Business combinations | My Assignment Tutor

24/03/20211Chapter 7Business combinationspart b pp 294 ‐ endChapter 9Consolidation: controlledentities©2021 John Wiley & Sons Australia LtdAccounting in the records of the acquiree•Where the acquirer purchases the acquiree’s assets andliabilities, the acquiree may continue in existence or mayliquidate.• The acquiree accounts affected by the businesscombination will differ according to the actions of theacquiree.Accounting in the records of the acquireeAcquiree does not liquidate•Under AASB 116/IAS 16 Property, Plant and Equipment,when an item of property, plant and equipment is sold,gains or losses are recognised in the statement of profit orloss and other comprehensive income.• Similarly, on the sale of a business, the acquireerecognises a gain or loss.1 2 324/03/20212Accounting in the records of the acquireeAcquiree liquidates• The accounts of the acquiree are transferred to twoaccounts, the Liquidation account and the Shareholders’Distribution account.• To the Liquidation account are transferred:̶ All liabilities taken over̶ The expenses of liquidation if paid by the acquiree̶ Additional expenses to be paid by the acquiree but notpreviously recognised by the acquiree.Accounting in the records of the acquireeAcquirer buys only shares in the acquiree•When the acquirer buys only shares in the acquiree, thereare no entries in the records of the acquiree because thetransaction is between the acquirer and the shareholdersof the acquiree entity.• The acquiree itself is not involved.Subsequent adjustments to the initialaccounting for a business combination• Three areas where adjustments may need to be madesubsequent to the initial accounting after acquisition dateare:̶ Goodwill̶ Contingent liabilities̶ Contingent consideration.4 5 624/03/20213Subsequent adjustments to the initialaccounting for a business combinationGoodwill• Having recognised goodwill arising in the businesscombination, the subsequent accounting is directed fromother accounting standards.̶ Goodwill is not subject to amortisation but is subject toan annual impairment test as detailed in AASB 136/IAS36 Impairment of Assets.̶ Goodwill cannot be revalued because AASB 138/IAS 38Intangible Assets does not allow the recognition ofinternally generated goodwill.Subsequent adjustments to the initialaccounting for a business combinationContingent liabilities• Having recognised any contingent liabilities of theacquiree as liabilities, the acquirer must then determine asubsequent measurement for the liability.•Under AASB 137/IAS 37 paragraph 36, the liability wouldbe measured at the best estimate of the expenditurerequired to settle the present obligation at the end of thereporting period.Subsequent adjustments to the initialaccounting for business combinationsContingent consideration• At acquisition date, the contingent consideration ismeasured at fair value, and is classified either:– as equity (e.g., the requirement for the acquirer toissue more shares subject to subsequent events); or– as a liability (e.g., the requirement to provide morecash subject to subsequent events).97 8 924/03/20214Disclosure — business combinations• Paragraphs 59–63 of AASB 3/IFRS 3 contain information ondisclosures required in relation to business combinations.• Apply Appendix B, which is an integral part of AASB 3/IFRS3• Figure 7.16 provides a sample of the disclosures• Figure 7.17 provides an example – Boral Ltd 2012 annualreportIntroduction• The preparation of consolidated financial statementsinvolves combining the financial statements of theindividual entities in a group so that they show the financialposition and financial performance of the group of entities,presented as if they were a single economic entity.• The application in this chapter is to a very simple groupstructure involving two entities, one of which owns all theissued shares in the other.Introduction• The accounting standard governing the preparation ofconsolidated financial statements is AASB 10/IFRS 10Consolidated Financial Statements.• To achieve this, AASB 10/IFRS 10:̶ Requires a parent to present consolidated financialstatements̶ Establishes control as the criterion for consolidation̶ Defines the criterion of control.10111224/03/20215Consolidated financial statements• Consolidated financial statements are defined in AppendixA of AASB 10/IFRS 10 as follows:• The financial statements of a group in which the assets,liabilities, equity, income, expenses and cash flows of theparent and its subsidiaries are presented as those of asingle economic entity.• Consolidated financial statements perform this function asthey are a consolidation, or an adding together, of thefinancial statements of all entities within an economicentity.Consolidated financial statementsConsolidated financial statements• Consolidation involves combining financial statements ofindividual entities to show financial position andperformance of group as if it were single entity• Consolidated financial statements are prepared by:(i) Aggregating (combining), line by line, like items ofassets, liabilities, equity, income and expenses; and(ii) Adjusting these combined figures for inter‐grouptransactions between entities within the group(covered in following chapters)13141524/03/20216Consolidated financial statementsSimple consolidation worksheet for the A Ltd groupConsolidation does not involve adjustments in the accounts of theentities. Consolidated financial statements are an additional set offinancial statements and are prepared in a consolidation worksheet.Consolidated financial statements• The consolidated financial statements consist of aconsolidated statement of financial position, consolidatedstatement of profit or loss and other comprehensiveincome, and a consolidated statement of cash flows.