Accounting Issues: Business Combination and Consolidation

Running head: FINANCIAL ACCOUNTING AND REPORTING
Financial accounting and reporting
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FINANCIAL ACCOUNTING AND REPORTING
MEMORANDUM
To: Daniel Ford
Director power limited
510 William Street
Melbourne, VIC 3000
From: Julia Edwards ([e-mail])
Through: Graduate accountant
Date: 17th May, 2019
Subject: Accounting issues: Business combination and Consolidation
Dear Daniel,
This memorandum I have prepared is in response to the e mail sent by you regarding
the accounting issues faced by the company in the event of acquisition of Cargo Limited by
Power Company limited. It would help in addressing the accounting issues that has been
raised related to the consolidation and business combination. The purpose of writing this
memorandum is to identify the issues and provide the board of directors with the solution to
accounting treatment accordance with the Australian accounting standard which would assist
them in the process of decision making. Therefore, in order to make the board well
understand the accounting treatment relating to the acquisition, I have addressed the
identified issues in accordance with the requirements of the standard.

FINANCIAL ACCOUNTING AND REPORTING
I have found that the boards of directors are concerned about the recognition of the
identifiable assets and liabilities at fair value in the financial statements. There are number of
matters that need to be discussed associated with the accounting for liabilities and assets. I
would be discussing the recognition of the assets and liabilities after the acquisition in
accordance with the AASB 3 Business combination. The measurement and recognition of
the identifiable liabilities and assets is done in accordance with the recognition principle laid
down in the paragraph 10 of AASB 3 (Brusca and Martínez 2016). The standard says that at
the date of acquisition, the assets and liabilities should be recognized by the acquirer
separately from goodwill. However, the recognition of the liabilities and assets are subjected
to the conditions outlined in the paragraph 11 and 12 of the standard. For recognition of the
identifiable liabilities and assets, they should be able to meet the definition in the framework
for the presentation and preparation of the financial statement at the date of acquisition. In
addition to this, such liabilities and assets must be a part of what the acquirer and acquire
exchanged in the business combination. The determination of such assets and liabilities of
being a part of what is exchanged in the business combination should be done in accordance
with the paragraph 51-53 (Apostolou et al. 2017).
The measurement principles is outlined in the paragraph 18 of AASB 3 which says
that the liabilities assumed and the identifiable assets acquired should be measured by the
acquirer at the fair value at the date of acquisition. It is required by the acquirer to measure
the components of non controlling interest in the acquiree at the date of acquisition at the fair
value. I want to make a point that the acquisition of Cargo Limited by Power limited is a
business combination that arose by exchanging only equity interest, the fair value of equity
interest of the acquiree are reliably measured that the equity interest of the acquirer
(Camfferman and Zeff 2015). In addition to this, recognition and measurement of assets and
liabilities are recognized in the consolidated financial statement at the pre combination