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This article deals with the accounting systems used in case of merger and acquisition. It also explains the difference between merger and acquisition accounting, Financial Reporting Standard 6 and the challenges faced by the companies in the process.
In order to keep cost of production low, a company opts for merger and acquisition process. Improved technology and reduced transportation cost are the main reasons for mergers and acquisitions. Research by Lehman Brothers found that on an average, large merger and acquisition deals increased the domestic currency of the acquirers by 1%. Besides, economies of scale, increased revenue, cross-selling, synergy and easier resource transfer are some of the reasons for a company to undertake merger or acquisition. The accounting methodologies used for merger are different from those of the acquisition.
In January 2006, the Accounting Standards Board (ASB) announced the issuance of a new International Financial Reporting Standards (IFRS) based on the UK accounting standards, which will be mandatory only at the start of the new financial year, i.e., on or after January 1, 2009. Until then, the reporting standard FRS 6 will be continued.
In case of public sectors, the merger could be either between two or more entities to form a new entity or it can be the transfer of functions from the responsibility of one part of the public sector to another. In these cases, the merger accounting principles will be followed as set out in FRS 6. This was reiterated at the main public sector forum which is the Financial Reporting Advisory Board (FRAB) in the UK. |
