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:
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.
Assessment Criteria
The criteria used to assess the submitted assignment will be:
- Ability to work collegially in a group environment for shared success.
- Evidence of relevant research and demonstrated understanding of research materials. As a minimum students should consult the references listed under additional resources in the Course Description
- The structure, coherence and logic of arguments and analysis presented.
- Demonstrated understanding of the subject matter that is the focus of the assignment topic.