The 2010 Activity Report of the German Accounting Standards Board states: The accounting treatment of business acquisitions is the most common source of errors in consolidated financial statements prepared in accordance with International Financial Reporting Standards (IFRS) by publicly traded German companies. This is not surprising, given that contractual agreements—particularly in the case of international business acquisitions—as well as the IFRS accounting standards for business combinations and consolidation are becoming increasingly complex.
However, IFRS accounting for business combinations in particular offers structuring options that can have a significant impact on the acquirer’s earnings. For example, call options to acquire a majority interest in a company can be structured in such a way that initial consolidation does not occur until a future date. This optional majority stake becomes relevant for consolidation purposes only if the option is priced at fair value or if exercising the option is advantageous. If the option price is fixed and currently not advantageous, the company is not consolidated at this time. Consolidation will only occur once the company’s earnings improve and the call option becomes advantageous. In this way, the call option can be used to influence the timing of the company’s initial consolidation.
Furthermore, the call option can be used to make a majority interest—and thus consolidation—contingent on future events. Even in the case of an acquisition involving minority shareholders, there is an accounting election: The minority shareholders’ interests can be recognized at the fair value of the acquired company’s proportionate net assets or at full fair value, including the recognition of proportionate goodwill. The latter results in higher equity in the consolidated financial statements; however, the future risk of impairment for the goodwill depends significantly in both alternatives on the control premium paid at the time of acquisition. Even a majority acquisition carried out in several stages can have positive effects on the consolidated financial statements compared to a direct acquisition. The change in value of the previously held investment is recognized in income in the consolidated financial statements when the acquisition of a majority stake results in the consolidation of the respective company. If an increase in the value of the originally held equity interest is expected by the time of the acquisition of a majority stake, a gradual purchase of the majority stake has a relatively positive impact on consolidated net income.
This process should be structured so that the total purchase price does not increase compared to a direct acquisition of a majority stake. It is important that these and other structuring options be identified during the acquisition negotiations and then optimally implemented in the purchase agreement. This can yield significant benefits for the Group’s future profitability, balance sheet structure, and other key financial metrics, as well as for financial covenants and credit ratings.
