Accounting Issues in Business Combination

This document provides an explanation of the accounting issues raised in a business combination and the valuation of assets and liabilities. It discusses the guidelines provided by AASB 3 and IFRS 3 for recognizing and measuring identifiable assets and liabilities. The document also addresses specific issues related to fair value adjustments and the creation of a business combination valuation reserve. Recommendations are provided for complying with accounting standards and preparing consolidated financial statements. The conclusion emphasizes the inclusion of all assets and liabilities in the consolidated statement.

Running head: FINANCIAL ACCOUNTING AND REPORTING 2
Financial Accounting and Reporting 2
Name of the Student:
Name of the University:
Authors Note:

1FINANCIAL ACCOUNTING AND REPORTING 2
MEMO
To: Julia Edwards (CFO, Power Limited)
From: (Name of the student), Accountant Graduate.
Dated: 26th May, 2019.
Ref.: Explanation to the accounting issues raised by Mr Daniel Ford, an independent
director of Power Limited.
This memorandum shall help in explaining the accounting issues raised by Mr Daniel Ford to
value of assets and liabilities of Cargo Limited in the books of Power Limited subsequent to the
100% acquisition of the former by the later.
AASB have issued AASB 3, Business Combinations after incorporating the features and
characteristics of IFRS 3 on the same topic. AASB 3 has been issued by the AASB under section
334 of the Corporations Act, 2001. AASB 3 has provided necessary guidelines to be followed by
a reporting entity while reporting business combinations in the financial statements. The standard
establishes principles to be followed by the acquirer of a business to;
I. Recognise and measure identifiable assets acquired in the financial statements.
II. Recognise and measure liabilities assumed at the time acquisition of a business.
III. Recognise and measure goodwill on the date acquisition. It is nothing but the
difference between the fair value of net assets acquired reduced by the liabilities
assumed.

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IV. Disclose necessary financial information required to be disclosed. This will help the
users of financial statements to correctly assess the financial implications of business
acquisition (Atanasov, 2016).
Thus, it is clear from the above that acquisition of 100% shares in the Cargo Limited by Power
Limited shall be governed by AASB 3 and IFRS 3. Hence, Power Limited must comply with the
requirements of AASB 3 to report the acquisition of 100% shares of Cargo Limited.
AASB 3 outlines the recognition and measurement principles to recognize and value identifiable
assets and liabilities of the acquiree company in the consolidated financial statements of the
parent company. In addition the para also outlines the recognition and measurement criterions for
non-controlling interests in the acquire company. However, since in this case the acquirer has
acquired 100% shares in Cargo Limited thus, there would be no non-controlling interests in the
company.
Recognition principle of identifiable assets acquired and liabilities assumed as on the date
of acquisition:
As per Para 10 of AASB 3, on the date of acquisition of shares in a company, recognize the
identifiable assets in the books of accounts of the acquirer company along with liabilities
assumed on the date of acquisition. In addition the acquirer shall also recognise the minority
interest in the acquiree as on the date of purchase of shares.
However, para 10 also provides that identifiable assets and liabilities assumed shall be
recognized subjected to the criterions provided in para 11 and 12 of the standard. Para 11 makes
it clear that in order to be recognised the assets and liabilities identified must meet the definition

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of assets and liabilities as mentioned in para 12. Para 12 further states identifiable assets acquired
and liabilities assumed must be part of the contract between the acquirer and the acquiree.
Measurement principle of identifiable assets acquired and liabilities assumed as on the date
of accusation:
Para 18 of AASB 3 outlines the measurement principles to be followed by the acquirer to
measure assets and liabilities in the books of the acquirer.
The identifiable assets acquired and liabilities assumed shall be valued at their respective fair
values as on the date when the share of the company was purchased by the acquirer. Thus, it is
clear that in a business combination the assets and liabilities shall be valued at the fair values as
on the date when the shares of the target company was purchased by the acquirer.
Taking into consideration the above discussion about the recognition and measurement criterions
lets proceed towards resolving the queries raised by Mr Daniel Ford on the recognition and
measurement principles of identifiable assets acquired and liabilities assumed in the books of
Power Limited on the 100% acquisition of Cargo Limited (Stevenson, 2012).
General issue with regard to recognition of all identifiable assets and liabilities of cargo
Limited:
As outlined in para 18 of AASB 3 that identifiable assets acquired and liabilities assumed shall
be valued at the fair value of such assets and liabilities as on the date of acquisition. Thus, all the
identifiable assets acquired that meet the definition of assets as per para 11 of the standard shall
be recognised in the Consolidated financial statement of the acquirer, i.e. Power Limited in this
case. Similarly, the liabilities assumed shall also be recognised in the consolidated financial

