IFRS’s “Business Combinations under Common Control” project
Subject: To provide an account of the issue of technology outage discussed in IFRS’s “Business Combinations under Common Control” project and the Acquisition Method and Ceiling Method (IFRS 3/AASB 3) adopted by the firm to overcome the issue.
The purpose of IASB Agenda ref 23 was to provide an update on the approaches being discussed and developed by the members of IFRS staff, for the transactions that can be done within the scope of BCUCC project. The session also allowed the members of the Board to provide a feedback on the developed approaches being developed by the staff. The aim of the project is to develop proposals for suggesting the best acquisition method set in IFRS 3 and to analyze whether all the transactions taking place during acquisition are within the scope of BCUCC project or not. The main idea behind adopting the best method of acquisition is to ensure that acquisition method provides all the useful information about the acquisition; ensure that the assets and liabilities are exchanged at the fair values and are consistent with the requirements mentioned in IFRS 3 Para 51-52 (IASB Agenda ref 23 , 2018).
The project deals with the technology outrage which was caused in a firm due to cyber incidents, technical glitches in the hardware and software, technology up gradation or infrastructure failure (Kimmel, 2018). The technology disruption caused huge losses to the company which rangedup toUS $ 8851 per minute. So, to overcome the issue, our company has decided to adopt the acquisition approach to overcome this outage. The main reason for acquisition approach is to get the technological support of the company for enhancing our own products and technology backup. It will be easier and quicker for us to acquire the technology of the company through this acquisition than developing the technology itself (McKinsey & Company, 2018). But to determine the best acquisition approach for acquiring company XYZ, the analysis of different types of acquisition methods needs to be done.
The method of acquisition which we will be adopting will consist of a series of five steps. The first step will be based on the measurement of the tangible liabilities and assets of the firm we will be acquiring (McKinsey & Company, 2018). This measurement has shown that the fair value of the net assets of the firm is $1, 235, 000. These measurements will be done by a third party valuation firm. The second step will be measuring the intangible liabilities and assets and it will be a difficult step as the details of these assets will not be mentioned in the balance sheet. Third, we will measure the non-controlling interest at its fair value on the date of acquisition, which was found to be 15%. Fourth, we will measure the consideration paid including stock, debt, cash or others. Finally, the goodwill and the purchase gain of the company will be measured (Jemison & Sitkin, 1986). It will calculated using the following calculative approach-
Adopting the Acquisition Method to overcome the issue
Consideration paid + Non-controlling interest – Identifiable assets acquired + Identifiable liabilities acquired (Accounting Tools, 2017)
Another approach which can be adopted is the Ceiling Method. This approach involves the assessment of the fair values of consideration which are transferred against the fair value of business which is acquired. Goodwill, in this case, can be described as the excess of consideration which is transferred over the fair value of the identifiable net assets which are acquired, capped at the fair value of acquired business. The excess consideration over fair value can be recognized as a function of distribution from equity (IASB Agenda ref 23 , 2018).
Both these methods will ensure that all the acquisition done by the company has been in an appropriate manner and has been a profit deal for it. It will help the company, both in improving it in terms of revenue and internal processes. The major consideration in the acquisition in terms of accounting can be seen as the calculation of the liabilities and assets which are acquired (AssetWorks, 2018).
To choose the best possible approach, we need to take the following scenarios under consideration:
Scenario 1: when fair value of the business which is acquired is less than fair value of consideration
“Full Fair Value approach = Ceiling approach”
This method includes the analysis of identifiable net assets, cash, impairment loss and goodwill.
Scenario 2: when fair value of the business which is acquired is more than fair value of consideration; and the fair value of consideration is more than the fair value of identifiable net assets of the business which is acquired. It can also be termed as the full value approach.
Scenario 3: the fair value of acquired business is more than fair value of consideration transferred which, in turn, is less than the fair value of identifiable net assets which are acquired.
The purchase consideration for the acquisition in our case is for approximately $1,272,000. The fair value of the business acquired is approximately $1,258,000 and the fair value of the net identifiable assets is $1,235,000. Our method of acquisition will rely totally on the fair value concept. The fair value of the acquired assets and liabilities is less than the actual business price, which shows that the company which we are acquiring is carrying intangible assets in form of the goodwill and this is the reason for the difference in the two prices. Keeping the above scenarios into consideration, it can be said that Ceiling method of acquisition analysis will be better suited for the company than the acquisition method.
Analyzing different types of acquisition methods
However, we all are aware of the fact that this acquisition will also come with certain other challenges such as diversity in the workforce, can be in the work culture and a few technological challenges for us to work on the technological devices and strategies. But with the combined efforts, we will be able to overcome all these challenges and get the best results for our company.
All these discussions show that the process of acquisition will be very complex, but all the procedures will be easy if we have a basic understanding of all the concepts which form the basis of all these transaction and carry out our accounting operations accordingly. We have to work collaboratively and ensure that all the guidelines as per Agenda 23 are fulfilled to ensure that this acquisition deal becomes a positive factor influencing the financial statements immediately and over a longer duration of time (The Monthly Fool, 2018).
National Accounting
123 Pine Chapel Circle
New Capstone AU 47646
Ms. Lauren Hill
96 C Scheme
Hilton Road AU 769678
Dear Ms. Hill,
As you are one of our best clients, I would like to inform you about the significance of IFRS project you should consider while performing business with other organizations. IFRS are the financial reporting standards that should be followed for the purpose of developing financial reports.Following IFRS, financial decisions can easily be made on regular basis by having a look at the financial statements (Papnoi, 2018). In order to avoid any kind of manipulations in financial statements, the utilization of set standards can protect such manipulations in the financial statements. Secondly, it requires explanation about the information in the financial statements due to which the user can easily take correct decisions without getting confused.
