Bookkeeping Business Acquisitions

Acquiring a competitor is one possible way of growing your business; however, should this business dealing be accounted for as a business acquisition or as an asset acquisition? Many organisations are seeking a way to keep up the pace of the ever-changing business environments that need to grow, evolve and adapt. Besides, the key to a business that has to achieve this, while at the same time reinventing itself and not losing its competitive edge could be an acquisition. Some of the world’s most renowned companies, like Disney and Google, have added this strategy as part of their growth.

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The same happens in any other industry, including the iGaming one where it can take various forms. In the iGaming industry, many casinos acquire smaller ones. For example, the Taj Mahal Casino from Atlantic City was acquired by Hard Rock International. Companies that acquire from other companies or companies, it is essential to determine if this addition is a business one or asset one.

In the case of Hard Rock, it was more of an asset acquisition, since the Taj Mahal belonged to Trump Entertainment & Resorts. The same can happen for the online counterpart. It is rare, but it happens when online casinos are up to be acquired by other big names. Even in the case of Admiral Casino, which previously belonged to another company and now it is part of Novomatic.

It may be straightforward to choose between two different types of acquisitions. Differentiation between the two is significant because gaining both can lead to different scenarios. One start point is to determine whether the addition meets the definition of business. However, in October 2018 the IASB (International Accounting Standards Board) issued amendments to the definition of a business.

The changes had become applicable to the annual economic reporting periods on 1st January 2020. Also, the description of business was comprehensive, and it was challenging to determine whether an acquisition was either business acquisition or asset acquisition. Previous of new amendments, the company was defined as an organisation that has three elements:

  • Processes applied to data.
  • Generated outputs from the application of those processes to the contributions. However, outputs are usually not required to qualify a business.

The New Business Definition

With the new amendments, there is a concentration test which is a simplified assessment that allows preparers to determine if the acquisition is an asset acquisition. It will be an asset acquisition if all the fair value of the gross assets concentrates in a single identifiable asset. If the preparer chooses not to apply the concentration test, then the assessment will focus on the existence of a substantive process. However, under the new amendments, an acquisition must have an input and a process.

In other words, the acquired set of activities and assets must generate outputs to meet the definition of business. On the other hand, if a company has not produced some productions is not considered to have an acquired set of activities and assets, which means that in situations like these, the definition of business will be substantive.

However, the substantive process affirms when the process is essential for the company when it will convert or develop the inputs into outputs. The company needs to include a skilled, organised workforce that has the experience to perform the process, and if the skilled, organised workforce can develop other inputs into outputs, such as the case of real estate and in-process research and development projects.

The Acquisition of a Business and Asset

According to the new IFR 3 amendments, if an acquisition falls under the definition of business, there should be several requirements that need to meet. Under this definition, the one that acquires a company has to carry out some value allocation exercise. In simple terms, an acquired business has to show they have value to stay under the “business acquisition” profile.

However, if an acquisition falls into the asset category, it means that the entity has acquired only assets or a group of assets from a company. Under the IFR 2 new amendments, this does not apply under the definition of the business combination.

Also, when an acquisition carries out, the management needs to determine if it is a business acquisition or an asset acquisition, especially when it comes to impact the accounting sector. Accounting for an asset acquisition is much easier than for a business acquisition.

Interesting related article: “What is M&A?