AASB3 Business Combination: Importance of Identifying the Acquirer and Recognizable Assets

This report explains the AASB3 business combination standard, its background, application, and importance of identifying the acquirer. It also discusses the assets recognizable by the acquirer. Relevant examples are included for better understanding.

CORPORATE ACCOUNTING

TABLE OF CONTENTS
Introduction....................................................................................................................3
AASB3 Business Combination......................................................................................3
Importance of identifying the acquirer of a business combination................................6
Assets recognisable by Acquirer....................................................................................8
Conclusion....................................................................................................................10
References....................................................................................................................12

INTRODUCTION
The AASB 3 business combination was adopted by Australian Accounting Standards
Board that is said to be solely responsible for the maintenance and development of all
financial reporting standards that are relevant to both private and public entities of the
economy of Australia (He, Evans and He, 2016) . The purpose of this report is to give
a detailed explanation of what is AASB 3 standard. It includes the proper definition
and functionalities of the AASB 3 business combination. The report is drafted to give
users the meaning of business combination that uses AASB 3. It further demonstrates
the importance of identifying the acquirer, in a business combination. Relevant
examples in the report throw limelight on the assets and liabilities that have not been
recognized by the acquiree but are identifiable by the acquirer. Supporting instances
have been attached to allow the user to avail a better understanding of AASB 3
business standards.
AASB3 BUSINESS COMBINATION
Background
The main agenda behind going ahead for AASB3 was to present the financial
reporting that is submitted by any particular entity whenever it applies or shoulders a
business combination (Dickinson, Wangerin and Wild, 2016). It gives detailed
analyses of all the business combination reports that are accounted while tackling the
purchase procedure or method. An excerpt of this standard was earlier published in
2014 in Commonwealth of Australia Gazette. AASB3 acts as an aid in helping the
acquirer to identify the acquiree’s assets.
This further includes the identification of the liabilities of an acquiree at their actual
fair values. This standard is considered, not to be valid and applicable to the annual
reporting periods which have begun before the time span of 1 January 2005.
Therefore, this standard is implemented to create the financial reports that are
pertaining to part 2M.3 of the Corporation Act which is called as a reporting entity.
The standard of AASB3 shall be applicable to all those annual reporting time duration
that occur after 1 January 2005. Bugeja and Loyeung, (2015) asserted that the

standard is finally applicable to all the accounting financial reports that are in real
time, considered to be general purpose financial and accounting reports. All the
content of information which is material in relation to AASB 1031 Materiality, in the
financial reports is known to be the general requirements in this standard (Dickinson,
Wangerin and Wild, 2016).
It specifies the requirement analysis for the standard of AASB3. The standard of
AASB3 is said to supersede AASB1015, AAS21, AAS 18, and AASB1013. Since it
is said to be superseding the above-mentioned standards, they all remain in the
applicable active state until they are superseded. It is considered ideal to apply this
standard to only those entities that are accounting for a business combination. The
application and implementation of the standard of AASB3 are said to be irrelevant to
the business entities which are joint together to create a shared venture. Any two
business entities that desire to develop a joint venture are not considered to be eligible
for applying this standard (AASB 3, Business Combinations, 2018). Furthermore, the
business combination that constitutes two or more mutual entities is said to be
ineligible to use the AASB3 standard in financial accounting.
Application of AASB 3
In order to successfully apply AASB3 accounting standards in the field of a business
combination, it is imperative first to identify and analyze which is a business
combination. Since this standard cannot be considered appropriate to use without a
business combination; it is required to recognize a business combination correctly. As
per the norms generalized by Australian Accounting Standards Board, it is
inappropriate to consider an entity as business combination if that particular entity has
although gained the control of more than one entity, they are not business entities in
reality. In such cases, we cannot use the application of AASB3. According to AASB3,
the application would be considered relevant, if and only if it is in context of the
business combination. In this scenario, a single entity, called the acquirer, should be
able to gain the control of the equities that are developed by one or more entities
which are known as acquiree (Jin, Shan and Taylor, 2015.).
Also, it further states that any entity that owns a group of assets which do not
comprise a business, in that case, it should allocate the price of the entire group

