Consolidated Financial Statements and Goodwill Calculation for Acquirer

This text provides an overview of how to prepare consolidated financial statements for an acquirer, calculate goodwill, and understand non-controlling interest. It also explores AASB3/IFRS3 business combination and acquisition methods with a case study on Bright Pharmaceutical SE.

Corporate Finance
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Table of Contents
Part A...........................................................................................................................................................3
Overview on how to prepare consolidated Financial Statements – For Acquirer....................................3
Calculation of Goodwill............................................................................................................................3
Non-Controlling Interest..........................................................................................................................4
Part B...........................................................................................................................................................4
Case Two: Accounting by Acquirer..........................................................................................................4
Part C...........................................................................................................................................................5
AASB3/IFRS3 Business combination........................................................................................................5
Acquisition Methods................................................................................................................................6
CASE STUDY: Bright Pharmaceutical SE:..................................................................................................6
How AASB 3/IFRS 3
Business Combinations affect the acquisition analysis:...........................................7
References...................................................................................................................................................8
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Part A
Overview on how to prepare consolidated Financial Statements – For Acquirer
Share capital-only share Capital and other shareholders' equity of $280,000 Erik Ltd, the
acquirer are recorded.
Dividend payable-The amount of dividend payable is the summation of the dividend payable of
two companies that is $25,000 plus $12,600 total to $37,600.
Accounts payable is the total accounts payable of the two companies, that is, $75000 plus
$25,000 totaling to $10,000
When recordings are being done in the corporate financial statements, the summation of two
companies is taken unless there are intra companies’ receivables or payables which are
deducted from the total receivables. Intra-group balances need to be ignored because the
consolidated accounts should show identity as a single reporting economic entity, thus the
group accounts should only show receivables or payables owed or owed by the group outsiders.
(Buschhuter & Street, 2013 pp. 163 - 204)
Calculation of Goodwill
Goodwill is treated as non-tangible assets in the financial position of consolidated accounts. It
arises when the cost of purchase of share is not equal to their par value. According to (Baker,
Biondi and Zhang, 2010), there are two methods of computing the Goodwill upon the
acquisition of the firm by another.
The Goodwill upon acquisition is computed as:
The fair value of the consideration transferred XXX
Plus fair value of non-controlling interest at acquisition XXX
Less share capital of subsidiary at the date of acquisition (XXX)
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Less share premium of the subsidiary company at the date of acquisition (XXX)
Deduct retained earnings of the subsidiary at the date of acquisition (XXX)
Deduct fair value adjustment at the date of acquisition (XXX)
Or
The fair value of the consideration transferred XXX
The fair value of non-controlled interest XXX
The fair value of the net asset at acquisition (XXX)
Non-Controlling Interest
This is the proportion of nets assets of a subsidiary company which is not controlled by the
parent company. This part is considered to belong to the outsiders. It is computed as follows as
outlined by (Stenka, Ormrod and Chan 2008)
The fair value of Non-Controlling Entity at acquisition date XXX
Plus NCI's share of post-acquisition retained earnings or other reserves XXX
Part B
Case Two: Accounting by Acquirer
a) In part A, 80,000 shares are issued at a fair value of 2.4$ to Jolie ltd by Angelina ltd in
exchange for net Assets of Jolie ltd. Thus in the books of Angelina, we are going to debit each
individual account of Jolie's account at the carrying amount that is Machinery $40,000, Fixtures
and fittings $60,000, Vehicle $35,000 and Cash account by 10,000. Then, credit Share capital
account with $192,000 that is; 80,000×2.4 and current Liabilities account with $16,000. The
difference between Credit and debit side which is 61,400 is recorded in the debit side which has
a lesser amount as Goodwill.
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b) 80,000 shares are issued at a fair value of $2 to Jolie ltd by Angelina ltd in exchange for net
Assets of Jolie ltd. Thus in the books of Angelina, we are going to debit each individual account
of Jolie's account at the carrying amount that is Machinery $40,000, Fixtures and fittings
$60000, Vehicle $35,000 and Cash account by 10,000. Then credit Share capital account with
$192000 that is 80000×2 and current Liabilities account with $16,000. The difference between
Credit and debit side which is $29,400 is recorded in the debit side which has a lesser amount
as Goodwill.
c) For every one share of Angelina Ltd is traded with two shares held in Jolie ltd. Thus Angelina
Ltd is going to issue 40,000 shares at a face value of $1.8. Thud means we credit Share capital
account in the books of Angelina Ltd with $72000.Shareholders are paid $1 for every share they
hold in Jolie ltd. Thus Angelina Ltd is going to credit $80,000 that is; 80,000 shares × $1 total to
$80,000 and Credit current Liabilities account with $16,000. Then debit the assets at the fair
value, that is Machinery $67,000, Fixtures and fittings $68,000, vehicle $35,000 and current
assets $12,000. The difference of $30,000 between Credit and debit sides is recorded in the
credit side as gain upon acquisition. (Jaruga, Fijalkowska & Frendzel, 2007 pp. 67-78) and
(Hamberg and Beisland, 2014 pp. 263 - 288)
Part C
AASB3/IFRS3 Business combination
Australian Accounting Standard Board is implementing the accounting policy for adopting the
international standard of accounting. AASB has decided to continue the issue of standards that
are sector-neutral applicable to both profit and non-profit making organizations. IFRS 3Provides
provides additional information to determine whether the transaction meets the definition of
the business combination and therefore accounted for as far as the requirements of the
guidelines. The following are guidelines outlined by IFRS 3.
