Australian Requirements for Business Combinations

Question: Critically evaluate the Australian requirements for accounting for business combinations. In your discussion you should specifically address the following issues: Exclusions from the scope of Accounting Standard AASB3 Business Combinations. The implications of the requirement to use the acquisition method of accounting for business combinations The identification of an acquirer in a business combination The determination of fair values of assets in a business combination The reasons for the choice of fair value to measure assets and liabilities acquired in a business combination The nature and treatment of goodwill or bargain purchase arising on a business combination. The two different ways in which a business combination can be accomplished. Answer: Australian requirements regarding business combination transaction are prescribed in AASB 3 Business Combination. This standard describes accounting treatment and recognition and measurement related to business combination transaction. Motive of this standard to provided comparability, relevancy and fair view of information and disclosure made by reporting entity in reporting of business combination transaction in financial statements. (AASB, 2015) For this solution we are providing some key points related to this standard these key points with description are as follows: This standard excluded following transactions from the scope of application: Transaction related to combination of two companies which are under same control. Transaction related to purchase or acquisition of assets under asset acquisition and this acquisition does not qualify definition of business combination. (Investopedia. n,d,) Transaction related to combined arrangement by two entities are reporting by them in their financial statements Australian standard requires that following must be complied to apply acquisition method: This standard says that to apply acquisition method first recognize which is the entity which obtained control by acquiring interest in other company. When this buyer buys interest in other company then this date is called acquisition date so it is necessary to identify that date because this date has very relevance in applying this standard. Buyer should indentify that which assets and which liabilities have been taken by him because only those assets and liabilities will be considered which have been bought in business combination. If any assets or liability was acquired in other acquisition like asset acquisition then it will not be considered. If Buyer Company has not acquired all the assets and liabilities then it will also recognize the share of non controlling interest in company. After recognizing the acquired property or liabilities now it must be know that at which value those will be valued and recorded in buyers books of accounts. Since every company has its own valuation model so it is fair to use fair value for measuring the acquired properties and liabilities. There are some exceptions for measurement and recognition principle and these exceptions should be treated according to their respective standards. When any equity interest is acquired in any company then this acquisition may be on loss or gain. If buyer pays more that value of net assets then it is considered as payment ofr goodwill and if it pays less than acquired net assets then it is called gain on bargain purchase. So it is compulsory to find out what is the value of goodwill or gain on bargain purchase on business combination transaction. So above are the basis requirements which must be followed by reporting entity while applying this standard in business combination transaction. It must disclose fact regarding the business combination transaction. Determination of buyer or acquirer in business combination transaction: To apply this standard successfully it is necessary to know that which entity is Buyer Company because it is responsibility of Buyer Company to apply this standard and fulfill the entire requirements. A company which buys properties or liabilities of another company is called as buyer or Acquirer Company. This company has strong position in compare to other company has power to control the other company. This company is normally big in size and has sufficient financial position to buy other company. It may be a company which has equity interest in Acquiree Company already but not in majority or it may be a company which acquires fresh equity interest in this company. This company will apply all the requirements related to acquisition method and will fulfill all the conditions. (Accounting learning, n.d.) Measurement of identifiable assets and assumed liabilities on fair value: As we described above it is necessary to know that at which value acquired properties and liabilities will be measured and will be shown in books of accounts of Acquiree Company hence fair value is used as measurement principle to measure these all acquired assets and assumed liabilities. Since all companies may use different accounting principles and accounting policies regarding recording of assets or liabilities and their measurement hence fair value method is used because this method is not affected by any accounting principle and accounting policies and every company accepts this method. Fair value is value which is decided by market condition and demand and supply rule and it denotes value at which any article or thing can be exchanged between two unknown party and both the parties are equally agreed at that price. (Perera, N., n.d.) Why assets and liabilities are valued at fair value only: We need to find out the value of properties and liabilities at which valuation of business combination transaction can be done without any conflict and adjustment. Since all the companies may use different valuation model and accounting policies so it is required to make uniformity in recognition of these properties and liabilities. Hence we used fair value method as this method is free from any adjustment and any company may opt without any adjustment. In this method value is decided by analyzing the position of asset, its life, location etc. and then two knowledgeable persons enter into an agreement to exchange this asset for a consideration which is agreed by every person. (Way, J.n.d.) In accounting world fair value method has very importance because in every valuation method it is first preference of person who values these assets and liabilities for valuation of assets and liabilities. This method considers the present and future position of assets and liabilities and then estimates the approx right value of such asset or liability. Accounting treatment of goodwill and gain on purchase according to this standard: When any equity interest is acquired in any company then this acquisition may result into gain or loss. (Mirzayav, E., 2016) If consideration paid for acquisition is more than acquired properties and liabilities then it will be considered as goodwill. This goodwill be treated as intangible assets in buyers books of accounts and will be shown in balance sheet. (Damodaran, A., 2012) Further it may be possible that Seller Company is under pressure to sale its business and then it may be agree to sell its business at lower price so in this case consideration will be lesser than value of acquired net worth of seller company. Apart from this condition sometimes there is no consideration for business combination then in this case also gain on bargain purchase is possible. So this is the excess of acquired net worth of Seller Company over the consideration paid by Buyer Company. This gain on bargain purchase is shown in income statement for the year in which business combination was completed. (Fazal, H., 2011) Business combination can be carried out in following ways: First is that business combination can be accomplished without consideration. Seller and buyer sign an agreement only and Buyer Company does not pay any amount for such acquisition. This happens sometime because it may be possible that buyer company repurchases its own shares again from Seller Company or both parties only sign the contract of acquisition and there is no combination in actual condition. Second is that business combination can be completed in stages like buyer company holds share in Seller Company already but shares are not in majority but now it acquires business in majority and this will be called as business combination transaction. References Fazal, H., 2011, What is Negative goodwill and its accounting treatment? Damodaran, A., 2012, Acquisition Accounting II: Goodwill, more plug than asset, Perera, N., n.d., THE FAIR MOVE:THE TREND TOWARDS FAIR VALUE ACCOUNTING, Way, J., n.d., Advantages or Disadvantages of Fair Value Accounting, AASB, 2015, Business Combinations, Investopedia, n.d., Asset Acquisition Strategy.