What is a Business Combination?

A business combination is a transaction in which the acquirer obtains control of another business (the acquiree). Business combinations are a common way for companies to grow in size, rather than growing through organic (internal) activities. Combinations can be used to rapidly acquire market share, fill out product lines, and gain access to new markets.

A business is an integrated set of activities and assets that can provide a return to investors in the form of dividends, reduced costs, or other economic benefits. A business typically has inputs, processes, and outputs. A development-stage entity may not yet have outputs, in which case you can substitute other factors, such as having begun operations and having plans to produce output, and having access to customers who can purchase the outputs.

A business combination is not the formation of a joint venture, nor does it involve the acquisition of a set of assets that do not constitute a business.

Noncontrolling Interest in a Business Combination

There may be a noncontrolling interest in a subsidiary; this situation arises when there are other owners of a subsidiary than the parent. If so, this noncontrolling interest is considered to be part of the consolidated group’s equity. This interest is reported in the consolidated balance sheet as part of equity, but separate from the equity of the parent. The noncontrolling interest should be clearly labeled as such. The following sample layout illustrates the concept. If an entity has a noncontrolling interest in several of the parent’s subsidiaries, these interests can be aggregated for presentation in the consolidated balance sheet.

Presentation of a Business Combination

When there is a business consolidation, the acquirer thereafter reports consolidated results that combine its own financial statements with those of the acquiree. The acquirer does not include in this consolidation the financial statements of the acquiree for any reporting periods prior to the acquisition date.