Challenges in Accounting for Business Combination under Common Control
AccounTrust
200 Broadway Avenue
West Beach SA 5023
Australia
To: The Employees of AccounTrust
From: S. Smith
Subject: Issues in the IFRS’s “Business Combination under Common Control”
Acqusition is considered as a situation where a business organization purchases most of the shares or all the shares of another business organization with the aim to take control. Thus, the occurrence of an acquisition can be seen when a company buys or obtains more than 50% shares of the target company. Ceiling Approach is considered as the process of fair value exchanged for avoiding the recognition of any inflated goodwill. Lastly, business combination can be defined as a transaction through which a company gains control of another organization (Bonacchi, Marra and Shalev 2015).
It can be seen in the current situation that the present accounting standards of International Financial Reporting Standards (IFRS) do not have any specified regulation for the accounting of business combination of the companies or that businesses that are controlled by the other companies. For this reason, this aspect creates some major difficulties for the investors and regulators for comparing the financial performance and position of the business organizations. In order to eradicate these issues related to business combination, the International Accounting Standards Board (IASB) is considering the development of requirements for bringing improvements in transparency and comparability in the accounting of business combination. It needs to be mentioned that there are some major issue related to the development of the requirements of ‘Business Combination under Common Control’ and it is needed for IFRS to take into consideration these issue at the time of the development of the requirements. These issues are discussed below:
According to the first issue, business combinations under common control and the businesses that have been undertaken at the time of the preparation of the initial public offerings (IPO) are not included in the scope of IFRS 3 Business Combination (ifrs.org 2018). As there is not any specific requirement of accounting for business combination under common control, it is needed for the business entities for the development as well as application of a specific accounting policy that can lead to the relevant information that represents the transactions faithfully. At the time of doing this, the business entities utilize the steps in IAS 8 Accounting Policies, Change in Accounting Estimates and Errors and take into consideration the IFRS standards’ requirements tackling with the similar as well as recent issues along with the present pronouncements of different regulation-setting bodies and other literatures in accounting. As a result of this, it can be seen that the practice business entities are using the acquisition method developed by the IFRS 3 for the purpose of the accounting operations of business combination under common control (Sedlá?ek, K?ížová and Hýblová 2013).
IFRS’s Project to Improve Accounting for Business Combination under Common Control
After the first issue, the second issue is related to the recognition process of the net identifiable assets at the time of the process of acquisition. The requirement of the acquisition method is the recognition of the acquired net identifiable assets at the date of the acquisition based on the fair value measurement; in addition, another major requirement is the recognition of any goodwill or any gain derived from a bargain purchase that develops from the accounting of business combination. For this reason, according to the predecessor method, the transferred net assets in a business combination under common control are required to be recognized at the predecessor carrying amount. In this context, it needs to be mentioned that there are major differences in the process of the application of the predecessor method in the acquisition of the business organizations due to the presence of different requirements under different national accounting framework.
Apart from the above two issues, the next issue in this context is related to the interest of the various parties and users of the financial statements of the companies. It can be observed that different interested parties like security regulators and others have major concern related to the diversity in the accounting practice for the business combination under common control; for this reason, they have asked the accounting boards for more guidance on this area for the accounting of business combination under common control. Most importantly, this aspect is a major concern for the emerging economies. According to some of the major interested parties in the emerging economies, the business combination under common control is a very common aspect in their authority. Thus, based on the above discussion, there are three major issue raised in the IFRS’s project related to the business combination under common control; and it is needed for IFRS to take into consideration all these issues at the time of the standard setting process for business combination under common control (ifrs.org 2018).
After the analysis of the major issue related to the business combination under common control, it needs to be mentioned that the business organizations have the option to select between different approaches of Acquisition Analysis for business combination under common control (iasplus.com 2018). According to the discussion paper of IFRS, the staffs have developed two specific approaches; they are Full Fair Value approach and Ceiling Approach. According to the opinions of the staffs, there are some major challenges under both the approaches of acquisition analysis. In order to address these issues and challenges, the staffs of IFRS have developed Ceiling Approach (iasplus.com 2018).
Ceiling Approach and Its Impact on Acquisition Analysis
Ceiling approach is considered as a major technique for the purpose of acquisition analysis. At the time of the adoption of ceiling approach, the organizational managers are needed to consider certain aspects. First, it is needed for the organizational managers to take into account the fair value exchanged in order to avoid the recognition of any inflated goodwill. In the process of ceiling approach, goodwill is regarded as the excess of fair value consideration over the identifiable net asset’s fair value, but it is capped at the fair value of the acquired business. For this reason, any gain is never recognized. In addition, in the process of ceiling approach, the financial managers are required to recognize an equity transaction incase fair value consideration is higher than the fair value of the acquired business; and in case, fair value consideration is higher than the fair value of the identifiable net assets. It indicates towards the fact that the ceiling approach affects the goodwill recognition process and equity distribution process when the fair value consideration is higher than the fair value of the business. In addition, this approach involves some major complexities as well as costs for the determination of the fair value of the business. At the same time, the presence of some major uncertainties can be seen in the measurement process of the fair value of the business. Lastly, ceiling approach does not focus on the reflection of synergies between the combining parties due to the fact that it caps the goodwill at the internally generated goodwill in the acquired business. Thus, it can be seen from the above discussion that the adoption of ceiling approach in the acquisition process may lead to some major complexities in the determination of the fair value of the business consideration. For this reason, it is suggested for the companies to stick to the existing standards.
