Financial Management and Control

This document provides an assessment on financial management and control, including calculating net asset value, arguments for and against historical and fair value accounting, and a recommendation for CFO on which business to acquire.

Running head: FINANCIAL MANAGEMENT AND CONTROL
Financial Accounting
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
1. Introduction:...........................................................................................................................2
2. Calculating the net asset value of both the organisation, explaining the possible journal
entries that need to be provided for acquisition:........................................................................2
3. Providing arguments for and against the use of historical and fair value accounting, while
explaining the trade-off between the two methods:...................................................................5
4. Providing recommendation to the CFO regarding which business to acquire:......................7
References and Bibliography:....................................................................................................8

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1. Introduction:
The main aim of the assessment is to identify the appropriate organization, which
would be suitable for acquisition purpose. Historical and fair value calculation has been
conducted to identify the overall profit/loss in value after the acquisition. Furthermore,
elephant journal has been provided for the acquisition purposes, which can help in identify
the goodwill amount that has been paid in the transaction. In addition, adequate arguments
regarding historical and fair value accounting has been conducted while explaining the
tradeoff between the two methods. Lastly, relevant recommendation has been provided to the
CFO regarding which acquire business to acquire.
2. Calculating the net asset value of both the organisation, explaining the possible
journal entries that need to be provided for acquisition:
Tallows Ltd
Particulars Historical Value Fair Value Change
Cash and cash equivalents 12,000 12,000 -
Accounts receivable 21,000 18,000 -3,000
Inventory 2,20,000 1,80,000 -40,000
Property Plant and Equipment
(net) 12,00,000 10,00,000 -2,00,000
Total Assets 14,53,000 12,10,000
Accounts Payable 1,45,000 1,45,000 -
Bank Loans 2,00,000 2,00,000 -
Shareholder’s Equity 11,08,000 11,08,000 -
Liabilities & shareholders’ equity 14,53,000 14,53,000 -
Loss in Value -2,43,000
Tallows Ltd
Particulars Historical Value Fair Value
Cash and cash equivalents 12,000 12,000
Accounts receivable 21,000 18,000
Inventory 220,000 180,000
Property Plant and Equipment 1,200,000 1,000,000

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(net)
Total Assets 1,453,000 1,210,000
Accounts Payable 145,000 145,000
Bank Loans 200,000 200,000
Shareholder’s Equity 1,108,000 865,000
Liabilities & shareholders’ equity 1,453,000 1,210,000
Net Assets 1,108,000 865,000
Bilgola Ltd
Particulars Historical Value Fair Value Change
Cash and cash equivalents 6,000 6,000
Accounts receivable 2,30,000 2,00,000 -30,000
Inventory 6,00,000 5,00,000 -1,00,000
Property Plant and Equipment
(net)
10,00,000 20,00,000 10,00,000
Total Assets 18,36,000 27,12,000
Accounts Payable 2,00,000 2,00,000 -
Bank Loans 3,60,000 3,60,000 -
Shareholder’s Equity 12,76,000 12,76,000 -
Liabilities & shareholders’ equity 18,36,000 18,36,000 -
Profit in Value 8,70,000
Bilgola Ltd
Particulars Historical Value Fair Value
Cash and cash equivalents 6,000 6,000
Accounts receivable 230,000 200,000
Inventory 600,000 500,000
Property Plant and Equipment
(net) 1,000,000 2,000,000
Total Assets 1,836,000 2,706,000
Accounts Payable 200,000 200,000
Bond payable 360,000 360,000
Shareholder’s Equity 1,276,000 2,146,000
Liabilities & shareholders’ equity 1,836,000 2,706,000
Net Assets 1,276,000 2,146,000
The above two tables provide information regarding the Profit or loss in value that
could be acquired by acquiring any of the two companies. From the above calculate it could
be identified that Greenmount Ltd needs to acquire only Bilgola Ltd, as the acquisition

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process indicated a profit in value of current organization. This would eventually help
company to acquire profitable endeavors, which can increase their income in the long run.
Particulars Tallows Ltd Bilgola Ltd
Value of
Purchase 2,000,000 2,000,000
Net Assets 865,000 2,146,000
Goodwill 1,135,000 -146,000
The above table provides information regarding the goodwill of both Tallows Ltd and
Bilgola Ltd, which has been calculated on the basis of fair value method. The calculation
indicated hat only tallows Ltd will have goodwill, while Greenmount will have a bargaining
price on Bilgola Ltd.
Information provided in the above calculation also indicates Australian method of
acquisition, which relies on fair value method to determine the benefits that could be incurred
from the transaction. The acquisition value is only 2 million, where assets having more value
need to be acquired by the organization for increasing the total value of assets. Thus, the total
asset value of Bilgola Ltd is more than 2 million, while Tallows Ltd fair value less. This
relatively makes the investment in Bilgola more valuable, as it will increase their total assets.
Particulars Amount Amount
Advisor fees $ 5,000
Legal fees $ 3,000
Cash $ 8,000
Tallows Ltd
Particulars Amount Amount
Cash and cash equivalents 12,000
Accounts receivable 18,000
Inventory 180,000
Property Plant and Equipment
(net) 1,000,000
Goodwill 1,135,000
Accounts Payable 145,000
Bond payable 200,000
Cash 2,000,000

