IFRS Acquisition Method in Business Combinations Under Common Control
There are various issues which have been raised by IFRS concerning the acquisition of the business combinations under the common control. Such issues are as discussed below in this memo. According to IFRS under the acquisition method, the acquirer has to be identified first
during the business combination. In the event that one of entities prior to the business combination has more of the nets assets and revenue, it is considered as the accounting acquirer.IFRS has illustrated how a topic basis how the acquisition method works in a business combination under control.
According to the acquisition method as suggested by IFRS, all the assets and liabilities which are identifiable are typically recognized at the date of acquisition. However such assets and liabilities are recognized at their fair value (Fiume, Onesti, Romano and Taliento, 2015 p.50).
Topic Two: Intangible Assets and Contingent Liabilities
Based on the acquisition method as indicated by the IFRS, the intangible assets and contingent liabilities are identified under various circumstances such as when they are separable.Also, they are only recognized when they are believed to arise from legal or contractual rights. Further, the fair values of the intangible assets and contingent liabilities must be measured reliably.
The goodwill which is usually as a result of a bargain during the purchase of a particular item. The goodwill is usually recognized and estimated as the variance existing between the net acquisition and transferred consideration. It is also recognized on the date when the amounts of identifiable assets have been acquired and during that period, the liabilities are typically assumed (Taplin, Zhao and Brown, 2014 p.320). The value of the non-controllable interest can also be recognized and measured when applicable. Further, under the acquisition method, the non-controlling interest is usually estimated at a non-controllable interest which is a proportionate share of the net assets of the identifiable acquirer. The non-controlling interest is also measured at the fair value.
The IFRS has developed the acquisition method which is applied for the acquirer in various business combination. The following are the outlined steps involved during the acquisition method as indicated below;
The first step involves the identification of the business combination and this is followed by the identification of the acquirer. The other procedure of the acquisition technique entails the determination of the date of acquisition of the particular business entity (Biancone, 2017 p.3). The fourth step is the recognition and measurement of the identifiable assets which have been acquired and also the liabilities which have been assumed by the acquirer during the acquisition of the other business entity. After the recognition of the identifiable assets and assumption of the liabilities, the next step entails, the recognition and measurement of any particular non-controlling interest which may exist at the time of acquisition of the other entity. The other step under the acquisition method entails, the ascertainment of the transferred consideration by the particular entity and this is measured reliably by the acquirer of the business combination. The last procedure involves the recognition and measurement of the goodwill which is the gain as a result of the bargain purchase during the acquisition of the business combination.
Topic One: Assets and Liabilities
There are also various advantages associated with the acquisition method and such advantages include, it allows the acquirer of the business entity to select the type of asset he or she desires to acquire and this also includes the liabilities such individual desires to cover. Such an advantage provides the acquirer with an opportunity to select the alternative which contains the most revenue and less costly (Janowicz, 2017 p.105). The other advantage relates to the acquisition of the stock such that the buyer of the business enterprise has the opportunity of buying shares of the shareholders and eventually gains control of the assets and leaves the burden of covering for the liabilities.
Additionally, the stock options acquisitions can also enable the buyer to transfer some of the unwanted liabilities to the seller of the business enterprise. In the event that the buyer considers that the liability in the previous business enterprise is expensive, he or she can decide to give it back to the seller (Lee, 2015 p.65). The acquisition method also enables the acquirer to create economies of scale which entails a process where the production level of the acquired enterprise increases through the lowering of the costs of production levels.
The ceiling approach takes into account the fair values which have been exchanged in the process of acquisition of a particular business enterprise and this is done with the aim of acknowledging the goodwill which has been inflated. There are certain key features of the ceiling technique which entails the consideration of the fair value when it is greater than that of the identifiable net assets. The other feature of the ceiling approach is that the technique has a greater impact on the recognition of the particular goodwill and that of the distribution of equity (Choi and Nam, 2018 p.508). The fair value is only considered when it is greater than the fair value of the business. Lastly, the synergies existing between the consolidated parties are not displayed in the goodwill in the ceiling approach. Such a goodwill is however captured at its fair value which is that of the acquired business.
Apart from the above mentioned features, there are also certain advantages associated with the ceiling approach. Such advantages include, it takes into account the fair value of an asset during the acquisition of a particular business enterprise and this allows the parties involved to clearly estimate the exact value of a particular business (Bonacchi, Marra and Shalev, 2015 p.100). The other merit of the ceiling approach is that it considers the synergies which are found in the consolidated parties and this typically entails the non-display of the goodwill. The goodwill in the ceiling approach is usually capped at the fair value of the business enterprise which has been acquired by another party and this is a fundamental advantage of the ceiling approach.