The business combination can occur in different ways such as by transferring cash, incurring
Liabilities and issuing financial instruments but not issuing consideration at all. (IFRS 3 B.5)
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According to Cairns 2012, the business combination can be structured in different ways to
satisfy different parties such consideration of government interest such as taxation, consider
the objectives of the firm including one becoming subsidiary firm another becoming parent
company, one transferring assets to the other company or a new entity. Business combination
involves business acquisition which has the following three elements.
Inputs that involve economic resources such as intellectual properties, noncurrent assets which
are translated to output upon passed through the process.
Process-This is a protocol or rules that are applied to inputs to bring about outputs. They
include strategic management, Operational processes, and resource management.
Outputs-This is the products of an inputs, once processes have applied to them.
Acquisition Methods
Identification of acquirer-IFRS 10 consolidated financial statements is purposely for figuring out
the acquirer business combination. The acquirer is the identity that transfers assets and cash to
another firm where the business combination is affected. (Leisenring, Linsmeir, Schipper and
Trott, 2012 pp. 329 - 344)
Determination of acquisition date-The acquisition date is the when acquirer takes control over
acquiree. The purchase date may be the date later or earlier the closing date.
Recognition and measurement of Acquired assets and liabilities- It is based on the
measurement principles.
Recognition and measurement of Goodwill or gain on bargain purchase-The difference between
purchase consideration and the net value of assets.
CASE STUDY: Bright Pharmaceutical SE:
In the case study, it enables the students to familiarize with the accounting of the business
combination under IFRS 3, and at the same time illustrating the uncertainty and judgment
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which is considered in the determination of assets and of Goodwill upon the acquisition of the
business.
The first step is candidate to assess the value of information in terms of quality generated
under IFRS 3 and also fair value accounting in relation to the business combination.
Secondly, students should account for a business combination by highlighting possible input
factors to measure several intangible assets and a contingent liability which are passed through
the process to come up with outputs. Referring valuation results, students calculate the amount
of goodwill recognized on the acquisition and assess the effects of their parameter choices on
the values of different assets and liabilities.
Third step, is to consolidate the financial statements and determine the impact of the
acquisition on the financial position of the acquirer, (Sahut, Boulene and Teulon 2011)
How AASB 3/IFRS 3
Business Combinations affect the acquisition analysis:
1. Transaction cost such as adviser's fees, stamp duty, and similar costs cannot be included
in the measurement of goodwill as earlier.
2. Pre-acquisition interest is measured at the fair in determining goodwill will on the
acquisition date.
3. Subsequent changes arising from such things like contingent Liabilities do not affect
goodwill computation but they are separate.
4. Also buying or selling minority interests in a subsidiary only impacts equity loss,
(Buschhuter and Striegel 2011 pp. 267 - 290)
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References
Glaum, M., Schmidt, P., Street, D. L., & Vogel, S., 2013. Compliance with IFRS 3-and IAS 36-required
disclosures across 17 European countries: company-and country-level determinants. Accounting and
Business Research, 43(3), pp. 163-204
Buschhüter, M., & Striegel, A., 2011. IFRS 3 - Business Combinations. In Kommentar Internationale
Rechnungslegung IFRS, pp. 137-205. Gabler.
Baker, C. R., Biondi, Y., & Zhang, Q., 2010. Disharmony in international accounting standards setting: The
Chinese approach to accounting for business combinations. Critical Perspectives on Accounting, 21(2),
107-117.
Cairns, D., 2012. The use of fair value in IFRS. In
The Routledge Companion to Fair Value and Financial
Reporting(pp. 25-39). Routledge.
Stenka, R. I., Ormrod, P., & Chan, A., 2008. Accounting for Business Combinations-The Consequences of
IFRS Adoption for UK Listed Companies.
Jaruga, A., Fijalkowska, J., Jaruga-Baranowska, M., & Frendzel, M., 2007. The impact of IAS/IFRS on
Polish accounting regulations and their practical implementation in Poland. Accounting in Europe, 4(1),
67-78.
Hamberg, M., Paananen, M., & Novak, J., 2012. The adoption of IFRS 3: The effects of managerial
discretion and stock market reactions. European Accounting Review, 20(2), 263-288
Sahut, J. M., Boulerne, S., & Teulon, F., 2011. Do IFRS provide better information about intangibles in
Europe?. Review of Accounting and Finance, 10(3), 267-290
Leisenring, J., Linsmeier, T., Schipper, K., & Trott, E.,2012. Business-model (intent)-based accounting.
Accounting and Business Research, 42(3), 329-344.
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