Accounting for Mergers and Acquisitions

Accounting for Mergers and Acquisitions (M&A) involves applying specific accounting principles to consolidate or combine the financials of the entities involved. The process is governed primarily by IFRS 3 (International Financial Reporting Standards) or ASC 805 (US GAAP) and follows Purchase Price Allocation (PPA) and business combination principles.

🧾 Key Concepts in M&A Accounting
1. Types of Mergers & Acquisitions
Merger: Two companies combine to form a new entity.

Acquisition: One company takes over another and becomes the new owner.

2. Accounting Method: Acquisition Method
Under both IFRS and US GAAP, the acquisition method must be used:

The acquiring company recognizes the identifiable assets, liabilities, and non-controlling interests at fair value.

Any excess of purchase price over fair value of net assets is recorded as Goodwill.

If the net assets acquired exceed the purchase price, a bargain purchase gain is recognized in profit and loss.

📋 Steps in M&A Accounting (Acquisition Method)
Step Description
1️⃣ Identify the acquirer – Who gains control?
2️⃣ Determine the acquisition date – When control is transferred.
3️⃣ Measure fair value of consideration transferred – Cash, shares, liabilities.
4️⃣ Recognize and measure identifiable assets and liabilities – At fair value.
5️⃣ Recognize Goodwill or Gain – Based on the difference between consideration and net assets.

💼 Components of Purchase Price Allocation (PPA)
Consideration transferred – cash, shares, contingent consideration.

Fair value of net identifiable assets – tangible and intangible assets.

Goodwill = Consideration - Fair Value of Net Assets

Goodwill is an intangible asset, subject to annual impairment testing.

🧮 Example
Let’s say Company A acquires Company B:

Purchase price: ₹100 crore

Fair value of identifiable net assets: ₹80 crore

Goodwill = ₹100 - ₹80 = ₹20 crore

📘 This ₹20 crore will appear on the balance sheet as Goodwill and not amortized but tested annually for impairment.

🔍 Post-Merger Financial Reporting
Consolidated Financial Statements: The acquirer must include the target’s results post-acquisition.

Non-controlling Interest (NCI): If less than 100% is acquired.

Impairment Testing: Goodwill must be tested annually or when impairment indicators exist.

Disclosure: Significant disclosures are required in notes to financials.

🧠 Key Terms
Goodwill – Premium paid over fair value.

Contingent Consideration – Additional payment based on future performance.

Reverse Acquisition – When the acquired company is the accounting acquirer.

Bargain Purchase – When net asset fair value > purchase price.