Accounting for Business Combinations

This assignment delves into the accounting treatment of goodwill arising from business combinations. It discusses two primary methods: the full goodwill method and the partial goodwill method. The assignment examines the principles behind each method, their application in financial reporting, and the implications for a company's financial statements. Understanding these methods is crucial for accurately representing the value of acquired businesses and their long-term impact on a company's performance.

Solution-1
Sr
.
N
o.
Case Advise AASB 10 Relevant
Extract
(a) MC has a 25 per cent
interest in the share
capital of LBX Pty
Limited (LBX), which is a
company involved in the
same industry as MC.
The remaining 75 per
cent of the share capital
is owned by LBX's
founders, Mr and Mrs T.
Mr and Mrs T are
unfamiliar with the
industry and so have
given MC three seats
out of the five seats
available on the board of
directors. MC takes all
the lead on all decisions,
but the business is
closely monitored by Mr
and Mrs T, who hold the
other two board
positions.
Control can be gained by
holding leading percentage of
shares in equity instruments
(i.e. more than 50%) or the
other means of gaining
control is the situations which
reflect the investor’s ability to
lead and control the investee
company’s decisions. In the
current situation, MC holds
25% shares, thus not having
leading percentage of shares
in equity instruments. But MC
has majority of seats of board
of directors, i.e. 3 seats out of
5. So, all the major decisions
are to be decided by MC.
Thus, it is concluded that MC
has control and power to lead
the major activities and
decisions of the company.
Further, when it is established
that the investor has control
over the investee, then as per
accounting standard 10, the
investor needs to consolidate
the investee’s financials.
The relevant extract of para
10 of AASB 10,
“Consolidation Financial
Statements”, which
supports above statement,
is as below:
“10. An investor has power
over an investee when the
investor has existing rights
that give it the current
ability to direct the relevant
activities, i.e. the activities
that significantly affect the
investee’s returns.”
The relevant extract of para
20 is as below:
“20 Consolidation of an
investee shall begin from
the date the investor
obtains control of the
investee and cease when
the investor loses control of
the investee.”
(b) MC has a substantial
loan receivable from
BBT Pty Ltd (BBT). BBT,
as a result of the current
economic climate, has
experienced significant
trading problems. BBT
has failed to make its
regular payments under
the loan with the
management of BBT
that MC executives will
take control of the
company's finances for
a period of five years.
An executive of MC has
As control is related to not
only having the right of
direction. But by also having
controlling power on the
decisions of the company. In
the given situation, although
due to non-repayment of loan,
the MC has gained the control
over the finances of the
company and can control all
the payments and finances.
But still the MC executives
have no seats over the board
of directors. Without having
any seats on BOD’s the MC
cannot participate in the
The relevant extract of para
12 of AASB 10 is
reproduced below:
“12 An investor with the
current ability to direct the
relevant activities has
power even if its rights to
direct have yet to be
exercised. Evidence that
the investor has been
directing relevant activities
can help determine whether
the investor has power, but
such evidence is not, in
itself, conclusive in
determining whether the

