Business combination / merger options FRS 102

What is the simplest way for 3 businesses to merge?

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I own 100% of company A (design and development company), Micro entity, 2 years old and profitable, just.

I own 90% of company B ( online business) with a 10% shareholder who injected cash, Micro entity, 6 years old and not profitable.  Software licence assets of £70k and directors loan (creditor) of £85k.

Company C, is a client of company A, 1 shareholder owner 100%, we’ve built a large web / development platform and shortly before paying their large bill, they stated they’d be open to merging with us. I read FRS 102 and since all shareholders would be remaining with a similar percentage, I felt a merger would work.

10% Shareholder of B introduced to his old firm, one of the big 4, for a meeting.  They stated that a merger would not be possible due to FRS 102 restrictions and the best option would be an acquisition and then “hive up” of all three businesses into 1 new company, equity only, no cash, and with the added benefit of valuing the various intangibles, not stated in the accounts, at fair value.

This sounded far more complex than was required and carried some hefty fees, and I didn’t see the benefit of valuing and creating new assets that carried significant amortisation and expence on a small business.

I want to keep this simple (1 set of accounts) and then approach a firm with an understanding of what the potential way forward is, what are the simplest options / pitfalls?

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By Margaret El Khalidi
18th Apr 2018 14:31

The use of merger accounting under FRS 102 is still permitted, but only when there is a group reconstruction with no change to the ultimate ownership of an entity. As the three businesses are not yet part of a group, the business combination can only be an acquisition by a New Co of the shares in the three companies and hive up of trade and assets and subsequent striking off of the subsidiaries if they are no longer required.

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By Cromford
18th Apr 2018 18:57

Thank you Margaret,

That makes complete sense, I now understand the need to value intangible assets at fair value, that have yet to be stated.

FRS 102 does seem pretty clear on this, once you provided the clarity between a merger or an acquisition and I noted the need to apply deferred taxation, should there be any timing differences between acquisition and year end of the potential subsidiaries.

Thanks again for the clarity on this.

Regards
Christopher

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