Accounting Issues: Business combination and consolidation

This memo addresses concerns raised by the board of directors regarding accounting information on business combination and consolidation. It discusses the disclosure requirements and the impact on financial statements.

MEMORANDUM
To: Board of Directors.
From: Julia Edwards ([e-mail]).
Sent: 20th March 2019.
CC:
RE: Accounting Issues: Business combination and consolidation
The memo is meant to address concerns raised by the board of directors
regarding the information on the acquisition. The concerns are in the
disclosure of accounting information on financial reports. According to the
FASB fair value is a relevant aspect of consolidation accounting as it ensures
the parent entity investment in an acquisition are eliminated, prior to any
adjustments all entries in assets and arising liabilities acquired are reported
at a fair value. According to IPSAS 1 there set out rules and a lot of
considerations for the presentations of financial statements, and in this case
consolidation statements the content to de disclosed includes the changes in
net assets, equity and cashflow of the business group. According to AASB
10/IFRS 10 it is a requirement for all parent entities to prepare consolidated
statements that are available to the public for use in which the subsidiaries
are measured at fair value through the profit or loss in accordance with the
standard.
The following issues raised have been explained further, to clarify any
doubts regarding the disclosure requirements and the amounts presented in
our consolidated statements.
Issue 1

The Board of directors has been wondering on whether the adjusted
made to fair value should be done in the consolidated worksheet or
in the Cargo Ltd accounts.
According to the FASB (financial accounting standards board,2009), fair
value is used to show present participant in the market and the assumptions
made on the future in-flow that is attached to the asset and outflows inline
with the potential liabilities. The choice of the accountant to prepare the
information and the inclusion of the adjustments to fair value made on the
consolidate sheet were justified since the failure to record such adjustments
will result to a need for revaluation to be done before eliminating the
subsidiary investments. One of the biggest challenges that is faced with
acquisition accounting is the basic requirements to the estimation of the fair
values of the assets that have been acquired and the liabilities assumed
from the same. The fair value accounting requirement are to be considered
in the process to value the assets, it is based on flow of cash model.
According to Shamkuts (2010) he conducted a study on accounting for fair
value, through a theoretical analysis, he found out that the application of fair
value gives fast hand information which can reflect the market value which
increases the transparency.
From the above raised issue, the workings made on the consolidation
worksheet don’t affect the accounts of the parent company or the subsidiary
firm. The fair value measured should ensure it is market based rather than
entity specific, the consolidated financial reports are a representation of the
healthy position financially for the firm and outcomes of undertakings for a
parent (entity in control) and one or more subsidiaries (entities controlled) as
if the individual entities were a single company or entity , in so reporting the
adjustments to the consolidated statement ensures that full disclosure ,
Furthermore the regulatory frameworks expect firm to fully disclose fair
value measurement. The additional disclosure allows users to be able to

know the actual changes in the balance of assets, where cashflows has
changed based on the financing activities.
Most of the assets and liabilities are required to be reflected in the reports of
the books of the parent company that it meant to show the significant
influence on the dealings of the company acquired. The fair value of the
market of the firm acquired should be allocated between the net of the
tangible assets and the intangible assets on the balance sheet of the
acquirer, thus the need to disclose such information to the consolidated
reports of cargo ltd. Unlike an associate company it is the due diligence of
the to consolidate the reports.
Issue 2
Which accounts of equity could be used when assets are being
revalued and can the difference be shown on different accounts of
equity for example income and a potential liability recognition?
The exchanged cost of asset is usually measured at a fair value unless there
is lack of substance commercially, or neither the asset acknowledged or can
be measured reliably. In measuring the asset value, we must recognize the
benefit of the gain or a loss in the period that they occur to give proper
market value for the investment. (Moyer,2008). In charging the revaluation
amounts to the revaluation account is one of the probable ways of
accounting for assets. The asset revalues of an asset on sale or buying, the
value is measured based on the available price in the active market.

