When to use Merger accounting?

If it's not a new entity does this preclude the use of merger accounting

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I have two clients who are both CIC's.  They are looking to become one company on 30th June.  Company 'A' is transferring all its assets to Company 'B'.  They are not creating a new entity.

According to the definition of merger in FRS102....

"All of the following criteria must be met for an entity combination to meet the definition of a merger:

(a) no party to the combination is portrayed as either acquirer or acquiree, either by its own board or management or by that of another party to the combination;

(b) there is no significant change to the classes of beneficiaries of the combining entities or the purpose of the benefits provided as a result of the combination; and

(c) all parties to the combination, as represented by the members of the board, participate in establishing the management structure of the combined entity and in selecting the management personnel, and such decisions are made on the basis of a consensus between the parties to the combination rather than purely by exercise of voting rights."

Now these 3 things are met for the case in this situation however - the first sentence in the definition as per FRS 102 says:

"An entity combination that results in the creation of a new reporting entity formed from the combining parties"

So am I right that even though they meet the 3 points above, because they are not creatig anew entity - i.e an existing enity is simply receiving the assets of the other - that I do not have to do merger accounting and can just to the purchase method

Which frankly would be preferable!!

Many thanks



Replies (4)

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By The Dullard
13th May 2022 12:16

What's the purpose of merger accounting? Answer that question, and you'll have answered your own.

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Replying to The Dullard:
By hairyfingers
13th May 2022 22:04

Thanks for your reply. For clarity the CIC's are public benefit entities so it's not as simple as if it's a reconstruction then use merger and everything else being an aquisiton - if that's what you were referring to? As they are are bound by 19.6 (b) - it's not in substance a gift so I'm left with "or a merger". So that led me to the definition of merger previously stated.

They match the 3 criteria but don't match the statement of 'creating a new entity' - so.... Am I right therefore to say it is not a merger... And so purchase method. Thanks again

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By paul.benny
13th May 2022 13:32

You might also want to take look at s19 of FRS102, which says that nearly all business combinations are actually acquisitions of one business by another. I agree with your conclusion but I'm not sure I share your rationale.

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Replying to paul.benny:
By hairyfingers
13th May 2022 22:10

Thanks Paul. Yes I'd reaf s19 The key from that is that these 2 are CIC's that are public benefit entities. So I've got 19. 6 (b) to satisfy. The combination is not a gift so I'm left with "is it a merger" hence reference to the merger definition. They do match the 3 criteria but it's not a new entity for the combination. Is that semantics or can I rely on that as a matter of fact - so not merger. The outcome is all the same so I don't really see an issue either way, just that the merger method is significantly more arduous to get there. Thanks again

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