been given control of
BBT's cheque book and
makes all payments. MC
has not gained any
seats on BBT's board of
directors, which is still
dominated by BBT
shareholders.
major decisions of the
company neither it can
control or direct those
decisions. Since,
Since, the MC has no control,
it is no obligation for
consolidation of the financials.
investor has power over an
investee.”
(c) MC owns 50 per cent of
Chatime Tea Ltd (CTL),
with the other 50 per
cent being owned by
Boost Juice Ltd (BJL).
Both companies have
equal voting rights and
an equal share of seats
on the board of
directors. Under the
agreement with BJL, MC
supplies the finance to
the company on normal
commercial terms. The
loan is fully secured
against the assets of the
company. BJL provides
the management and
entrepreneurial flair to
CTL. under the
agreement forged, BJL
will receive a
management fee in
respect of the net profits
of CTL after allowing for
interest payments on
the MC loan. In times of
no profits, the interest
payments will still be
met, but BJL will not
receive any
remuneration.
For consolidating the investee
financials, the control should
be established first. Control
can be gained either by
holding majority shares in
equity instruments, or by any
other circumstances which
shows that the investor has
ability to control the activities
of investee or ability to affect
the profits or losses of the
investee. In the given case,
both the shareholders, i.e. MC
and BJL has equal share of
voting rights. Hence, no one
can take the decision alone.
However, the MC provides
finance to the CTL on normal
commercial terms in respect
of which MC is entitled to
receive a fixed amount of
interest. This is a routine
business transaction and does
not give rise to any controlling
power. Further, the BJL has an
agreement with the investee,
i.e. CTL for providing certain
managerial and
entrepreneurial services, in
respect of which BJL will get a
percentage in profit shares.
Since, BJL has its fee based on
profits, so it has more interest
in the profits of the company
and can affect the outcome
with its consultancy. So, it is
concluded that BJL can control
the affairs of the CTL and MC
has no control over CTL.
Since, MC has no control, thus
no consolidation is required.
The para 13 of AASB 10
supports the cited view.
“13 If two or more
investors each have
existing rights that give
them the unilateral ability
to direct different relevant
activities, the investor that
has the current ability to
direct the activities that
most significantly affect the
returns of the investee has
power over the investee.”

(d) MC, Coffee Club Ltd
(CCL) and Gloria Jeans
Ltd (GJL) are each 33.33
per cent shareholders of
PGH Pty Ltd, a small
proprietary company
that is involved in the
music industry. CCL and
GJL are passive
shareholders with the
one board seat each out
of a total of three. MC
has one board seat and
is also involved in the
day-to-day running of
the business.
As explained above for
controlling either majority in
shares or power to control the
activities should be there. In
the given situation, all
shareholders have equal
percentage of shares and no
one can take decision on its
own. The presence of all the
three shareholders is required
for taking any decisions.
Further, all the three
shareholders have equal
number of seats in the board
of directors. Hence, all the
shareholders have equal
rights, controls and
obligations. Just merely by
fact that the two
shareholders, i.e. CCL and GJL
are passive shareholders and
are not involved in the routine
business and MC is involved in
the day to day business does
not give rise to any power of
control as for taking any
decision MC needs to consult
with remaining 2
shareholders. Hence, it is
concluded that MC has no
power to control and hence
consolidation in not required.
(e) MC hold a 75 per cent
interest in JB Wifi Pty
Ltd. The interest was
created when MC
converted a substantial
loan it made to JB Wifi
into equity at the
invitation of JB Wifi when
JB Wifi began to trade
poorly and recovery of
the loan seemed
uncertain. JB Wifi has a
large deficiency in net
assets and has been
consolidated for many
years. MC is a passive
investor, having no
seats on the board of
Control comes with holding
majority of shares in the
company. As due to majority
of shares, the decision of
shareholder having majority
of shares will prevail. In the
given situation, the MC holds
75% shares in JB wifi Pty. Ltd.
due to 75% shareholding the
MC can take any decision and
this decision will prevail as
the others have just 25% of
shares. This fact is supported
by para 11 of AASB 10 as well
which clearly states that
power can be obtained by
holding majority voting rights
in the equity instruments.
The para 11 of AASB 10,
also states that,
“11 Power arises from
rights. Sometimes
assessing power is
straightforward, such as
when power over an
investee is obtained directly
and solely from the voting
rights granted by equity
instruments such as shares,
and can be assessed by
considering the voting
rights from those
shareholdings. In other
cases, the assessment will
be more complex and
require more than one

directors and no say in
the financing or
operating decisions of JB
Wifi.
Hence, the MC has control
over JB and needs to
consolidate the financials.
factor to be considered, for
example when power
results from one or more
contractual arrangements.”

