Advanced Financial Accounting: Business Combinations Analysis Report

This report delves into the intricacies of advanced financial accounting, specifically focusing on business combinations. It outlines the acquisition method, detailing the steps involved in identifying the acquirer, determining the acquisition date, and measuring assets, liabilities, and non-controlling interests. The report explains goodwill, its recognition, and measurement, including the formula used. It also covers bargain purchases and the accounting treatment of negative goodwill. Furthermore, the report addresses goodwill impairment, the methods of payment in business combinations, and the preparation of consolidated financial statements, including adjustments needed. The document also explores the concepts of control, significant influence, the equity method of accounting, joint arrangements, and the differences between joint ventures and joint operations. Finally, it provides a comprehensive overview of the accounting treatments for joint arrangements, offering valuable insights into complex financial reporting standards.

Running head: ADVANCED FINANCIAL ACCOUNTING 1
Advanced Financial Accounting
Name
Institution

Advanced Financial accounting 2
ADVANCED FINANCIAL ACCOUNTING
Question 1
a) Business combination is the process of transaction whereby the acquirer takes control
over another business. A business can also be described as a collection of integrated activities
and assets which can be conducted and managed with the aim of giving out return to those who
invested in the business or other participants, members and owners. Normally, business
combination means a transactions where one firm gain Control, or acquire controlling interest, in
a different company (Lusch Brown and O’Brien 2011). Business combination can also mean
amalgamation of the properties of more than two business entities. It can be managed easily
through a hostile takeover, a merger and voluntary acquisition. Such business combination must
use the techniques of accounting known as the Acquisition method-This technique of
accounting requires that liabilities assumed and assets acquired to be determined at the fair value
mostly at the date of the acquisition (Gokcen & Teraman, 2018).
The application of the acquisition method involves the following steps:
Identify acquirer- the first step is the identification of the acquirer. The acquirer is the
organization that takes control of another business (Silva, Sancovschi & Amaral, 2018). The
control process is being dealt with under the international financial reporting standard. An
investor should have gain control after fulfilling the following: has gained power over the
investee and has the ability of using the power in managing the return.
The steps taken in applying the Acquisition method include the following:
Determination of acquisition date- the second step is to determine the date when the
acquisition was created through writing in the form of a contract, the date of the acquisition is

Advanced Financial accounting 3
mostly the closing date, when the acquirer obtains legal possession of all the assets as well as
assuming the liabilities of the target firm. The date of the acquisition can be earlier than the
agreed date by the parties that are involved in the transaction. The reasons why the two parties
has to ascertain date of the acquisition is because it can be used in the determination of the fair
value of items such as assets acquired, consideration paid, non- controlling interest and liabilities
assumed. The date of the acquisition is essential because it help in considering the post and pre
acquisition dividends.
Identify and measure liabilities, assets and Non- controlling Interest in acquire- this
is the third steps, it require acquirer to recognize liabilities assumed, assets acquire and any NCI
in the acquire. Accounting standards should be taken into consideration when assessing and
measuring the assumed liabilities and assets of the business.
Bargain purchase/Goodwill- This is the last steps acquisition method and it involve
calculation of Bargain purchase or Good will. A bargain purchase mostly happens when an entity
acquire an assets with lesser amount than the fair market value of the Assets.
b) The report of the Netcomm Wireless suggests that it recognized Goodwill.
Goodwill is defined as the intangible asset that emerges when a buyer obtains an existing
business. Goodwill is being recognized when the fair value is more than the purchase
consideration (Negative good will) or when the fair value is less than acquisition costs.
Good will is measured using this formula: Goodwill = price paid for the acquired
organization minus fair market value.
Goodwill= (fair value of non-controlling rate of interest + consideration paid) – (Assets-
liabilities).

Advanced Financial accounting 4
c) Again from a bargain purchase is the process where the acquirer records the
differences that exist between purchase price and fair value as a gain. It is another name of the
negative goodwill (Rousseau, 2015).
A gain from a bargain purchase is being measured by finding the differences between the
fair value of any assets and purchase price. Again from a bargain purchase is being recorded on
the acquirer income statement because of the negative goodwill (Seim & Sinkinson, 2016).
d) In accounting, Goodwill is not allowed to be amortized. Goodwill is accumulated
when the company pays excess money for the purchase of an asset than the fair value of the asset
according to the brand of the company and client base. Companies apply the purchase techniques
of accounting, which inhibit the automatic amortization process (goodwill).
Goodwill should not be subjected to amortization. Instead, organizations must perform
constant impairment testing. The amount of goodwill being maintained by the organization on its
books must be tested to identify whether it has impaired.
The current standards of accounting require all public companies to do annual tests on the
impairment of goodwill.
e) Impairment loss can be subsequently revised this is because it will enables for the
assessment of the goodwill
QUESTION2
a) The acquirer pays for the assets using other assets or in case, by issuing their own
share and by the combination of shares and cash. Where the purchase is made by cash, it is easier
to determine the costs of the assets. When an asset is used to pay for purchase, then the costs will

