Business Combination - Example

BUSINESS COMBINATION Student Name Affiliate Institution Business Combination Business combination is an entity for obtaining control of one or many businesses. The most common business combination is the purchase of an entire business in the process of business merger or business acquisition. The acquirer purchases a net asset or the acquire, (Refsness, 2012). Business mergers or acquisitions must be applied with standards of accounting so as to minimize conflict of interest and enhance standardization. Business combinations must be done according to the IFRS. The IFRS defines business combination as a transaction where the acquirer controls the acquiree in a variety of ways. The accounting elements for business combination include transferring of cash or cash equivalents, other assets, incurring liabilities, issuance of equity interests, and providing more than one type of consideration. A business combination must be structured for legal purchases, for taxation purposes and for attracting quality shareholders. For a newly combined business, shareholders equity will be transferred from owners to the newly formed company. Such business combination process formalization, (Baker et al., 2010). The IFRS standards require a formal application to the acquisition method to all business that is combining. The standards aim at defining the entities and expectations of a business combination such as defining of control, recognition of assets and liabilities, required accounting configencies and accounting for the non-controlling interests, (Benston, 2006). Business entering into merger or combination may do establish guidance for fair value measurement. The assets and liabilities of combining business are recorded at fair value and with limiting exceptions, (Benston, 2006). The good will is recognized because the purpose and goal of acquisition or merger is to expand or grow business to shareholders interest and to customer’s interests. Account’s Standards The IFRS 3 created a business combination guidance that outlines the accounting standards that are applicable to business combination. The business combinations that are usually acquisition or merger are accounted for using an acquisition method. These methods often require analysis of assets that are acquired and liabilities that are measured using a fair value at the acquisition date. The revised IFRS 3 were created in 2008 to govern business combinations from the beginning of July 2009. IFRS 3 aim at enhancing relevant, comparability and reliability of the information provided by business combinations. The IFRS 3 sets out the principles that recognize and measure acquired assets and liabilities in an effort of determining the good will and necessary disclosures, (Epstein & Jermakowicz, 2008). The IFRS 3 provides definitions of terms that are used in all business combinations that include true merger or merger of equals. In addition to definitions, the scope of IFRS 3 must be applied when conducting a business combination. The general guidance determines whether a transaction is a business combination that must be accounted according to standards requirements. Business combination, that involves an acquisition or merger, involves three elements that include inputs, processes and outputs. The inputs are those activities that are each stakeholder is bringing to the combination. These activities include assets and liabilities and extra investments. The process involves accounting standards that satisfy regulations, taxation and other objects of both internal and external stakeholder’s interests. The acquisition method include the following elements: Identification of the acquirer, determination of the acquisition date, recognition and measurement of identifiable assets of the two parties involved, as well as determining the controlling interest of the business combination. This method also recognize and measure good will of the business combination. The Malaysian Accounting Standards define business combinations much as those defined at international standards. According to Malaysian Accounting Standards, the results of all business combinations are that an acquirer obtains the acquiree, these two parties are defined according to international standards, (MASB, 2012). The acquisition date is defined as the date, in which the acquirer takes control of the acquired business. In Malaysia a business combination can be structured for different purposes that include legal and taxations. Commercial business in an international platform combines for the same purpose as those of Malaysia. In Malaysia like in any other region of the world, the accounting standards governing all business combinations must be accounted for by applying the following accounting standards: identifying the acquirer, measuring the cost of the business combinations, allocating costs to the cost of business combinations to the assets acquired and also assigning contingent liabilities for the acquiree, (MASB, 2012). In accordance to the Malaysian IFR Standards, a business combination must account for the assets and values of the business being acquired and contingent liabilities so as to get the fair value that can be recognized in accordance to the goodwill. The accounting standards recognize the fair value associated with a business combination so as to safeguard the interests of stakeholders