Solution-2
Acquisition Analysis as on 30 June, 2018
Net fair value of identifiable assets and liabilities of TakeItEasy Ltd.
Share capital
500,0
00
Retained earnings
200,0
00
Fair value of Property, Plant & Equipment ((530000-
430000)*(1-30%))
70,0
00
Net fair value
770,0
00
Net consideration paid
900,0
00
Goodwill
130,
000
Consolidation Worksheet entries
1 Pre - Acquisition Entry as on 30 June, 2018
Share capital Dr
500,00
0
Retained earnings Dr
200,00
0
Business combination valuation reserve Dr
70,00
0
Goodwill Dr
130,00
0
To Shares in TakeItEasy Ltd. Cr
(900,00
0)
2
Business Combination Valuation Entries as on
30 June, 2019
(a
)
Accumulated Depreciation - Property, Plant &
Equipment Dr
270,00
0
To Property, Plant & Equipment Cr
(170,00
0)
To Deferred tax liability Cr
(30,00
0)
To Business combination valuation reserve Cr
(70,00
0)
(b
)
Depreciation exp - Property, Plant & Equipment
(100,000/10) Dr
10,00
0
To Accumulated Depreciation - Property, Plant
& Equipment Cr
(10,00
0)

(c
) Deferred tax liability Dr
3,00
0
To Income tax expense Cr
(3,00
0)
(d
) Impairment Loss - Goodwill Dr
70,00
0
To Accumulated Impairment Loss - Goodwill Cr
(70,00
0)
(e
) Dividend Received Dr
40,00
0
To Retained earnings Cr
(40,00
0)
Consolidation Worksheet as on 30 June, 2019
Particulars
Challen
geMe
Pty Ltd
TakeItE
asy Ltd Total Adjustments &
Eliminations
Consoli
dated
amount
sAssets $ $ Ref
. Dr Cr Ref
.
Cash 80,000 40,000 120,000 120,000
Accounts receivable 50,000 50,000 100,000 100,000
Inventory 140,000 123,000 263,000 263,000
Land 600,000 400,000 1,000,0
00
1,000,0
00
Property, Plant &
Equipment 900,000 700,000 1,600,0
00 170,000 2(a) 1,430,0
00
Accumulated
depreciation
(300,000
)
(313,000
)
(613,00
0) 2(a) 270,00
0 10,000 2(b) (353,00
0)
Goodwill 1 130,00
0 130,000
Accumulated
Impairment Loss -
Goodwill
70,000 (70,000)
Investment in
TakeItEasy Ltd. 900,000 - 900,000 900,000 1 -
Total Non-current assets 2,370,00
0
1,000,00
0
3,370,0
00
400,00
0
1,150,0
00
2,620,0
00
Liabilities
Accounts Payable 100,000 10,000 110,000 110,000
Dividend Payable 100,000 50,000 150,000 150,000
Loan 670,000 140,000 810,000 810,000

Deferred Tax Liability 2(c) 3,000 30,000 2(a) 27,000
Shareholder's Equity
Share Capital
1,000,00
0 500,000
1,500,0
00 1 500,00
0
1,000,0
00
Retained Earnings 500,000 300,000 800,000 523,000
Business combination
valuation reserve 1 70,000 70,000 2(a) -
Total shareholder's
equity
2,370,00
0
1,000,00
0
573,00
0 100,000 2,620,0
00
Reconciliation of
opening and closing
retained earnings
Profit after tax 400,000 190,000 590,000
2(b)
2(d)
2(e)
120,00
0 3,000
2(c) 473,000
Retained earnings - 30
June, 2018 300,000 200,000 500,000 1 200,00
0 300,000
Interim Dividend (90,000) (40,000)
(130,00
0) 2(e) 40,000 (90,000)
Final Dividend
(110,000
) (50,000)
(160,00
0)
(160,00
0)
Retained earnings - 30
June, 2019 500,000 300,000 800,000
360,00
0 3,000 523,000

