Australian Accounting Standards And Procedures For Business Acquisition

Limited Shareholder Companies

Discuss About The Conceptual Framework And Financialisation?

A business proprietor can either buy shelf companies or create new companies by their own efforts. Primarily companies which are limited by shares remain most appropriate for a small business, where there is at least 1 shareholder and not more than 50 shareholders. These companies have a separate legal existence, limited liability of shareholders and perpetual existence. A company need not have a constitution of its own, it can simply follow the provisions of the Corporations Act. The person who is the only director and sole shareholder of the company has the responsibility for managing the daily affairs of the company and he/she may have the authority of exercising the company’s powers. The shareholders of the company own the company and can take decisions regarding the companies by just passing a resolution. Prior to issuing new shares, the company must offer them to its present shareholders in accordance with their shareholding. The company should have an office registered in Australia and it must tell about this to ASIC. The Corporations Act has imposed some obligations which must be duly followed. The name of the company must be shown in all the business dealings, public documents, cheques and negotiable instruments and on its common seal. The company must pay a review fees to ASIC each year. Most importantly, the company must notify the ASIC about any basic changes in its address or directors or company secretary. The annual financial statements must be prepared in accordance with the applicable accounting standards, unless stated by the shareholders in the AGM.

Chair of AASB: Kris Peach had been appointed as the Chair of the Australian Accounting Standards Board for a five year period in November 2014. She has a vast experience in accounting standards environment. Being the chairperson, she is also a member of the board of the New Zealand Accounting Standards Board and Australia Financial Reporting Council.

Members	Organisation Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper
Ms Regina Fikkers (Deputy Chair)	Pricewaterhouse Coopers
Mr Mike Blake	Member of International Public Sector Accounting Standards Board
Ms Kimberley Crook	Chair of New Zealand Accounting Standards Board.
Mr Peter Gibson	Department of Finance, Canberra ACT
Mr Ken Liow	Principal, Obsidian Capital
Ms Carmen Ridley	Principal, AFRS/ Member of GAAP
Ms Taryn Rulton	COO, Monash College
Mr Marc Smit	Head of Accounting Policy of national Australia Bank
Prof Stephen Taylor	Professor of Financial Accounting in University of technology Sydney.
Ms Alison White	Deloitte

Title	Issue date	Operation date
Disclosure of interests in other entities	Feb 2017	Jan 2018
Statement of cash flows	March 2016	Jan 2018
Interpretation of Standards	Dec 2017	31st Dec 2017
Amendments to Australian Accounting Standards – Clarifications to AASB 4	July 2017	1st Jan 2018
Insurance Contracts	July 2017	1st Jan 2018
Service Concession Arrangements: Grantors	July 2017	1st Jan 2019
Amendments to Australian Accounting Standards – Clarifications to AASB 4	July 2017	Jan 2018

The accounting standards numbering systems have been amended and are now numbered from 1001 in order to reflect their original numbering for example standard 19 becomes 1019. This method provides the advantage of indicating the origin of interpretations of the standards.

1. In order to account for the initial 30% of the shareholding for Bream Ltd by Bass Ltd, the acquirer must account for the initial accounting for the business. This consists of recognising and ascertaining the just and correct values of the assets and liabilities which are to be allocated to the subsidiary’s recognisable assets, liabilities and contingent liabilities and the total price of the combination (Corporategovernanceboard.se, 2018).If the initial accounting for a business combination can be determined only on the end of the period where the combination is affected mainly because either the correct values to be assigned to the various recognisable assets can be determined only provisionally, then in such a case, the parent company shall account the combination using these provincial values.
2. Over the period of negotiation between the two companies, the prices of the shares of bass Ltd had stooped very low at about $5.40 and a high of $6.20. An average of both these prices comes to about $5.8. Mr Spencer must use the average price of $5.40 in order to account for the issue of Bass Ltd shares as per the standards prescribed under AASB3. Here in exchange for the 70 % shareholding control, Bream Ltd shareholders should value these shares at the average price in order to account for the share issue.
3. Date of exchange refers to the date on which each and every individual transactions and investments are scrutinised in the financial reports of the acquirer whereas the date of acquisition refers to the date on which the acquiring firm gains the control of the acquire. In business combination the acquisition method is followed in order to execute the entire process. Identification of acquirer, finalisation of acquisition date and identification of all the assets and liabilities at the fair value on the date of acquisition is of paramount importance for the entire procedure of business combination. In this regard, the acquirer’s books and financial statements are important. Assets received and liabilities presumed by the acquirer in lieu of the command of the operations of the subsidiary company is required in accordance with para 24 to be measured in fair value on the date of exchange.