and those of the acquiring company. Positive goodwill is promoted as compared to negative goodwill. Government Intervention During a business combination, a merger or acquisition face problems with government’s approval. Companies combining in an international or local platform deal with government’s approval especially when the government has as significant interest in the business. The drug industry draws a lot of interest from the government because of the high tax revenues that come from this industry. The government may take a position to support the acquisition or interfere in the industry and block the deal if finds a reason to do so. The government will directly or indirectly give reasons for not approving a given business combination. The government determines whether the combination businesses are going to complete the merger especially when the merging business will not have a long lasting consequence. The importance of a merger goes beyond the interests of the merging business and into governments and competitors, (Beresford, 2001). Even though the merging companies may complete the merging plans, the government‘s interest will prevent the closing of the business deal and that is what happens to Pfizer and Allergan recent business combination. News Review Pfizer and Allergan business combination In November 2015, Pfizer and Allergan agreed to merge in a business combination deal that was valued at 150 billion dollars. The business combination could make the world’s largest drug maker. The deal terms that were agreed in November 2015 were that if Pfizer shares would go to every Allergan share with possibility of containing small components, (Rockoff & Mattioli, 2015). The purpose of this business combination was to take advantage of lower corporate tax elsewhere in the globe. The Dublin based Allergan was smaller and the New York based company was larger hence a reverse merger strategy was created. The global drug tax rates are costly hence prompting to searching of cost effective and cost saving strategies and the merger was one of ways that will reduce the corporate tax, (Rockoff & Mattioli, 2015). A business combination analysis indicated that if the deal could mature, the new forming company will reduce it is corporate taxes by 20% as an estimate. In April 2016, the Wall Street Journal reported news that Pfizer was planning to walk away from Allergan deal. External environment as compared to internal environment killed the planned business environment. The Obama Administration took claim that Pfizer was moving to Ireland in an effort lower it’s corporate taxes while the business combination accounting standards for the combination were formalized, the U.S government changed it’s corporate rule that prevent the business combination, (Rockoff et al., 2016). In the commercial business world, the government’s interference is considered a political influence that has an impact in altering business. The Obama Administration claimed that Pfizer could not only cut its tax rates but it is running away with taxes that belong to the U.S. The New York based company could not move out of the U.S because of high taxes and the government claimed that this move will qualify as a business fraud. The consequences of killing a merger that Pfizer could pay Allergan a break up fee of about 400 billion U.S dollars. The fee is a compensation of the planning cost that Allergan had incurred incurred since November 2015. How Pfizer Defended it is Actions To Get Out Of The Merger Critics indicate that Pfizer knew it is wrong dong because the company did not object the government decision that could not allow the company to merge with Allergan. In response to this criticism, Pfizer maintained that it followed a standard business combination accounting standards. The company states that, it highly depends on actuarial estimates, calculations and assumptions. The process of business combination is a complex process that comes with a series of complex judgments about internal and external stakeholders and that is why Pfizer could not go ahead with the merger plans because of government influence. The pharmaceutical industry is influencing because of it high profitability and high tax returns. Therefore the government and other direct stakeholders world work to ensure that Pfizer, as the largest drug manufacturer and supplied in the U.S remain in it’s hands. The significant of this industry is what makes the government to exert pressure on the future plans of this drug company. Under the accounting rules, Pfizer aimed at relocating to Ireland and because a non U.S tax residence. The Internal Revenue Services (IRS) challenged this move. Since, Pfizer had followed all the rules and regulations of a merger and was ready to relocated the Federal government through IRS agency challenged the tax rules, that could not favor the Pfizer plans halting it is plan and the merger. Expert opinion on business combinations Business combinations can be friendly or unfriendly mergers. The combinations results into extensive negotiations between the two company’s management teams. The business organizations performing similar functions merge to increase the scale of their populations. From this definition, the recent Pfizer and Allargen business combination is considered a horizontal merger. The purpose of this business combination includes improving concentration