ChallengeMe Pty Ltd
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
For the year ended on 30 June, 2019
(Amount in $)
Particulars As at
30 June, 2019
Current assets
Cash and cash equivalents 1
20,000
Inventories 2
63,000
Trade and other receivables 1
00,000
Total current assets 4
83,000
Non-current assets
Property, plant and equipment
- Land 1,000,000 1,0
00,000
- Property, plant and equipment 1,430,000
- Accumulated depreciation - PPE (353,000) 1,0
77,000
Intangible assets
- Goodwill 130,000
- Accumulated impairment loss (70,000)
60,000
Total non-current assets 2,1
37,000
Total assets - (a) 2,6
20,000
Current liabilities
Trade and other payables 1
10,000
Dividend payable 1
50,000
Total current liabilities 2
60,000
Non-current liabilities
Loan 8
10,000
Deferred tax liability

27,000
Total non-current liabilities 8
37,000
Total liabilities - (b) 1,0
97,000
Net assets (a-b) 1,5
23,000
Equity
Share capital 1,000,
000
Retained earnings 523,
000
1,5
23,000
Total equity 1,5
23,000
Solution-3
Deferred Tax
Worksheet
Particulars Carrying
Amount Tax Base
Taxable
Temporary
Difference
Deductib
le
Temporar
y
Differenc
e
Assets
Cash 20,000 20,000
Inventory 100,000 100,000
Accounts Receivable 100,000 - 100,000
Prepaid Insurance 10,000 - 10,000
Plant (net of dep) 320,000 300,000 20,000
Total assets 550,000 420,000
Liabilities
Accounts Payable 80,000 80,000
Provision for Warranty
Expense 20,000 - 20,000
Loan Payable 200,000 200,000
Provision for long service
expense 20,000 - 20,000
Total Liabilities 320,000 280,000
Total Temporary
Difference 30,000 140,000
Deferred Tax Liability @
30% 9,000
Deferred Tax Assets @
30% 42,000

Journal Entries
Account Titles Debit Credit
Income tax expense (refer
WN-1) 96,000
To Income Tax Payable 96,000
(Being income tax payable
recorded)
Deferred tax asset 42,000
To Income tax expense 42,000
(Being deferred tax asset
recorded)
Income tax expense 9,000
To Deferred tax liability 9,000
(Being deferred tax liability
recorded)
Deferred tax liability 9,000
To Deferred tax asset 9,000
(Being liability off setted with
assets. (as per para 74 of
AASB 112))
Working Note-1
Calculation of taxable income for the year ended 30
June, 2017
Particulars
Amount
($)
Profit before tax 300,000
Add: Accounting Depreciation 80,000
Add: Long service leave expense 20,000
Add: Warranty expense 30,000 130,000
Less: Tax Depreciation 100,000
Less: Warranty expense paid 10,000 110,000
Taxable income 320,000
Tax @ 30% 96,000

Solution-4
Part (a)- Calculation of Goodwill Acquired assuming that any non-
controlling interest in the acquirer is measured at fair value
Consideration Paid
10,000,00
0
Equivalent Share of NCI (30%)
4,285,71
4
14,285,71
4
Less: Fair value of net assets and liabilities
acquired
Share capital 8,000,000
Retained Earnings 2,000,000
10,000,00
0
Goodwill
4,285,71
4
Hence, the amount of goodwill is $4,285,714.
Part (b)- Calculation of Goodwill Acquired assuming that any non-
controlling interest in the acquirer is measured at the non-controlling
interest’s proportionate share of the acquiree’s identifiable net assets
Share capital 8,000,000
Retained Earnings 2,000,000
Net fair value of assets 10,000,000
% of shareholding acquired 70%
Net fair value of assets
acquired 7,000,000
Consideration Paid 10,000,000
Goodwill 3,000,000

