A business combination is the process by which two or more businesses become one economic entity in a certain way. There are many types and methods of business combinations, mainly including mergers by absorption, new mergers, share acquisitions, asset acquisitions, business acquisitions, etc. The accounting treatment of a business combination needs to follow the following principles and requirements:
- The principle of control: Control means that one party has decisive influence over the activities of the other party, and is able to make itself benefit or take risks from the activities of the other party. Control is a key factor in determining whether a business combination has taken place, and it is also the basis for determining the scope of preparation of consolidated financial statements. Generally speaking, control is found when one party holds more than 50% of the voting shares of the other party, or is otherwise able to effectively control the business decisions of the other party. The determination of control should take into account various factors, such as the shareholding structure, the terms of the agreement, the selection of management, business dealings, etc.
- Purchase date principle: The purchase date refers to the date on which the purchaser acquires control of the acquiree, and it is also the accounting recognition date of the business combination. The purchase date principle requires that the purchaser should recognize the purchase cost, the identifiable assets and liabilities of the acquiree, goodwill or negative goodwill, etc., at the fair value on the date of purchase. The determination of the purchase date shall be determined according to the method and time of the transfer of control, such as the closing date of the share transaction, the effective date of the agreement, the date of approval of the general meeting of shareholders, etc.
- The purchase cost principle: Purchase cost refers to the consideration paid by the purchaser to obtain control of the acquiree, including cash, payables, shares, bonds, equity instruments, etc. The principle of purchase cost requires that the purchaser should measure each component of the purchase cost at the fair value on the date of purchase, including directly related expenses, conditional consideration, non-controlling shareholders' equity, etc. The measurement of the purchase cost should be judged according to the substance and terms of the transaction, such as whether there are non-recurring events, whether there are unfair **, whether there are subsequent adjustments, etc.
- Fair value principle: Fair value refers to the amount of money or liability that can be transferred or transferred in a transaction, reflecting the consensus and expectations among market participants. The fair value principle requires that the purchaser should measure the identifiable assets and liabilities of the acquiree, including tangible assets and liabilities, intangible assets and liabilities, financial assets and liabilities, etc., at the fair value on the date of purchase. The measurement of fair value should be selected according to the degree of activity and observability of the market, such as the market method, income method, cost method, etc.
Consolidated financial statements refer to the financial statements of each enterprise within the scope of consolidation, which are prepared into financial statements reflecting the financial status, operating results and cash flows of the consolidated economic entities in accordance with certain methods and procedures. The scope and timing of the preparation of the consolidated financial statements shall be determined in accordance with the following provisions and judgments:
- Scope of preparation of consolidated financial statements:The scope of preparation of consolidated financial statements refers to the enterprises that should be included in the consolidated financial statements, including purchasers, acquirees, subsidiaries, associates, joint ventures, etc. The scope of preparation of consolidated financial statements should be divided according to the existence or absence of control, and generally speaking, when the purchaser has control over the acquired party or subsidiary, it should be included in the scope of preparation of consolidated financial statements;When the purchaser has significant influence over the associated enterprise or joint venture, it should account for its investment income according to the equity method and disclose the relevant information in the consolidated financial statements.
- The timing at which the consolidated financial statements were prepared: The time point at which the consolidated financial statements are prepared refers to the end of the reporting period of the consolidated financial statements, which is also the reporting date of the consolidated financial statements. The timing of the preparation of the consolidated financial statements should be consistent with the end of the reporting period of the buyer's financial statements, and if the financial statements of each enterprise within the scope of consolidation are inconsistent at the end of the reporting period, necessary adjustments should be made to reflect the situation at the end of the reporting period of the consolidated financial statements. The timing of the preparation of the consolidated financial statements shall be determined in accordance with the accounting policies and reporting requirements of the purchaser, and in general, the timing of the preparation of the consolidated financial statements shall be the same as the end of the reporting period of the purchaser's annual or quarterly report.
A head office refers to a combination of enterprises that have a control relationship between the head office and its branches. The preparation of the consolidated financial statements of the head office and branch office needs to be carried out in accordance with the following steps:
- Preparation of consolidated working papersConsolidation working paper refers to the process of summarizing the financial statements of each enterprise within the scope of consolidation into a worksheet according to certain formats and rules. The compilation of consolidated working papers requires the process of summarizing them into a worksheet according to certain formats and rules. The preparation of the consolidated working paper needs to be carried out according to the following requirements:
The financial statements of the head office and the branch are adjusted and unified according to the same accounting policies and reporting style to ensure the comparability and consistency of the consolidated financial statements.
