 In this presentation, we're going to talk about forms of business combinations, which is basically external expansion, two types of entities that are going to be related in some way, shape, or form. Get ready to act because it's time to account with advanced financial accounting. Forms of business combinations. Now remember, we're talking about expansion here. We're thinking about expansion. We've got the two categories. We've got the internal expansion and external expansion. We're considering here the external expansion. We have an organization that now wants to expand and they're going to be consolidating in some way or have two separate entities that will be combining. Now we're talking about two separate legal entities, typically separate legal entities that are now going to be combined in some way, shape, or forms. The forms of business combinations can be the statutory merger, the statutory consolidation, and the stock acquisition. If you think about, in other words, two separate legal entities and say, all right, well, how can these two separate legal entities be combined in some type of way? You can imagine some different kind of scenarios in which that could take place. When you're imagining those different types of scenarios, you're going to be thinking about, okay, well, what's going to be the key factor here? It's going to be the controlling interest. What's going to be a situation where you had two separate legal entities and now they're going to have some controlling relationship, which could be that they're combined together under one entity at some point, or they are having a parent subsidiary type of relationship, in which case the control would be over the 50%. So that control concept is what you want to keep in mind here. So if we're talking about a statutory merger, we talked about that before, and that really is the case where one company, in essence, you can think about it as being consumed by the other company, right? If you got company A and company B, basically company A is going to be consuming company B, therefore the assets and liabilities of company B will, in essence, result with company A. The end result is company A then, which now has the assets and liabilities of B. So that's going to be the merger type of situation. So that will be assets, liabilities of the acquired company are transferred to the acquiring company, right? Assets and liabilities are transferred. Now notice when this happens, you're thinking, all right, now there's two entities, two entities that have different stockholders at this point in time, typically. And therefore you have a negotiation process. And therefore when that transfer happens, you're going to think, well, it looks a lot like there's going to be some negotiation process. And therefore you may have to revalue that as fair market value as basically an arms length transaction is kind of happening because these two parties have interests that are often different from each other with regards to this negotiation on the merger type of process. So what's going to be the accounting related to that? So assets and liabilities of the acquired company are transferred to the acquired company. The acquired company is liquidated or dissolved. So once the transfer happens, then you're left with what, a shell here, right? You're going to say, okay, now the assets and liabilities are taken out of the books here on company B, they've been transferred in some way, shape or form to company A, if you're thinking about this from a bookkeeping standpoint. Now you've got company B, which has no assets or liabilities anymore. We basically did a liquid, we basically liquidated all the assets and liabilities and are left with just a shell, the shell company not having anything in it. And of course at that end, of course, then you're going to dissolve the company B. And then the result is a single entity is the result of the merger. So now you have company A that now has the assets and liabilities of company B and it has now basically consumed it. So note, you're not left with, with regard to the merger, a subsidiary parent relationship. You just basically had two entities before and they've been consumed to one. You can think about, okay, what is the accounting, what are going to be the accounting concepts, how are we going to do that from an accounting perspective? And you can see basically this is how it's done, right? You had two entities, you're going to combine them together. You're going to have to deal with however the rules with regards to this process, which could involve revaluating instead of just putting the book values over into the prior company. But in essence, obviously company B, clearing it out, liquidating it. In essence, rolling the assets over here left with the shell, then the shell needs to be in essence dissolved leaving you with just company A. Statutory consolidation. You can also imagine this type of situation. You can say, well, what if we had these two companies and we basically create another company and we merge both of their assets into the new company? So that we had company A and we had company B. What if we create, say, another company, company C, and then put the assets of company A and B into it? So it would look something like this, both companies are dissolved, assets and liabilities being transferred to a new company. So we have a new company set up, the assets and liabilities transferred to it. Now you have a new legal entity form because company C is now the new legal entity, however, in substance, the company is often actually one of the combining companies reincorporated with a new name. So in other words, you had two companies before. You could think of a situation, you might imagine the situation as saying, well, now you've got the third company, maybe these are going to be basically even sized companies or whatever and you make another company and merge them together and now you have a new company. But typically, even though in substance, you're going to have a new company. As a result of this transaction, it still is the case that usually you're going to have one of these companies are going to be larger than the other. We might say here that A is larger than B. So even though the inform, you have a new company that has been created in substance, it's often still a situation where you basically had kind of like a merger type of situation, a purchase type of situation, a consumption of one of the companies into another. So that's generally, so you could think of that same concept substance versus form kind of debate, similar type of debate that you might have versus when you think about a lease versus a purchase. When you have a lease that looks a lot like a purchase, you have a similar kind of thing here where you're saying, new entities being created, but inform. However, in substance, it could look oftentimes looks a whole lot like a situation of a standard merger, a statutory type of merger where the new company is basically the controlling company here and the other company basically got consumed by it. Now then we have the stock acquisition. And this is another way that you can see this happening rather than we could then have company A and then company B. You got company A and company B, voting shares are acquired. So now you're going to say that company A purchases the voting shares of company B. So both companies still operate as separate but related legal entities. So now you've got two entities because company A, you can imagine buying the stocks of company B. If they acquire more than that magic number for controlling, which is typically over 50%, 51% or greater, then they have a controlling interest because they can basically influence management. They can influence who is management. They can vote management in and out in and of themselves. Then you can see that relationship. And of course that relationship would result in a parent subsidiary type relationship because now you have the parent who has all the stocks. That parent, the one entity now owns basically a controlling interest of stocks that allows them to control the behavior of the second company. And of course company A's control is controlled or owned by the owners of company A. The acquired company accounts for its ownership interest in the other company as an investment. In other words, when you have this transaction taking place, company A is purchasing the stock of company B, it's gonna be recording this logistically on the books in terms of a journal entry as an investment. So we're gonna have an investment in terms of an asset on company A's books. A parent subsidiary relationship is created. So we have a parent subsidiary relationship, consolidated financial statement reporting is generally required. So note that obviously when you record the transaction of the purchase here, company A is purchasing company B. You can have to record that on company A's books as an investment in company B. However, when you do the financial reporting note that you're then gonna have to report this as consolidated financial statements. In other words, you're gonna have to take the parent in some city area like we said, if there's more than 50% ownership, that controlling point and then report that basically as if it's one entity so that you can report it in such a way that's as transparent as possible to the readers of the financial station statements. So we can break this down basically to the purchasing of the assets versus the acquisition of stock. So if we purchase the assets, then that's where the one company acquires another's assets using negotiations with management. And in that case, there's pros and cons to either method. It might be a little bit more cumbersome to sit down with two company management and try to go basically, you can imagine going line item by line item here and setting the price, negotiating the price for the actual purchasing of the assets. However, you might have more flexibility with the assets you want to purchase and you may be able to purchase simply those assets and you may be able to not take on some of the things that you don't want, such as liabilities and contingent liabilities and contracts that you may not want to take on as well. So those pros and cons, either method or we have the acquisition method of stock. Majority of outstanding voting shares is generally required unless other factors result in the gaining of control. So the acquisition of stock, meaning of course the purchasing of stock over that control and point, which would typically be 51 and above. Again, there's pros and cons to that method. It might be a little bit easier to come to rather than sitting down, going line by line by the items. But again, you could be stuck in that case with taking on things that you don't want, such as contracts and whatnot that the company that's being purchased has adhered to and contingent liabilities and those types of things. So obviously either method has its pros and cons.