5. Business Combinations Flashcards
What is business combinations
A transaction or other event in which an acquirer obtains control of one or more businesses
What is control?
An investor controls an investee when the investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee
What does the term business mean?
An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants.
Does AASB 3 exclude certain businesses from its scope?
Yes, including those established as joint ventures or under common control.
What does AASB 3 apply to?
Only to combinations involving ‘businesses’, thereby excluding other exchanges of assets between entities.
What are all businesses generally capable of?
Providing a return to the owners, and would generally (but not always) involve entities whose activities have inputs, processes and outputs
What is acquirer?
The entity that obtains control of the acquire
What is the acquisition date?
The date on which the acquirer obtains control of the acquiree
T or F - AASB 3 requires application of the acquisition method when accounting for business combinations.
True
What does the determination of the acquisition date effect?
The measurement of fair value of a number of amounts in the accounting for a business combination.
What are the 4 key steps of the acquisition method?
(1) identify the acquirer,
(2) determine the acquisition date
(3) recognise and measure the identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquiree
(4) recognise and measure goodwill or a gain from a bargain purchase.
T or F - Identification of an acquirer may require judgement by the accountant, and AASB 3 provides indicators to assist in making this judgement.
True
What is the contingent liability?
(a) a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control
of the entity; or
(b) a present obligation that arises from past events but is not recognised because (i) it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation, or (ii) the amount of the obligation cannot be measured with sufficient reliability
What is fair value?
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
What must the aquiree recognise?
The identifiable assets acquired and liabilities assumed at fair value at acquisition date.
What happens when fair values are not measureable prior to end of the reporting period?
Where fair values are not measurable prior to the end of the reporting period, provisional measures may be required.
The recoginition of assets and liabilities is not subject to normal recognition criteria although …
Although AASB 3 makes recognition subject to two main conditions, namely the definitions of assets and liabilities must be met, and the item acquired or assumed must be part of the business acquired.
T or F - Fair value may be measured in a number of ways.
True
What is contingent consideration?
A possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity
What is goodwill and does it have to be disclosed?
Goodwill is a residual measured after determining the consideration transferred. Movements in goodwill including impairment must be disclosed.
What does goodwill consist of?
Basically assets that are unidentifiable, or do not meet asset recognition criteria.
Can an acquiree continue to exist as an entity subsequent to a business combination, or go into liquidation?
Yes, either options
Is goodwill amortised?
No, but is subject to an annual impairment test.
Does AASB 3 require extensive discourses relating to business combinations?
Yes, so that users of financial statements can understand the economics of the transactions.
Do subsequent events require adjustments to goodwill?
No
Can contingencies recognised at acquisition date be effected?
Yes, by expected events not occurring or expected estimates needing to be revised. Adjustments are regarded as being post acquisition effects
When an acquiree liquidates what key accounts are raised?
The Liquidation account and the Shareholders’ Distribution account.
Is a gain on a bargain purchase recognised in profit or loss?
A gain on bargain purchase is recognised in profit or loss in the year it arises.
T or F - Where the net fair value of the identifiable assets acquired and liabilities assumed exceeds the cost of the combination, a gain on purchase is recognised, affecting current period income.
True
Is goodwill directly measured?
No, but is a residual — that is, the difference between the cost of the combination and the sum of the net fair values of the identifiable assets acquired and liabilities assumed.
What is a gain on bargain purchases recognised?
Only after reassessments are made.
What does core goodwill consist of?
Going concern goodwill and combination goodwill.
What is the sum of the consideration transferred?
The fair values of the components given up by the acquirer, but does not include any directly attributable costs, which are expensed
