Business Communications

Business Communications

Name:

Institution:

Business Communications

Introduction

In true definition, accounting standards can be defined as standards considered when conducting financial reporting. These standards are viewed as guidelines that have been accepted globally concerning accounting and in strategic measures such as business combination. The main role of these standards is to analyze financial statements from various business entities (Mackenzie, 2011). The advantageous aspect about these standards is that their applicability cuts across all businesses. Lack of such standards would negate the possibility of conducting comparative analysis of financial statements. Some of the activities that require application of these standards include preparation and presentation of business expenses and income, liabilities and assets. The applicability of the GAAP is limited to the United States with the eventual likelihood of being eradicated and replaced with International Accounting Standards, which are globally gaining popularity due to globalization.

History of Accounting Combinations

Business combination is the process through which an acquirer gains control over more than one business. This type of transaction can be described as mergers of equals or true mergers. Two types of business acquisitions have existed since the inception of this branch in accounting (Mackenzie, 2011). They include acquisition of assets and acquisition of shares. The conception of business combination was derived from the Theory of Firm. The intricacies of this theory focus on the evolution, emergence of firms as well as the growing notion of activities that are involved in business combination.

The background of business combination commences with the acquisition of fiscal power by a businessperson. This theoretical individual played the role of an administrator as well as a business owner. The growth of the company marked the widening of duties and responsibilities undertaken by managers (Herring, 2003). The result of this widening prompted delegation for a skilled administrator with the capabilities on managing a fast-growing company as well as possessing specific knowledge about administration. However, with the developed of complexities in employing an administrator as well as monetary difficulties, the result was separation of company control and ownership.

Several issues emerged because of introduction of business combination. Firstly, there was asymmetry concerning information. This is because the owners of the companies were not directly involved in administration duties. This function was fulfilled by the administrators who were viewed as ambitious to gain control over the companies they administered (Mackenzie, 2011). Due to this asymmetry, conflicts resulted between the two primary parties that were the company owners and the administrator hired. The driving factor that fueled the continuity of this conflict was the fact that both parties were focused on the maximization of their own self-interest which were in total collision. The impending issue surrounding this conflict would be ultimately breakdown of capital market owing to progressive adverse selection. To solve the issue, solutions were established and have been in practice until recently. They include creation of incentives, optimization of contracts between investors and entrepreneurs, and consequently, the mitigation of errors that occur because of investment (Mackenzie, 2011). In addition, it is important to note that the most common practice considered as the solution to issues that result from business combination is disclosure of information inclusive of private data when the business entities merge.

Identification and Discussion on the Financial Accounting Standards (FAS) that govern business combinations and consolidations    

            The standards applied when governing consolidations and business combinations are known as International Financial Reporting Standards. The main role of these standards is the enhancement of comparability, relevance, and reliability pertaining to the details and information availed about business combination and their influence. These standards provide adequate principles necessary when conducting measurement and recognition of liabilities and assets, evaluating important disclosures as well as determining goodwill. The establishment of IFRS is because of the collaboration between the IFRS 3 and standards of the US Financial Accounting Standards Board.

The scope covered by these standards is wide as it focuses on various aspects. Firstly, it outlines the process of determining whether a particular transaction can be defined as business transaction. The guidelines elaborate on the number of ways that business combination can take place such as incurring liabilities, transferring cash, non-issuance of consideration and issuance of equity instruments (Herring, 2003). Secondly, it points to the elements that are necessary when acquisitioning a business. They are inclusive of output, inputs, and processes. Secondly, the principles also discuss on methods through which accounting should be conducted when handling business transactions. There are several steps outlined at this stage. They include

• Method of acquisition
• Identifying the acquirer
• Determination of the date of acquisition
• Recognizing and measuring liabilities, identifiable assets and the minority interest, this is now known as non-controlling interest from the acquiree.
• Measurement of gain or bargain from the purchase.

The standards and principles outline in IFRS also elaborate on the choice of accounting policy that is made available for each transaction. Additionally, it states the factors that are considered and applied when measuring the non controlling interest. These parameters include the proportionate share of the acquiree’s net assets and the full good will technique that is referred to as fair value.

Reasons for Business Combinations

Business combination is considered as a business strategy employed to improve the market strength of businesses as well as direct efforts for expansion and increase of profitability. In terms of developing a merger, it involves the unification of two business entities to create a combined business enterprise (Mackenzie, 2011). On the other hand, acquisition involves one major business entity gaining major control of another company. The company purchases assets and stocks through two ways. One of the interesting aspects about business combination is the fact that it can be exercised in established corporations and small business enterprises (Mackenzie, 2011). Several advantages can be gained from this endeavor. Consequently, disadvantages are also observed while undertaking business combination. These two elements are discussed concerning the parties affected, which is either the acquiree or the acquirer.

