Accounting Issues in Business Combination

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.

2FINANCIAL ACCOUNTING AND REPORTING 2
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