Key Aspects of Corporate Accounting

The whole study is divided in two parts, wherein first part contains an essay on recognition and measurement process of goodwill/gain amount through bargain purchase in event of business-combination as per AASB-3/IFRS-3. While second part consists of numeral task to prepare acquisition analysis and consolidation worksheet entries in context of acquisition of Davis Ltd by corporation Alma limited.

TASK

PART A

Recognition and measure of goodwill or gain amount from bargain purchase under business combination:

AASB 3: Business Combination deals with the accounting practices to be followed inn case of business combination. Core objective it is to enhance relevancy, reliableness, efficiency and comparability of accounting information which a enterprise provides in annual financial statements regarding event of business combination and respective effects. This standard provides guideline for effecting business combination event in books of both companies. Main issue in business-combination is assessment of goodwill or gain due to business acquisition. Provisions stated in this standard specifies the appropriate recognition of goodwill or gain step wise and measurement criteria for assessing business goodwill (Bugeja and Loyeung, 2015). This also determines amounts which are to be included in computation of goodwill/gain as well as specific items to be excluded from computation.

As per AASB-3, event of business acquisition is defined as contract, specific agreement or financial event under which acquirer corporation acquires percentage/share in ownership or full ownership in other corporation. Must requirement here is legal agreement and financial deal between corporations wherein ownerships exchanged from one corporation to another corporation. Provisions of this standard states that goodwill amount is measured as the difference amount between:

(a) Aggregate amount of:

1. the amount of purchase consideration to be paid (normally at fair-value),
2. Figure of non-controlling interest or NCI (if any), and
3. Acquisition-date fair value figure of acquirer's previously hold equity shares interest in other corporation (acquiree), under process of business combination.

(b) Net amount of identifiable assets amount and amount of liabilities assumed as on the date of acquisition.

The above points can be summarised in an equation, as follows:

If amount of difference from above measurement is negative figure, overall resulting gain amount is bargain-purchase in term of profit or loss, that may incur in cases like forced seller performing under compulsion. Although, before any amount of bargaining purchase-gain is recognized in profit/loss, acquirer company must attempt a significant review for proper and complete determination of value of assets/liabilities as well as all the measurements effectively indicate considerations of provided information (Bepari, Rahman and Mollik, 2014).

As per the provisions of AASB 3, under a process of business combination wherein acquirer corporation and acquiree corporation or any its former-owners) significantly exchanges only their equity holding interests, fair value as on acquisition-date of the acquiree corporation’s equity holding interests can be quite more faithfully assessable than fair value of acquirer corporation's equity holding interests' fair value. Thereby, acquirer corporation shall ascertain net amount of acquired goodwill on the basis of acquiree corporation's equity interest fair-value as on date of the initial acquisition rather than fair value of equity holding interest transferred as at acquisition date. For determining certain amount of acquired goodwill under a process business combination where no significant amount of consideration transferred, acquirer corporation shall apply acquirer corporation’s interest at fair value (as on acquisition-date) in acquiree corporation in stead of fair value amount of consideration transferred as on acquisition date (Kabir and Rahman, 2016).

Eventually an acquirer corporation make bargain purchase that is regarded as business combination where aggregate amount of point (b) is greater than amount assessed in point (a) [As discussed above]. In case such excess remains even after acquisition date then acquirer corporation shall recognize assessed gain in P&L as on acquisition-date. Such amount of gain will be provided to acquirer corporation.

Before identifying a profit on an acquisition bargain, acquirer corporation shall re-evaluate whether it appropriately identified all obtained assets as well as all presumed liabilities, and must identify any further specific assets or liabilities found in that analysis. The purchaser must then check for all following processes for calculating the quantities that this Norm needs to be recognized as on acquisition-date:

• Identifiable acquired incomes/assets and liabilities/obligation assumed;
• Any NCI in acquiree corporation
• With respect to business combination done in several stages, acquirer corporation’s formerly acquired equity holding interest in another corporation (acquiree), as well as
• Net amount of purchase consideration transferred (Kabir, Rahman and Su, 2017).

Main aim of such review is ensuring that all the measurements adequately shown key considerations of aggregate accessible information as on acquisition-date. The net consideration acquired in business combination should be determined at fair value, assessed as sum of the equal consolidation-date amounts of the assets acquired by the purchaser, the obligations accrued by acquirer corporation to acquiree corporation's former equity holding interests provided by acquirer. The consideration exchanged may involve the acquirer corporation's assets or obligations which have bearing sums that vary as on acquisition date from the reasonable values (for instance, non-monetary assets or any business). The purchaser corporation shall, at purchase date, re-evaluate the all acquired assets/liabilities assigned to their reasonable values and recognize the resultant gains/losses in P&L if any.