Advantages of Business Expansion

            Geographic Expansion of Business Entities.  Small businesses usually experience a difficult period when seeking to expand geographically. This is especially when the main objective is opening a branch in another state or city as part of their expansion strategy. The difficulty develops because various factors that should be considered when expanding a business (Herring, 2003). Firstly, the marketing program requires huge investment in establishing a clientele base for the new business branch. Secondly, expansion translates to employing new staff members to service the branch and provide services for the customers (Herring, 2003). Hence, capital should be set aside to cater to this need. Lastly, establishing a physical location for the branch requires capital allocation. Thus, owing to the fact that most SME’s lack the financial stability to cater to these needs, only one solution is available, that is, business combination. The small businesses can seek to merge with an established company in order for business expansion to be actualized. This step poses great benefits for the acquirer, the established business, because it also expands through owning more shares within the SME. As for the acquiree, which is the SME, they gain a reputable market presence that will further expand the brand recognition and increase the clientele base.

            Eliminating Competition. In various industrial atmospheres, the constant factor observed is fragmentation of the market. This is attributed to the constant competition present between smaller companies. Such a situation is observed in instances, where there is no major company in the particular industry. As a strategic move, market share can be increased when a small business owner decides to acquisition shares in their competing companies (Herring, 2003). Through this process, the extent of competition is clearly eliminated progressively. From a positive standpoint, elimination of competition assures the acquiring company a monopolistic business as there lacks a bigger company to pose any threat in terms of profits margin and shares ownership.

            Saving Costs. In the process of business combination, there is a likelihood that the merged company will be under the management of the same team. This team is tasked with the responsibility of supervision of operations (Herring, 2003). When an acquisition is being made, the executive team of the acquired company can be replaced by that of the acquirer company. Savings are greatly made from such measures because elimination of CEO’s is fiscally substantial.

Disadvantage of Business Combination

            Monopoly. In the recent times, it has been observed that most economic issues are undergone by smaller business. The main reason is simply that they have no control over the prices of services or products offered. Secondly, they are unable to conduct extensive research on the reduction of costs (Herring, 2003). Lastly, they lack the financial capability to purchase modern versions of the equipments used in production of commodities. Due to the three aforementioned reasons, large organizations are the only business entities that are capable of fixing prices thus creating a monopolistic nature of the economy where fiscal power is restricted to the established companies.

            Overcapitalization. When businesses combine, the resulting entity is larger due to the merging of employees, staff and equipment. Owing to this issue, there is need for more production to be made for the commodities offered. This great demand leads to overcapitalization. The effect of this aspect is the reduction of the effectuality of the management. These slowers down productivity rendering the progression of the company

Financial Factors

            Relative Size. Four financial factors are considered in business combination. Firstly, the relative size of the resulting business entity is considered, research has indicated that the size influences the returns gained by the acquirer (Herring, 2003). This size can be defined as the total assets of the acquirer and its relation with the transaction value (Mackenzie, 2011). This value is usually included during the reporting period for further evaluation.

            Existence of Operation Sector. The second factor is the operation sector, which determines the extent of disclosure between the acquirer and the acquiree. Studies indicate that a company that possesses an electric sector within its structure and complies with the standards of ANEEL has more levels in terms of disclosure (Mackenzie, 2011).

            Origin of the Company Acquisitioning Assets. The third factor is the origin of the acquiring entity. This factor determines the disclosure level as well depending on the origin of the company acquiring the shares of the acquiree company. Private companies are restricted in that they have limited levels of disclosure.

Non-Financial Factors

Listing Status

            The most important non-financial factor observed in the listing status. This is determined by the corporate governance structure as well the disclosure level. Based on the studies conducted on companies in Australia, it is observed that the listing influence the level of disclosure a company has access to. For instance, those that are under the Brazilian Mercantile are likely to have more disclosure levels as compared other listings.

Acquisition Tactics

            Institutional Buyouts. This tactic involves several entities. The acquisition can be done by venture capitalists or private equity firms. The main asset that is acquired is the controlling interest belonging to the separate company (Herring, 2003). The investor, who is the acquirer, focuses on disposition of stakes of a business entity for an estimated period.

            Leveraged Buyout. Leverage buyout can be described as the process through which a company is acquisitioned by using borrowed money. For complete purchase to be made, the cost of acquisition must be met. This tactic dictates that the acquisition process is to offset loan taken by the acquiree. The assets are considered as collateral. In instances where the assets are not sufficient to repay the loan, additional assets from the acquiree are claimed (Herring, 2003). The main advantage of this strategy is allowing companies to acquisition many assets even in the absence of the capital required.

Conclusion

The progression of the global economy has been promoted by the practice of business combination. Through this process, small companies are able to expand and gain more profits, which increase the fiscal gains within the state. Existence of accounting standards in business combination considered various financial and non-financial aspects determine the success of this process and influence in the market share. Based on the detailed discussion conducted, it is evident that business combination offers a win-win solution for the acquiree and the acquirer.

References

Herring, H. (2003). Business combinations & international accounting. Australia: South-Western.

Mackenzie, B. (2011). Applying IFRS for SMEs. Hoboken, N.J.: Wiley.