Comparison Of Goodwill In Mergers And Acquisitions Between China And Foreign Countries

In February 15th, Sinopec held a news conference. Sinopec bought a premium of 13% to 26% of its cash offer, and purchased 14 billion 300 million Qilu Petrochemical, Yangzi Petrochemical, Zhongyuan oil and gas, and four A shares of the petroleum Daming company.

The ongoing share reform will provide a variety of market-oriented means of payment and innovation, bringing large-scale mergers and acquisitions of listed companies, and mergers and acquisitions will become one of the themes of this year's capital market.

After realizing the full circulation, the valuation criteria of assets will also be marketization. The acquisition and merger of stock exchanges will be an important part of the capital market behavior.

The merger and acquisition activities of the company will produce goodwill, that is, when the merger is made, the cost incurred by the purchaser on the purchase date is greater than the net value of the identifiable assets and liabilities fair value.

The measurement and recording of consolidated goodwill is mainly manifested in the accounting treatment after its confirmation and confirmation, which will have a great impact on the financial position and operating results of the enterprise merger at that time and thereafter.

According to the Provisional Regulations on accounting treatment of enterprise annexation issued by the Ministry of Finance in 1997, the difference between the net assets that the paction price is higher than the assessed recognition is included in the "intangible assets and goodwill". The accounting method for the merger of the merged enterprises still retain the legal person qualification. The current relevant provisions are mainly the Interim Provisions of the consolidated financial statements issued by the Ministry of Finance in 1995.

According to the regulations, the consolidated statement should be compiled by book value, and the difference between the amount invested by the parent company's equity capital investment project and the share held by the parent company in the subsidiary's owner's equity is regarded as the "combined price difference".

It is worth noting that the combined price difference can not be completely equal to the combined goodwill.

Consolidated goodwill refers to the difference between the parent company's long-term equity investment cost (or purchase cost) of the parent company, which is higher than the fair value of the net assets of the subsidiary, rather than the difference between the fair value of the net assets of the parent company and its book value.

The combined price difference does not distinguish the above two part discrepancy. It includes the difference between the investment cost and the fair value of the net assets of the subsidiary company, and the difference between the fair value of the net assets of the subsidiary company and its book value.

The above accounting methods are compatible with the immature property rights trading market in China.

Because it is difficult to obtain an accurate fair value, the fair value of the net assets of the M & A is not considered when recording the merger.

At present, the commonly used international practices are different from the above accounting methods.

For example, the Announcement No. 141st issued by the US financial accounting standards board (FASB) which came into force in July 2001 and the International Financial Reporting Standard No. third, "enterprise merger", which came into effect in March 2004, requires the merger of enterprises to adopt the "purchase law", that is, when the paction occurs, the merger and acquisition enterprise will merge the assets and liabilities reflected by the fair value of the purchased enterprise, and the purchase cost exceeds the share portion of the fair value of the purchased assets that can be identified in the assets and liabilities. It should be regarded as goodwill and recognized as an asset.

In view of the differences between the recognition methods of consolidated goodwill and the popular practices in the world, the business combination (Draft) published by the Ministry of Finance in 2005 has put forward a train of thought for China's consolidated goodwill accounting recognition method, which takes into account the actual situation of China and international practice.

According to the draft, "according to whether the enterprises participating in the merger are controlled by the same party, they are divided into enterprise merger and non control merger under the same control."

For enterprise merger under the same control, it is required to conduct accounting treatment on the basis of book value and do not recognize consolidated goodwill. For non controlled enterprise merger, the combined method of purchase is used to prepare consolidated statements. The difference between the cost of the purchaser's merger and the net fair value of the recognizable assets and liabilities is confirmed as goodwill on the day of purchase.

Accounting for two and consolidated goodwill, accounting treatment after merger goodwill is another important part of its consolidated goodwill. It will have a great impact on the financial position and operating results of the merged enterprises in the future period.

According to our current regulations, the consolidated price difference reflecting the investment cost and the net assets difference of the subsidiary company is actually a long-term investment adjustment project, and it should be listed separately under the "long-term investment" item in the consolidated balance sheet.

In the enterprise accounting standards investment, the period of amortization of equity investment is clearly stipulated: the contract stipulates the investment period shall be amortized according to the time limit of investment; if there is no provision for investment period, the cost of investment should exceed the difference between the share of the owner's equity and the investment period, and generally be amortized in the period not exceeding 10 years (including 10 years); the investment cost should be lower than the difference between the owner's equity share of the invested unit, and generally be amortized according to the period of not less than 10 years (including 10 years).

At present, the most popular method of handling goodwill in the world is goodwill (merger cost is greater than the fair value part of the net assets of the merged company). The annual revaluation method is adopted, that is, amalgamation of goodwill does not need to be amortized, but the impairment test must be carried out at the reporting unit level every year.

When the goodwill's book value exceeds its connotation fair value, the difference should be recognized as impairment loss, and the negative goodwill shall be directly incorporated into the consolidated current profits and losses.

The above practices were adopted in the Announcement No. 141st issued by the US financial accounting standards board (FASB) in July 2001 and the international financial reporting standard third, which was effective in March 2004.

Starting from the basis of the integration of China's accounting standards and internationalization, the "corporate merger (Draft)" issued by the Ministry of Finance in 2005 adopted the two methods of annual amortization and impairment testing, namely, "goodwill should be amortized in a systematic and reasonable way within the estimated time of use according to the way the enterprise consumes the economic interests of the asset. If it is not possible to reliably determine the way to consume economic benefits, it should be amortized by the straight line method within a period of not more than 10 years.

At the end of each accounting period, the value of goodwill shall be measured by the enterprise and measured according to the principle of its book value and recoverable amount. For the part that can be recovered below the book value, the value reduction shall be prepared.

For the negative goodwill, the draft stipulates that "first, the fair value of assets and liabilities acquired in the merger, the fair value of the cash, non cash assets or equity securities issued as a combined consideration shall be reviewed. If the result of the review indicates that the fair value of the assets and liabilities determined is appropriate, the difference between the fair value of the net assets acquired by the purchaser and the acquired assets shall be directly incorporated into the combined profits and losses of the current period."

From the draft of the Ministry of Finance issued by the Ministry of Finance in 2005, we can see that China's accounting standards have been adapted to the trend of market economy and enterprise internationalization under the premise of taking into account the actual situation of our country, and ready for the coming tide of mergers and acquisitions in China's capital market.

However, we also see that the above methods of handling goodwill may affect the operation performance of the M & A enterprises in the current and subsequent periods. If the "negative goodwill is directly incorporated into the profits and losses of the consolidated current period" stipulated in the draft, it may cause the merger enterprises to manipulate profits through fictitious and fair value of the net assets of the enterprises.