Title | Week 5 roundup (3) - Business Combinations |
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Author | Halie Tran |
Course | Company Accounting |
Institution | Swinburne University of Technology |
Pages | 5 |
File Size | 267.9 KB |
File Type | |
Total Downloads | 81 |
Total Views | 146 |
Download Week 5 roundup (3) - Business Combinations PDF
Week 5: Business Combinations. Warning for Weeks 5 – 9 Unfortunately, in Accounting there are a number of words which mean the same and are used interchangeably e.g. Stock = Goods = Merchandise = Inventory Net fair value of Liabilities this is the amounts in the Balance Sheet of the business, which is being acquired, sometime the buyer will not acquire all liabilities e.g. contingent liabilities are difficult to value. Consideration transferred is the amount to be paid to the Seller, can be cash, shares or both Net fair value of Assets = Net fair value of Assets acquired. Goodwill is when the amount paid [purchase consideration] by the Acquirer is MORE than the net fair value of the acquiree’s identifiable assets and liabilities. Gain is when the amount paid [purchase consideration] by the Acquirer is LESS than the net fair value of the acquiree’s identifiable assets and liabilities. Sometimes called a ‘bargain purchase’, non-accountants often say ‘I got a bargain’ as they paid less than the value of the item purchased. The objective of the Accounting standard AASB 3 Business combination, is to establish the principles and requirements for how an acquirer in a business combination: • recognises and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquire • recognises and measures the goodwill acquired in a business combination, or a gain from a bargain purchase • determines what information should be disclosed so that users of financial statements can evaluate the nature and financial effects of the business combination. Acquisition Method Under AASB 3 The acquirer shall use acquisition method for each business combination which is to measure the identifiable assets acquired and the liabilities assumed at their acquisition-date fair values. This has four key steps 1. Identify the acquirer 2. Determine the acquisition date: when control obtained 3. Recognise and measure Assets, Liabilities and contingent liabilities (i.e. present obligations but do not fulfil the recognition criteria, i.e. probable and reliable amount). 4. Recognise goodwill which is the difference between total net fair value of assets less acquisition price paid. What is Fair Value? Fair value is market value – Quoted market price – e.g. quoted securities – Recent transaction – for identical assets/liabilities – Other Measurement techniques, e.g. present value Goodwill An asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognised. (AASB 3, Appendix A ) It is not an ‘identifiable intangible’ Goodwill is measured as a “residual” Consideration transferred less identifiable assets acquired and the liabilities assumed Goodwill is subject to an annual “impairment test” after acquisition (AASB 136 Impairment of Assets)
Worked example: Business Combinations On the 1st July 2012, Mightier Ltd completed negotiations to take over the operations of Smaller Ltd and to acquire 100% of the shares of Minnier Ltd. The accounts of all the companies as at the 30th June 2012 are shown below: Acquisition of Smaller Ltd Mightier Ltd is to acquire all the assets (except cash) of Smaller Ltd. In exchange, for every two (2) shares in Smaller Ltd, shareholders are to receive three (3) shares in Mightier Ltd, plus $0.50 cash for every share held by the shareholders of Smaller Ltd. Mightier is to pay sufficient cash to Smaller Ltd to cover liquidation its costs of $10,000 Each share in Mightier Ltd has a fair value of $2.75. The assets and liabilities of Smaller Ltd are all recorded at fair value except for the following: o Debtors
$600,000
o Inventory
$130,000
o Property Plant & Equipment
$1,000,000
The companies have had some commercial transactions in the past and there is an amount of $58,000 showing as a “Debentures in Smaller” in the accounts of Mightier Ltd. The fair value of these debentures is $65,000. As part of the acquisition, Mightier Ltd agrees not the request payment for these debentures. Acquisition of Minnier Ltd Mightier Ltd is to acquire all the shares in Minnier Ltd. In exchange, the shareholders in Minnier Ltd are to receive three (3) shares in Mightier for every four (4) shares held in Minnier Ltd. Each share in Mightier Ltd has a fair value of $2.75. At the date of acquisition an extract of Minnier Ltd’s accounts shows the following: General Reserve $680,000 Issued Share Capital ($1 ORD A shares) $5,200,000 Retained Profits (c/b) $1,500,000 Additional Information Accounting and legal costs in issuing shares to both Smaller Ltd and Minnier Ltd amounted to $10,000 and $6,000 respectively.
