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1000word Essay On Merger Accounting.Inc...Accounting Issues, Difficulties And An Example Merger.

1267 words - 5 pages

Q> In the context of a current, well publicised merger discuss:A)the accounting issues that management would have to consider. You should make reference to statute and standards.B)From a shareholder perspective, the difficulties a proposed merger may encounter.When a merger takes place between two entities the management of these companies must face the task of adjusting their accounting methods to deal with the fact that they now manage a new entity. In order to discuss the accounting issues of a merger, the term merger must first be defined. In FRS6 the Accounting Standards Board defined a merger as a "business combination that results in the creation of a new reporting entity formed from the combining parties, in which the shareholders of the combining parties come together in a partnership for the mutual sharing of the risk and benefits of the combined entity, and in which no one party to the combination in substance gains control over any other, or is otherwise seen to be dominant, whether by virtue of the proportion of its shareholders rights in the combined entity, the influence of its directors or otherwise".When two companies come together the management must decide if they meet these criteria. In effect they must determine if the combination is in fact a merger or an acquisition. The simple way of looking at this is: A+B=C this is a merger as a new reporting entity is formed however if the case were A+B=A this would be an acquisition as one company remains dominant and no new entity is formed. For example, when the Bank of Scotland and Halifax came together HSBO, a new entity, was formed. It was therefore evident that a merger had taken place. It is very important to distinguish between these two methods of business combination as they result in the option to use different methods of accounting.Once the company management have determined that a new entity has been formed and that a merger has in fact taken place, then they must be aware of the effects this will have on the accounting requirements of the newly formed company. There are two different methods of accounting for business combinations in the UK. Acquisition Accounting and Merger Accounting. As in the case of the Bank of Scotland/Halifax merger, the new management team had to decide between the two types of accounting as they inevitable had different effects on HBOS.FRS 6 sets down the disclosure requirements of a firm and defines the different methods of accounting as well as documenting the situations in which each method is relevant. Acquisition accounting "assumes that the holding company has depleted its net assets to acquire the net assets represented by the share capital and reserves of the subsidiary at the date of acquisition", Elliot and Elliot (2002, p 532) It is therefore appropriate to use the acquisition method when shareholders receive cash, loan stock or non-equity shares as payment. However, merger accounting "is available when the shares of a subsidiary...

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