• The following definitions are contained in Appendix A ofAASB 10/IFRS 10: GroupA parent and its subsidiaries.ParentAn entity that controls one or moreentities. Subsidiary An entity that is controlled by anotherentity.Consolidated financial statements• If A Ltd controls both B Ltd and CLtd, then A Ltd is a parent andboth B Ltd and C Ltd are itssubsidiaries, and all together theyform a group.16171824/03/20217Consolidated financial statementsReasons for consolidation• Consolidated financial statements are prepared for anumber of reasons̶ Supply of relevant information̶ Comparable information̶ Accountability̶ Reporting of risks and benefits.Control as the criterion for consolidation• In Appendix A, a parent is defined as an entity that controlsone or more entities while a subsidiary is a controlledentity.• An entity must then determine when it is a controllingentity and which entities it controls.• In AASB 10/IFRS 10, an investor is a reporting entity thatpotentially controls one or more entities; it may have aninvestment in the investee, but is not required to do so.Control as the criterion for consolidation• Control of an investee is defined in Appendix A of AASB10/IFRS 10 as follows:• An investor controls an investee when the investor isexposed, or has rights, to variable returns from itsinvolvement with the investee and has the ability to affectthose returns through its power over the investee.19202124/03/20218Control as the criterion for consolidation• Paragraph 7 of AASB 10/IFRS 10 identifies three elements,all of which must be held by an investor in order for it tohave control, namely:̶ Power over the investee̶ Exposure, or rights, to variable returns from itsinvolvement with the investee̶ The ability to use its power over the investee to affectthe amount of the investor’s returns.• These three elements are discussed in detail in thefollowing slides.Control as the criterion for consolidationPower• Power is defined in Appendix A of AASB 10/IFRS 10 asfollows:• Existing rights that give the current ability to direct therelevant activities.̶ Power arises from rights• Rights could also exist because of a contractbetween one entity and another entity.• Rights in relation to purely administration tasks arenot rights that affect power.Control as the criterion for consolidationPower̶ Power arises from rights• Examples of rights that affect who has power are listedin paragraph B15 of AASB 10/IFRS 10, namely:̶ Voting rights̶ Rights to appoint, reassign or remove members ofan investee’s key management personnel̶ Rights to appoint or remove another entity thatparticipates in management decisions.22232424/03/20219Control as the criterion for consolidationPower̶ Power arises from rights• The rights need to give the holder the current ability todirect the relevant activities when decisions aboutthose activities need to be made.• Protective rights are defined in Appendix A as follows:Rights designed to protect the interest of the partyholding those rights without giving that party powerover the entity to which those rights relate.• E.g., A lender’s right to restrict a borrower fromundertaking certain activitiesControl as the criterion for consolidation̶ Power is the ability to direct• An entity that has the ability to direct may decide not to exercisethat ability and so allow another entity to actually direct.̶ The ability to direct must be current• The investor must be able to exercise its rights to direct at thetime decisions are made concerning the activities of an investee.̶ It is relevant activities that are directed• The determination of relevant activities may change over timeand differ between entities; hence it may be necessary toanalyse the purpose and design of an investee.• For many investees, the relevant decisions are those that governthe financial and operating policies of the investee.Control as the criterion for consolidationPower̶ Level of share ownership• Share ownership normally provides voting rights• Power is presumed to exist where an investor owns more than 50% of thevoting rights of an entity unless there is evidence to the contrary• Voting rights of less than 50% can result in an investor having powerover an investee – consider the following factors:• Dispersion of other shareholders – probability of shareholders attendingmeeting lessened by location and by size of share parcels• Attendance at AGMs – e.g. if only 60% of eligible votes attend meeting, 31%can control meeting• Existence of contracts – power by agreement with other investors• Level of disorganisation or apathy of other shareholders25262724/03/202110Control as the criterion for consolidation̶ Level of share ownershipDoes A Ltd control B Ltd?A LtdB Ltd45%20 shareholders eachholding