AASB 3 Business Combination: Steps for Consolidating Financials

This article explains the steps involved in consolidating financials as per AASB 3 Business Combination. It covers acquisition analysis, business combination valuation entries, NCI recognition, and consolidation worksheet entries. It also discusses the difference between partial goodwill and full goodwill methods for calculating goodwill/gain on bargain purchase.

As per AASB 3, “Business combination” whenever any entity acquires another entity’s
major stake or control than the consolidation needs to be done. Consolidation refers to
combining the accounts of the subsidiary companies with the holding company to
present a single statement of accounts. AASB 3 requires to prepare and account for the
business combination using purchase method.
Requirement -1:
For consolidating the financials, the first step is to prepare acquisition analysis, which
compares the consideration paid with the value of net assets acquired. The excess of
consideration paid over net value of assets acquired is termed as goodwill and is an
intangible asset for the acquiring company, similarly if the value of assets acquired is
excess of consideration paid then the difference is termed as gain on bargain purchase.
The acquisition analysis of Davis Ltd. at acquisition date is as below:
Description Amount
Share capital $1,330,000
Asset revaluation surplus $570,000
Retained earnings $456,000
Fair Value of Inventories $319,200
Fair Value of Land $638,400
Fair Value of Plant $744,800
Net fair value of assets and liabilities $4,058,400
% of Share capital acquired by Alma Ltd. 92%
Net value of assets acquired by Alma Ltd.
(4,058,400*92%) $3,733,728
Consideration Paid $3,800,000
Goodwill $66,272
Net value of assets of NCI (4,058,400*8%) $324,672
Requirement -2:
Next step is to prepare Business Combination Valuation Entries and Pre- acquisition
entries at acquisition date. These entries are as below:
Pre- acquisition entries
This entry eliminates the investment and record the assets and liabilities acquired in
business combination.
Account Titles Debit Credit

Share capital $1,223,600
Retained earnings (1/7/19) $419,520
Asset revaluation surplus $524,400
Business combination valuation reserve $1,566,208
Goodwill $66,272
Investment in Davis Ltd. $3,800,000
Business Combination Valuation Entries
These entries relate to recording of additional amount due to fair valuation of inventory,
land and furniture on the date of acquisition. Further, goodwill acquired during the
business combination is also recorded.
Account Titles Debit Credit
Inventories $456,000
Deferred tax liability $136,800
Business combination valuation reserve $319,200
Land $912,000
Deferred tax liability $273,600
Business combination valuation reserve $638,400
Accumulated Depreciation $266,000
Plant $798,000
Deferred tax liability $319,200
Business combination valuation reserve $744,800
Goodwill $66,272
Business combination valuation reserve $66,272
Requirement -3:
Journal entry to recognise NCI at acquisition date
Under this entry, the value attributable to NCI share in the net assets and liabilities is
recorded. Further, the share of NCI in the business combination valuation reserve is
also recorded, since it belongs to NCI as well.
Account Titles Debit Credit

Share capital $106,400
Retained earnings (1/7/19) $36,480
Asset revaluation surplus $45,600
Business combination valuation reserve $136,192
NCI $324,672
Requirement -4:
Consolidation Worksheet entries at 30 June, 2020
For consolidation of books, the consolidation worksheet entries need to be entered.
These entries include pre-acquisition entries, NCI entries and other consolidation
entries. The following are the consolidation worksheet entries at 30 June, 2020.
Pre- acquistion entries at 30 June, 2020
Account Titles Debit Credit
Share capital
$1,223,60
0
Retained earnings (1/7/19) $419,520
Asset revaluation surplus $524,400
Business combination valuation reserve
$1,566,20
8
Goodwill $66,272
Shares in Davis Ltd.
$3,800,00
0
Share capital $106,400
Retained earnings (1/7/19) $36,480
Asset revaluation surplus $45,600
Business combination valuation reserve $136,192
NCI $324,672
Transfer from business combination valuation
reserve $319,200
Business combination valuation reserve $319,200
Other entries at 30 June, 2020

All inventories acquired on acquisition date sold by 30 June, 2020. The impact due to
fair valuation of inventory is recorded. Further, the impact of tax @ 30 % is also
recorded in income tax expense.
Account Titles Debit Credit
Cost of sales $456,000
Income tax expense $136,800
Transfer from Business combination valuation reserve $319,200
Fair valuation of Land and Plant recorded. Further, since the plant is a depreciable
asset, hence the amount of depreciation on excess value of fair value amount over
carrying amount of plant is recorded and the corresponding taxation impact is also
accounted for.
Account Titles Debit Credit
Land $912,000
Deferred tax liability $273,600
Business combination valuation reserve $638,400
Accumulated Depreciation $266,000
Plant $798,000
Deferred tax liability $319,200
Business combination valuation reserve $744,800
Depreciation expense $212,800
Accumulated Depreciation $212,800
Deferred tax asset $63,840
Income tax expense $63,840
Goodwill $66,272
Business combination valuation reserve $66,272
NCI share in current year profit recorded. The profit is calculated by adjusting current
year profit with consolidation adjustments, i.e. sale of inventory in current year,
depreciation on fair valuation amount and their tax impacts.

Account Titles Debit Credit
NCI ((76,000-(212,800-63,840)-319,200)*8%) $31,373
NCI share of profit $31,373
Requirement -5:
Goodwill can be calculated by using two methods, one is partial goodwill method and
other is full goodwill method. The above solution is done using the partial goodwill
method. However, if full goodwill method is followed, then the acquisition analysis
calculation will change. While calculating the goodwill / gain on bargain purchase, the
fair value of NCI is to be considered instead of proportion amount of net fair value of
assets and liabilities. Correspondingly to net fair value of NCI, share of Alma Ltd will
also be based on fair value calculated by reciprocating the fair value of NCI.
Hence, the amount of goodwill / gain on bargain purchase will be changed resulting in
change in pre-acquisition entries and NCI entries. Rest entries, i.e. Business
Combination Valuation Entries and Consolidated worksheet entries will remain same.