among the individual identifiable assets and liabilities. Such tasks are performed by
evaluating the criteria in that particular group relying on their fair costs at the date on
which they were acquired. However, an actual business combination is said to be
organized in several different ways for the purpose of taxation and other legal
issues. It, therefore, includes the purchase and assumptions of liabilities of one and
another entity that is referred to combine and constitute one entity in a business
combination environment. This involves the transactions between shareholders that
own the joint entities (AASB, 2015).
The business combinations in AASB3 lead to a parent-subsidiary relationship as an
output. To be precise, the acquirer enacts the role of a parent whereas; the acquiree
plays the role of the subsidiary. The standard of AASB3 is implemented in all the
consolidated financial statements, especially in these situations. A parent-subsidiary
relationship is not said to be developed when a business combination constitutes the
purchase of net assets that involves goodwill at the same time, instead of the purchase
of equity of that particular entity (Bodle, Cybinski and Monem, 2016). Clause
remains firm in AASB3 that the date of acquiring the control shall never collide with
the date of acquiring the ownership of interest.
The method used for accounting in AASB3 stays strictly abiding by the application of
purchase method. As per this standard, entire business combinations must be
accounted by implementing the purchase method. The purchase method in this
standard tends first to recognize the acquirer. Since all the methodologies in the
AASB3 standard revolve around the activities of acquirer and acquiree, its first and
foremost duty remains at identifying who the acquirer is (Ferrer and Tang, 2016). The
post is recognizing the acquirer; it determines the exact cost of the business
combination. Once, it calculates the entire cost of a business combination, the
purchase method in AASB3, allocates the net cost to all the liabilities and assets at the
date of acquisition. As the prime task of purchase method remains at identifying the
acquirer, he should be responsible for calculating the exact cost of a business
combination as the sum of fair values and costs.
AASB3 requires that all the assets and liabilities that are identified and acquired must
be displayed at a fair cost. Loyeung and et al. (2016), asserted that it is inclined
towards this because a fair value helps in providing fairly correct information to all

the users. The main agenda behind this standard is to provide genuinely improved
information which is pertaining to reliability and comparability of the reporting entity.
This standard is said to be relevant to any transaction or an entity which meets the
defined norms of a pure business combination. It has been proven successful in
identifying and calculating the financial statements for an acquirer and the assumed
liabilities in acquiree (Dunbar and Laing, 2017). It has also been able to help in
determining which type of information is eligible to be disclosed to the users in order
to let them have proper analyses of the financial statement for effects of finance and
nature in the context of the business combination. Moreover, the standard uses the
acquisition method to providing the facilities of accounting to entities in a business
combination.
IMPORTANCE OF IDENTIFYING THE ACQUIRER OF A
BUSINESS COMBINATION
Role of acquirer
Identifying the acquirer is one of the most important tasks in AASB3. The role of the
acquirer is to stay in a combining state for one or more entities and gain the control or
access for other combining entities in a business combination. Dickinson, Wangerin,
and Wild, (2016) assessed that the methodology of purchase method tends to
centralize the acquirer in the field of the business combination. It views the same from
the perspective of the acquirer and begins to assume that either one of the
organizations in the mode of the transaction may be recognized as an acquirer.
An acquirer is said to be one of the most imperative and powerful in the business
combination. It is important to correctly identify an acquirer since he has the sole
authority of control over one or more entities in a business combination. An acquirer
in AASB3 takes control of the operation and financial policies and governs them in an
entity. In order to obtain benefits in a productive manner, an acquirer is required in
business combination. In the field of a business combination, the governing entity
shall be acquiring more than one-half of the voting rights of another entity. Since the
governing entity is the combining entity, it must have the voting rights until and
unless, it can be evidently interpreted that such ownership does not necessarily
involve any kind of control (Tran and Zhu, 2017). However, as a result of a

combining entity, one of the entities is liable to take over control of another entity
even if it does not acquire one-half of the voting rights of another entity. In such
circumstances, it is the negotiation of agreements that come into action. In order to
settle for acquiring the assets and liabilities of other entity, they allow settling through
generalized agreements.
Assessment of acquirer
It is important to know the correct and eligible acquirer in an entity since it is purely
related to the acquisition of other assets and liabilities which in turn helps in obtaining
maximum benefits. A sort of virtue of agreement is signed with different investors to
gain control on more than one half voting rights of entities (Russell, 2017). In
situations wherein the combining entity fails to obtain more than one-half of the
voting rights of the other entity, it tries to sort through agreements. It further gains
control to appoint or even remove, the position holders sitting in the other entity.
However, it is stated in AASB3 that while recognizing the acquirer in a business
combination, the guidance provided in AASB10 shall be used for reference. Either
one of the combining entities is identified as an acquirer. But, in cases where a new
entity is formed, it becomes difficult to identify the correct acquirer. An incorrect and
ineligible acquirer might not be beneficial for gaining control and obtaining assets
from the other entity in a business combination.
This is why, the entities that existed earlier are examined, and on the basis of
evidence, the acquirer is chosen. While identifying the acquirer, several other factors
are kept in mind in a business combination when using the AASB3 standards. It is
checked if the revenue generated in the governance of acquirer is comparatively better
than other revenues of the rest of the entities. Also, the acquirer is said to be
responsible for measuring the cost of a business combination. If the cost calculated by
the acquirer is somewhat incorrect or meets any discrepancies that will further create
a problem in the accounting of financial reports. The acquirer must be fairly capable
of identifying the absolute correct acquisition date since that is effective in calculating
the fair value of all the assets and liabilities that are currently in the acquisition of the
acquirer. Sometimes, the cost of a business combination is given in exchange for
obtaining the control of the acquiree. Therefore, while identifying the acquirer, this
becomes important to examine whether the acquirer will be able to determine the