1. Identification of a business combination is the most important aspect of business combination. In such cases, the business combination results in obtaining complete or partial control of the ownership of the acquiree by an acquirer.In the procedure of identification of an acquirer, it should be kept in mind that a parent-subsidiary relationship comes into the existence between the acquirer and acquiree. In some cases, it might be difficult to recognise the acquiring firm, there exists some sign which help to resolve this such as:

• When the fair value of any one of the combining entity is significantly higher than the other, the entity which has the higher fair value is the acquirer.
• When the combination is done with the exchange of ordinary equities and other allied instruments in return for liquid assets or other assets, the company paying this liquid asset, is generally regarded as the acquirer (AASB, CAS, Business combination, 2014).
• When due to the process of the business combination, one entity is able to select the management of the other entity, then the entity which is able to dominantly influence the assemblage of the managing team, of the other company or entity.
• When business combination is considered, which is actually initiated and completed through the exchange of equities, the organisation which issues these equities is generally considered as the acquirer.

1. It is indeed necessary to identify an acquirer in the case of business combination because, it is the acquirer on whose financial books, and the primary changes relating to the various provisions like the identification of assets and assumed liabilities are recorded and maintained. In the case of business combinations, as per AASB3, the role of the acquirer is of paramount importance in the entire procedure of business combination (Aasb.gov.au, 2018). It is the acquirer which initiates the entire procedure of combining two different business entities as a result of which the importance of identifying an acquirer cannot be downplayed. Some significant changes might occur in accounting if any one of White Ltd or Cloud Ltd is not correctly identified as an acquirer. This is because the results of the business combination on the post-combination earnings would be, to a very large extent, is influenced by the correct identification of both the acquirer and acquiree.

Para 5 of AASB 10 issues the primary requirement that an investor shall determine whether it controls an investee. One of the most important observation from this paragraph is that the investor has the power over the investee. The power to direct refers to the power to control the activities associated with any entity. Whether an investor has powers over an investee depends on the rights the investors have in relation with the investee (Aasb.gov.au, 2018).It is stated that power arises from rights, and is referred to the voting rights granted by various equity instruments and rights which arise from contractual arrangements.  Although, the main source of powers for the profit organisations will be these rights but their powers would frequently emanate through the different sources for the various non-profit entities. For many non-profit organisations, rights emanating from administrative arrangements or various statutory provisions often would be the source of power (Legislation.gov.au, 2018).  Assessment of the purpose and design of an investee would help an investor to identify who has the actual power over the investee. However, the effect of the constituting document or legislation is assessed in the context of the prevailing situations, as all facts and circumstances need to be taken into account in evaluating if an investor has power over an investee (Legislation.gov.au, 2018). For e.g., the needs and structure of an investee may refer to the pertinent activities of the investee and how decisions about these apposite activities are made.  For example, a government might not have power over a research and development organisation that operates under a statute created by that government’s legislation. This limits the sphere of control as the powers of controlling is held by other entities.The example mentioned above illustrates that an investor might not have power over an investee because of the rights of other parties upon the investee.

Role of AASB

 AASB is a financial body which operates in order to set and maintain the Australian Financial accounting standards. It provides guidance to both the public and private in preparing and presenting financial statements.AASB3 deals in procedures governing business combinations and AASB 10 deals in the proper creation and exhibition of consolidated financial statements. In the case of acquisition of Bluto Ltd by Pluto Ltd, the case comes into the genre of business combination and which shall be governed by AASB3 and the preparation of the consolidated financial statements needs to be governed by AASB10 (Ifrsbox.com, 2018).The following steps need to be followed in accordance with AASB3. The identification of the acquirer is the first priority, followed by setting of acquisition date, recognising assets and liabilities of Bluto Ltd followed by recognition of goodwill or any gain from the deal (Aasb.gov.au, 2018). In accordance with AASB10, the entity should be recognised (Pluto Ltd) for preparation of consolidated financial statements, defining the controlling standards to ensure if the investor has control over the investee, in accordance with the rules of the standard, setting up of accounting requirements for preparation of financial statements for the acquirer which is Pluto Ltd in this case. Proper assessment of control needs to be ensured by the controlling entity by ensuring that the investor company has powers of the investee, rights to variable returns from the investee (Bluto Ltd), the ability to use its power over the investee to influence the amount of the returns. The investor must keep these things in mind while preparing the consolidated financial statements which shall present the assets and liabilities of both the parent as well as the subsidiary company in a single statement. Following all these provisions of the accounting standards would help the parent company to turn into strong and efficient company after acquiring the subsidiary company and this move shall embolden its overall strength and power in the competitive world.

As a result of the acquisition of Cancer Ltd by Mensa Ltd, the accountant of the company must ensure that in accordance with the cost of business acquisition as per AASB 3, the cost of the business must be measured at the acquisition date at the fair value. The fair value must be in accordance with the current market values prevalent in the market.The necessary adjustments must be made in the consolidation worksheet of the parent company which is Mensa Ltd in this case. Assets received or liabilities presumed by the acquiring firm in lieu for command over the subsidiary are required by para 24 of AASB, which is to be measured at their correct and just values on the date of exchange (Aasb.gov.au, 2018). The consolidation worksheet incorporates the net assets, land, goodwill and retained earnings. The incorporation into the consolidated worksheet occurs when  a business combination involves more than one transaction, then the cost of the combination is the aggregate cost of all the individual transactions. Then the price of each individual transaction is determined at the date of exchange. In such kind of scenarios, the adjustments to the fair value of the assets and liabilities must be made in the consolidation worksheet (AASB, CAS, Fair value Measurement, 2013).

