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.

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.

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.