Convergence and Divergence Regarding Business Combinations

Convergence and Divergence Regarding Business Combinations

Alin Eliodor Tănase (Titu Maiorescu University, Romania), Traian Ovidiu Calotă (Titu Maiorescu University, Romania) and Gabriela Claudia Oncioiu (Titu Maiorescu University, Romania)
DOI: 10.4018/978-1-7998-4637-6.ch005
OnDemand PDF Download:
No Current Special Offers


The presence of several legal entities within the same group entails the existence of as many independent accountants as there are companies. In accordance with IFRS 3 “business combinations,” the result is goodwill that will be recognized as a non-current intangible asset in the consolidated balance sheet, being subjected annually to the impairment test; insofar as the investment cost is lower than the acquisition cost of the net assets, the negative goodwill will be obtained which will be recognized in the form a profit in the consolidated profit and loss account. In addition, national differences in accounting, taxation, and auditing are the sources of the various problems that arise in the process of controlling subsidiaries and consolidating accounts. This chapter aims to study the convergence and divergence regarding business combinations in the joint business as well as to analyze the managerial controversies that are presented in the conversion of the financial statements.
Chapter Preview


Intangible assets acquired in a business combination, including a project represented by an internal research and development process, are recognized in accordance with IFRS 3 as assets separated from goodwill if they meet the definition and criteria for recognizing assets, if they are separable or result from contractual or legal rights, and the fair value of the assets can be measured reliably (Ball, Li & Shivakumar, 2015; Iatridis, 2010; Guthrie & Parker, 2016).

Also, the same Standard stipulates that “in some circumstances, the acquirer may be required to make a subsequent payment to the seller, as compensation for a reduction in the value of the assets given, the equity instruments issued or the debts existing or assumed by the acquirer in exchange for control on the acquired company. This is the case when, for example, the acquirer guarantees the market price of the issued capital or debt instruments as part of the cost of the business combination and is required to issue additional capital or debt instruments to recover the initially determined cost. In such situations, no increase in the cost of the business combination is recognized. in the case of equity instruments, the fair value of the additional payment is offset by an equal reduction in the value attributed to the instruments originally issued. in the case of debt instruments, the additional payment is regarded as a reduction of the premium or an increase of the discount at the initial issue” (Choi, Peasnell & Toniato, 2013; Barth, Landsman & Lang, 2008;).

The high degree of competitiveness of an entity depends fundamentally on the degree of structuring, optimization and relationship between its processes. If the management of the entity wants lower production costs, lower delivery times and high quality of works, it must necessarily change its business processes. All the issues related to the mentioned issues are centralized and analyzed by a specialist, called a business analyst who will prepare two situations regarding the business processes of the entity: a current situation and a future situation that is desired. The business analyst also has the responsibility to facilitate, aggregate and monitor the business processes, while the management responsibility only includes providing the information necessary to guarantee the entire process. Ensuring success on the line of business process optimization can be translated by permanently optimized internal processes or by a methodology of permanent improvements.

The emphasis in this standard is on the accounting treatment at the date of purchase. In particular, it provides that all business combinations will be accounted for by applying the acquisition method (Schleicher, Tahoun & Walker, 2010).

There may be situations where more investors are interested in investing in the same entity (Ball, Li & Shivakumar, 2015). They may at any time have a greater or lesser influence on the entity, but only one of them may have control (Iatridis, 2010). Other investors may have the right to participate in decision-making on the activities of the entity, which may eventually constitute evidence of significant influence, but not of control (Cairns, Massoudi, Taplin & Tarca, 2011).

Key Terms in this Chapter

Accounting Estimates: Are often made under uncertainty in terms of determining their value as it involves the use of judgment. As a result, the risk of material misstatement is greater when these estimates are involved and in some cases the auditor may determine that the risk of material misstatement is greater and it requires special attention in the audit.

Equity: Total debts and owners’ rights claimed for a specific period of time.

Performance: The ability of an organization to exploit its environment to access scarce resources.

Fair Value: The amount at which an asset is bought or sold in an arm’s-length transaction, in which neither party is forced to act.

Joint Business: Is defined as a transaction or other event in which an acquirer obtains control of one or more businesses. After completion of the combined entity as transferee undertaking and acquire continues its existence as a separate legal entity. In practice, some transactions sometimes called “true mergers” or “mergers between equal entities” are also business combinations.

Complete Chapter List

Search this Book: