Advices for Accounting Issues - Memo

This memo provides advices for accounting issues related to the acquisition of Cargo Ltd by Power Ltd. It discusses the treatment of identifiable liabilities and assets, adjustments to fair values, revaluation of assets and liabilities, and the existence of the equity account. The memo concludes with a summary of the proper treatment for these accounting issues.

Running head: ACCOUNTING AND FINANCIAL REPORTING
Accounting and financial reporting
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1ACCOUNTING AND FINANCIAL REPORTING
MEMORANDUM
To: Daniel Ford, Director, Power Ltd
From: Julia Edwards, CFO, Power Ltd
E-mail: [e-mail]
Date: 25th May 2019
Subject: Advices for accounting issues
Thank you for your e-mail this morning. We always maintained good relationship with your
company and always provided you with the best possible solutions. The issues mentioned by you
associated with the following –
Your company, Power Limited acquired entire shares of Cargo Ltd, major manufacturer Ltd.
However, the directors are not sure regarding treatment of all the identifiable liabilities and
assets of Cargo Ltd. Though directors are happy with the valuation of the liabilities and assets,
they are not sure regarding various matters associated with the accounting treatment of these
liabilities and assets. Issues specifically mentioned by you and the suggestions are as follows –
Issue 1 – Boards of directors are not sure regarding whether the adjustments to the fair values
shall be made in consolidation worksheet or shall be made in Cargo Ltd’s account
While entire share of another company is acquired by any company the acquirer gets the
controlling power on the acquired company. Control here is assumed to be existed while the
parent entity indirectly or directly through the subsidiaries owns more than half voting power of
another entity (Dekoninck et al. 2016). In such case the entire liabilities and assets of the

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acquired company is reported by the acquirer company in its consolidated financial statements.
Initially, all the financial items are accounted at fair values unless any evidence is there in
contrary to change the price (Aasb.gov.au 2019). All changes in fair value of financial items
excluding the derivatives generated from accrual of interests and from similar items shall be
recognized under heading interest and similar expenses or interest or similar income, whatever is
appropriate under the accompanying consolidated income statement in the year in which accrual
takes place. Further, the amount associated with the identifiable liabilities and assets shall be
computed through using the fair value of the liabilities and assets (Bepari and Mollik 2017). In
case any surplus is arising from the fair valuation or deficit arising from the same, such impact
shall be incorporated in the consolidated worksheet and the resulting net deficit or net surplus
shall be adjusted with business combination valuation reserve. In case of any gain it is reported
as capital reserve and in case of loss the same is reported as goodwill.
Issue 2 – usage of equity account while revaluing assets and usage of separate equity account
for recognition of liabilities
At the time of consolidating financial statements of the acquired entity, impact of asset
revaluation shall be ascertained. While liabilities or assets revalue it may happen that the fair
value of the one or more liabilities or assets is lower than their carrying value. It may also be the
case that fair value of the one or more liabilities or assets is higher than their carrying value.
Carrying value for the purpose of comparing the value is the cost of the asset reduced by
accumulated depreciation and amortization (Aasb.gov.au 2019). In case where the fair value is
lower as compared to the carrying value loss amount shall be regarded as revaluation loss and in
case where the fair value is higher as compared to the carrying value loss amount shall be
regarded as revaluation profit (Dunbar and Laing 2017). Whether there is a revaluation loss or

