Chapter 18

Accounting for Mergers and Acquisitions


Mergers and acquisitions (M&A), or “business combinations,” bring together separate companies or businesses into one reporting entity. In this chapter we focus on the financial reporting issues that arise in such transactions. Since 2005, IFRS and US GAAP have mandated that all business combinations be accounted for as acquisitions, a transaction where one of the combining entities obtains control over the other. Simply put, all corporate control transactions are assumed to be acquisitions; mergers are not recognized for financial reporting purposes.

To illustrate the accounting for acquisitions, we refer to Procter & Gamble’s (P&G) acquisition of The Gillette Company. In January 2005, P&G announced that it had signed a deal to acquire 100% of Gillette, a global leader in blades and razors, oral care, and batteries.

Both IFRS and US GAAP require the “purchase method” of accounting. This method allocates the purchase price of the acquisition to all identifiable assets and liabilities on the basis of fair value. The remainder, i.e., nonidentifiable intangible assets, is captured in “goodwill.” The following sections focus on the key features of the purchase method.

Purchase price/cost of acquisition

The first step in accounting for M&A is to determine the acquisition cost. This exercise is fairly straightforward when the acquisition is a cash transaction. The cost of acquisition equals the amount of cash or cash equivalents ...

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