CRITICAL ANALYSIS OF NATIONAL AND INTERNATIONAL ACCOUNTING REGULATIONS ON

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1 CRITICAL ANALYSIS OF NATIONAL AND INTERNATIONAL ACCOUNTING REGULATIONS ON TRANSACTIONS WITH BUSINESS ENTITIES Prof. Sorinel Domnişoru, Ph.D Lect. Daniel Goagără, Ph.D University of Craiova Faculty of Economics and Business Administration Craiova, Romania Abstract: The purpose of this article is to highlight how specific combinations of national entities, viewed through the appropriate accounting regulations, comply or not the information needs required by international accounting bodies, specifying the methods by which it may be achieving greater good convergence in this regard. The manner which these aims are achieved depends largely on the efficiency of financial reports released by the local entities. JEL classification: M41, M42. Key words: combination of entities, mergers, acquisitions, international reglementation. 1. INTRODUCTION The emergence of an economic entity is based on a "productive projects, namely the creation and organized distribution of goods and services", representing therefore to carry out one or more activities whose duration can be set right by the articles of association. The merger allowed the companies to provide important technical structures, leading to increased competitive ability. Studying the evolution of economic entities shows that only those who have reached a certain level of activity were able to invest in research and development to enable them to maintain or create a technological lead over competitors. Economic development and the existence and development of financial markets have facilitated the emergence and subsequent expansion of powerful economic entity, able to dominate the market and have the ability to invest in shares. The ability to buy freely, financial market equity determined to obtain a degree of control or influence over the issuer, which led to groups of companies. 2. CORRELATIONS AND DEBATES Transactions, mergers and acquisitions, we believe that fall within the scope of IFRS 3 "Business Combinations" and FAS 141, "Business Combinations". By adopting the IASB IFRS 3, March 2004, suspended the implementation of the old standard IAS 22, in force since At the same time published the revised standards IAS 36 "Impairment of Assets" and IAS 38 "Intangible Assets", review these 43

2 rules appeared as a necessity arising from changes in accounting economic entity combinations. The adoption of IFRS 3 was the result of numerous discussions, both practitioners and theoreticians, who was devoted to the methodology of accounting for combinations of economic entities. The old standard, IAS 22, allowing specific recording accounting transactions using either the pooling of interests method or the purchase method. This created the premise that economic transactions economic entity type combinations are highlighted in accounting by using different methods, which inevitably led to the emergence of significant differences in the reporting of financial results. In this situation, given that the same type of economic transactions were used different accounting methods rightly, analysts and other users of information released from the accounts have raised the issue of the difficulty of comparing the financial results of the various entities. At the same time, there was a need for better information regarding intangible assets because they represent an important economic source for many entities and an increasing proportion of the assets acquired in transactions of mergers and acquisitions, accounting for the emergence synergistic effect. While the purchase method recognized all intangible assets acquired in combinations of economic entities (either separately or as goodwill), when using the pooling of interests method only those intangible assets expected to register the acquiring entity were recognized. Meanwhile, the management of business entities indicated that differences in accounting from the use of the pooling of interests method and the purchase method affects the competitiveness of the market transactions of mergers and acquisitions. Taking into account the views of theorists and practitioners, and that standards bodies worldwide, including the USA, Canada and Australia, they decided to eliminate the pooling of interests method, the entry into force in July 2001, FAS 141, to suspend the application of Opinion 16, the IASB adopted IFRS 3. As a result, the combination of economic entities is required to be accounted for using the purchase method, which states that the fair value of assets acquired, liabilities assumed and contingent liabilities are measured at the acquisition date. The adoption of this standard has not ended the debate on these issues, but they continue and focuses on reconsidering the term contingent liabilities. Thus in 2008 the IASB adopts a new version of IFRS 3. If the initial version of the standard transactions, mergers and acquisitions is presumed to be addressed within the scope of its improved version, approved in 2008, since its objective is the definition specifies that transactions relating to mergers will be considered fit the category combinations economic entities will be treated in line with IFRS 3. The application of IFRS 3 and FAS 141 improved financial reporting information as balance entities engaged in economic entity combinations will be prepared taking into account the economic substance of the transactions. Applying these standards, we believe that generates positive effects that are mentioned below. A better reflection of the investments made in the acquiree, justified by the fact that the acquisition method requires the recording of transactions with business entities on the basis of exchange, so that users are provided with information on the total purchase price paid to acquire another entity. This allows a better assessment of future performance related investments. Such information could not be provided when using the pooling of interests method. 44

