Answer / patrick velay

ACCOUNTING FOR ACQUISITIONS AND MERGERS

A consolidation reserve is created for differences in the
valuation bases of long-term policy liabilities and
investments supporting those liabilities. Certain assets
held in policyholder portfolios may not be recognised at
fair value in terms of IFRS, whereas the valuation of the
related policy liabilities are based on the assets at fair
value. This creates a mismatch with a corresponding impact
on the shareholders’ fund.
A separate reserve is created for these valuation
differences due to the fact that they represent accounting
differences and not economic losses for the shareholders’
fund. Valuation differences arise from the following:
• Investments in subsidiaries and consolidated funds,
which are valued at net asset value plus goodwill;
•and Investments in associates and joint ventures, which
are recognised on an equity-accounted basis.
The reserve represents temporary differences insofar as the
mismatch is reversed when the affected investments are
realised.

1 ACQUISITION ACCOUNTING
In order to reflect the fact that the purchaser has
acquired control of a company acquisition accounting
requires that net assets are included at their fair values
and that only post-acquisition reserves are included in the
*consolidated reserves*. The investment will be recorded in
the books of the purchaser at cost – which is normally the
fair value of consideration.

2 MERGER ACCOUNTING
The main points of merger accounting are as follows:
• Interests in the new business are pooled – net assets are
aggregated
• Investment is recorded at nominal value of shares issued
• No adjustment is needed to the carrying value of net
assets to reflect fair value
• Differences between carrying value of investment and
nominal value of shares is
Either
• treated as a reserve arising on consolidation if carrying
value is less than the
nominal value of shares, or
• deducted from reserves if carrying value is more than the
nominal value of shares• Accounting policies must be
consistent between the two businesses
• Profits or losses for the period in which the merger
takes place should all be included in the group accounts
• Group accounts are presented as if entities had always
been combined – i.e. corresponding amounts should be shown.
• Pre-merger and post-merger figures must be detailed in
the notes to the accounts.
3 MERGER RELIEF
When a company issues shares at a premium, this amount must
be credited to a share premium account. Exception may
exist, in those cases, there is a merger relief provision
and there is no need for a share premium account.
4 EXERCISE 1
B Ltd acquires all of the share capital of C Ltd by issuing
5,000 EUR1 ordinary shares. The market value of these
shares is EUR 1.60.
Using (1) acquisition accounting and (2) merger accounting
what entries would be made in the books of B Ltd?

5 SOLUTION 1

Dr Investment in C Ltd
Cr Share capital
Cr Merger reserve
Using merger accounting what entries would be made in the
books of B Ltd?
£ £
Dr Investment in C Ltd

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