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Financial Accounting 2
Accounting for non-current assets:
Business Combinations
COMMONWEALTH OF AUSTRALIA
Copyright Regulations 1969
WARNING
The Lecture material contains content owned by Kaplan Business School and
other materials copyrighted by Hoggett J., Edwards L., Medlin J. Chalmers K.,
Hellmann A., Beattie C., and Maxfield J., “Accounting” 9th Edition, 2015, John
Wiley & Sons Australia, Ltd.
The material in this communication may be subject to copyright under the Act.
Any further reproduction or communication of this material by you may be the
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2
Lecture Outline
• Understand the nature of a business combination
1.
• Understand the nature of and accounting for goodwill and gain from
4. bargain purchase.
3
Reference
4
The nature of a
business combination
AASB 3 (Appendix A) defines a business combination
as:
5
Four General Forms of
Business Combinations
• A Ltd acquires all assets and liabilities of B Ltd
• B Ltd continues as a company, holding shares in A Ltd
1.
6
Basic Principles
• AASB 3 prescribes the acquisition method in accounting
for a business combination. The key steps in this method
* are:
• Identify an acquirer
• Determine the acquisition date
*
• Recognise and measure the identifiable assets acquired,
the liabilities assumed, and any non-controlling interest in
* the acquiree
7
Identifying The Acquirer
• The business combination is viewed from the perspective of
the acquirer
1. • The acquirer is the entity that obtains control of the acquiree
8
Determining the
acquisition date
• Acquisition date is the date that the acquirer
obtains control of the acquiree
1.
• The correct acquisition date is important as it
will:
2. • The fair values of net assets acquired
9
Accounting in the Records of
the Acquirer:
• Fair value allocation occurs at acquisition date and requires the
recognition of:
1.
• Contingent liabilities
3. • Any non-controlling interest in the acquiree
• Goodwill
• FVINA = Fair Value of Identifiable Net Assets (incl. contingent
4. liabilities)
10
Accounting in the records of the
acquirer: Contingent liabilities
AASB 3 requires:
Contingent liabilities which can be measured reliably are
recognised by the acquirer
12
Accounting in the records of
the acquirer: Intangible assets
Fair value of
an • Reflects market expectations about the probability
of future economic benefits flowing to the entity
intangible
13
Accounting in the records of the
acquirer: Measurement
• AASB 3 requires that assets acquired and liabilities and
contingent liabilities assumed are measured at FV
1.
14
Accounting in the records of the
acquirer: Consideration
transferred
Assets
Consideration Contingent
Liabilities
Fair value of: Liabilities
Equity
Instruments
15
Accounting in the records of the
acquirer: Consideration Transferred
• The consideration paid by the acquirer may consist
of one or a number of the following forms of
1. consideration:
• Cash
• Non-monetary assets
2. • Equity instruments
• Liabilities undertaken
• Cost of issuing debt/equity instruments
3. • Contingent consideration
16
Accounting in the records of the
acquirer: Consideration
transferred
• At face value if paid now
• If deferred must be discounted to present
Cash value as at the date of acquisition
17
Accounting in the records of the
acquirer: Consideration transferred
Contingent consideration
Example
Where an acquirer issues shares as part of their consideration, the agreement may
require an additional payment of the value of the shares falls below a certain
amount within a specified period of time
18
Calculating consideration
transferred: Example
On 1 January 2015 A Ltd acquired all the assets and liabilities of B
Ltd. Details of the consideration transferred are as follows:
Cash of $400,000, half to be paid on 1 January 2015, the
balance due on 1 January 2016. The incremental borrowing
rate is 10%
100,000 shares in A Ltd were issued. The share price on 1
January 2015 was $1.50 per share. Costs of issuing the shares
was $1,000.
Due to doubts as to whether the share price would remain at or
above the $1.50 level, A Ltd agreed to supply cash to the value
of any decrease in the share price below $1.50. This guarantee
was valid for a period of 3 months (to 31 March 2015). A Ltd
believed that there was a 75% chance that the share price
would remain at or above $1.50 until 31 March 2015 (and a
25% chance that it would fall to $1.40)
Supply of a patent to B Ltd. The fair value of the patent is
$60,000. As the patent was internally generated it has not been
recognised in A Ltd.'s books.
Legal fees and associated with the acquisition totalled $5,000.
19
Calculating consideration transferred:
example
Required:
Calculate the consideration transferred
20
Accounting in the records of the
acquirer: Goodwill
• When a business combination results in goodwill,
AASB 3 requires that the goodwill is:
1.
• Recognised as an asset
• Measured at its cost at the date of acquisition
2.
• Goodwill = consideration transferred - acquirer’s
interest in the FVINA
3. • Goodwill is considered to be a residual interest
22
Accounting in the records of the
Example acquirer: Goodwill
Details of B Ltd’s assets and liabilities acquired by A Ltd are as follows:
CA FV
Plant & equipment 360,000 367,000
Land 260,000 257,000
Inventory 24,000 30,000
Accounts receivable 18,000 16,000
Accounts payable (35,000) (35,000)
Bank overdraft (55,000) (55,000)
Net assets 572,000 580,000
B Ltd is currently being sued by a previous customer. The expected
damages is $50,000. Lawyers estimate that there is a 20% chance of losing
the case. Required:
a) Calculate the FVINA acquired and determine the goodwill on acquisition.
b) Prepare the journal entry in the books of A Ltd to account for the
acquisition
23
Accounting in the records of
the acquirer: Goodwill
Fair value of recorded net assets 580,000
Carrying amounts in B’s books are irrelevant
to A
FVINA 570,000
Cost of acquisition Per Slide 19 594,318
Goodwill on acquisition “Residual” interest 24,318
24
Accounting in the records of the acquirer: Goodwill
Journal entries in the books of A Ltd to account for the
acquisition
Land 257,000 FV
Inventory 30,000
A/C Receivable 16,000
Residual interest FV
Goodwill 24,318
A/C Payable 35,000
Bank o/draft Contingent 55,000
liability
Provision for damages 10,000
Cash 200,000
Deferred consideration payable Components of 181,818
cost of
Share capital acquisition 150,000
Provision for loss in value of shares 2,500
Gain on sale of patent 60,000 25
Accounting in the Records of the
Acquirer: Goodwill
Journal entries in the books of A Ltd to account for the acquisition
(cont.)
Legal fee expenses 5,000
Share capital – share issue 1,000
costs
Cash 6,000
26
Subsequent adjustments to the
initial accounting for business
combinations
• May be made subsequent to acquisition date in relation
to:
1.
28
Disclosures
29
Lecture 08 Activity
30