Issues in Consolidation Treatments

This memo discusses the issues faced by Power ltd in measuring the assets of the business in relation to the acquisition of Cargo ltd. It addresses relevant accounting standards and provides solutions and explanations.

Running head: ACCOUNTING ANF FINANCIAL REPORTING
Accounting and Financial Reporting
Name of the Student:
Name of the University:
Author’s Note:

1
ACCOUNTING ANF FINANCIAL REPORTING
Memo
To: Daniel Ford ([e-mail])
From: Accounting Professional
Date: 10.1.2019
Subject: Issus in Consolidation Treatments
Purpose and Scope
The business of Power ltd effectively has acquired the business of cargo ltd for which
assets and liabilities are shown in the consolidated financial statements of the business. The
memo is produced for the purpose of discussing the issues which is faced by the business of
Power ltd in measuring the assets of the business. I would be explaining all the issues raised by
you in reference to the Australian accounting standards which are applicable in the business. The
management of the company is concerned with the treatments of accounting relating to
acquisition of Cargo ltd. The memo would be addressing different provisions of relevant
standards which are applicable to the case and would help you to understand treatments which is
related to the company. The discussion regarding the three issues which is identified by the
management of the company is effectively shown below:
Issues 1
The assets of the business are identified on the basis of fair value in the consolidated
financial statement which is prepared by the management of the company for the purpose of
effective reporting of the assets of the business. As per the provisions of para 18 of AASB 3
Business Combinations, the assets of the business which can be identified by the management

2
ACCOUNTING ANF FINANCIAL REPORTING
of the company after acquisition are shown on the basis of the assets fair value on the acquisition
date of the business (Popli, Ladkani and Gaur 2017). The provision clearly states that the assets
which are acquired by the business needs to be appropriately shown on the basis of the fair value
of the assets which are shown in the financial statements of the business.
However, it is to be noted that there is an exception to this recognition principle which is
stated under para 21 of AASB 3 Business Combinations, which states that the companies are
required to measure the exceptional items of a business by following the given alternatives which
is shown below:
a. Recognised the item by either by applying recognition conditions in addition to those
which are stated under paragraphs 11 and 12 or by applying the requirements of other
Australian Accounting Standards which would cause difference in values which is
shown.
b. The item is measured at an amount other than their acquisition-date fair values for the
assets which is acquired by the business.
In addition to this, the provisions which is stated under AASB 3 states that the management
of the company is required to perform the valuation of the assets and liabilities of the business
which is acquired from acquisition of a business, if the book value of the considered asset and
liability is more than the existence of the contingent liabilities of the business (Paugam, Astolfi
and Ramond 2015). In addition to this, it is also to be noted that change in the fair value due to
contingent liabilities of the business should be recognized after the date of acquisition of the
business.

3
ACCOUNTING ANF FINANCIAL REPORTING
Therefore, in any overall estimation, it can be suggested to the management of the company
that all the assets which are identifiable should be valued at their respective fairs value which
was identified at the date of acquisition of the asset. In addition to this, the management should
not consider the treatment regarding the fair value of the asset which is shown in the annual
report of the business as the same is consistent with the provisions which is stated under AASB 3
Business Combinations (Aasb.gov.au. 2019). The management of the company needs to pass
appropriate valuation entries in the annual reports at the time of preparing consolidated financial
statements.
Issue 2
The issue stated in the mail provided by the directors of the company relates to
revaluation of the assets of the business following appropriate provisions of AASB 116 which is
related to property plants and equipment of the business. As per accounting terms a revaluation
of the asset takes place when the fair value of the asset is more than the carrying value associated
with the asset. In such a case the equity account which is used for appropriate revaluation of the
asset is the revaluation reserve which the business needs to create. In case of upward revaluation
which is also known as revaluation surplus a change needs to be identified in the equity account
of the business (Aasb.gov.au. 2019). In case there is a disposition of the revalued asset, then the
remaining amount present as revaluation surplus is credited in the account of retained earnings of
the entity which is being acquired. The revaluation surplus needs to be transferred to the retained
earnings of the business (Ratiu and Tudor 2013). The event in which the recognition of
revaluation surplus is done in the comprehensive income statement in the annual reports which is
done in case of disposal of asset would be transferred to retained earnings of the business.