Hence, the amount of goodwill is $3,000,000.
Part (c)
The Australian standard 3 prescribes two methods for calculation of goodwill, the
full goodwill method under which the non-controlling interest is measured at fair
value by the acquirer and full goodwill is recorded (i.e. pertaining to acquirer and
NCI both) and second is partial goodwill method under which the non-controlling
interest is measured by proportionating the shares of non-controlling shareholders
in identifiable net assets and goodwill of acquirer only is recorded in the books.
However, there are certain flaws of prescribing two methods. These are:
a) Non-comparability of financials – Due to different accounting of goodwill, the
primary objectives of AASBs to make the financials comparable gets
defeated. So, a layman who has no or little knowledge gets confused and will
not be able to understand the financials of two companies and this can create
chaos for him.
b) Different ratios and leverages – Moreover, under partial goodwill method, the
assets and equity are reflected on a lower amount as compared to full
goodwill method and due to this, the leverage is higher under partial goodwill
method as compared to full goodwill method. Moreover, the return on equity
also remains higher in full goodwill method, due to lower equity as compared
to full goodwill method.

Solution-5
Acquisition Analysis as on 1 July, 2014
Net fair value of identifiable assets and liabilities of
Solutions Ltd.
Share capital 200,000
Retained earnings 180,000
Net fair value of assets acquired 380,000
Net consideration paid 356,000
Gain from bargain purchase 24,000
Consolidation Worksheet entries
1
Pre - Acquisition Elimination Entry as on 1 July,
2014
Share capital Dr 200,000
Retained earnings Dr 180,000
To Gain from bargain purchase Cr (24,000)
To Shares in Solutions Ltd. Cr (356,000)
(To record acquisition analysis)
2 Intercompany eliminating entries
(a
) Retained earnings (30/6/18) Dr 7,000
Income Tax expense Dr 3,000
To Cost of goods sold Cr (10,000)
(To record elimination of profit from opening
inventory)
(b
) Sales Dr 33,000
To Cost of goods sold Cr (28,000)
To Inventory Cr (5,000)
(To record elimination of profit from closing
inventory)
(c
) Deferred tax asset (5,000*30%) Dr 1,500
To Income tax expense Cr (1,500)
(To record tax impact on above elimination)
(d
) Sales Dr 12,000
To Cost of goods sold Cr (10,000)
To Inventory Cr (2,000)
(To record elimination of profit from closing

inventory)
(e
) Deferred tax asset (2,000*30%) Dr 600
To Income tax expense Cr (600)
(To record tax impact on above elimination)
(f
) Gain on sale of Plant (116,000-81,000) Dr 35,000
Plant Cr (35,000)
(To record elimination of gain on sale of plant)
(g
) Deferred tax asset (35,000*30%) Dr 10,500
To Income tax expense Cr (10,500)
(To record tax impact on above elimination)
(h
) Accumulated Depreciation - Plant (35,000/6) Dr 5,833
To Depreciation expense Cr (5,833)
(To record elimination of depreciation on
excess amount)
(i) Management fee revenue Dr 26,500
To Management fee expenses Cr (26,500)
(To eliminate the management fee incomes
and expenses)
(j) Dividends received from Solutions Ltd Dr 93,000
To Dividend Paid Cr (93,000)
(To record inter-company elimination of
dividend)

