Question

What steps would you take to analyze the assets and liabilities of a business combination? What are the U.S. GAAP and IFRS accounting rules regarding consolidations?

Answer 1

Accounting Accounting for business combinations: Basic principles AASB 3 prescribes the so-called "acquisition method" in accounting for a business combination. The key steps in this method are: Identify the acquirer Determine the acquisition date Recognise and measure the identifiable assets acquired, the liabilities assumed, and any non- controlling interest* in the acquiree; and Recognise and measure goodwill or a gain from bargain purchase 1. 2. 3. 4. * Non controlling interest you de.not have to pyrchase all the shares inB Ltd to obtain control. Eg. A Ltd acquires 60% of shares in B Ltd. the other, 40% B Ltd shares are held by the NCI

Accounting Step 3 - Recognition/measurement of assets acquired and liabilities assumed Recognition-Contingent liabilities. A contingent liability is either: (a) a possible obligation from past events with outcome outside control of company (e.g. court case in progress); OR (b) a genuine liability that fails one or both recognition tests Contingent liabilities of acquiree are recognised by acquirer but only if they are genuine liabilities which fail the "probability of occurrence" test. Here the "reliable measurement" test is satisfied because acquirer pays $$s to acquire such contingent liabilities ' ' Contingent liabilities that are possible obligations still ignored. ' The fair value of contingent liability is the amount that a third party would charge to take on the contingent liability.

Accounting Accounting in the records of the acquirer: Step 4 - Goodwill / gain on bargain purchase Example On 1 January 2016 A Ltd acquired all the assets and liabilities of B Ltd but not B's issued shares. Details of the consideration paid: Cash of $400,000, half to be paid on 1 January 2016, with the balance due on 1 January 2017, The incremental borrowing rate for A Ltd is 10% 100,000 shares in A Ltd were issued. The share price on 1 January 2016 was $1.50 per share. This price was a six-month high. Cost of issuing the shares was $1,000 Due to doubts whether the share price would remain at $1.50, A Ltd agreed to pay cash equal to value of any decrease in the share price below $1.50. This guarantee was valid for 3 months (to 31 March 2016). A Ltd believed that there was a 75% chance that the share price would remain at or above $1.50 until 31 March 2016 (and a 25% chance that it would fall to $1.40) Snterhaiod apneranted e A tdht ha ot beer tecpgnisetdin 4 Supply of a patent to B Ltd. The fair value of the patent is $60,000. As the patent was internally generated by A Ltd it has not been recognised in A Ltd's books. patent Legal fees and associated costs with the acquisition totalled $5,000.
The U.S.GAAP and IFRS rules are as follows :

U.S.GAAP rules that should be considered while preparing consolidation financial statement:

• If a company has a majority of voting power in another company (here it is more than 50%), then consolidation of financial statements can be done.
• According to GAAP, if your business holds 20% to 50% in equity; you need to report your financial statements under the equity method. The reasoning behind this that as a company when you have 20%-50% equity in the other company, you can exert your influence.
• According to GAAP, in consolidated statements, equity portions or retained earnings of subsidiary companies should be removed.
• If the subsidiary is not fully owned, then non-controlling interest should be used.
• While producing the consolidated statements, the balance sheets of subsidiary companies should be adjusted to the current fair market value of the assets.
• While preparing the consolidated income statement, if the revenue of the parent company is the expense of the subsidiary; it should be completely removed. IFRS rules regarding consolidation are as follows :

• Consolidation procedures

  In order to prepare consolidated financial statements, IFRS 10 prescribes the following consolidation procedures:

• Combine like items of assets, liabilities, equity, income, expenses and cash flows of the parent with those of its subsidiaries;
• Offset (eliminate):
  • The carrying amount of the parent’s investment in each subsidiary; and
  • The parent’s portion of equity of each subsidiary;
• Eliminate in full intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between entities of the group. Differences in U.S GAAP and IFRS rules :
• US GAAP adopts a bipolar consolidationmodel, which makes a distinction between a variable interest model and voting interest model. Under IFRS, on the contrary,consolidation is based on control, which is presumed to exist when a parent company holds more than half of a business' voting power, or holds legal rights.