Business Acquisition and Merger — common mistakes

Always use the fair values or agreed values of assets and liabilities for your calculations, not their book values in the vendor's old accounts. The exam question will provide these values.

When preparing the new Statement of Financial Position, create a 'workings' column or separate workings to clearly show how you've combined the figures. For example, for 'Property, Plant and Equipment', show: 'Original PPE + PPE acquired = Total PPE'. This helps you stay organised and can earn you method marks even if your final answer is incorrect.

Goodwill is unidentifiable; it represents a collection of positive attributes that cannot be individually separated and sold, like reputation or morale. Other intangible assets, like patents or trademarks, are identifiable. They can be separated from the business and sold, and they have a finite legal life.

Under current IFRS rules (IFRS 3), goodwill is not amortised. Instead, it must be tested for impairment at least annually. This means the company must assess if the value of the goodwill has decreased. If it has, an impairment loss is recorded.

Book value is based on historical cost less accumulated depreciation, which may not reflect the asset's true current worth. Fair value represents the realistic market value at the date of acquisition. Using fair value ensures the acquirer's financial statements provide a more accurate and relevant picture of the new, combined entity's financial position.

The vendor must close their books. This typically involves transferring all assets and liabilities to a 'Realisation Account'. The purpose of this account is to calculate the profit or loss on the sale of the business. The purchase consideration received is credited to this account, and the final balance (profit or loss) is transferred to the owner's capital account(s).