Business Solutions and Consolidations

Business Solutions and
Consolidations

Table of Contents
INTRODUCTION...........................................................................................................................1
ISSUE 1...........................................................................................................................................1
ISSUE 2...........................................................................................................................................2
ISSUE 3...........................................................................................................................................3
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Business consolidation is a combination of different business in order to form a large
organisation to compete with its competitors (Chang, 2016). It is used by companies to improve
the efficiency of its operations by reducing extra process and personnel. This report contains the
solutions to various accounting issues related to the acquisition of Cargo Ltd by Power Ltd. It
explained the three main issues raised by the board of directors of Power Ltd regarding the
adjustment of fair value in the consolidation work sheet, which equity accounts used in
revaluation and the existence of equity share holder accounts of Cargo Ltd. It also explains the
treatment regarding these issue in a consolidated worksheet this report also show the different
equity accounts which are used during the revaluation of assets and liabilities.
ISSUE 1
The issue raised by the board of directors is that adjustment related to the acquisition of
Cargo Ltd should be recorded in consolidation worksheet or in the accounts of Cargo Ltd
Solution:
As per the Australian Accounting Standards Board the adjustment which are related to
the acquisition should be recorded in a consolidated worksheet rather than in the accounts of the
acquired company (Australian accounting standards board. 2018). Consolidated worksheet is a
tool used by companies to prepare consolidated financial statements of both subsidiaries and
parent organisation. This statement shows the value of both the firms, necessary eliminations and
adjustment and the combined value of both the firms. In business combination the acquiree
company dissolves its assets and liabilities and the acquirer absorbs its assets and liabilities to
form a single entity, at the date of acquisition the assets and liabilities are recorded in the
consolidated worksheet after the necessary adjustments. The assets and liabilities which are
acquired by are recorded at the fair value in the consolidated worksheet after the necessary
adjustments. Fair value is the price decided by both the parties i.e., buyer and seller, it is a price
at which an assets is sold or purchased. It also show the value of subsidiary company's liabilities
and assets when consolidated with the parent company. Fair value shows the amount which is
paid by the company to acquire a particular assets or an amount which is paid to transfer the
liabilities.
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In the above given case Power Ltd acquired a major manufacture Cargo Ltd the
adjustment which are to made are made to the consolidated worksheet at fair value. As per the
AASB the acquired company has to show the assets and liabilities at fair value at which it is
acquired and all the adjustments are made in the consolidated worksheet which shows the
individual value of both the companies and the consolidated value of the firm after the
acquisition (Heeg, 2018). The adjustment are to be made in the consolidation worksheet as
Power Ltd acquired Cargo Ltd, all the assets and liabilities are dissolved by Cargo Ltd and the
Power Ltd has absorbed all its assets which results in the closing of the books of accounts of the
Cargo Ltd so any changes in the value of assets or liabilities are now to be recorded in the
consolidate financial statements of Power Ltd.
ISSUE 2
The issue raised by the board of directors is that what equity accounts will the company
be using to revalue the assets which are acquired from Cargo Ltd and these equity can also be
used to recognise the liabilities of the acquired company.
Solution:
BCVR: Business Combination Valuation Reserve (BCVR) is considered, as a
revaluation reserve that remain exist for short-term duration. The amount of assets depreciated
and sold with an external party. The amount is transferred in the retained earning amount.
Valuation entries are made based on AASB 102. It provides path to record the value of
inventories on cost with adjustments. It is created by passing a journal entry of arising any
increment in intangible or tangible assets.
It is created when a two business combines its assets and liabilities in order to carry out
the future business transaction. It a reserve which is created as per the AASB 102 in order to
record the transaction while carrying out during the time of merger.
As per the Australian Accounting Standard Boards the equity account which will be
affected when revaluing the value of assets and liabilities. During the time of acquisition the
assets and liabilities are revalued at their fair value which show the amount which is paid to the
acquiree company for taking over its assets and liabilities if the amount of revaluation of assets is
more than the revalue of the liabilities than the profit which is earned in the process of
revaluation is distributed among the share holders of the acquirer company (Nelson, 2018). If the
subsidiary have any reserve it will not be added to the business combination valuation reserve it
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will be shown under the heading of its subsidiary and will combining the assets and liabilities of
both the companies the reserves shown in the subsidiary will be added to the parent company's
reserve. In the above given case of acquisition of Cargo Ltd the accounts which will be used are
equity share capital accounts, retained earnings and business combination valuation reserve. As
per AASB 102 inventory valuation standard specify the guidelines for evaluating inventories.
According to this accounting standard inventories are evaluated on the basis of net realisable
value and lower cost. Non for profit organisations consider the inventories on cost. Situational
base cost measurement is followed in case of non for profit organisation corporations.