AASB 3 and AASB 10 in Business Acquisition

When a business combination consists of more than one transaction, it is known to occur in stages. In such cases, each transaction must be treated separately by the parent firm, by utilising the price of the transaction and just value data on the exchange date transaction, in order to ascertain the worth of any goodwill connected with that transaction. In these cases, the correct market values might be different on each exchange transaction date because all the recognisable assets, liabilities and other contingent liabilities of the acquiring firm are yet to be revalued at their adjusted fair values as on the acquisition date. Here, revaluation is not considered a normal gainis not recorded on the income or any other financial statement; rather it is taken into to an equity account called revaluation surplus. Revaluation surplus holds all the upward revaluations of a company’s assets until those assets are disposed. In the case of recognition of liabilities, a separate equity account needs to be maintained as the recognition of liability requires an outflow of resources symbolising economic benefits (such as cash) from the firm and the price or the value of the obligation can be reliably measured.

As Mensa Ltd has acquired all the assets and liabilities of Cancer Ltd, the identification and consequent recognition of all these assets and liabilities of the subsidiary company by the parent company is very essential and necessity. The acquisition procedure had started with the identification of the acquisition date and identifying all those assets and liabilities of Cancer Ltd. As, this case has been an acquisition in successive stages, the revaluation and adjustment of all these assets and liabilities as per their fair value is essential. The fair value of these financial instruments as per each individual exchange date is of utmost importance to the company as this would help the parent company to make note and keep track of all the intricacies of the acquisition(Australia.gov.au, 2018). As a result of all these reasons, the maintenance of all these equity accounts is necessary from the perspective of the parent company, although they are not related to the equity accounts of the subsidiary company.

1. On acquisition of a subsidiary, by a parent company, the accounting treatment for goodwill which is received by the acquirer (including any amortisation thereof) must be reported as an adjustment in the consolidated accounts and not in the subsidiary’s not in the subsidiary’s or parent entity’s accounts. The following must also be disclosed such as:

• The balance of goodwill which is amortised as on the date of reporting.
• The amount of goodwill amortised in the profit and loss account as an expense.
• The period for which the acquired goodwill has been amortised.

The Standard as per AASB states the accounting treatment for goodwill from the acquisition of a business entity, through acquisition of the assets, or in the case of an investment in an associated company or any other subsidiary company, done through the acquisition of partial or all of the shares in another entity. The Standard of AASB 1013 states that the straight line method of goodwill has been prescribed. Along with this, the standard also prescribes treatment for any kind of internally generated also prescribes the accounting treatment for internally generated goodwill.

Goodwill impairment is a kind of a charge or expense that companies record when any goodwill’s carrying value which is reflected through its financial statements surpasses its fair value. In accounting, goodwill is recorded after a company acquires assets and liabilities, and pays a price in excess of their book value in lieu of their brand image, reputation or any other favours. This impairment occurs when there is a decline in the ability of an asset to generate any income or cash flows for the company. Identification of goodwill is done in two steps. The first step includes comparing the fair value of the concerned goodwill with its balance sheet value. If it is observed that the fair value exceeds, then impairment never occurs, it only happens if the fair value is exceeded by the balance sheet value. In the case of Hydra Ltd, the impairment of goodwill should be recognised as financial event in its books rather than as a consolidation adjustment because Draco Ltd has been acquired along with its goodwill by Hydra Ltd.

References:

AASB, C.A.S., 2013. Fair Value Measurement.

AASB, C.A.S., 2014. Business Combinations. Disclosure, 66, p.77.

AASB, C.A.S., 2014. Financial Instruments. Project Summary.

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Guthrie, J. and Pang, T.T., 2013. Disclosure of Goodwill Impairment under AASB 136 from 2005–2010. Australian Accounting Review, 23(3), pp.216-231.

Ifrs.org. (2018). IFRS. [online] Available at: https://www.ifrs.org/groups/international-accounting-standards-board/ [Accessed 4 Apr. 2018].

Ifrsbox.com. (2018). IFRS 10 Consolidated Financial Statements – IFRSbox – Making IFRS Easy. [online] Available at: https://www.ifrsbox.com/ifrs-10-consolidated-financial-statements/ [Accessed 4 Apr. 2018].

Legislation.gov.au. (2018). AASB 10 – Consolidated Financial Statements – August 2011. [online] Available at: https://www.legislation.gov.au/Details/F2013C00408/ [Accessed 2 Apr. 2018].

Zhang, Y. and Andrew, J., 2014. Financialisation and the conceptual framework. Critical perspectives on accounting, 25(1), pp.17-26.