Business combinations - part 1

In this lesson

1. 0:00 What is a business combination
2. 0:45 Identifying business vs asset acquisition
3. 2:30 Acquisition method step by step
4. 4:02 Identifying the acquirer
5. 5:11 Determining acquisition date
6. 6:01 Recognising assets and liabilities
7. 7:00 Intangible assets and contingent liabilities
8. 8:38 Calculating goodwill at acquisition
9. 10:01 Measuring consideration transferred
10. 11:52 Worked example: Shepherd and Pie Company

About this lesson

You'll discover what defines a business, how to apply the concentration test, and master the acquisition method's four essential steps: identifying the acquirer, determining the acquisition date, recognising identifiable assets and liabilities at fair value, and calculating goodwill. Through worked examples, you'll see how to treat different forms of consideration, including cash, deferred payments, and contingent consideration, and understand why some items (like acquisition costs) are excluded from goodwill calculations. Business combinations occur when an acquirer obtains control of one or more businesses. A business must contain three elements: inputs (economic resources like property, materials, and employees), processes (systems and standards that transform inputs), and outputs (goods, services, or income). The concentration test offers a quick way to determine whether acquired assets actually constitute a business – if substantially all fair value is concentrated in a single asset or similar group of assets, it's not a business and no further assessment is needed. This distinction matters because it determines whether you use the acquisition method or simply record an asset purchase. The acquisition method involves four core steps. First, identify the acquirer – typically the entity transferring cash or incurring liabilities, though you may need to consider voting rights and management control. Second, establish the acquisition date, which is when control transfers (usually when consideration is legally exchanged, but sometimes earlier or later depending on the facts). Third, recognise and measure identifiable assets acquired and liabilities assumed at fair value, with specific exceptions for deferred tax, employee benefits, and reacquired rights. Fourth, calculate goodwill by taking consideration transferred plus noncontrolling interest, minus identifiable net assets at fair value. Consideration transferred can take multiple forms, each treated differently. Cash is straightforward; deferred consideration is discounted to present value at acquisition, then unwound through profit or loss over time. Contingent consideration is measured at fair value at acquisition date – if it's cash-based and the fair value changes due to new information within the measurement period, the change goes to profit or loss; if it's equity, you don't remeasure it. Acquisition costs like due diligence fees are expensed separately and never included in goodwill. Understanding these distinctions ensures you correctly reflect the true economic substance of the business combination in consolidated financial statements.

Duration: 14m