Business Combination

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Meaning and definition of Business Combination

A business combination is essentially an event or transaction where an acquirer acquires control of either one or over one business. Further, a business can be defined as a set of integrated assets and activities which are capable of being managed and conducted with an intention of offering a return to the investing members or other participants, owners and members.  Generally, business combinations refer to transactions in which one company gains control, or at least controlling interest, in another company. A business combination can be aptly defined as amalgamation of the assets of two or more business entities for their consolidation as a single entity under single ownership. A business combination can be managed easily through the way of a voluntary acquisition, a merger, or a hostile takeover. In many cases, a preferred means of managing a business combination might be acquiring a controlling amount of stock.

IFRS 3 Business Combinations is about accounting at a time when the acquirer successfully acquires control of a particular business (for example, merger or acquisition). It is these kinds of business combinations that are recognized by utilizing the ‘acquisition method’ that usually requires liabilities and assets that are assumed for measurement on the basis of fair value on the date of acquisition.

A very common approach to business combinations is merger. As per this particular model, two entities operating in similar area combines their assets with an intention to set up a new entity, which is very strong and efficient in handling competition than would they could have accomplished on their own. Such a merger enables a the newly formed entity in retaining existing customers whereas it also gets an opportunity to position itself in a manner that it is able to acquire new customers.

The IFRS 3 new version was issued in the month of January in 2008 after revision and is applicable to business combinations that occur in an organization’s first annual year beginning after or on 1st of July 2009.

Method of accounting for business combinations

The business combinations are accounted on the basis of the acquisition method as per IFRS 3. This particular method is utilized for all types of business combinations. However, when it comes to the application of this method, the acquirer has to be identified first. After this the acquisition date needs to be determined. Once the date has been determined, the measurement and recognition of the assets that are identifiable is required in addition to assumption of liabilities. Besides, measuring and recognizing of any NCI (non-controlling interest) in the acquiree is also needed. Apart from this, measurement and recognition of gain or a goodwill from a bargain based purchase and measurement of liabilities and assets that have been acquired on a fair value basis is done. The method also involves measuring of NCI either at fair values or the proportionate share of the NCI of net assets of the acquiree. 

Different types of Business Combinations

Business combinations can be categorized into the following four types:

1. Vertical combination

This is a business combination wherein various departments of large industrial units come together under single management. Under this business combination all the stages, from purchase to selling of product, are linked by units. The key objectives of a vertical combination include:

i. minimizing the per unit cost

ii. elimination competition

iii. hiring the experts’ services

iv. supplying goods at lowest prices

v. avoiding over production

vi. improving production methods

vii. achieving large scale benefits

viii. finding proper market for their product

ix. supervising the management

x. reducing the middleman commission

xi. earning maximum profit

2. Horizontal combination

Also referred as voluntary combination, it is an association of two or more business units of same nature under a single management. Both the business units involved in combination are engaged in same activity and their combination is, therefore, referred as horizontal combination. The key objectives of this business combination are the same as those of a vertical combination.

3. Circular combination

This business combination type involves different business units coalesce themselves under a single management. For instance, a shoes industry combining with cloth and sugar industry exemplifies mixed combination. The key objective of this benefit is securing the benefits of administrative ability by the way of common management.

4. Diagonal combination

A diagonal business combination involves two or more business entities performing subsidiary services combining themselves under a single management. The key objective of this amalgamation is making the business unit large and self sufficient.

Quote Waseem Khan, 19 March, 2015
In first line of second paragraph,IFRS is mentioned with the name of Business Combinations instead of IFRS 3.Kindly note that Business Combinations is dealt by IFRS 3 not IFRS 2.

Kindly Note that:

IFRS 3 -Business Combinations
IFRS 2- Share Base Payments

Admin Please correct it.

Best Wishes,
Waseem Khan
+923349003585
wasimkhan585@yahoo.com
Quote Vit. A., 19 March, 2015
Thanks, Waseem Khan! Corrected.

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