In accordance with the "Basic Standards for Enterprise Accounting," the Ministry of Finance issued Accounting Standard for Business Enterprises No. 20 — Business Combinations on 2006/2/15, effective as of 2007/1/1.
1. Overview of Guidelines
A business combination is a transaction or event in which two or more separate businesses are combined into a single reporting entity. This Standard classifies business combinations as either combinations under common control or combinations not under common control.
Types of Business Combinations
- • Business combination under common control: A business combination in which all of the enterprises participating in the combination are ultimately controlled by the same party or parties before and after the combination.
- • Business combinations not under common control: The parties involved in the combination are not subject to the ultimate control of the same party or the same group of parties before and after the combination.
II. Business Combinations Under Common Control
Accounting Principles
- • In a business combination, the acquiring entity shall measure the assets acquired and liabilities assumed at their carrying amounts on the acquisition date.
- • Adjust capital reserve for the difference between the book value of net assets acquired by the combining party and the book value of consideration paid.
- • If capital reserve is insufficient for offset, adjust retained earnings.
- • Directly related costs incurred by the acquirer in connection with a business combination shall be recognized as expenses in the period in which they are incurred.
III. Business Combinations Not Under Common Control
Purchase Method
The acquirer shall determine the cost of a business combination as follows: For a single transaction, the cost is the fair value of assets paid, liabilities incurred or assumed, and equity instruments issued by the acquirer on the acquisition date to obtain control of the acquiree.
Recognition of Goodwill
When the purchase price exceeds the acquirer's share of the fair value of the acquiree's identifiable net assets, the difference shall be recognized as goodwill. After initial recognition, goodwill shall be measured at cost less any accumulated impairment losses.
Handling of negative goodwill
If the purchase price is less than the buyer's share of the fair value of the acquiree's identifiable net assets, the difference shall be reviewed and recognized in current profit or loss.
Regulatory Document Attachment
Accounting Standards for Business Enterprises No. 20 — Business Combinations (PDF)