Accounting Requirements for Business Combination Accounting requirements for combination of business requires parent entity to prepare a consolidated financial statement that includes the report of all subsidiaries. However, this does not mean that the subsidiaries are excluded from presenting consolidated reports. All items must be accounted for at fair value including investments. In case of shared power as in case of joint ventures, the consent of all parties will be required. For acquisitions, it is extremely important for the acquirer to determine the timing and the nature of acquisition. The profits and losses as a result of intra-firm transactions between Novartis and Alcon including treatment of fixed assets and inventories must be eliminated. The accounting for contingent asset or liabilities and subsequent adjustment at fair value is also one of the challenging aspects in case of business combinations.
Other factors to care of during business combination include pre-acquisition contingencies treatment, interaction of accounting standards between the acquirer and the acquired, treatment of intangible assets (including goodwill), treatment of risk management, proper disclosures under accounting policies, treatment of depreciations and provisions, deferred and corporate taxes (International Accounting Standards Board, 2009, p. 331).
When one business entity acquires another, the differences in consolidated financial statements of the combined business may face challenges with regard to the following factors: a) Revenue recognition – The control may transfer either on date of acquisition or over a period of time. Determination of exact point of transfer is very important since the financial position of the parent and subsidiary would depend on it. If the control is transferred over a period of time, then acquiring company use the input methods (cost incurred) of output methods (revenue realised) to recognise revenue.
b) Determining the asset’s fair value – The assets of Alcon should be measured at fair market value less cost. This fair value should also reflect a liquidating price for third party liabilities in case the company becomes insolvent in future. More specifically, there is nothing mentioned in the IFRS guidelines about which market should Novartis use as base to calculate the fair value of assets. Thus, it completely depends on Novartis to determine the market for valuing assets at fair value since it will be the reporting entity after acquisition.
Ray, K. G. (2010). Mergers and Acquisitions: Strategy, Valuation and Integration. New Delhi: PHI Learning Pvt. Ltd.
Deloitte. (2008). Business Combinations and Changes in Ownership Interests. London: Deloitte Touche Tohmatsu.
International Accounting Standards Board. (2009). International Financial Reporting Standards. London: IASC Foundation Publications Department.