The continuous increase in the diversity and complexity of economic and financial transactions at both national and transnational level is leading to a continuous dynamic of business organizations and reorganizations. Thus, some of the practical forms adopted are the formation of groups, associations, and other organizational forms, which implies the production of significant mutations in the standards and regulations in the field at national and international level. The chapter aims to introduce the concept of joint business and to distinguish between the notions of acquisition of assets and acquisition of businesses. It also discloses the required information requirements for affiliate related party as well as the interests held in other entities (subsidiaries, joint ventures, joint ventures, etc.).
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There may be situations where more investors are interested in investing in the same entity (Alzola, 2017). They may at any time have a greater or lesser influence on the entity, but only one of them may have control (Bozec, 2008). Other investors may have the right to participate in decision-making on the activities of the entity, which may eventually constitute evidence of significant influence, but not of control (Daske & Gebhardt, 2006).
The cost of acquisition, also referred to as the cost of the business combination, is the sum of the fair values of the transferred assets, the liabilities assumed and the equity instruments issued by the acquirer in exchange for control of the acquire at the date of the transaction (Ghosh & Olsen, 2008). It also includes direct, directly attributable costs (such as professional fees), but not the costs of issuing equity securities or debts used to pay the obligation (Klein, 2002).
When the settlement of part or all of the cost of a business combination is deferred, the fair value of that deferred component must be determined by adjusting the amounts to be paid at the present value at the date of exchange, taking into account any premiums or discounts that may appear with the settlement (Lobo & Zhou, 2001).
When applying the acquisition method, the income statement and cash flow statements will include the entity's operating performance of acquire as of the acquisition date (Richardson, 2011). The results of the pre-acquisition operation are not restated and remain the same as those reported historically by the acquirer (Xiong, 2006). As a consequence, the acquirer's financial statements (the balance sheet, profit and loss account and cash flow statement) will not be comparable before and after merger but will reflect the reality of the merger.
Despite the solid principles embodied in IFRS 3, many analysts believe that the determination of fair value implies a considerable degree of managerial flexibility (Zeghal, Chtourou & Fourati, 2012). Values of intangible assets, such as computer software, may not be easily validated when analyzing acquisitions. Managerial reasoning may be particularly evident in the allocation of surplus purchase price (after all other assets and liabilities). If, for example, the remaining excess purchase price is allocated to goodwill, the net profit of the firm will not be affected because the goodwill is not depreciated (but tested for impairment). If the surplus (the positive difference) is to be allocated to fixed assets, depreciation would increase, thereby reducing net profit and generating incorrect financial statements.
Subject recognition of goodwill in financial statements found both supporters and opponents among professionals (Louwers, Ramsay, Sinason & Strawser 2007). Supporters of recognized goodwill say that goodwill is „the present value of the surplus revenue that a company can get” (Kothari, Leone & Wasley, 2005). This group claims to determine the fair value of these excess revenues is similar to determining the present value of cash flows associated with other activities and projects. Opponents of the recognition fund argue that the purchase price paid, many times proves to be based on unrealistic expectations, leading to further reductions default to zero of the goodwill (Jeanjean & Stolowy, 2008).
Both arguments have merit. Many companies are able to achieve revenues in excess out of their investments. As such, the prices of ordinary shares of these companies must register first a book value of intangible assets. Consequently, investors who buy ordinary shares of such companies pay for intangible assets (reputation, brand names, etc.).
There are companies who receive low incomes from investments, despite the presence of a surplus revenue balance indicated in goodwill (Dechow, Sloan & Sweeney, 1996). The price of ordinary shares of these companies tends to fall below book value because their assets are overvalued (Mechelli & Cimini, 2014). Therefore, it should be clear that only by paying a price above fair market value of the net assets of the acquired company it cannot guarantee that the purchasing entity will continue to receive surplus revenue.