Financial Reporting and Ethics - The Institute of Chartered ...

3AMALGAMATION, ABSORPTION ANDRECONSTRUCTION3.0 LEARNING OBJECTIVESAfter studying this chapter, it is expected that readers will understand:! The meaning of business combination;! The reason(s) why businesses combine;! The major types of business combinations;! Accounting entries for business combinations;! When a company will embark on capital reduction scheme;! The principles of implementing an already formulated capital reduction scheme;! The differences between capital reduction and capital reconstruction scheme;! Distinction between internal and external reconstruction schemes; and! The formulation of an acceptable capital reduction scheme.3.1 INTRODUCTIONThe term “business combination” is used to describe an arrangement wheretwo or more businesses owned and operated as separate entities come togetherto become a single entity under the same ownership. The implication of this isthat the separate businesses will discontinue their ownership and come undera single ownership. Business combinations can be found in sole- proprietorship,partnership and companies’ business arrangements. Companies combine witha view to eliminating or reducing competition, to carry on business on a largescale or to control prices and markets.Business combination can take two forms:(a)(b)AmalgamationAbsorptionSometimes companies are dissolved due to financial problems and after severaladjustments they re-register to carry on normal businesses. This process iscalled reconstruction or reorganisation. This exercise is undertaken by thosecompanies which either incur heavy losses for a long time and were unable19