Being a consultant in this firm, it would be my pleasure to inform you about the advantages you can acquire by performing business with the firm that follows IFRS in their financial information. Otherwise, it might affect you in future as misinformation and lack of sufficient details in the financial documents might be risky in long run (IFRS, 2018).
The company has decided to enter into an acquisition approach to overcome the impacts of technology outage. The company will acquire a Sydney based company XYZ. The purchase consideration for the acquisition is for approximately $1,272,000. The fair value of the business acquired is approximately $1,258,000 and the fair value of the net identifiable assets is $1,235,000. It is my duty to inform you about the best possible ways as you have acquired 15% non-controlling interest in Bain Company that is a wholly owned subsidiary of your parent company. You will have 15% equity ownership in the subsidiary company and the parent company will be merging the financial results of the subsidiary with its own financial results. I would like to inform you that you will not have any control over the decisions taken by the company as you will be the minority shareholder. The non-controlling interests will be considered at the net asset value of the entities and will not account for the potential voting rights. So, you will not be a part of decision making in the company (Investopedia, 2018).
As the acquisition information indicates, the fair value of the acquired assets and liabilities is less than the actual business price. It shows that the company XYZ which we are acquiring is carrying intangible assets in form of the goodwill. We will be using the ceiling method acquisition analysis to make this deal profitable.
As you have been our client for a long time now, it is our duty to make you aware about all kinds of financial or other kinds of associated threats that might affect you in future. I would be able to provide you with more useful information if you could tell me about what type of non-controlling interests i.e. direct or indirect, have you opted for in the subsidiary because it would have been easier for me to tell you some seriously good aspects about it. You will have to provide us with all the relevant details and we will be ready to provide you the relevant information (Knowledgebible, 2010).
Anyways, you need not to worry about anything. We will always be here to help you at any point of time you need. Please get in touch with us and we will update you about all the accounting and financial information you will be preferring to have in future.
We will always be excited to assist you in your future financial and accounting endeavors. We wish you luck for the same.
Sincerely,
Adam Williams
Accountant
National Accounting
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Date |
Activity / Action |
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13th October, 2018 |
The assignment is based on the technological outage in the organization. When I first received the project, I started conducting the research on internet about the most popular technology outages in the world, their causes and the losses the companies incurred due to these outages. I further planned to learn a proper methodology for writing memo and letter, the type of language it must include and what are the main points which need to be covered. |
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14th October, 2018 |
I downloaded the Business Combinations under Common Control discussion paper to get an idea of the IFRS projects from the IFRS website. Also, I downloaded the project related documents from the website. I conducted an online research on how acquisition can play a role in resolving the problem of technology outage. |
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16th October, 2018 |
First draft of the assignment is completed: When did you complete your first draft and what did you do to improve it prior to submission, what resources did you use to improve the spelling and grammar, did you seek any help from staff? I completed the first draft of the assignment on 15th October 2018 which included a rough template of memo and letter and included the major points which I will include in them. After the draft was ready, I elaborated the points and made them specific in order to get the best possible structure for it. Later, I proofread the document and checked for the grammatical errors. For improving the grammar and spelling I visited the following links- After, the final draft was ready, I checked it for plagiarism. After, it was ensured that the document is free from grammatical errors and plagiarism, I submitted the document. |
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17th October, 2018 |
The final draft was ready by 17th October 2018. The final draft was prepared before the due date so that it can be checked thoroughly before submission in order to present all my ideas intact. |
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18th October, 2018 |
Date of submission of the assignment: |
References
Accounting Tools, 2017. Acquisition method of accounting. [Online] Available at: https://www.accountingtools.com/articles/2017/5/4/acquisition-method-of-accounting [Accessed 16 October 2018].
AssetWorks, 2018. The Benefits of Acquisition. [Online] Available at: https://www.assetworks.com/the-benefits-of-acquisition/ [Accessed 16 October 2018].
IASB Agenda ref 23 , 2018. Business Combinations under Common Control. IFRS Foundation.
IFRS, 2018. Work plan. [Online] Available at: https://www.ifrs.org/projects/work-plan/ [Accessed 16 October 2018].
Investopedia, 2018. Non-Controlling Interest. [Online] Available at: https://www.investopedia.com/terms/n/noncontrolling_interest.asp [Accessed 16 October 2018].
Kimmel, S., 2018. Technology Outages: The Top Causes. [Online] Available at: https://www.channele2e.com/technology/business-continuity/what-is-causing-it-outages-in-2018/ [Accessed 16 October 2018].
Knowledgebible, 2010. Significance of International Financial Reporting Standards – IFRS. [Online] Available at: https://www.knowledgebible.com/forum/showthread.php/5520-Significance-of-International-Financial-Reporting-Standards-IFRS [Accessed 16 October 2018].
McKinsey & Company, 2018. The six types of successful acquisitions. [Online] Available at: https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-six-types-of-successful-acquisitions [Accessed 16 October 2018].
Papnoi, B., 2018. What are the importance of IFRS? [Online] Available at: https://www.quora.com/What-are-the-importance-of-IFRS [Accessed 16 October 2018].
The Monthly Fool, 2018. What Are the Differences Between the Acquisition Method and the Purchase Method in Accounting? [Online] Available at: https://www.fool.com/knowledge-center/the-differences-between-the-acquisition-method-the.aspx [Accessed 16 October 2018].
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