4
ACCOUNTING ANF FINANCIAL REPORTING
The revaluation of the assets along with the surplus and deficit which is associated with
the asset should be included in the consolidated worksheet of the business in case of preparation
of consolidated financial statements. An upward revaluation is considered as capital gain and the
same is not recorded in the financial statement of the company. It is shown as revaluation surplus
and directly credited to the equity account of the shareholders of the business. The revaluation
surplus would be transferred only when the asset is disposed off by the management of the
company (Kieso, Weygandt and Warfield 2016). In case of downward revaluation, the initial
amount is shown in the comprehensive income statement and the amount is also recorded as
revaluation surplus under the comprehensive income statement. In the scenario which is given in
the case of excess recognition different equity accounts should be used in such relations.
Issue 3
The third issues require explanation whether the equity accounts used would remain
existent in the annual reports indefinitely or not. The case which is identified by the directors can
be resolved by application of appropriate provisions of accounting standards. The equity account
which is shown in the consolidated statement after the acquisition of Cargo Ltd would be
different from the equity account of the acquired company itself. The provisions of para 11 of
AASB 132 financial instruments, it is the requirement of the acquirer to appropriately classify
the obligation for payment of contingent consideration.
The revaluation of the equity account would be done by the acquirer company on the
basis of fair value at the date of acquisition of the company and any gain or loss associated with
the same is to be recognised in the comprehensive income statement. In certain cases where the
business combination is affected by exchanging the interest in equity, the entity issuing the
equity interests are usually the acquirer (Lassini, Lionzo and Rossignoli 2016). However, in case

5
ACCOUNTING ANF FINANCIAL REPORTING
of reverse acquisition, the case is entirely different. Therefore, the new business which is formed
after affecting business combination is not necessarily the acquirer and if the formation of new
business is done for affecting the business combination, then identification process for the
entities would be done in accordance with the provisions which is stated under AASB 3. The two
entities which are engaged in consolidation might opt for separation and operating as the single
entity by not considering the affects of the business combination. Therefore, it can be said that
the equity account which is associated with the acquisition of Cargo ltd would be recognised by
the management of Power ltd in the annual reports of the business (D’Haen and Van den Poel
2013). Therefore, it can be said that the acquired company’s equity account can remain in
existence for a limited amount of time considering the applicable provisions of AASB standards.
The above discussion provides appropriate clarification regarding the issues which are
raised by the you. The solution and explanation which is provided by me is based on relevant
accounting standards which are applicable in such a case. I hope that the solutions and
explanations which is provided by me can satisfy your queries and as assist you in taking
appropriate decisions regarding the operations of the business. In addition to this, I hope the
explanation which is provided by me would help you to grasp the concepts and accounting
treatment in relation to acquisition in a business.
Regards

6
ACCOUNTING ANF FINANCIAL REPORTING
Reference
Aasb.gov.au. (2019). [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB116_08-15_COMPoct15_01-18.pdf
[Accessed 16 May 2019].
Aasb.gov.au. (2019). [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB3_08-15.pdf [Accessed 16 May 2019].
D’Haen, J. and Van den Poel, D., 2013. Model-supported business-to-business prospect
prediction based on an iterative customer acquisition framework. Industrial Marketing
Management, 42(4), pp.544-551.
Kieso, D.E., Weygandt, J.J. and Warfield, T.D., 2016. Intermediate Accounting, Binder Ready
Version. John Wiley & Sons.
Lassini, U., Lionzo, A. and Rossignoli, F., 2016. Does business model affect accounting choices?
An empirical analysis of European listed companies. Journal of Management &
Governance, 20(2), pp.229-260.
Paugam, L., Astolfi, P. and Ramond, O., 2015. Accounting for business combinations: Do
purchase price allocations matter?. Journal of Accounting and Public Policy, 34(4), pp.362-391.

7
ACCOUNTING ANF FINANCIAL REPORTING
Popli, M., Ladkani, R.M. and Gaur, A.S., 2017. Business group affiliation and post-acquisition
performance: An extended resource-based view. Journal of Business Research, 81, pp.21-30.
Ratiu, R.V. and Tudor, A.T., 2013. The Classification of Goodwill-An essential accounting
analysis. Review of Economic Studies and Research Virgil Madgearu, 6(2), p.137.