Depending on the contact that a company engages in, there are chances that some shareholders will lose their ownership of the business, the method of purchase is called acquisition.
According to this method, the buying company acquires or purchases shares in another company or company and pays cash or issues its shares or loan stock in exchange for those shares; this may result in loss of shareholding of the old shareholders.
If much of the purchase price is paid in cash, then there is a significant outflow of cash from the group. This adjustment has to be done when accounting for a combination. This method is based on the principle that the holding company acquires control over all assets of the other company even though it does not necessarily have to take over 100% of the shares of the other company. The main feature of consideration in this method is the determination and accounting for pre-acquisition profits of the subsidiaries are regarded as capital from the group point of view and therefore do not appear anywhere in the consolidated group reserves.
An acquisition is guided by the International financial reporting standard (IFRS) 3, which offers guidelines on how the process should be conducted and how to value the acquired business. The same standard offers guidelines for reporting of business combinations (acquisitions and mergers).