The financial statements of the head office and the branch are translated and converted in the same currency unit to reflect the true and fair situation of the consolidated financial statements.
The financial statements of the head office and branch offices are aligned and matched at the end of the same reporting period to reflect the completeness and accuracy of the consolidated financial statements.
The financial statements of the head office and branches are filled in according to the format of the consolidated working papers, including the columns of the head office, branches, consolidated adjustments, consolidated amounts, etc.
- OffsetSet-off treatment refers to the process of offsetting or adjusting the transactions and transactions between various enterprises within the scope of the merger in accordance with certain methods and rules. The purpose of set-off treatment is to eliminate internal transactions and dealings between the various enterprises within the scope of the consolidation to reflect the external transactions and dealings of the consolidated economic entity. The content of the set-off treatment mainly includes the following categories:
- Offset internal equityInternal equity refers to the investment of the head office in the branches, or between the branches. The method of offsetting the internal equity is to deduct the investment amount of the head office or branch company from its assets, and at the same time deduct the corresponding part of the investor's shareholders' equity. The purpose of offsetting internal equity is to eliminate the ownership relationship between the individual enterprises within the scope of the merger to reflect the overall ownership structure of the consolidated economic entity.
- Offset internal income and expenses: Internal income and expenses refer to the income and expenses arising from transactions and transactions such as sales and purchases, leases and leases, interest and borrowings between various enterprises within the scope of consolidation. The method of offsetting internal income and expenses is to deduct the mutual income and expenses of each enterprise within the scope of consolidation from its income statement, and adjust the unrealized gains or losses in the related assets and liabilities accordingly. The purpose of offsetting internal income and expenses is to eliminate internal transactions and transactions between enterprises within the scope of consolidation in order to reflect the impact of external transactions and transactions of consolidated economic entities.
- Offset internal claims and debtsInternal claims and liabilities refer to the claims and liabilities arising from transactions and transactions such as receivables and payables, borrowings and loans, deposits and withdrawals between various enterprises within the scope of consolidation. The method of offsetting internal claims and liabilities is to deduct the mutual claims and liabilities between the various enterprises within the scope of the consolidation from their assets and liabilities, and at the same time to offset the related interest income and expenses accordingly. The purpose of set-off of internal claims and liabilities is to eliminate internal claims and liabilities between enterprises within the scope of consolidation in order to reflect the status of external claims and liabilities of the consolidated economic entity.
- Fill in the consolidated financial statements:Filling in the consolidated financial statements refers to the process of preparing financial statements such as consolidated balance sheet, consolidated income statement, and consolidated cash flow statement according to the consolidated amount in the consolidated working paper and in accordance with the format and requirements of the financial statements. The method of filling in the consolidated financial statements is to fill in the consolidated amounts in the consolidated working papers one by one according to the items and order of the financial statements, and make the necessary notes and explanations. The purpose of the consolidated financial statements is to reflect the financial position, results of operations and cash flows of the consolidated economic entities for analysis and evaluation by internal and external stakeholders.
The preparation of the consolidated financial statements of the head office is conducive to reflecting the overall financial status and operating results of the head office, improving the comparability and transparency of financial information, promoting the unified management and decision-making of the head office, and enhancing the trust and satisfaction of external stakeholders. There are also some advantages, disadvantages and influences in the preparation of the consolidated financial statements of the head office, mainly including the following aspects:
- Strengths, weaknesses and impact on the head officeThe preparation of the consolidated financial statements of the head office can make the financial information of the head office more complete and accurate, and better reflect the actual situation and development trend of the head office, which is conducive to the internal control and risk management of the head office, and is also conducive to the strategic planning and business development of the head office. However, the preparation of the consolidated financial statements of the head office will also increase the financial cost and workload of the head office, which requires the financial personnel of the head office to have a high level of professionalism and skills, and also requires the information system and internal processes of the head office to support the preparation and disclosure of the consolidated financial statements.
- Strengths, weaknesses and impact on external stakeholdersThe preparation of the consolidated financial statements of the head office can enable external stakeholders, such as investors, creditors, regulators, tax authorities, etc., to have a clearer understanding of the financial status and operating results of the head office, to better evaluate the value and potential of the head office, and to better protect their own rights and interests. However, the preparation of the consolidated financial statements of the head office will also make it difficult for external stakeholders, such as investors, creditors, regulators, tax authorities, etc., to distinguish between the internal and external transactions and transactions of the head office, to grasp the specific situation and differences of each branch of the head office, and to conduct separate analysis and evaluation of each branch of the head office.