Accounting for Business Combination

Questions: 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. Answers: According to the Australian Accounting standard 3 Business Combination accounting requirement will relate to business combination transactions. To provide relevant, dependable and equivalent financial statements by the reporting entities which enters into business combination transaction in reporting year are some of the objectives of the Accounting standard. Control of acquirer entity in business of Acquirer Company and acquisition of assets and assumed liabilities of any entity forms the Business Combination. The standard will provide the guidelines for the preparation of proper financial statements and provide relevant information. I will provide information also on identifiable assets, goodwill along with some disclosure requirements related to acquisition of company which will eventually result into business combination. (Craig, 2012) Below are some of the Australian requirements for accounting for business combination: Exclusion from the scope of AASB 3: Any joint arrangements made by entities must be recorded in financial statements. In case any asset or liability or both are acquired and these are taken under asset acquisition rather than business combination. Two entities under same control which are doing business Acquisition method used for implication of requirements: In Para 6 7 we see that it is recognizable that the entity which will control other entity shall be recognized as acquirer. The entity that will acquire will be larger than the other. Para 8 9 finds out that it is very important to figure out the date on which control on entity was obtained by other entity. As all the measurement and recognition will commence from this date. According to the Para 10 to 31 there is recognition and measurement of identifiable acquired net assets only. In these Para it will be recognized by the reporting entity that which assets and liabilities shall be acquired by it and at what values shall these will be measured on. This date would majorly be date of control taken. Para 10 says that with separation of goodwill and minority interest reporting entities will be recognized by all acquired assets. All the assets or liability when shall comply with definition of liabilities and assets. In case if they are related to asset acquisition transaction then the asset acquisition standard will not be applied and weight age will be given to the liabilities and the assets on the basis of the market value which it holds when the asset were acquired.(West, B., 2015) Para 6 7 of AASB 3 Business Combination We provide guidance for the identification of the acquired entity. the combining of this entity or acquires entity is a phenomenon well The Entity which film acquire control another entity by acquiring assets or liabilities. The entity will be in control buy pain proper and significant consideration to a query entity. the word which hole to control of others entity is generally large in size compared to any other entity first kind of entity will form the financial statement standard terminology and will be called has acquired entity who is the acquirer entity can be found out from the agreement of contract in Business combination and transaction. Finding fair values of assets in a business combination All assets and liabilities are valued when an entity take over business of any other entity or invest in such entity where in the holding company takes the date on which such transaction were entered. Value is stated as the values for which these are valued. As the method mentioned is totally related to market condition of anything or article it is very useful and free from any error because. It takes various parameters into consideration like the demand supply rule, market know how and the knowledge that individual possesses. So the fair value method can be termed as the method in which the evaluation is done on the basis of the goods exchanged between persons involved for whom there is an established market. Such people should not be given any position of responsibility as they may misuse the power by influencing price of such exchangeable goods or article. (Silvia, M., n.d.) So all acquired net assets are valued at the value which will remove any conflict and shall provide better understanding and relationship among acquirer and acquiree. Reasons for the choice of fair value to measure the assets and liabilities acquired in a business combination. The assets and liabilities are valued using the fair value method in case of business combinations the use of fair value method is acceptable in practical life to measure the value of asset and is also accepted by the accounting boards. The fair value method is not decided by any person but it depends upon the demand and supply of any product in a perfectly competitive market In case of business combinations when two entities combine they may have different views for valuing their Assets and liabilities in such case the fair value concept is the most appropriate to measure the value of Assets and liabilities The fair value so used will not lead to any conflict between both the parties of a business combination and with his result in satisfaction of both the parties which is very necessary .Why calculating Goodwill Again which arises from a business combination it is necessary to check whether the acid valued at fair value or not if not If not then it is necessary to value all the Ass ets and liabilities on the date of acquisition at the fair value share value is to be considered only on the date of acquisition because on this date the acquirer company has a control over the target. The treatment of goodwill for gain arising in the case of business combinations or business acquisition Sometimes in the case of business acquisition and entity has to pay something more than the value of the assets acquired. the acquired company I also have to pay something less than the value of assets acquired search gain or loss has to be computed according to their respective accounting standards the amount which is paid in excess of the net assets acquired is known as Goodwill is computed by subtracting the net assets from the consideration paid by the acquirer entity Sometimes when the acquirer entity has to pay amount less than the value of the net assets in such case the acquired company is said to have made again on bargain purchase. Ways. in which business combination can be accomplished There are two ways of doing business combinations of 41 to 44deals with the way in which business communication can be achieved. both paragraph show the stages in which business communication can be accomplished .Paragraph 41 and 42 relates with the accomplishing combination of business pages it would be possible to control any other entity which will have equity interest before the admission date. Paragraph 43 and 44 shows how did business combination can be accomplished without a transfer of the consideration. It may happen that Combining entities in order to obtain the net asset without any consideration. The situation may arise due to various reasons like the acquiring entity main purchase order purchase it won't show from the existing acquirerin order to get the control. References Fazal, H., 2011, What is Negative goodwill and its accounting treatment? West, B., 2015, Business Combinations: Dont Fall in the GAAP Thouvenin, D., 2003, Business combinations and fair value, Silvia, M., n.d., IFRS 3 Business Combinations,