Fair Value Measurement, 3rd Edition

CHAPTER 3Business Combinations

BUSINESS COMBINATION is a financial reporting term that refers to a broad range of transactions in which one company acquires another. The FASB Master Glossary defines a business combination as “a transaction or other event in which an acquirer obtains control of one or more businesses. Transactions sometimes referred to as true mergers or mergers of equals are also business combinations.” The terms merger and acquisition refer to the most common forms of business combinations. Mergers and acquisition transactions are frequently described simply as M&A in the business community.

Mergers occur when two separate companies combine to form a single surviving entity. Mergers are usually accomplished through the exchange of shares, where the shareholders of one company surrender their shares in exchange for shares of the other company. Mergers often occur between companies of relatively equal sizes. When mergers involve companies of unequal sizes, the larger one takes control of the smaller company's assets and liabilities, and the smaller one ceases to exist. In contrast, acquisitions occur when one company buys another company. Acquisitions are accomplished when one company purchases a controlling number of the target company's shares directly from the shareholders in exchange for cash, for shares, or for a combination of both.

Although merger transactions may exist from a legal perspective, they do not exist in financial reporting. All merger and ...