Corporate Structures
Business Acquisition and Merger
One of the most technically demanding Paper 3 topics. Questions typically require you to value a business, calculate goodwill, determine the purchase consideration, and prepare the opening statement of financial position for the newly formed entity — all in one question.
Step 1: Revalue the acquired business’s net assets to fair value. Step 2: Calculate goodwill (purchase consideration − fair value of net assets acquired). Step 3: Prepare the acquiring entity’s opening SoFP by combining its own net assets with the fair-value net assets of the acquired business, then add goodwill as an intangible non-current asset. Watch for part-way-through-year acquisitions — you may need to time-apportion profit.
Key Concepts to Revise
Types of Acquisition / Merger
Sole trader → sole trader merger (new partnership)
Sole trader / partnership → acquired by Ltd company (purchase of business)
Two sole traders / partnerships → merger into new Ltd company
Business Valuation Methods
Net asset value — fair value of assets minus liabilities
Earnings yield / P/E ratio — based on profit capitalized at a given rate
Dividend yield — value implied by expected dividend stream
Goodwill Calculation
Goodwill = Purchase consideration − Fair value of net assets acquired
Purchase consideration can be: cash, shares issued at market value, debentures, or a combination. Goodwill is an intangible non-current asset in the acquiring entity’s SoFP (not amortised under 9706 syllabus).
Purchase Consideration Types
Cash — straightforward payment to vendor
Shares — valued at market price, not nominal; credit share capital (nominal) and share premium (excess)
Debentures — valued at nominal or issue price; create long-term liability
Opening SoFP — Ltd Acquires Business
Non-current assets: acquiring company’s NCA + acquired NCA at fair value + goodwill
Current assets / liabilities: combined at fair value. Equity: acquiring company’s equity + new shares issued (if any). Liabilities: existing + debentures issued (if any) + cash element reduces bank.
Merger of Two Sole Traders into Partnership
Revalue each sole trader’s assets to agreed values. Capital account of each partner = fair-value net assets contributed
Opening partnership SoFP: combine both sets of fair-value assets and liabilities. No goodwill unless separately agreed and retained in books.