Advanced Financial accounting 5
be determined by the assets’ fair value. When the company issued share for the purchase, then
the value of the share represent cost of purchase.
b) Netcomm wireless is a consolidated group. The number of note is contained in Note
31 (d) to the organization’s financial statement.
c) The process of control is where an organization has the capacity to direct the financial
policies and operating of another company with the aim of increasing economic benefits.
The difference between significance of influence and control is that control normally
means an individual own over fifty percent of the equity of the company while significant
influence means an individual own between 20% to 50%.
d) The process which is involved in the preparation of consolidated financial statement
includes:
 When preparing the statements, the costs of the investments must be replaced
with the fair value as well as the liability of the subsidiary.
 Goodwill then a rise on acquisition
 Double counting should not be allowed. Items that are linked to transfer are being
removed.
e) Acquisition analysis helps in setting adjustments for:
Pre-acquisition entries- it is needed to remove the carrying amount of the investments of
parents in the subsidiary.
Valuation entries for business combination is required to modify the carrying amount of
each of the liabilities assumed and acquired identifiable assets to fair value.

Advanced Financial accounting 6
The assets of the subsidiaries are being revalued to fair value so as to establish an
accurate amount for a gain or goodwill on purchase.
F) Yes, Netcomm wireless has the associates.
g) The investors use equity method of accounting to account for their investments.
Equity method is used by the investors in holding significant influence over the investee,
but lack full control.
When the equity method is used it makes a difference when the investor is a parent
company. The investor will record investment as assets.
h) Netcomm wireless is a party to join arrangement
i) Joint control is the control of the substances that forms an estate by connecting
organization, another name for joint control is the surety (Manandhar et.al, 2018). Joint control is
where more than two undertaking have the ability of exercising influence to another undertaking.
Decisive influence refers to the power to prevent which determine commercial behavior of a
particular undertaking.
The differences between joint venture and joint operation are that joint venture is the
proportionate holding in asset (net asset) of any organization whereas join operations are created
when two companies join together and start the task jointly, for example an oil pipeline. The key
thing is that both the organizations give a proportion of liabilities/assets (Levi, 2016).
The accounting treatment for joint arrangements sets two dissimilar techniques of
accounting for interest which depend on the kind of the arrangement. The investor will have to
use either line-by-line basis or equity method of accounting. The accounting arrangement depend
the nature of the interest and substance of the arrangement (Kiehn, 2016).

Advanced Financial accounting 7
References
Gokcen, G., & Teraman, O. (2018). Importance of Synergistic Value in the Context of Business
Combination: A Case Study From Turkey. Economics, 6(1), 49-60.
Kiehn, O. (2016). Decoding the organization of spinal circuits that control locomotion. Nature
Reviews Neuroscience, 17(4), 224.
Levi, M. (2016). The phantom capitalists: The organization and control of long-firm fraud.
Routledge.
Lusch, R.F., Brown, J.R. and O’Brien, M., 2011. Protecting relational assets: a pre and
post field study of a horizontal business combination. Journal of the Academy of Marketing
Science, 39(2), pp.175-197.
Manandhar, U., Tummuru, N. R., Kollimalla, S. K., Ukil, A., Beng, G. H., & Chaudhari, K.
(2018). Validation of Faster Joint Control Strategy for Battery-and Supercapacitor-Based
Energy Storage System. IEEE Transactions on Industrial Electronics, 65(4), 3286-3295.
Rousseau, D. (2015). I-deals: Idiosyncratic Deals Employees Bargain for Themselves:
Idiosyncratic Deals Employees Bargain for Themselves. Routledge.
Seim, K., & Sinkinson, M. (2016). Mixed pricing in online marketplaces. Quantitative
Marketing and Economics, 14(2), 129-155.

Advanced Financial accounting 8
Silva, A. S., Sancovschi, M., & Amaral, C. F. (2018). Ordinary Voluntary Accounting Changes
Due to a Business Combination: A Case Study.