Consolidated worksheet for FinalHeadache Ltd and its controlled entity for the period
ending 30 June 2019
Reconciliation of opening and closing retained earnings
Particulars
FinalHead
ache Ltd
Solutio
ns Ltd Total Eliminations and
adjustments Consoli
dated
Amount$ $ Re
f. Dr Cr Ref
.
Sales revenue 671,400 540,000 1,211,4
00
2(b
),
2(d
)
45,00
0
1,166,40
0
Cost of goods sold (464,000) (238,000
)
(702,00
0)
48,00
0
2(a
),
2(b
),
2(d
)
(654,000)
Gross Profit 207,400 302,000 509,400 512,400
Dividends received from
Solutions Ltd 93,000 - 93,000 2(j) 93,00
0 -
Management fee revenue 26,500 - 26,500 2(i) 26,50
0 -
Gain on sale of plant 40,000 35,000 75,000 2(f) 35,00
0 40,000
Expenses
Administrative expenses (30,800) (38,700) (69,500) (69,500)
Depreciation (29,500) (56,800) (86,300) 5,833 2(h
) (80,467)
Management fee
expense - (26,500) (26,500) 26,50
0 2(i) -
Other expenses (101,100) (72,000) (173,10
0) (173,100)
Profit before tax 205,500 143,000 348,500 229,333
Tax expense (61,500) (42,200) (103,70
0)
2(a
) 3,000 12,60
0
2(c
),
2(e
),
2(g
)
(94,100)
Profit for the year 144,000 100,800 244,800 135,233
Retained earning -- 30
June 2018 319,400 239,200 558,600
1,
2(a
)
187,0
00 371,600
463,400 340,000 803,400 506,833
Dividends paid (137,400) (93,000) (230,40
0)
93,00
0 2(j) (137,400)

Retained earnings at
30 June 2019 326,000 247,000 573,00
0 369,433
Statements of
financial position
Particulars
FinalHead
ache Ltd
Solutio
ns Ltd Total Eliminations and
adjustments Consolid
ated
Amount$ $ Re
f. Dr Cr Ref
.
Shareholders' equity
Retained earnings 326,000 247,000 573,000 369,433
Share capital 350,000 200,000 550,000 1 200,0
00 350,000
Gain from bargain
purchase - 24,00
0 1 24,000
Current Liabilities
Accounts Payable 54,700 46,300 101,000 101,000
Tax Payable 41,300 25,000 66,300 66,300
Non-Current Liabilities
Loans 173,500 116,000 289,500 289,500
Total Equity and
Liabilities 945,500 634,300 1,579,8
00
1,200,23
3
Current Assets
Accounts Receivable 59,400 62,300 121,700 121,700
Inventory 92,000 29,000 121,000 7,000
2(b
),
2(d
)
114,000
Non-Current Assets
Land & Buildings 224,000 326,000 550,000 550,000
Plant at cost 299,850 355,800 655,650 35,00
0 2(f) 620,650
Accumulated
depreciation - plant (85,750) (138,800
)
(224,55
0)
2(h
) 5,833 (218,717)
Investment in Solutions
Ltd 356,000 - 356,000 356,0
00 1 -
Deferred tax asset
2(c
),
2(e
),
2(g
)
12,60
0
12,600
945,500 634,300 1,579,8 1,200,23

00 3

FinalHeadache Ltd
Consolidated Statement of Profit or Loss Account
For the year ended on 30 June, 2019
Particulars Amount ($)
Sales revenue 1,166,400
Less: Cost of goods sold (654,000)
Gross Profit 512,400
Add: Other Income
Gain on sale of plant 40,000
Less: Expenses
Administrative expenses (69,500)
Depreciation (80,467)
Other expenses (173,100) (323,067)
Net Profit 229,333
Less: Tax expense (94,100)
Profit for the year 135,233

FinalHeadache Ltd
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
As on 30 June, 2019
(Amount in $)
Particulars As at
30 June, 2019
Current assets
Trade and other receivables 121,700
Inventories 114,000
Total current assets 235,700
Non-current assets
Property, plant and equipment
- Land & Buildings 550,000 550,000
- Plant 620,650
- Accumulated depreciation - Plant (218,717
)
401,933
Deferred tax assets 12,600
Total non-current assets 964,533
Total assets - (a) 1,200,233
Current liabilities
Trade and other payables 101,000
Tax Payable 66,300
Total current liabilities 167,300
Non-current liabilities
Loan 289,500
Total non-current liabilities 289,500
Total liabilities - (b) 456,800
Net assets (a-b) 743,433
Equity
Share capital 350,000
Gain from bargain purchase 24,000
Retained earnings 369,433 743,433
Total equity 743,433

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