A Synopsis of Accounting for Business Combinations

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During the 1980 's and 1990 's a great number of business mergers and acquisitions took place. The generally accepted accounting principles to record the initial transaction and to account for the acquired assets during their estimated useful lives this were well established.

Over time however, users of financial statements began to question whether those principles and practices accurately reflected the market realities regarding the assets, their useful lives and their contribution to a company 's value. In addition, intangible assets have become increasingly more important as an economic resource.

It was apparent that
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SFAS 141 is based on the proposition that all business combinations are essentially acquisitions, and thus all business combinations should be accounted for in a consistent manner with other asset acquisitions.

FAS 141 begins with the declaration that the “accounting for a business combination follows the concepts normally applicable to the initial recognition and measurement of assets acquired, liabilities assumed or incurred…as well as to the subsequent accounting for those items.”

A “business combination occurs when an entity acquires net assets that constitute a business or acquires equity interest of one or more other entities and obtains control over that entity or entities.”

In a combination effected through an exchange of cash or other assets it is easy to identify the acquiring entity and the acquired entity. In a combination effected through an exchange of equity interests, the entity issuing the equity interest is generally the acquiring entity. However, in some business combinations, known as reverse acquisitions, it is the acquired entity that issues the equity interests. (Paragraphs 15-19 offer guidance in this complex area.)


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