Lesson 38 - Advanced Accounting Course

Lesson 38: Mergers & Acquisitions (M&A) – Financial and Accounting Considerations

💡 What Are Mergers & Acquisitions?

• A merger is when two companies combine to form one new entity.
  
  

• An acquisition is when one company buys another and takes control.
  
  

👉 Both are strategic moves used by companies to grow, gain market power, enter new markets, or acquire valuable assets.

🏢 M&A Example:

• 🍔 Company A (FastBite) acquires 🌮 Company B (TacoPower).
  Now FastBite owns and controls TacoPower — including its restaurants, employees, and trademarks.
  
  

🎯 Financial Goals of M&A

🧾 Key Financial Considerations

1. Valuation of Target Company
   
   

   • Use methods like:
     
     

     • 📊 DCF (Discounted Cash Flow)
       
       

     • 🔁 Comparable Company Analysis
       
       

     • 💰 Precedent Transactions
       
       

   • Goal: determine fair price for the deal
     
     

2. Form of Payment
   
   

   • 💵 Cash: Buyer pays full amount upfront
     
     

   • 🏦 Stock Swap: Buyer gives shares in exchange
     
     

   • 🪙 Combination: Mix of cash + shares
     
     

3. Due Diligence
   
   

   • Deep investigation of:
     
     

     • Financials 📈
       
       

     • Legal risks ⚖️
       
       

     • Assets & liabilities 🧾
       
       

     • Contracts & HR 👥
       
       

📚 Accounting Treatment (IFRS & GAAP)

After an acquisition, the buyer must:

1. Consolidate the financials
   The target’s assets and liabilities are added to the buyer’s books.
   
   

2. Apply IFRS 3 / ASC 805: Business Combinations
   
   

   • Use the acquisition method (formerly “purchase method”)
     
     

   • Steps:
     
     

     1. Identify acquirer
        
        

     2. Determine acquisition date
        
        

     3. Measure fair value of assets, liabilities, and non-controlling interest
        
        

     4. Calculate goodwill
        
        

💡 What is Goodwill?

When the purchase price > fair value of net assets:

🧠 Goodwill represents things like:

• Brand name 💎
  
  

• Customer loyalty ❤️
  
  

• Employee expertise 👥
  
  

💥 Goodwill must be tested annually for impairment — not amortized.

🧮 M&A Accounting Summary Table

⚠️ Common Accounting Challenges 

📘 Recap