Topic Two: Intangible Assets and Contingent Liabilities
Part Two
Letter to one of the Clients
Date: 11/10/2018
Mr. Jackson
154 Company Ltd
500 street, city
Canada
Dear Mr. Jackson,
RE: IMPACT OF ISSUES RAISED BY IFRS.
This is concerning the issues which have been raised by IFRS relating to matters such as the fair value of the net identifiable assets, purchase consideration and fair value of the business acquired. Under the fair value of the identifiable assets, the key impact on the client would be that the goodwill of the entity will be recognized separately from the other assets and this will create certain additional calculations (Su and Wells, 2015 p.1185). The other implication will be on the purchase consideration where all the assets which will be transferred and the liabilities accounted for by the previous owners will be accounted for outside the acquisition accounting. Another impact of the issues of the IFRS is that the identifiable assets and liabilities which will be acquired by the client will be assessed at their fair value and this is unlike in the previous approach of recognition and measurement of such assets and liabilities where they were evaluated at cost price.
According to Masadeh, Mansour and AL Salamat (2017 p.100), unlike before the suggested issues on business combination under control where the purchase consideration and the sale considerations were treated separately, under the new legislation by IFRS, the will be treated as a whole and this will, therefore, leave the client with many numerous calculations which could time consuming and complex to complete (Hughes, Larson, Sander and Xiques, 2017 p.15). Further, the client will have an easy time when accounting for the various transactions within the acquired business enterprise and this is because the IFRS has outlined certain fundamental steps and procedures involved when accounting for various items. Such items include the goodwill, identifiable assets and liabilities and the fair value of the business which the client has acquired.
The issues proposed by the IFRS will also enable the client to attain a certain level of accountability and this is attributed to the fact that the method of acquiring business enterprise will typically aim at reducing informational gap which has been existing between the management of particular company and the fundamental providers of capital (Tan and Lim, 2017 p.120). Another impact of the issue is that the client will be in a position to achieve a certain level of transparency and this is because the quality of information and comparability of information in the financial statements of the business enterprises acquired internationally will be enhanced in the long run.
Additionally, the impact on the client will be that the IFRS issues will typically result in economic efficiency which enable the acquired company of the client to offer useful and relevant information to a variety of investors (d’Arcy and Tarca, 2018 p.215). Such relevant and useful information based on the acquisition method will typically enable the investors of the acquired company to recognize certain key risks and opportunities in regards to the potential investments and also there will be an improvement on the allocation of capital in the existing company of the client.
References
Biancone, P.P., 2017. Business combinations under common control (BCUCC): the Italian experience. GSTF Journal on Business Review (GBR), 2(3).
Bonacchi, M., Marra, A. and Shalev, R., 2015. Fair value accounting and firm indebtedness–evidence from business combinations under common control.
Choi, J.S. and Nam, H.J., 2018. Do Goodwill and Its Impairment Write-offs Predict Future Cash Flows Under the IFRS Regime?.
d’Arcy, A. and Tarca, A., 2018. Reviewing IFRS Goodwill Accounting Research: Implementation Effects and Cross-Country Differences. The International Journal of Accounting,53(3), pp.203-226.
Fiume, R., Onesti, T., Romano, M., and Taliento, M., 2015. Dialogue with standard setters. Business combinations under common control: concerns, criticisms and strides. Financial Reporting.
Hughes, S.B., Larson, R.K., Sander, J.F. and Xiques, G., 2017. Difficulties converging US GAAP and IFRS through joint projects: The case of business combinations. Advances in accounting, 39, pp.1-20.
Janowicz, M., 2017. Business combinations under common control in International Financial Reporting Standards–is authoritative accounting guidance needed?. Zeszyty Teoretyczne Rachunkowo?ci, (93 (149)), pp.97-111.
Lee, P.J., 2015. Assessment of business subsidiary operations and consolidated financial statements through a common global accounting language, IFRS vs. GAAP.International Journal of Business and Social Research, 5(7), pp.61-70.
Masadeh, W., Mansour, E. and AL Salamat, W., 2017. Changes in IFRS 3 Accounting for Business Combinations: A Feedback and Effects Analysis.
Su, W.H. and Wells, P., 2015. The association of identifiable intangible assets acquired and recognized in business acquisitions with postacquisition firm performance.Accounting & Finance, 55(4), pp.1171-1199.
Tan, P. and Lim, C.Y., 2017. Heineken’s Acquisition of Asia Pacific Breweries: Accounting for Business Combinations and Changes in Ownership Interests. Issues in Accounting Education, 32(4), pp.101-127.
Taplin, R., Zhao, Y. and Brown, A., 2014. Failure of auditors: The lack of compliance for business combinations in C hina.Regulation & Governance, 8(3), pp.310-331.