Profit and Loss Accounts
Mightier Ltd 30/06/2012
Sales Revenue
Smaller Ltd 30/06/2012
Minnier Ltd 30/06/2014
$11,842,125
$1,359,337
$5,961,750
Stock at start Purchases Stock at end Cost of Goods Sold
$388,125 $5,070,000 -$698,625 $4,759,500
$72,262 $542,156 -$127,689 $486,729
$270,250 $3,605,625 -$477,538 $3,398,337
Gross Profit Less Expenses Operating Expenses General Administration Expenses Depreciation & Amortisation Expenses Finance Costs
$7,082,625
$872,608
$2,563,413
$1,856,963 $565,368 $1,943,213 $72,450
$311,868 $98,047 $173,199 $4,613
$792,350 $179,687 $147,737 $17,250
Total Expenses
$4,437,994
$587,727
$1,137,024
$528,781 $528,781
$56,195 $56,195
$210,163 $210,163
Net Profit before Tax Income Tax Expense Net Profit after Tax Add Retained Profits (o/b) Total Available Less Appropriations Interim Dividends Paid Transfer to General Reserve Dividends Proposed
$2,115,850 $735,181 $1,380,669
$228,686 $89,188 $139,498
$1,216,226 $379,328 $836,898
$3,068,875 $4,449,544
$968,937 $1,108,435
$1,753,750 $2,590,648
$181,125 $362,250 $1,216,125
$36,000 $96,000
$520,000
Total Appropriations Retained Profits (c/b)
$1,759,500 $2,690,044
$132,000 $976,435
$572,000 $2,018,648
AddOther Income Dividend and Interest Revenue
a)
$52,000 $0
REQUIRED: Prepare the acquisition analysis to acquire Smaller Ltd. Step 1
Cost of combination Cash Cash for Liq Costs
$600,000 $10,000
Shares (1,200,000/2*3*$2.75 FV)
$4,950,000
Lost Asset
$5,560,000
Debentures (FV)
$65,000 $5,625,000
$0
Step 2
FVINA Acquired Debtors
$600,000
Accruals & Receivables
$773,438
Short term Cash Investments
$120,000
Inventory
$130,000
Motor Vehicles
$53,813
Securities
$55,734
Dividend and Interest Receivable
$5,765
Trademarks & Patents
$355,542
Deferred Tax Asset
$67,265
Property, Plant and Equipment
$1,000,000
Land
$1,605,390
FVINA
Step 3
$4,766,947
Calculate Goodwill/Discount (Step 1 - Step 2) Goodwill
$858,053
Record the acquisition of Smaller Ltd in the books of Mightier as at the 1st July 2012. Books of MIGHTIER LTD General Journal
Debit
Credit
Record Acquisition of Smaller Ltd Debtors
$600,000
Accruals & Receivables
$773,438
Short term Cash Investments
$120,000
Inventory
$130,000
Motor Vehicles
$53,813
Securities
$55,734
Dividend and Interest Receivable Trademarks & Patents Deferred Tax Asset
$5,765 $355,542 $67,265
Property, Plant and Equipment
$1,000,000
Land
$1,605,390 Payable to Smaller Ltd (L)
$5,560,000
Debentures in Smaller (FV) Goodwill (New Asset)
$65,000 $858,053
Adjust Deb Acct Debentures in Smaller (FV)
$7,000
Gain on Disposal of Deb
$7,000
Settlement of Amounts Owing to Seller Payable to Smaller Ltd
$5,560,000
Cash
$610,000
Share Capital
$4,950,000
Record the acquisition of Minnier Ltd in the books of Mightier as at the 1st July 2012. Record Acquisition of Minnier Ltd Shares in Minnier Ltd (A) Cash / Share Capital Minnier Ltd are to receive three (3) shares in Mightier for every four (4) shares held in Minnier Ltd.
$10,725,000 $10,725,000...