Accounting in the Books of Transferor of Company

The term “transferor company” refers to the company that is being acquired or merged with another company in a business combination. In such a transaction, the transferor company ceases to exist as a separate legal entity, and its assets, liabilities, and equity are transferred to the acquiring or surviving company. The transferor company is also referred to as the “Target company” or the “Acquired company“. The accounting treatment of the transferor company in a business combination is governed by various accounting standards, including International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP).

When a company is acquired or merged with another company, the accounting treatment in the books of the transferor company involves several steps.

Here is a general overview of the accounting entries that need to be recorded:

• Recording the purchase consideration: The transferor company should record the purchase consideration received from the acquiring company as a liability on its balance sheet. This liability represents the amount owed to the acquiring company in exchange for the transfer of ownership.
• Recognizing the net assets acquired: The transferor company should recognize the fair value of the net assets acquired by the acquiring company in exchange for the purchase consideration. This includes both tangible assets such as property, plant, and equipment, as well as intangible assets such as goodwill and intellectual property.
• Recording the gain or loss on the transaction: The transferor company should recognize any gain or loss on the transaction in its income statement. This is calculated as the difference between the purchase consideration received and the fair value of the net assets acquired.
• Eliminating the intercompany accounts: If the transferor company and the acquiring company had any intercompany accounts, such as accounts payable or accounts receivable, these should be eliminated as part of the consolidation process.
• Preparing consolidated financial statements: The transferor company should prepare consolidated financial statements that combine the financial results of both the transferor and acquiring companies. This involves adding the net assets acquired to the acquiring company’s balance sheet and income statement.

Example:

Let’s say Company A acquires Company B for a purchase consideration of $10 million. The balance sheets of both companies before the acquisition are as follows:

Company A balance sheet:

Assets: $20 million

Liabilities: $10 million

Equity: $10 million

Company B balance sheet:

Assets: $5 million

Liabilities: $2 million

Equity: $3 million

Here are the accounting entries that need to be recorded in the books of the transferor company, i.e. Company B: