a Key Features

The key features of merger accounting are as follows:

1. the financial statements of the combining companies are aggregated and presented as if the companies had been together since their respective incorporations;

2. the full year's results of the combining companies must be included in the consolidated profit for the year even if the merger takes place during the year;

3. comparative figures for both consolidated balance sheet and consolidated profit and loss account are restated as though the combining companies were together throughout the previous year.

b When Merger Accounting is Mandatory

Business combinations meeting the stringent and detailed conditions set out in FRS 6, together with those in CA 1985, should be accounted for using merger accounting.

If these conditions are satisfied, merger accounting is mandatory. However, ASB anticipates that these conditions will be met on rare occasions only.

c FRS 6, Accounting for Acquisitions and Mergers

In outline the FRS 6 conditions are as follows:

A combination meets the definition of a merger only if it satisfies the five criteria set out in paragraphs 6 11 of the FRS. These criteria relate to:

1. the way the roles of each party to the combination are portrayed;

2. the involvement of each party to the combination in the selection of the management of the combined entity;

3. the relative sizes of the parties to the combination;

4. whether shareholders of the combining entities receive any consideration other than equity shares in the combined entity;

5. whether shareholders of the combining entities...