International Finance and Accounting Handbook

(avery) #1

circumstances shall be considered.” Some of these considerations are:



  • Consideration should be given to the relative voting rights in the combined en-
    tity after the combination. The combining entity whose owners as a group re-
    tained or received the larger portion of the voting rights is generally the acquirer.
    Consideration should be given to unusual or special voting arrangements and
    options, warrants, or convertible securities.

  • Consideration should be given to the existence of a large minority voting inter-
    est in the combined entity when no other owner or organization group of the
    original group of owners has a significant voting interest. The acquiring entity
    is generally the combining entity whose single owner or organized group of
    owners holds the large minority interest in the combined entity.

  • Consideration should be given to the composition of the governing body of the
    combined entity. The combining entity that has the ability to elect or appoint the
    governing board is generally the acquirer.

  • Consideration should be given to the composition of the senior management of
    the combined entities. The combining entity whose senior management domi-
    nates that of the combined entity is generally the acquirer.

  • Consideration should be given to the terms of the exchange of equity securities.
    The combining entity that pays a premium over the market value of the equity
    securities is generally the acquirer.


The most significant change in the purchase price allocation is the criteria estab-
lished in Statement No. 141 to recognize intangible assets apart from goodwill. State-
ment No. 141 defines intangible assets as assets (not including financial assets) that
lack physical substance. It then provides specific criteria for recognizing those intan-
gible assets. Criteria for the recognition of intangible assets in a business combina-
tion are:



  • The intangible asset arises from contractual or other legal rights, regardless of
    whether those rights are transferable or separable from the acquired entity or
    from other rights or obligations.

  • If the intangible asset does not arise for a contractual or other rights it is to be
    recognized apart from goodwill only if it is capable of being separated or di-
    vided from the acquired entity and sold, transferred, licensed, rented, or ex-
    changed (regardless of whether there is an intent to do so). An intangible asset
    that cannot be sold, transferred, licensed, rented, or exchanged individually is
    considered separable if it can be sold, transferred, licensed, rented, or exchanged
    in combination with a related contract, asset or liability.


The Statement specifically states that an assembled workforce is not an intangible
asset to be recognized apart from goodwill.


(ii) International Accounting Standards. International Standards permits the use of
both purchase method and the pooling-of-interest (uniting of interest) methods of ac-
counting for a business combination. International Standards, however, set very strict
criteria for the use of the pooling method. International Accounting Standard No. 22
defines a uniting of interest as a business combination in which the shareholders of


18 • 18 CONSOLIDATED FINANCIAL STATEMENTS AND BUSINESS COMBINATIONS
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