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revaluation profit the same is reported under business combination valuation reserve. If there is
any reduction in asset value business combination valuation reserve shall be debited and the
associated asset account shall be credited. Conversely, in case of any increase in asset value
business combination valuation reserve shall be credited and the associated asset account shall
be debited. Further, the entire amount of accumulated depreciation is adjusted through writing
off and the same is adjusted with business combination valuation reserve and net amount of the
same account shall be adjusted after giving the effect of tax (Bugeja and Loyeung 2017).
Net effect for the revaluation as well as the balance amount of business combination valuation
reserve is shifted to the capital reserve account or to goodwill. If business combination valuation
reserve has debit balance, the amount is transferred to goodwill accounting through debiting to
goodwill account and crediting to business combination valuation reserve account. In case there
is business combination valuation reserve credit balance the balance is transferred to capital
reserve account through debiting business combination valuation reserve simultaneously
crediting the capital reserve account (Aasb.gov.au 2019). In case of liabilities revaluation it shall
be treated in the same way in which the assets revaluations are treated. With the increase in
liability business combination valuation reserve is required to be debited and the associated
liability account shall be credited. Further, for reduction in the asset’s value, reverse entry shall
be passed (Jin, Shan and Taylor 2015).
Issue 3 – existence of the equity account for indefinite period
Business combination valuation reserve (BCVR) is used for reporting the adjustments related to
(i) decrease or increase in the recorded liabilities and asset’s book value to the fair values of the
subsidiary (ii) recognising the contingent liability of the subsidiary at the fair values (iii)

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recognising the unrecognised asset for the previous period for instance, internally generated
intangibles. In case it is possible to make these adjustments directly in the books of the acquired
company, it is common for making these adjustments in the consolidation (Aasb.gov.au 2019).
However, in some of the cases the accounting standards prevent to make these adjustments in the
consolidation. Hence, it is clear from the facts that the revaluation adjustments in case of
revaluation of assets and liabilities shall be made in the books of the acquirer company. Impact
of these adjustments for revaluation is shown in the capital reserve account or in the goodwill
account of the acquirer company. Hence, the Business combination valuation reserve is the
temporary account and does not exist any longer in books of account after the account is closed
and is transferred to the capital reserve account or the goodwill account (Bugeja and Loyeung
2015)
Hence, it can be summarised that the consolidated liabilities and assets of acquired company
along with the liabilities and assets of acquirer shall be done in compliance with the requirements
of the appropriate accounting standards. In case any surplus is arising from the fair valuation or
deficit arising from the same, such impact shall be incorporated in the consolidated worksheet
and the resulting net deficit or net surplus shall be adjusted with business combination valuation
reserve (Aasb.gov.au 2019). With the increase in liability business combination valuation
reserve is required to be debited and the associated liability account shall be credited. Further,
for reduction in the asset’s value, reverse entry shall be passed. Further, the Business
combination valuation reserve is the temporary account and does not exist any longer in books of
account after the account is closed and is transferred to the capital reserve account or the
goodwill account (AASB 2014)

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Hope the above provided suggestion will assist you in applying proper treatment for the
accounting issues mentioned by you. In case of any issue or doubt kindly contact us through our
official websites or e-mail.

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Reference
AASB, C.A.S., 2014. Business Combinations. Disclosure, 66, p.77.
Aasb.gov.au., 2019. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB3_08-15.pdf [Accessed 25 May 2019].
Bepari, M.K. and Mollik, A.T., 2017. Regime change in the accounting for goodwill: Goodwill
write-offs and the value relevance of older goodwill. International Journal of Accounting &
Information Management, 25(1), pp.43-69.
Bugeja, M. and Loyeung, A., 2015. What drives the allocation of the purchase price to
goodwill?. Journal of Contemporary Accounting & Economics, 11(3), pp.245-261.
Bugeja, M. and Loyeung, A., 2017. Accounting for business combinations and takeover
premiums: Pre-and post-IFRS. Australian Journal of Management, 42(2), pp.183-204.
Dekoninck, E.A., Domingo, L., O'Hare, J.A., Pigosso, D.C., Reyes, T. and Troussier, N., 2016.
Defining the challenges for ecodesign implementation in companies: Development and
consolidation of a framework. Journal of Cleaner Production, 135, pp.410-425.
Dunbar, K. and Laing, G.K., 2017. Deconstructing the Accounting Standard AASB 13 Fair
Value: Exit vs Entry Price for Assets. Journal of New Business Ideas & Trends, 15(2).
Jin, K., Shan, Y. and Taylor, S., 2015. Matching between revenues and expenses and the
adoption of International Financial Reporting Standards. Pacific-Basin Finance Journal, 35,
pp.90-107.