ACCM4300 - Analyzing Fair Value and Equity Accounts in Business

This case study provides an analysis of accounting issues related to business combinations and consolidations, specifically addressing where adjustments to fair value should be made, which equity accounts are used in revaluing assets and liabilities, and the existence of these equity accounts. It references AASB 3, which specifies provisions for transactions meeting the definition of a business combination, and discusses the recognition of assets and liabilities at fair value. The report suggests that adjustments to fair value are more appropriately made in the consolidation worksheet and that organizations typically use Asset Revaluation Surplus and Business Combination Valuation Reserve accounts during revaluation. It concludes that these pre-acquisition equity accounts are eliminated in pre-acquisition entries and that the balance in the asset revaluation reserve is transferred to retained earnings when the asset is sold or fully depreciated. The analysis is supported by references to accounting standards and textbooks.

FINANCIAL ACCOUNTING AND
REPORTING

TABLE OF CONTENT
oIntroduction
oWhether adjustment to fair value to be made in consolidated worksheet or accounts
of Cargo Ltd.
oEquity accounts used during revaluation of asset at acquisition
oExistence of equity accounts used during revaluation of asset at acquisition
oConclusion

INTRODUCTION
AASB 3 specifies provision relating to transactions or event meets
the definition of business combination. The acquirer is require to
ascertain the acquisition date on which it obtains the control.
Present report provides discussion relating to recognition of events
relating to acquisition. Further, recognition of revaluation of asset
has also been discussed in detail along with its accounting
treatment.

ISSUE1: WHETHER ADJUSTMENT TO FAIR VALUE
METHOD TO BE MADE IN CONSOLIDATION
WORKSHEET OR IN BOOKS OF CARGO LTD.
oNo specific regulation is available relating to recognition of adjustment of
fait value.
oAsset and liabilities are required to be recognized at fair value.
oRecognition of adjustment in consolidation worksheet is more appropriate.

CONTINUE…
oAASB 3 asserts that acquirer is require to recognize assets and
liabilities at fair value.
oThe journal entries made in respect of same are know as business
value combination entries.
oSpecific entry is made every time as it does not affect the actual
financial statement of individual entities.

ISSUE 2: EQUITY ACCOUNTS WHILE REVALUATING ASSET
AND TO BE USED IN RELATION TO RECOGNITION OF
LIABILITIES
o AASB does not asserts any particular equity account name
relating to revaluation of asset.
oOrganization usually apply Asset Revaluation Surplus account
and Business combination and valuation reserve equity account
while revaluation of assets.

Journal entries relating to acquisition1 Share Capital A/c Dr
Retain Earnings A/c Dr
Business combination valuation reserve A/c Dr
To Shares in Cargo A/c Ltd
2 General Reserve A/c Dr
Transfer to general reserve
3 Transfer from business comb. valuation reserve A/c Dr
Business combination valuation reserve A/c
Journal entries relating to acquisition

CONTINUE..
oBusiness combination and valuation reserve equity account is
developed in order to transfer the difference between fair value
and the value at which asset as well as liabilities have been
recognized.
oIt can be understood with specified example: plant and machinery
value has been increased while acquisition of organization. Now
the plant and machinery will be recognized at enhanced value.
Further, the increased amount will be transferred to deferred tax
liabilities as well as to CVR equity account for adjustment.

ISSUE 3: DOES THESE EQUITY ACCOUNTS REMAIN FOR
INDEFINITE PERIOD AS IT DOES NOT RELATE TO
EQUITY ACCOUNTS RECOGNIZED BY CARGO
oBalance available under asset revaluation reserve is not
transferred to retained earning.
oBCVR remain all in existence when the assets and
liabilities are considered as unsettled accounts.
oIn case when asset is sold or fully depreciated to other
party the balance in specified equity account is transferred
to retained earnings and derecognized.

CONCLUSION
It can be concluded that adjustment relating to recognition of assets at fair value is to
be made in consolidation worksheet. Further, revaluation of asset is done through
creating business combination valuation reserve account which affects pre-
acquisition entries. Further being part of pre-acqustion equity, these are eliminated in
pre-acquisition entry.

REFERENCES
Beams, F.A., Anthony, J.H., Bettinghaus, B. & Smith, K.A., 2016. Advanced accounting. Pearson
Education Limited 2018.
Cecchetti, S. & Schoenholtz, K., 2018. Financing intangible capital. CEPR Policy Portal.
Conrecode, J., Valencia, A. & Volkan, A., 2017. Goodwill as a Contra-Equity Account. Journal of
Business and Accounting, 10(1), pp.155-162.
Fischer, P.M., Tayler, W.J. and Cheng, R.H., 2015. Advanced Accounting. Cengage Learning.
Harris, P., 2015. Push-down Accounting: A Comprehensive Case Study. Journal of Business Case
Studies (Online), 11(1), p.23.
Michailetz, V.B. & Artemenkov, A.I., 2018, September. The Transactional Asset Pricing Approach:
Its Application in Professional Business Valuation and Fair Value Theories. In TALK TO IVSC-
ANEVAR INTERNATIONAL BUSINESS VALUATION CONFERENCE Bucharest, Romania (Vol. 7).
MOROSAN, G., GROSU, V. & ZUBAȘ, I.M., 2016. Approaches Concerning Accounting of
Intangible Assets. Ecoforum Journal, 5(1).

THANKS