The Accounting Process for a Business Merger
Companies that want to merge have to worry about more than just anti-monopoly laws. Working out the accounting details of a large merger can keep a managing board and an army of accountants busy. The particular accounting procedures companies follow depend on the method used to purchase the company, or companies, and the accounting system the buying company opts to use. However, there are some general guidelines that shed light on how the accounting process works in a business merger.
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Assessing the Cost of a Merger
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The accounting of a business merger requires the accountants and analysts to calculate the cost of the merger as part of the incremental analysis of the merger. This helps managers make a sound business decision as well as provide necessary data for financial statements if the merger materializes. Costs include the direct costs, indirect costs and the cost of issuing securities for the merger. This is important for managers to estimate before they consolidate or merge the companies because it can reduce the issuing price of the stock after the merger.
Choose a Purchasing Method
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The parent company of a merger may choose to merge or buy the target company by using one of two accounting methods: purchasing the net assets or purchasing the common stock of the target company, also known as the pooling of interests method. The main difference between these methods is the purchasing method reports the market value of the target company and its assets on the date of the sale, regardless of their initial or historic value. When businesses pool their interests, the assets of both companies are valued at their initial acquisition date.
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Purchasing Company
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The parent or purchasing company must record the purchase in its accounting records as a receipt of assets and expenditure of cash. This is done by creating a liability or issuing of stock in the purchasing company's books to account for the payment of the share transfer.
Target Company
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The company acquired by the merger must also account for the purchase by eliminating its assets and reporting the receipt of cash or other receivables from the parent company. In mergers in which the target company is liquidated, accountants must include an entry accounting for the distribution of assets to the company's shareholders.
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