3 Improve the comparability of financial information reporting because all combinations of economic entities are accounted by using a single method, so specialists are able to compare the financial results of transactions involved similar economic entity. All assets acquired and liabilities assumed in transactions of this type are recognized and measured in the same way regardless of the nature of exchange - ie whether the entity acquires securities issued or exchange value. Providing financial information about the assets acquired and liabilities assumed, the economic entity combinations more complex, resulting from the application of explicit criteria for recognition of intangible assets separately from goodwill. This additional information is required, among other things, to be made available to specialists for a better understanding of resource assets acquired and the ability to make future profits and cash flow. In the spirit of IFRS 3, a combination of economic entity is defined as a transaction or other event in which the acquirer obtains control of one or more business entities. Specify that the difference between the old version of IFRS 3 and approach 2008 is that transactions, mergers (merger by acquisition and merger meeting) are also economic entity combinations IFRS spirit. To determine if a transaction falls within the scope of IFRS 3, we consider it necessary to determine whether the entity meets the definition of "business". From the analysis of IFRS 3, "Business" is defined as an integrated group of activities and assets conducted and managed in order to generate a profit, lower costs or other economic benefits to investors, owners and other participants, if an entity acquires a group of assets or a separate legal entity that does not meet the definition of "business" as IFRS 3, the transaction should not be accounted for as a combination of economic entities. Acquiring a legal entity in itself does not prove the existence of a combination under IFRS 3 reasoning. We exemplify such that if one asset represents a legal entity, it is impossible for the purchase of such an entity to be considered a combination of economic entities, but rather believe that the transaction will be treated as an acquisition of an asset. In general, it is considered that the following types of transactions meet the definition of economic entities combinations: purchase of all assets, liabilities and rights of the assets of an entity, which can be done either by issuing shares or by the transfer of cash or cash equivalents or other assets; purchase only a portion of the assets, liabilities and rights of an entity that together satisfy the requirements of the definition of "business" or the transfer of cash or cash equivalents or other assets; establishment of a new legal entity in which all assets, liabilities and activities combined companies will be maintained. Combining economic entities can generate cash payments, issuance of securities, assumption of debt or other assets in exchange for sacrificing business acquisition. Where an entity purchases all assets and liabilities relating to a manufacturing operation to another entity, the transaction will be considered in line with IFRS 3 as the activities and assets of a business acquired is consistent with the reasoning of this standard. However, if an entity buys only hardware assets of a company in liquidation, the transaction will be considered out of IFRS 3, because the hardware by itself can not be considered an integrated group of assets and activities, and no other assets (software) and Provider (development facilities and services) may be used to provide a benefit of 45

4 investors and other economic advantages. In this case, the transaction will be accounted for as a purchase of assets at their fair value. From the analysis of the provisions of IFRS 3 we see that there are three exceptions to the general principles of economic entities combinations. First, IFRS 3 does not apply to combinations of economic entities that" businesses" were combined to create an association, joint venture (joint ventures). Secondly, the provisions of IFRS 3 does not apply to combinations involving entities or businesses under common control, both before and after the transaction. Such transactions have been defined in the standard as "a combination in which entities, in the end are controlled by the same party or parties, both before and after operation, and the transitional control is - transient". In the process of determining whether a such operation is conducted between two companies under common control should be considered contractual commitments involving all the stakeholders. If an entity is not included in the same consolidated financial report does not mean, in itself, it is not currently control. Transactions economic entity type combinations involving companies under common control are not required to apply IFRS 3, but may apply other methods considered as meeting the requirements of accounting policies. For example, two entities A and B are both controlled entity C. For economic and fiscal entity C decide to reorganize the group structure and result in the entity B is purchased by an entity A. This transaction is not covered by IFRS 3, in the transaction because both entities are controlled by the entity C, both before and after. Generally, in this situation, the entity elects to effect the transfer of assets and liabilities at the amount they have registered in the books. Anyway entity A is not prevented from applying IFRS 3 if desired. In the third case, the provisions of the standard does not apply when business combinations involving two or more mutual entities. The initial version specify and IFRS 3 does not apply when several separate entities come together to form a reporting entity. The amendments of 2008 these operations were included within the scope of IFRS 3. I have reviewed some aspects of IFRS 3, to demonstrate that a combination of economic entities can generate fusions between two or more companies in which either one of their assets and liabilities are transferred to the other, and the first company is dissolved - merger by absorption - or the assets and liabilities of both companies are transferred to a third new company and both the original companies are dissolved - merger by fusion -. If initially there was ambiguity regarding the classification of transactions for mergers and acquisitions within the scope of IFRS 3, we believe that this lack of precision has been removed by the adoption of the new version of the standard in Also, the economic entity combinations, and therefore mergers and acquisitions, it is necessary to observe some basic principles of the standard. First, a combination represents a purchase and will be reflected in the accounts using the purchase method because it involves a transaction in which the assets are transferred, the liabilities are assumed and their acquirer in exchange for issuing securities or cash transfers. Secondly, the acquisition date, the acquirer shall include in its results of operation results acquiree and recognize identifiable assets and liabilities on the balance 43 A transaction or other event in which an acquirer obtains control of one or more businesses. Transactions sometimes referred to as true mergers or mergers of equals are also business combinations as that term is used in this IFRS. - IFRS 3 (2008). 46