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statement of Power Limited as long as these meets the definition of liabilities as provided in para
11 of the standard.
The important point to be considered here is that the directors are happy with the valuation of
assets and liabilities thus, all the assets and liabilities meeting the definitions as per par 12 of
AASB 3 shall be recognised in the consolidated financial statements of Power Limited.
Specific issue 1:
As per the accounting standard, i.e. AASB 3 the adjustments to the fair value are made in the
consolidation worksheet and not in the accounts of Cargo Limited. This is because the worksheet
provides detailed adjustments to the fair value in one place where all the assets and liabilities are
recorded and adjusted for the purpose of consolidation (Hamid, 2016).
Specific issue 2:
Business Combination Valuation Reserve shall be created to revalue the assets and liabilities.
The increase in value of an asset shall be credited in the revaluation reserve whereas a decrease
in the value of asset shall be debited in the revaluation reserve. Similarly at the time of
revaluation of liabilities in case the liabilities are increased then the revaluation reserve shall be
debited and a reduction in liabilities shall be adjusted by crediting the revaluation reserve
account (AAO Consolidated Financial Statements 2018, 2018).
Specific issue 3:
Business combination valuation reserve created for the revaluation of assets and liabilities is not
to be in existence for indefinitely. Once the assets and liabilities for which the reserve was
created are disposed of in case of the assets and settled in case of liabilities the business

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valuation combination reserve account is also written off against the profit and loss account of
the company. The Business combination valuation reserve is created by the acquirer company to
adjust the revaluated assets in its equity thus, there is no need for the acquiree company, i.e.
Cargo Limited in this case to adjust its equity for fair value adjustments to assets and liabilities
(BOYMAL, 2007).
Recommendations:
After considering the detailed discussion about the particular accounting standard and different
paragraphs of the standard dealing with the issue of recognition and measurement, the following
recommendations are made.
Firstly, all the assets acquired and liabilities assumed by Power Limited are to be recognised in
the consolidated financial statements of the company as long as the assets and liabilities are
meeting the definition of assets and liabilities as per para 11 of AASB 3.
Secondly, the assets and liabilities of Cargo Limited shall be measured at their respective fair
values as on the date of acquisition in the books of accounts of Power Limited.
Finally, fair value adjustments in case of revaluation of assets and liabilities are recorded in the
Business Valuation Combination Reserve Account to be shown under reserves in the Balance
sheet of the company (Bugeja and Loyeung, 2016).
Conclusion:
An entity operating in Australia is subjected to the accounting standards issued by the AASB and
should follow these standards to prepare financial reports. In case of Power Limited the company
has acquired 100% shares of Cargo Limited. As a result it requires to prepare consolidated

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financial statements in addition to its own separate financial statements. The assets and liabilities
of its fully owned subsidiary, i.e. Cargo Limited, shall be valued at their respective fair values as
on the date of acquisition. The issue raised by the independent board of director that not all assets
and liabilities of Cargo Limited should be included in the consolidated statements is not correct
and tenable. Inclusion of all the assets and liabilities meeting the definition of such as per para 12
of AASB 3 is the correct accounting treatment. Non-disclosure of all assets and liabilities of the
fully owned subsidiary is not as per the AASB 3. Hence, in order to comply with the accounting
standards to show the true and fair picture of consolidated position of Power and its subsidiary
all the assets and liabilities of Cargo shall be considered and included in the consolidated
statement.

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References:
AAO Consolidated Financial Statements 2018. (2018). Ophthalmology, 125(11), pp.F1-F32.
Atanasov, A. (2016). ///// (The Category 'Business' in the Context of Accounting for Business
Combinations Under IAS/IFRS). SSRN Electronic Journal, 1(2), pp.10-17.
BOYMAL, D. (2007). The Work Program and Priorities of the AASB. Australian Accounting
Review, 17(42), pp.3-7.
Bugeja, M. and Loyeung, A. (2016). Accounting for business combinations and takeover
premiums: Pre- and post-IFRS. Australian Journal of Management, 42(2), pp.183-204.
Detzen, D., Hoffmann, S. and Zülch, H. (2013). Bright Pharmaceuticals SE: Accounting for a
Business Combination under IFRS 3. Accounting Education, 22(3), pp.282-294.
Hamid, A. (2016). Accuracy Combination Test of Classical and Modern Technical Analysis: A
Case Study in Stock of PT Wijaya Karya Tbk. Binus Business Review, 7(1), p.71.
Stevenson, K. (2012). The Changing IASB and AASB Relationship. Australian Accounting
Review, 22(3), pp.239-243.

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