AccounTrust
200 Broadway Avenue
West Beach SA 5023
Australia
15th October, 2018
To,
The Managing Director
Suite 109
240 Wandaloo ESP
New Canberra WA 2565
Australia
Dear Sir,
The main aim of this letter is to inform you about the effects of the projects of IFRS related to the acquisition analysis of business combination under common control on you recent acquisition. On a more elaborative note, we would like to mention you that IFRS has taken an initiative for developing requirements for the smooth accounting of business combination under common control. Thus, according to the Ceiling approach of IFRS related to the acquisition analysis of business combination under common control, there will be some major impact on your company’s acquisition of 15% Non-Controlling Interests of the wholly owned subsidiary of the parent company (Bonacchi, Marra and Shalev 2015).
According to the details of the acquisition process, the amount of purchase consideration is $12,720,000; it implies that Max Retail Corporation made a payment of $1272000 in order to acquire the business. It can also be seen that the fair value of the acquired business is $1258000 and the fair value of the net identifiable assets is $1235000. Now, as per the ceiling approach, in case the fair value of the consideration exceeds the fair value of the identifiable net assets, the companies are needed to recognize a provision amount of goodwill (Sedlá?ek, K?ížová and Hýblová 2013). In case of your company, it can be seen that the fair value of the acquired business or business consideration is higher than the fair value of net identifiable asset; and the different between fair value of business acquired and the fair value of the net identifble assets is $23000 ($1258000-$1235000) (Fiume et al. 2015).
For this reason, now it is required for you to recognize this difference of $23000 as goodwill. After this process, it will be required for your business organization to allocate this goodwill worth $23000 to each of the CGUs of the receiving business entities (Gláserová 2016). After this process, the requirement will be to measure the amount of CGUs and to compare them with the carrying amount. In this process, it will be required for your organization to confirm the value of goodwill when the recoverable amount is higher than the carrying amount. On the contrary, you will be required to adjust and distribute the provision of goodwill in case the recoverable amount is lower than carrying amount (Eloff and de Villiers 2015).
Sincerely,
AccounTrust
References
Bonacchi, M., Marra, A. and Shalev, R., 2015. Fair value accounting and firm indebtedness–evidence from business combinations under common control.
Eloff, A.M. and de Villiers, C., 2015. The value-relevance of goodwill reported under IFRS 3 versus IAS 22. South African Journal of Accounting Research, 29(2), pp.162-176.
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.
Gláserová, J., 2016. Impacts of Newly Acquired Items Within Business Combinations on the Items of the Financial Statements. Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 64(1), pp.265-274.
Iasplus.com., 2016. Business combinations under common control. [online] Available at: https://www.iasplus.com/en/meeting-notes/iasb/2016/april/business-combinations [Accessed 15 Oct. 2018].
Iasplus.com., 2018. Business combinations under common control. [online] Available at: https://www.iasplus.com/en/meeting-notes/iasb/2018/may/bcucc [Accessed 15 Oct. 2018].
Iasplus.com., 2018. Business combinations under common control. [online] Available at: https://www.iasplus.com/en/meeting-notes/iasb/2018/february/bcucc [Accessed 15 Oct. 2018].
Ifrs.org., 2018. Business Combination Under Common Control. [online] Available at: https://www.ifrs.org/-/media/feature/meetings/2018/july/asaf/ap6-measurement-approaches.pdf [Accessed 15 Oct. 2018].
Ifrs.org., 2018. Staff Paper [online] Available at: https://www.ifrs.org/-/media/feature/meetings/2016/april/iasb/business-combinations-under-common-control/ap23a-methods-accounting-bcucc.pdf [Accessed 15 Oct. 2018].
Ifrs.org., 2018. Staff Paper. [online] Available at: https://www.ifrs.org/-/media/feature/meetings/2016/april/iasb/business-combinations-under-common-control/ap23-cover-paper.pdf [Accessed 15 Oct. 2018].
Ifrs.org., 2018. Staff Paper. [online] Available at: https://www.ifrs.org/-/media/feature/meetings/2016/april/iasb/business-combinations-under-common-control/ap23b-application-predecessor-method.pdf [Accessed 15 Oct. 2018].
Sedlá?ek, J., K?ížová, Z. and Hýblová, E., 2013. Comparison of accounting methods for business combinations. Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 60(2), pp.315-324.
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