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The journal entry provided in the above table indicates that a goodwill value of
$1,135,000 will be incurred by Greenmount after acquiring Tallows Ltd. As per the fair value
measurement depicted in AASB 3, Para 18 the journal entry has been prepared. In addition,
the goodwill is analysed as per the AASB 3, Para 32, where adequate information regarding
the business combination is depicted in the journal entry.
Particulars Amount Amount
Advisor fees $ 5,000
Legal fees $ 3,000
Cash $ 8,000
Bilgola Ltd
Particulars Amount Amount
Cash and cash equivalents 6,000
Accounts receivable 200,000
Inventory 500,000
Property Plant and Equipment
(net) 2,000,000
Accounts Payable 200,000
Bond payable 360,000
Cash 2,000,000
Acquisition gain 146,000
The above journal entries provide information regarding the acquisition of Bilgola Ltd
by Greenmount Ltd. There is no goodwill present while acquiring Bilgola Ltd, as
Greenmount received bargain on the purchase price. Hence, Greenmount received a gain on
acquisition of $146,000.
3. Providing arguments for and against the use of historical and fair value accounting,
while explaining the trade-off between the two methods:
There are two different types of valuation method such as historical cost method and
fair value method, which is used by the organizations to evaluate the current valuation of a

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company. In accordance with AASB CF, Para QC 5, the aims of both the method is to
provide relevant information to the stakeholders of the organization regarding its current
position. Both the Historical cost method and fair value method has Advantages and
disadvantages, which is evaluated as follows.
Historical cost method:
According to the AASB 116, Para 30, historical cost method needs to account for
their assets at cost, which was incurred at the time of purchase. Thus, with the help of
historical method the organization is able to provide relevant representation of their assets to
their investors. Furthermore, the HC does not take into consideration the changes in
eocncomy and valuation of an asset, while preparing the financial report. This method is
considered to be reliable, as physical evidence is present for regarding the valuation of the
asset. Nevertheless, the comparison of the historical value with the current market value does
not provide adequate information to the organization regarding the current value of the asset
(Krahel & Titera, 2015). Henceforth, it can be assumed that historical cost method has a
relevant loophole, which does not depict the current value of the assets, as required by the
Australian accounting board. However, historical value method allows the organization to use
deprecation to devalue their assets in the accounting book.
Fair value method:
In accordance with the AASB 13, Para 9, fair value method is needed by organization
in Australia for valuing the assets in their financial books (Aasb.gov.au, 2019). This method
actually depicts the correct value of the assets dint eh financial books, which allows the
stakeholders to determine the correct value of the organization. The fair value method uses
faithful representation, where the current value of the asset is depicted in the annual report.
The value of the asset keeps on changing, as the revaluation of the assets is used for depicting
the current value of the assets as per the market value. The AASB ruling that is used in

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Australia also indicates that the fair value method is used in the acquisition process, as it
helps the organization to determine the accurate value of their assets. There is some limitation
to the fair value method is used under AASB ruling, as there is no significant guidelines on to
how the fair value of an assets can be determined. The market value is mainly used for
detecting the current fair value of an organization, which is on assumption basis.
4. Providing recommendation to the CFO regarding which business to acquire:
The assessment provides information regarding the acquisition calculation that can
help in identifying the most viable organization for investment. From the relevant calculation,
it can be identified that investments in Bilgola Ltd can provide Greenmount Ltd to increase
its total value of assets. In addition, the acquisition will have long term impact on the balance
position of the organization, as significant rise in the total assets will be witnessed. There will
be no goodwill present if acquisition of Bilgola Ltd is conducted by Greenmount, as they
have received a bargain on their payment. However, goodwill only occurs when the
acquisition cost is higher than the net asset value of the company. Moreover, under value
method, it is detected that Bilgola Ltd in profit in value in comparison to Tallows Ltd. In
addition, relevant arguments are also provided regarding the historical and fair value
accounting, which is used for determining the accurate value of an organization and help the
management make adequate investment decisions.

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References and Bibliography:
Aasb.gov.au. (2019). Aasb.gov.au. Retrieved 31 March 2019, from
https://www.aasb.gov.au/admin/file/content105/c9/AASB116_08-
15_COMPoct15_01-18.pdf
Brînză, D., & Bengescu, M. (2016). Accounting based on the historical cost versus
accounting based on the fair value. Lucrări Științifice Management Agricol, 18(2),
145.
Ettredge, M. L., Xu, Y., & Yi, H. S. (2014). Fair value measurements and audit fees:
Evidence from the banking industry. Auditing: A Journal of Practice & Theory, 33(3),
33-58.
Iasplus.com. (2019). Iasplus.com. Retrieved 31 March 2019, from
https://www.iasplus.com/en
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2016). Intermediate Accounting, Binder
Ready Version. John Wiley & Sons.
Krahel, J. P., & Titera, W. R. (2015). Consequences of Big Data and formalization on
accounting and auditing standards. Accounting Horizons, 29(2), 409-422.
McLaney, E. J., & Atrill, P. (2014). Accounting and finance: an introduction. Pearson.
Warren Jr, J. D., Moffitt, K. C., & Byrnes, P. (2015). How Big Data will change
accounting. Accounting Horizons, 29(2), 397-407.