correct fair value or it. It is because; this would further reflect the position of a
business organization. An acquirer enacts the role of the entity which is responsible
for issuing the equity interests (Ferrer and Tang, 2016). A business combination is
said to be highly affected by the exchange values issued by equity interests.
Scenarios to be considered while identifying the acquirer
It is important to consider all the current circumstances and pertinent fact while
assigning the role of an acquirer to an entity in order to obtain maximum benefit from
the activities that are performed in a business organization. Although, in situations of
the reverse acquisition, the role of the acquirer is reversed. Here, the issuing entity
becomes the acquiree, and the acquirer is the one whose equities are acquired.
Therefore, it is vital to examine the situation while recognizing the acquirer correctly.
Any different situation might lead to several varied outputs. In that case, an incorrect
assignment to an acquirer also worsens the situation. Generally, an acquirer is
believed to be a much larger entity but, sometimes all the liabilities and assets
determine that a smaller entity tends to acquire large assets. The acquirer further
enacts the role of a parent in the parent-subsidiary relationship (Carey, Potter and
Tanewski, 2014). The parent is responsible for yielding high product and assigning
duties to the subsidiary. It is also helpful in interpreting which all assets are acquired.
Hence, this is imperative, to correctly recognize and identify an acquirer in order to
allow a business combination to generate the maximum product.
ASSETS RECOGNISABLE BY ACQUIRER
Assets and liabilities are recognized in order to ascertain the appropriate value of the
business in case of business combination or acquisition of any business. Thus,
significant consideration is to be provided in accordance with the importance of asset
for the acquirer or acquiree. In words of Steenkamp and Steenkamp (2016) ,the asset
or liabilities which will be of no value for the acquiree will be those on which it has
no more control. It will comprise those liabilities too for which the same is not
concerned in a significant manner. Three instances of such assets along with
justification have been specified below:
Intangible Assets

Intangible assets can be defined as that asset which does not have any substance form.
Though they don’t comprise physical existence, they add worth to business (Norman,
2017). They are long-term assets which mean that company can utilize it more than
one year. For Instance, goodwill, trademark, patents, brand identification, copyrights,
trade names and customer lists. There are two types of intangible assets that are
intellectual property and goodwill. According to the paragraph 37 of AASB 138
acquirer identifies value of the intangible asset individually on the purchase date only
in case it complies with the definition and its valuation can be done on a reliable
basis. It can be analyzed from above discussion that evaluation and measurement of
the intangible asset are more important for acquirer as the amount to be paid for
acquisition is to ascertained after giving effect to same. Acquirer identifies assets
apart from goodwill as it is intangible and value of it will be calculated only when
someone purchases it (Bond, Govendir and Wells, 2016.). AASB 138 supplies
assistance on decisive whether the fair value of an intangible asset permutation can be
considered consistently. In reality, intangible assets are very vital for the company as
it increases the value of the firm and can be essential to its long-term victory of life.
Contingent Liabilities
In accordance with provision specified in Para 86 of AASB 3, a liability is reported as
a contingent liability only in case the outflow of resource remote. In case the
organization is jointly and severally liable for the payment, the part is only to be
treated as a contingent liability. It is necessary for an acquirer to ascertain whether the
liabilities recorded as contingent liabilities continue to be of same nature as not. It is
because the acquirer will be responsible for all the future liabilities of acquired
organization. It is important for an acquirer to identify contingent liability of the
acquiree as part of allotting cost of business amalgamation only in case if its value can
be estimated (AASB, 2014). In case it is not possible to value liability on reliable
basis than the below specification is to be provided:
 There will be a resultant cause of the amount classified as goodwill or
amount as per Para 56 of AASB 3. (Zhuang, 2016).
 The acquirer must reveal all the details related to that contingent liability
needed to be presented in accordance with AASB 137.
Goodwill

Goodwill refers to an intangible asset; it is essential for the company in order to carry
on the functions of the business. Moreover, people frequently depict goodwill as the
capital infrastructure of the business. Hence, it is very significant to emphasize that it
is not included in assets for business purchases which are exclusively connected to the
purchase of plants, equipment, and stock. Ji and Lu (2014) , asserted that acquirer
should identify goodwill at the purchase date into a business permutation like an asset.
Goodwill obtains in a business amalgamation symbolizes a payment made through the
acquirer into an expectation of future financial profits from assets that are not able of
being recognized individually. Goodwill is estimated as the leftover expense of the
business after identifying acquiree’s particular assets, liabilities and contingent
liabilities (Leung and et al. 2014). In accordance to IFRS 3 “goodwill can be defined
as the difference between the quantities of deliberation transferred from acquirer to
acquiree and net individual assets obtained.” The same is ascertained through
reducing net asset recognized from the sum of three variants, i.e., consideration
transferred, amount of non-controlling interest and fair value of previous equity
interest.
CONCLUSION
The above discussion depicts that AASB 3 deals with the provision relating to
business combinations. The same is require to complied by each entity which is
required to prepare financial reports in accordance with Corporations Act. Further, the
standard appropriately provides explanation relating all the variants considered
regarding a business combination. Goodwill of an organization is to be evaluated on a
continuing basis, but the consideration of same is essential for acquirer than acquiree
in case of a business combination. The reason behind same is that it becomes more
important for an acquirer to ascertain whether the valuation presented by acquiree is

appropriate or not. It is analyzed not only in case of goodwill but for all other asset
and liabilities too.

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