Accounting Issues: Business Combination and Consolidation

Running head: FINANCIAL ACCOUNTING AND REPORTING 2
Financial accounting and reporting 2
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FINANCIAL ACCOUNTING AND REPORTING 2
MEMORANDUM
From: Julia Edwards ([e-mail])
Through: Graduate accountant
To: Daniel Ford
Director power limited
510 William Street
Melbourne, VIC 3000
Date: 14th May, 2019
Subject: Accounting issues: Business combination and Consolidation
Dear Daniel,
This memorandum is in response to the e mail received by you and addresses the key
accounting issues related to the business combination and consolidation in relation to the
acquisition of Cargo limited by Power Limited. The objective of writing this memorandum is
to address the accounting issues that you have pointed regarding the treatment of assets and
liabilities at the fair value and recognition of equity accounts. I would be explaining all the
issues raised by you in reference with the Australian accounting standard board which would
make it easier for you to understand the accounting treatment regarding the concerned
accounts.

FINANCIAL ACCOUNTING AND REPORTING 2
The first issue raised by you was regarding the adjustment of fair value in the
accounts of Cargo Limited or in the consolidation worksheet. The acquisition of the group of
assets or assets that does not constitute the business, in such scenario, the recognition and
identification of the individual assets acquired by the acquirer is done if the assets meet the
definition of the recognition criteria at the date of acquisition as in accordance with the
Australian accounting standard. The recognition principle as mentioned in the paragraph 10
of AASB 3 that the acquirer at the date of acquisition shall recognize the identifiable assets in
the acquiree’s account separately from the goodwill (Su and Wells 2018). In order for the
liabilities and assets to be qualified for recognition, the assumed liabilities and assets must be
a part of the acquirer and acquiree. The identifiable assets and liabilities shall be measured by
the acquirer by assuming the acquisition date fair values. Unless other measurement basis is
required by AASB, all the items of non controlling interest should be measured at the fair
value acquisition date. However, there is a limitation imposed on the recognition principles as
mentioned in the paragraph 22-31 of the AASB 3 (Bond et al. 2016). It is essential for the
acquirer to perform the valuation of the liabilities and assets if the book value of the liabilities
and assets are more than the existence of contingent liabilities. The changes in the fair value
in the event of contingent consideration should be recognized by the acquirer after the date of
acquisition.
In addition to this, the consolidation worksheet is prepared only for the purpose of
consolidation and the adjustments in the consolidation account are done every time when the
consolidation accounts are prepared. Any adjustments to the fair value are done by the
valuation of business combination and the recognition of the differences in the value of assets
and liabilities should be done by the acquisition analysis (Aasb.gov.au 2019). Thereafter, the
valuation entries of the business combination are adjusted in the worksheet of the
consolidation account.