Financial Analysis of Business Combinations (Advanced Issues)

Abstract

This chapter focuses on the financial reporting implications of accounting methods for merger and acquisition transactions (equity method, full consolidation, and proportionate consolidation). We begin by comparing each method to each other in terms of off-balance sheet financing. The equity method is a single-line consolidation method, which means that the investee’s liabilities are netted against its assets, and hence, the investee’s debt is not shown explicitly on the investor’s balance sheet. In contrast, proportionate consolidation and full consolidation show the investee’s debt on their balance sheets. We continue by analysing changes in purchase price allocations. Acquirers may, in fact, revise the initial purchase price allocation of an acquisition and these revisions may provide useful information to the users of financial statements. An additional choice for acquirers reporting under IFRS is between the partial and full fair value method for non-controlling interests and goodwill. We analyse the motivation and the reporting implications of this choice. Then, we analyse the growth of a company, as reflected in the financial statements, separating organic (internal) growth from acquired growth. The chapter ends by analysing the impact of acquisitions on the acquirer’s cash flow statement.