BIM33705 - Business successions: accounting: business combinations and goodwill

FRS 102 Section 19 Business Combinations and Goodwill requires entities to account for business combinations using the purchase method. The purchase method involves the following steps:

• Identifying an acquirer

• Determining the acquisition date
• Measuring the cost of the business combination (‘consideration’)
• Allocating the costs of the business combination to the assets acquired
• Recognising and measuring goodwill

When allocating the cost of a business combination the entity should recognising the identifiable assets and liabilities acquired at their fair values at the acquisition date.

Fair values at acquisition are not affected by provisions or accruals for future expenditure that are expected to be incurred as a result of the acquisition. For example, if the acquirer intended to retrain some employees after the take-over it is not entitled to include a provision for retraining costs as part of the calculation.

The cost of acquisition of a business includes the cash, loan notes or shares paid and the value of the assumption of liabilities.

In certain specified circumstances, including group reconstructions, businesses may use merger accounting when they acquire another business.