As in the case of Power Ltd acquiring Cargo Ltd, the equity account which will be
used in relation recognition of liabilities is the reserve and surplus and retained earning account
of Cargo Ltd. As per the norms given in Australian Accounting Standards Board the liabilities of
the acquiree company will be first set off by the reserve and surplus of the acquiree company and
later the remaining assets will be transferred to the acquirer company i.e., Power Ltd. Yes the
equity accounts will be used in order to realise the amount of liabilities of Cargo Ltd (Rani,
Yadav and Jain, 2015). As the retained earning is the part of equity accounts shown under the
head of equity share capital in the statements of financial position. In the case of recognition of
liabilities business combination valuation reserve can also be used by the company, which is
being maintained by the acquiring company to over take the existing business of Cargo Ltd to
improve its organisational efficiency. Equity is not considered as income because it is a part of
capital. When reserves and surplus are amortised or reinvested then it reduce the overall amount
of equity. Equity share capital accounts includes share capital, reserve and surplus and securities
premium accounts., equity share holder accounts are affected as in the case of revaluation of a
company's assets and liabilities as shareholders are the owners of the company so any profit
earned or loss incurred shareholders accounts are affected. If company incurred any loss from the
revaluation, that loss will be transferred to share capital account.
Profit on bargain purchase is not considered as equity account because the equity is part
of entire capital whereas the losses and gains are the part of income and expenditure account. the
changes in value of fixed assets are compensated in it. net impact fall upon equity in terms of
increment in amount of reserves and surplus.
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ISSUE 3
The issue raised by the board of directors of Power Ltd is about the existence of share
capital of Cargo Ltd.
Solution:
No, the share capital of Cargo Ltd will not be existing indefinitely as the company was
acquired by the Power Ltd the share holders holding the shares in the Cargo Ltd will be
converted in the shares of Power Ltd the amount of share holders account will be transferred to
the share holder account of Power Ltd. As per the Australian Accounting Standards Board the
share capital in the case of acquisition is transferred to the share capital of acquirer company.
The reason these share capital does not remain in existence indefinitely is that the company s
acquired by some other company and from further all the operations of Cargo Ltd will be held
under the name of Power Ltd, the legal existence of Cargo Ltd is also ended after the acquisition
by Power Ltd (Su and Wells, 2015). The share holder who were holding shares in the Cargo Ltd
will be paid for their shares, they can be paid using various methods which includes payment in
cash in full settlement of their share price or issuing new share in the Power Ltd, new company
can issue preference share, debentures or equity share as per the company's decision and
shareholder's preference.
AASB 3/ IFRS 3 defines rules related to business consolidations and outlines with
acquisition of obtained and control of business. This standard defines the business combinations
and accounts for acquisition method. The rules related to acquiring another business are covered
in AASB as well. With the help of this accounting standard organisation accountants be able to
consolidate the accounts of merged company or subsidiary countries.
Power Ltd following all the rules given in the Australian Accounting Standard Boards
acquired the company Cargo Ltd. As per AASB the company acquired by the other company
will loose its existence both legally and physically the company may still operate under the name
of acquirer company. In the above given case Cargo Ltd is the acquiree company and Power Ltd
is the acquirer company. As per the rules and regulation given in the Australian Accounting
Standard Boards all the assets and liabilities are dissolved by Cargo Ltd and the acquirer
company i.e., Power Ltd will absorb its all the assets and liabilities at the fair value. The share
holder will lose its existence in the Cargo Ltd and the acquirer company will issue new share in
the Power Ltd (Zagelmeyer and et.al., 2018). The controlling authority of share holders holding
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shares Cargo Ltd will have the same controlling authority after the acquisition of it and holding
new shares in the Power Ltd. Business Combination valuation reserve is eliminated once both
the business are combined and all the assets and liabilities are acquired by acquirer company. It
is important for a business to eliminate the business combination valuation reserve as the assets
and liabilities of both companies are merged together.
CONCLUSION
Business consolidation is a process which involves the taking over of one company's
assets and liabilities by other company, some time businesses consolidates with each other in
order to improve the efficiency in the operations of business and to compete with big
competitors. From the above report it can be concluded that the adjustments will be recorded in
the consolidation worksheet at their fair value as per the rule given in the AASB. It also
establishes that the equity accounts which will be used in the revaluation of the assets and
liabilities are Equity Share holder account, Retained earning and Business combination
valuation reserve. The above report also the various reason which justifies the non existence of
equity share holders account in Cargo Ltd.
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REFERENCES
Books and Journals
Chang, J. F., 2016. Business process management systems: strategy and implementation.
Auerbach Publications.
Heeg, R., 2018. Upscaling and upgrading for the future. Research World, 2018(68). pp.6-7.
Nelson, T., 2018. Mergers and Acquisitions from A to Z. Amacom.
Rani, N., Yadav, S. S. and Jain, P. K., 2015. Impact of mergers and acquisitions on shareholders’
wealth in the short run: An event study approach. Vikalpa. 40(3). pp.293-312.
Su, W. H. and Wells, P., 2015. The association of identifiable intangible assets acquired and
recognised in business acquisitions with postacquisition firm performance. Accounting
& Finance. 55(4). pp.1171-1199.
Zagelmeyer, S., and et.al., 2018. Exploring the link between management communication and
emotions in mergers and acquisitions. Canadian Journal of Administrative
Sciences/Revue Canadienne des Sciences de l'Administration. 35(1). pp.93-106.
Online
Australian accounting standards board. 2018. [Online]. Available through:
<https://www.aasb.gov.au/admin/file/content105/c9/AASB3_08-15>
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