Reference no: EM131049940
Question :
PART A
Required:
Critically evaluate the Australian requirements for accounting for business combinations.
In your discussion you should specifically address the following issues:
- Exclusions from the scope of Accounting Standard AASB3 Business Combinations.
- The implications of the requirement to use the acquisition method of accounting for business combinations
- The identification of an acquirer in a business combination
- The determination of fair values of assets in a business combination
- The reasons for the choice of fair value to measure assets and liabilities acquired in a business combination
- The nature and treatment of goodwill or bargain purchase arising on a business combination.
- The two different ways in which a business combination can be accomplished.
PART B
CASE STUDY
Federation Ltd acquired the net assets of an existing business Nigeria Pty Ltd on 1 July 2015. The statement of financial position of Federation Ltd immediately prior to the acquisition is as shown below:
Federation Ltd
Statement of Financial Position as at 1 July 2015
| Assets |
|
| Cash at bank |
40,000 |
| Accounts Receivable |
95,000 |
| Inventory |
110,000 |
| Shares in Wesfarmer's Ltd |
80,000 |
| Plant and Equipment (net) |
550,000 |
| Land and Buildings (net) |
650,000 |
|
|
| Total Assets |
1,525,000 |
| Liabilities |
|
| Accounts Payable |
220,000 |
| Provisions |
80,000 |
| Bank Loans |
200,000 |
|
|
| Total Liabilities |
500,000 |
|
|
| Shareholder's Equity |
|
| Issued Capital |
900,000 |
| Retained Earnings |
125,000 |
|
|
| Total Shareholder's Equity |
1,025,000 |
|
1,525,000 |
The identifiable net assets of Nigeria Pty Ltd acquired by FederationLtd , valued at fair value at date of acquisition comprise the following:
| Assets acquired: |
|
| Accounts Receivable |
20,000 |
| Inventory |
60,000 |
| Motor Vehicles |
50,000 |
| Plant and Equipment |
150,000 |
| Land and Buildings |
300,000 |
|
|
| Liabilities assumed: |
|
| Accounts Payable |
105,000 |
| Bank Loan |
100,000 |
In addition Nigeria Pty Ltd has unrecorded contingent liabilities estimated at $65,000
The terms of the acquisition are as follows:
- Cash consideration of $120,000 to be paid to Nigeria Pty Ltd on 30 June 2016. This amount is to be raised by a bank loan (Federation Ltd's incremental borrowing rate is 8%)
- The shares in Wesfarmers held by Federation Ltd which have a fair market value of $90,000 at 1 July 2015 are to be transferred to Nigeria Ltd.
- Federation Ltd is to issue 50,000 shares to Nigeria Pty Ltd . At 1 July 2015 Federation Ltd's shares are trading at $4 per share.
- Federation Ltd incurred legal expenses of $10,000 and share issue costs of $4,000 in connection with the acquisition
- Under the terms of the acquisition Federation Ltd is required to issue further shares to Nigeria Pty Ltd if the value of Federation Ltd's shares fall below $4 per share by 30 June 2016. It is estimated that there is a 20% likelihood that the share price will fall to $3.50 by 30 June 2016.
Required:
Prepare the journal entries in the books of Federation Ltd to record the acquisition of Nigeria Pty Ltd and a statement of financial position for Federation Ltd immediately after the acquisition.
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