within their industry to maximize industry’s competition. The horizontal merger and business combination increase a market power and eliminate anticompetitive effects as opposed to developing the antitrust grounds for the merger, (Epstein & Jermakowicz, 2008). Business combinations are often driven by complex motives and reasons that make this process is continuous and never ending in the commercial corporate world. Patterns of business combinations focus on identifying opportunities and threats within the industry. Business combinations are cyclic in nature with external factors that influence these mergers including the economy, regulation and technological shocks of the market. Firms may have their own good will for their business combinations, but external environment such as interest from competitors and regulatory agencies can block the organization’s needs to merge, (Epstein & Jermakowicz, 2008). With the business combinations possible, companies that are merging must determine the level at which their plans will be successful. Otherwise, governments and regulatory agencies can impact the organizations decisions to merge and the merging companies might never get to seal their deals. Interview guidelines for business combinations Open interviews to find the expert opinion from both the accounting professional and an academic researcher in this field will be focus on exploring the process and problems associated with business combination especially in a high sensitive industry. An accounting professional will be chosen from Pfizer. A letter, through the email will be sent to the human resources of this company to request the department to refer the interviewer to an accounting professional. After meeting the accountant either through phone call and email response a phone interview will be schedule at their most appropriate time. Through the phone interview, the team will collect appropriate information for writing an expert opinion about business combinations. The second interview will come from an academic research. The most appropriate choice for this interview is the accounting lecturer. His expertise and experience in the discipline will assist in developing expert opinion about business combinations that occur through a merger or a combination. My own view I believe that the IFRS 3 guidelines that are international standards aim at improving the information provided by business combinations. These guidelines establish the principles and requirements of the acquirer. Under IFRS 3 and AASB 3, business organizations that are planning for combination must identify the business combination assets and liabilities that are going to be traded in the new platform. Business mergers occur with the objective of non-organic growth. Non-organic growth comes with complex regulations and approval processes. The lengthy and complex process is what makes a business combination plan seem to take long before the deal is closed. Within the lengthy process are approval authorities. The most important regulator being the government because of the controlling interest especially when a merger or a combination will have an impact on the tax revenue. If the business combination is going to reduce or impact the tax revenue, the government authority will try to block the plan hence affecting the combination and sometimes stopping it. Therefore, when organizations are having their own interest, I suggest that they should determine whether their resident governments are going to allow the merger. Even though resistance or difficulties of getting the business combination go ahead from the government is treated as an external impacting factor, the management lead change should design their merger process in such a way that they should seek approval from the government or legislative authority before proceeding with the plans of the merger. Otherwise, these companies may end up spending significant amount of money and resource in the lengthy merger process only for the government to block the merger for the sake of political interest. Reference Beresford, D.R., 2001. Congress looks at accounting for business combinations. Accounting Horizons, 15(1), pp.73-86. Baker, C.R., Biondi, Y. and Zhang, Q., 2010. Disharmony in international accounting standards setting: The Chinese approach to accounting for business combinations. Critical Perspectives on Accounting, 21(2), pp.107-117. Benston, G.J., Bromwich, M. and Wagenhofer, A., 2006. Principles‐versus rules‐based accounting standards: the FASB's standard setting strategy. Abacus, 42(2), pp.165-188. Rockoff, J. and Mattioli, D. November 22, 2015. Pfizer, Allergan Agree on Historic Merger Deal. The Wall Street Journal. Accessed October 18, 2016 from http://www.wsj.com/articles/pfizer-allergan-on-cusp-of-merger-deal-1448217490# Refsness, F. O. 2012. The Role of Organizational Structures, Strategies and External Environments in Merger-Empirical evidence from two contrasting cases. The European Inter-University http://www.esst.uio.no Rockoff, J.D. Hoffman and Rubin, R. April 5, 2016. Pfizer to Walk Away From Allergan Deal. The Wall Street Journal. http://www.wsj.com/articles/pfizer-to-walk-away-from-allergan-deal-1459907657 Epstein, B.J. and Jermakowicz, E.K., 2008. Wiley IFRS 2008: Interpretation and Application of International Accounting and Financial Reporting Standards 2008. John Wiley & Sons. Read More