Accounting Treatment for Assets, Liabilities, and Equity in Business Combination

Running head: FINANCIAL ACCOUNTING AND REPORTING 2
Financial accounting and reporting 2
Name of the student
Name of the university
Student ID
Author note

FINANCIAL ACCOUNTING AND REPORTING 2
MEMORANDUM
To: Daniel Ford
Director power limited
510 William Street
Melbourne, VIC 3000
From: Julia Edwards ([e-mail])
Date: 16th May, 2019
Subject:
Dear Daniel,
The memorandum has been prepared in response to the accounting issues raised by
you regarding the acquisition of Cargo Limited by Power Limited sent through e mail. The
intention of writing this memorandum is to address the accounting issues that have been
raised regarding the equity account and adjustments of assets and liabilities regarding the fair
value. In addition to this, the existence of the equity account recognized by cargo Limited has
also been evaluated. With regard to the issues that are raised by you, I would be explaining
the accounting treatment concerning the assets, liabilities and equity account that is consistent
with the Australian accounting standard board that would assist you and the board in
understanding the issues.
In the first issue, you raised the concern about the adjustment of assets and liabilities
at the fair value in the consolidated worksheet or in the accounts of Cargo Limited. The

FINANCIAL ACCOUNTING AND REPORTING 2
acquirer recognizes the assets and liabilities acquired if the acquisition of the assets does not
constitute the business provided the assets and liabilities meet the recognition criteria at the
date of acquisition in accordance with the requirement of Australian accounting standard. The
paragraph 10 of the AASB 3 lays down the recognition principle that all the identifiable
assets at the date of acquisition should be recognized by the acquirer in the account of acquire
separately from goodwill (Aasb.gov.au 2019). The assets and liabilities can be qualified for
getting recognized, such liabilities and assets must form a part of the acquiree and acquirer.
In addition to this, the acquirer shall measure the liabilities and assets by making the
assumption that the assets have been acquired at the fair value at the date of acquisition. The
valuation of liabilities and assets should be performed by the acquirer if the value of existing
contingent liabilities is more than the book value of assets and liabilities.
The working for consolidation is prepared only in the event of consolidation and the
time whenever it is required to prepare the consolidation access. Moreover, the valuation of
business combination would be done by making adjustments to the fair value. The acquisition
analysis would help in determining the differences between the values of liabilities and
assets. Therefore, in the worksheet of consolidation account, the valuation entries in relation
to the business combination should be done (Gláserová 2016).
The another accounting issue that was raised by you was regarding the revaluation of
assets in the equity accounts and whether such equity accounts can be used regarding the
recognition of liabilities. The equity account that should be use dafter the consolidation for
revaluing the assets is account of the business combination revaluation reserve. Regarding the
assets revaluation, the equity account recognizes any upward change in the capital assets
valuation. The classification of the liabilities as equity is considered appropriate only when
such liabilities fail to meet the definition of the financial liability (Hughes et al. 2019). In
relation to recognition of liabilities, the amount is recognized as equity when the fair value of