Although, in some cases transferred assets/liabilities left within consolidated enterprise after the entire business-combination (since assets/liabilities initially transferred to other corporation acquiree instead of former-owners), while acquirer thus holds controlling of them. In such circumstances, acquirer corporation shall assess all acquired assets/liabilities at respective carrying figures just before acquisition-date and not recognize loss/gain on acquisition of assets/liabilities it currently controlling both pre and post business combination (Su and Wells, 2018).

Any assets or liabilities arising from a contingent consideration scheme shall be considered as part of acquirer's transition in return of the acquiree corporation. The purchaser shall accept as component of compensation exchanged in return for the seller the acquisition-day of contingent consideration at fair-value. The acquéreur shall, in accordance with the terms and conditions of equity instrument and financial-liability in para11 of AASB-132 Financial Instruments, categorize a duty to to make payment contingent consideration which satisfies definition of financial instrument as financial liability or equity. Acquirer corporation shall, when the conditions stipulated are satisfied, categorize as asset a right to go back the earlier transferred payment. The guidelines on corresponding contingent consideration reporting are provided in para 58 (d'Arcy and Tarca, 2018).

The purchaser should re-measure previously held equity-interest in purchased at fair-value acquisition date, under business combination accomplished by phases and accept the resultant benefit or lost, if any, by profit, loss or other comprehensive profits, if relevant. The acquirer may have recorded adjustments in the valuation of its share in the acquired interest in detailed profits during previous reporting periods. If so, it will be identifiable on same terms as if the acquisition had disposed, explicitly from the previously held stake, of the sums that were recognized in other full revenues (Su and Wells, 2018).

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PART B

As per the analysis of given case study following facts has been identified related to business combination in context of Alma Ltd and Davis Ltd, as follows:

• Date of the Acquisition: 1-July, 2018
• Agreed Purchase consideration amount: $ 1997196
• Dividend payable in books of David Ltd: $ 40000
• Equity Share capital : $ 699000
• General Reserves : $ 300000
• Asset Revaluation Reserve : $ 240000

In May-2019, Davis Ltd transferred from assets revaluation surplus at 1 July 2018 to general reserve: $ 120000

Tax Rate: 30 percent.

Acquisition analysis at 1 July, 2018:

*As given in case scenario shares were acquired ex div., of Davis Ltd therefore Alma ltd is not eligible to acquire dividend amount that was announced by Davis Ltd prior to date of acquisition and thus it will not consider it as amount of refund on amount of consideration transferred in business acquisition.

Consolidation worksheet entries for Alma Ltd’s group at 30 June 2019:*As given in case scenario shares were acquired ex div., of Davis Ltd therefore Alma ltd is not eligible to acquire dividend amount that was announced by Davis Ltd prior to date of acquisition and thus it will not consider it as amount of refund on amount of consideration transferred in business acquisition.

Business combination valuation entries:

Inventories A / c Dr. $ 240000

Deferred Tax Liability Account $ 72000

Business combination valuation reserve Account $ 168000

land Dr. $ 479000

Deferred Tax Liability Account $ 143700

Business combination valuation reserve Account $ 335300

Vehicle A/c Dr. $ 559000

Deferred Tax Liability Account $ 167700

Business combination valuation reserve Account $ 391300

Share Capital Account Dr. $ 699000

General Reserve Account[300000 - 136404 (gain)] Dr. $ 300000

Asset revaluation surplus Account Dr. $ 240000

Business combination valuation reserve Account Dr. $ 894600

Shares in Davis Ltd $ 1997196

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CONCLUSION

From above study report it has been concluded that various aspects of corporate accounting help to define a corporation's accounting structure. It help to put strict controlling over effective compliance of standards and policies of accounting within business organisation. It also involves establishing internal control over accounting practices and ensures proper disclosure of any change in accounting polices, standards etc. Moreover, any major financial event like business-combination, liquidation also guided by corporate accounting procedures. Management in listed company coordinate with accounting staff to ensure the effective compliance of adopted accounting standards and policies.

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REFERENCES

Books and Journals:

• Schaltegger, S., Etxeberria, I.Á. and Ortas, E., 2017. Innovating corporate accounting and reporting for sustainability–attributes and challenges. Sustainable Development. 25(2), pp. 113-122.
• Bugeja, M. and Loyeung, A., 2015. What drives the allocation of the purchase price to goodwill?. Journal of Contemporary Accounting & Economics. 11(3). pp. 245-261.

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