According to Almansour et al., (2016) despite the reflection on the facts that
firms are determined to take advantage of the surplus from revaluation thus
it must be duly recognized in books to enable the frim to enhance its equity
base.
Any time a firm revalues its fixed assets it affects the power of the company
in debt contract negotiations with the holders of the debt. (Asad & Qadeer,
2014).
According to Bashir & Asad (2018) a probable aspect for revaluation of
assets is since cash flows are declining from operations. In difference, if the
assets are categorized as equity, or results in an equity component, then the
potential following record keeping ignores the changes in the value shifts
between the holders and shareholders thus its critical to discern the
accounts.
The equity method of accounting heralds from a position where the company
has controlling interest between 20%- 50 % and that they participate in the
policy making decisions , the accounting maintained will be recognized at
the statement of financial position at the historical cost, and the share of the
investee’s reported profit is to be adjusted for cost amortization that is
reflected in the balance sheet, the assets will also be reflected in the
statement of income, and the dividends received are recorded as a return on
capital thereby will bypass the statement of income.
The intangible assets held by the firm should be recognized either at the
cost of the Combined firm which has paid for them or at the fair value of on
at the time of acquisition as part of the combination of the business. They
are also amortized over their projected useful life.
Following guidelines on the IASB the group must recognize a provision for
contingent liabilities acquired in various business combinations, at the point
of acquiring, the various provisions have to be measured at its fair value of
the contingent liabilities, that show the probable range of outcomes, cutting

the various portfolios of liabilities that makes it easier to adjust for risk.
Every amount carrying of the provisions made could be re assessed in each
subsequent period.
According to AASB 3/IFRS 3, at the date when acquiring is done the
identifiable assets must be recognized and liabilities that are assumed of the
subsidiary there after be recognized at their fair values.
The acquired assets will be recorded in the cashflow statements, any
material adjustment to the the assets acquired should be reflected to the
consolidated cashflow statement. The difference between the fair value of
the firm acquired is between the fixed assets and the portion of intangible
assets that gives rise to goodwill. This are some of the assets that arise on
the acquiring company’s balance sheet.
Issue 3
Will the accounts of equity accounts remain indefinitely,
subsequently they may not seem to have a relation that is
recognizable by Cargo Ltd.
The equity accounts will endure in existence this is to guarantee that the
financial reporting remains relevant through the adoption of fair value
measurements, if it is omitted the financial report can lead to misleading
reports, thus maintaining them ensures that it reduces the increasing costs
for understandability to the information users. (FASB,2007). According to
IASB (2014a) it has been noted that some questions regarding the distinction
between liabilities and equities should be made clear to ensure resultant
accounting.
The existence of equity accounts relates to disclosure and presentation
requirements for the various financial instruments embedded in

characteristics of equity thus the classification of the same will ensure proper
disclosure. (IASB, 2016a).
Financial report handlers need to be issued with disclosures so that the
various nature of claims and even rights to make decision shared to the
public. (Schmidt ,2013). The equity account has to be maintained
indefinitely. By maintaining relevant financial information its easy to
evaluate the firm performance and possibly the equity value in the market,
thus possible relationship between the accounting information and the value
in the respective accounts is key to enhancing relevance of financial reports
shared to the public to.
Both the acquired and acquiring companies will be required to prepare their
own financial reports, the closing process may be quite hard , thus the
accounting practices and policies in place vary and thus the period taken for
an acquired company to harmonize his books may be different.

References
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of Micro and Small Enterprises? A study on mediating role of innovation.
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Financial Accounting Standards Board [FASB], 2006a. Statement of financial
accounting standards NO. 157: Fair Value Measurements (Sfas No. 157).
Financial Accounting Standards Board [FASB], 2007. Statement of financial
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financial liabilities (SFAS No.159)..
IASB. 2014a. Financial instruments with characteristics of equity research
project. IFRS Staff paper7CSeptember2014.
IASB. 2016a. Financial instruments with characteristics of equity research
project [ONLINE].
Moyer, L. 2008. How fair is fair value accounting? Forbes.
Schmidt, M. 2013. Equity and liabilities – A Discussion of IAS 32 and a
Critique of the Classification. Accounting in Europe, 10, 201-222