or purchase cost, all the liabilities fair value is deducted which is also acquired. Net purchase cost is paid to acquiree. Now, its record is maintained.
4. Calculation of Goodwill
If there is difference between fair value and net acquisition cost, it will be goodwill. Acquirer may pay its price to acquiree. Following is the formula of calculating cost of goodwill.
Following is example of calculating goodwill.
After business combination, all acquired assets and liabilities will become the part of balance sheet of acquirer because he had paid its purchase cost.
1. Identification of Acquirer
A company who buy other company's business will be acquirer. Identification is necessary because, in his books, number of assets and liabilities will be increased by adding these.
2. Determination of the 'acquisition date'
To know the acquisition date is important because correct fair value of assets and liabilities will be calculated on the basis of acquisition date. There are some assets like shares and mutual funds whose value will change every day. So, correct date should be noted.
3. Calculate the fair Value of Assets and liabilities Acquired
First of all all assets measured by counting of their quantity. Now by multiplying their fair value acquisition cost is calculated. In this acquisition cost or purchase cost, all the liabilities fair value is deducted which is also acquired. Net purchase cost is paid to acquiree. Now, its record is maintained.
4. Calculation of Goodwill
If there is difference between fair value and net acquisition cost, it will be goodwill. Acquirer may pay its price to acquiree. Following is the formula of calculating cost of goodwill.
| Goodwill | = | Consideration transferred | + | Amount of non-controlling interests | + | Fair value of previous equity interests | - | Net assets recognized |
Following is example of calculating goodwill.
After business combination, all acquired assets and liabilities will become the part of balance sheet of acquirer because he had paid its purchase cost.
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