The core values for this course are integrity and excellence. Applying the value

Question

The core values for this course are integrity and excellence. Applying the values of integrity and excellence, discuss ethical considerations of accounting for business combinations in a manner that prevents misunderstanding in the questions below.

Business combinations have become an important strategic move by corporations for various reasons.

Discuss the importance of understanding the GAAP behind business combinations before performing the accounting. Additionally, why is it important that accountants report the numbers as dictated by GAAP regardless of what they may be?

Explanation / Answer

Horizontal Combination : It is also known as parallel or trade unit integration. It is
affected by units engaged in manufacturing similar products or rendering similar services .It involves the brining together of competing firms under single ownership and management.The benefit of horizontal combination is as follows;

(i) It eliminates wasteful inter-firm completion in the same line of industry.
(ii) It helps in achieving economies of large scale production and distribution.
(iii) It can control supply of the product and market prices.

Vertical Combination : It is also known as sequence or industry or process
integration. It arises as a result of integration of those business enterprises which are engaged in different stage of production of a product.The aim of vertical integration is to gain self-sufficiency as regards raw materials and distribution of finished products.

Lateral Combination : It refers to the integration of business units producing and
selling different but allied products. The lateral combination may be either convergent or
divergent. Convergent lateral combination arises when firms producing different products but supplying to a common user join with him. For example, brick manufacturer, stone supplier, cement supplier, and wood supplier may integrate with a construction company; Divergent lateral combination represents combination of one supplier of a common raw material with different users.

Diagonal Combination : It means integration of a main activity or process with
ancillary activities and services. For instance, a newspaper company may integrate with
transport company to ensure quick deliver of the newspaper to different parts of the country or an automobile plant may combine with a power generating unit. Thus, diversification of activities is diagonal.

Circular Combination : When there is integration of business units which remotely
connoted with one another in their production and sales, furculum integration is achieved.

b.companies seek to engage in business combination for the following reason:

Obtaining quality staff or additional skills, knowledge of your industry or sector and other business intelligence. For instance, a business with good management and process systems will be useful to a buyer who wants to improve their own. Ideally, the business you choose should have systems that complement your own and that will adapt to running a larger business.

Accessing funds or valuable assets for new development. Better production or distribution facilities are often less expensive to buy than to build. Look for target businesses that are only marginally profitable and have large unused capacity which can be bought at a small premium to net asset value.

Your business underperforming. For example, if you are struggling with regional or national growth it may well be less expensive to buy an existing business than to expand internally.

Accessing a wider customer base and increasing your market share. Your target business may have distribution channels and systems you can use for your own offers.

Diversification of the products, services and long-term prospects of your business. A target business may be able to offer you products or services which you can sell through your own distribution channels.

The importance of understanding the GAAP behind business combinations before performing the accounting is to know :

The required use of a "fair value " model to account for business combinations has increased the involvement of valuation specialists-both related to management,s accounting for a business combinatio and the auditor's testing of the amounts recognised.

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