DEFINITION of 'Merger Deficit'

Merger deficit is an accounting concept of the International Accounting Standards Board (IASB) used to record a transaction where the total consideration paid for the purchase of another company is less then the total value of the equity purchased. In other words, according to the IAS rule, merger deficit is equivalent to the positive difference between the value of an acquired business assets and the shareholders' equity of the acquired entity.

BREAKING DOWN 'Merger Deficit'

Merger deficit as an accounting term is applicable outside the U.S., but it is roughly similar to the GAAP concept of goodwill, an asset that represents the difference between a purchase price of a firm and the value of its net identifiable assets. Here, net identifiable assets are a proxy for shareholders' equity. In the U.S., goodwill is booked as an asset on the balance sheet after completion of an acquisition. Under IAS, merger deficit is recorded in the shareholders' equity section as a negative number. Like goodwill, the merger deficit amount is not amortized; instead, both in the U.S. and where IAS is followed, an annual impairment test takes place to determine whether a write-down of the positive difference arising from an acquisition is required.

Example: Accounting of a Merger Deficit

Aemulus Holdings Berhad, a Malaysian investment holding company, notes that its consolidated financial statements were prepared using the merger method to account for the acquisition of ACSB, a test and measurement equipment manufacturer. The merger deficit is defined by the company as the difference between the merger cost and the value of the share capital in the acquired subsidiary. The consideration paid by issuance of shares of Aemulus was RM 35 million, compared to the nominal value of RM 22 million of the subsidiary's share capital, leaving a merger deficit of RM 13 million. This figure appears in the equity section of the company's balance sheet as of September 30, 2015.

RELATED TERMS
  1. Merger Securities

    Merger securities are non-cash assets paid to a company's shareholders ...
  2. Mergers and Acquisitions - M&A

    Mergers and acquisitions (M&A) is a general term that refers ...
  3. Horizontal Merger

    A horizontal merger occurs when companies in the same industry ...
  4. Deficit Spending

    Deficit spending occurs whenever a government's expenditures ...
  5. Purchase Acquisition

    Purchase acquisition is used in mergers and acquisitions where ...
  6. Deficit Hawk

    Slang for someone who wants the government to keep the federal ...
Related Articles
  1. Insights

    The Pros & Cons of a Trade Deficit

    Is a trade deficit, also known as a current account deficit, beneficial or detrimental to a country's economy?
  2. Insights

    In Praise Of Trade Deficits

    When a country imports more than it exports, is it a recipe for disaster or just part of a larger cycle?
  3. Investing

    A Guide to Spotting a Reverse Merger

    A reverse merger is a type of corporate action that can be profitable for investors who know what to look for.
  4. Personal Finance

    Debt Versus Deficit: Understanding the Differences

    Gain an understanding how deficit differs from debt, and how they are related.
  5. Personal Finance

    6 Things You Didn't Know About The U.S. Budget Deficit

    The country appears to be spiralling into more debt all the time, but is it really as bad as it looks?
  6. Taxes

    Retail Investors May Face Capital Gains Tax on Pfizer Allergan Merger

    The Pfizer-Allergan merger may end up costing retail investors a pretty penny, but they may be able to minimize their losses.
  7. Investing

    How Does Goodwill Affect Stock Prices?

    Intangibles like goodwill have a role in stock prices, but just how much really?
  8. Financial Advisor

    Office Depot and Staples Merger: What You Need to Know (SPLS, ODP)

    A major office-supply company merger is now in the works between Office Depot and Staples. First attempted 18 years ago, will this time be the charm?
RELATED FAQS
  1. How does a merger affect the shareholders?

    Explore the impact of a merger and understand how the process affects shareholders of the newly merged firm in terms of stock ... Read Answer >>
  2. What happens to the US dollar during a trade deficit?

    Learn what happens to the U.S. dollar during trade deficits. Trade deficits happen when imports exceed exports leading foreigners ... Read Answer >>
  3. Which countries run the largest budget deficits?

    Discover the countries with the largest budget deficits and what it means. Deficits are influenced by the economy and also ... Read Answer >>
  4. What is a trade deficit and what effect will it have on the stock market?

    Learn what is a trade deficit is, also known as net exports, and what effect they have on the stock market. Read Answer >>
  5. What is a stock-for-stock merger and how does this corporate action affect existing ...

    First, let's be clear about what we mean by a stock-for-stock merger. When a merger or acquisition is conducted, there are ... Read Answer >>
Trading Center