5 sheet of the acquiree, and the goodwill arising from the acquisition. Third, a combination of economic entities is required to be carried at its cost, represented by the amount of cash or cash equivalents - securities issued - paid or the fair value at the transaction date plus costs directly attributable to the acquisition. Assets and liabilities are measured at their fair value at the transaction date and marketable securities issued by the acquirer are measured at the market price on the date of transaction. Using the purchase method in accordance with IFRS 3 requires several steps: Step 1: Determining whether the transaction or event is a combination of economic entities in the spirit of IFRS 3; Step 2: Dentifying the acquirer; Step 3: Determining the acquisition date; Step 4: Recognising and measuring the identifiable assets acquired, the liabilities assumed and any interest not involving control; Step 5: Evaluation and determination of the components of the combination of economic entities; Step 6: Identification and assessment of goodwill or any other gain on negotiation; Step 7: Subsequent measurements and accounting for the transaction. Regarding regulations in Romania 44, accounting plan, fusion operation is treated as a capital increase in the acquiring company and the acquired company dissolution without liquidation of the merger by absorption, and a society that created used set, ie a dissolution without liquidation if the mergers meeting. The acquiring company shall prepare an inventory of all property items and, based on it, draw up a balance sheet fusion basis financial negotiations. The net assets of the acquiring company shall be submitted as input fusion contribution can be determined based on book values or the values correct (corrected). As we noted no IFRS 3 is not recommended that intake be determined based on the carrying values, unless the fusion seeks an internal restructuring of the group of companies, which implies that the absorbed corporation controlled by the acquiring company or both companies are calling the common control of another entity. Therefore, the use of fair values in determining intake, this means the appearance revaluation differences, which can be an added value or a negative value. The acquired company accounts need arises registration of clearing mutual obligations absorbing entity - if any - the transfer of assets and liabilities, equity and debt cancellation to shareholders, receipt and distribution of securities in the acquiring company. Will perform the same operations and economic entities cease to exist in a merger meeting. The acquiring company shall prepare a balance sheet at the same time as the company being acquired, the basis of reference for the negotiation of the merger. The accounts of the acquiring company will register the property received as contributions from whichever entity absorbed in the merger, capital increase and decrease Treasury - if the merger was intended to grant a consultancy. If later found that some goods have been omitted in the draft merger they accounted null value and if they are omitted debts for acquiring exceptional expenses which may be incurred merger premium. If the acquiring company accounting question first fusion, which is the positive difference 44 OMPF 1376/2004 approving the Methodological Norms regarding the Recognition of major merger, division, dissolution and liquidation of companies and the withdrawal or exclusion of associates of the companies and their tax treatment published in the Official 1012/

6 between the value of assets received as contributions and the amount that will be increased capital of the acquiring company, representing in fact " right of entry " to be paid by new shareholders acquiring entity. The first merger is included in equity and destination may increase legal reserves, incurring expenses resulting from the merger operations, the establishment of reserves other than the legal establishment of provisions for transactions that originate from the company being acquired. From an accounting perspective, the differences between the carrying amount of the contributions made by the company being acquired and their fair value can be recorded either in account equity - revaluation - or management accounts as income or extraordinary expenses. Given this, accounting for mergers, Norms College of Accounting in our country recommends using two methods, the conventionally method of accounting earnings and capitalization method or net book value method. method of accounting earnings draws French and consists of using the income and expense accounts, the default calculation of the merger, the transmission assets of the acquiring company or the company being acquired ceases to exist from companies newly established company. capitalization method or the method involves subtracting the net book value of asset tracking and liabilities transferred by entities acquired or cease to exist, including regulation of the transfer of equity using off-balance sheet account 892 "Closing Balance". Taking these elements by the acquiring or newly formed entities is through off-balance sheet account 891 "Opening balance". 3. CONCLUSIONS Comparative analysis of the international and national rules aimed Recognition economic transactions with entities in our country finds that regulations were not adapted to the requirements of IFRS 3. Adapting to this standard becomes, at one time to achieve accession to the European Union, a special importance due to increasing economic transactions with entities domiciled in different states. This raises the need for uniform coverage of mergers and acquisitions transactions, so that the information provided by financial statements to be consistent and to enable a more accurate transactions. REFERENCES 1. Drăgan C, Brabete V., Mihai M. 2. Feleagă N., Feleagă L. 3. Hennie van Greuning Business Accounting. EEC Directives, National Regulations, IFRS, Lambert Academic Publishing, Contabilitate consolidată, o abordare europeană şi internaţională, Editura Economică, Bucureşti 2007 Standarde Internaţionale de Raportare Financiară. Ghid practic, World Bank,, Ed. Irecson 4. Săcărin M. Contabilitate aprofundată, Editura Economică, Bucureşti Vasilescu L. Performanţă şi risc în activitatea firmelor, Editura Universitaria, Craiova,