Accounting for Mergers and Acquisitions: Key Concepts and Journal Entries
Mergers and acquisitions can significantly impact the direction of a business. They allow businesses to grow, expand into new markets, and increase their value. But behind the scenes, one of the most important tasks is accounting. Understanding how to manage the financial side of mergers and acquisitions is crucial for transparency and compliance.
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What is M&A Meaning in Business?
M&A stands for mergers and acquisitions. In business, this refers to the combining of two companies into one (merger) or one company purchasing another (acquisition).
In a merger, both companies come together to form a new entity. In an acquisition, one company takes over another’s operations, assets, and liabilities. These changes can affect everything from the balance sheet in financial accounting to daily operations, which is why proper accounting treatment is necessary.
Types of Mergers and Acquisitions
There are different types of mergers and acquisitions, depending on the business goals and structure of the deal:
- Horizontal merger – A company merges with another in the same industry to expand its market share.
- Vertical merger – A business merges with a company in its supply chain to control production or distribution.
- Conglomerate merger – Two companies from unrelated industries come together.
- Friendly acquisition – When the target company agrees to the acquisition.
- Hostile acquisition – The acquiring company takes control without approval from the target’s management.
Related read: accounting principles every business should know during M&A.
Accounting Methods for Mergers and Acquisitions
There are two main accounting methods for mergers and acquisitions, but only one is widely used today:
Purchase method (also known as acquisition method)
This is the most commonly accepted method and is required under current accounting standards like Ind AS 103 and IFRS 3. Under this method:
- Assets and liabilities of the acquired company are recorded at fair market value.
- If the purchase price is more than the fair value of net assets, the difference is recorded as goodwill under financial accounting.
- The acquiring company reflects the transaction in its books from the date of acquisition.
Pooling of interests method
This older method combined both companies’ assets, liabilities, and equity without recognising goodwill. It is no longer accepted under most modern accounting standards.
Why Accounting for Mergers and Acquisitions Matters
Proper accounting ensures accurate reporting, legal compliance, and trust among stakeholders. It also helps assess the transaction’s financial impact, especially when audit trails, taxes, and integration costs are involved.
Businesses that do not follow correct accounting practices risk misreporting profits, assets, and liabilities, which can cause legal and financial issues later.
Recommended: Learn about Types of Vouchers involved in accounting entries during M&A deals.
Conclusion
Accounting for mergers and acquisitions is a crucial part of the M&A process. From comprehending the different types of mergers and acquisitions to choosing the right accounting methods, every step needs attention to detail.
Whether it’s a small-scale takeover or a multi-crore merger, the journal entries need to reflect the true value of the transaction. Businesses can streamline this using smart accounting software built for complex financial reporting.
As a Chartered Accountant with over 18 years of experience, I have honed my skills in the field and developed a genuine passion for writing. I specialize in crafting insightful content on topics such as GST, income tax, audits, and accounts payable. By focusing on delivering information that is both engaging and informative, my aim is to share valuable insights that resonate with readers.
Frequently Asked Questions
- What is the difference between a merger and an acquisition?A merger is when two companies combine to form a new entity. An acquisition is when one company buys another and takes control. In accounting, both affect financial statements, but acquisitions often involve purchase consideration, asset revaluation, and goodwill adjustments, which must be recorded accurately.
- Why is accounting important during mergers and acquisitions?Accounting ensures accurate valuation of assets, liabilities, and goodwill during mergers and acquisitions. It helps comply with legal standards, ensures transparency, and supports financial reporting. Using software like BUSY, businesses can manage entries, revaluations, and integration of accounts efficiently during the merger or acquisition process.
- What journal entries are passed during an acquisition?Typical journal entries include debiting acquired assets and goodwill, and crediting liabilities and purchase consideration (cash or shares). For example:
Dr. Assets, Dr. Goodwill
Cr. Liabilities, Cr. Bank/Shares Issued
These entries ensure the acquisition is properly reflected in the acquirer’s books as per accounting standards. - When should a company record the acquisition in its books?A company should record the acquisition when it gains control—usually on the date the agreement is completed and legal ownership transfers. This ensures compliance and reflects the change accurately in financial records. BUSY can help automate these updates and manage post-acquisition accounting seamlessly.
