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Tutorial 8 RQ 10.2. Discuss the importance of identifying the acquisition date.

Acquisition date is the date on which the acquirer obtains control of the acquiree. Important because on this date: the fair values of the identifiable assets acquired and liabilities assumed are measured. the fair value of the consideration transferred is measured the goodwill or gain on bargain purchase is calculated.

CS 10. 5: Accounting for acquisition-related costs Arguments in favour of expensing: - These costs are not part of the fair value exchange between the buyer and the seller. - The services received from the outlays have been consumed, and so do not give rise to assets. Arguments against expensing: - Inconsistent with other accounting standards such as AASB 116 Property, Plant and Equipment. - The costs are an integral part of the acquisition price, with the outlays being incurred in order to generate future benefits. Under AASB 3, a fair value model is adopted so consistency with AASB 116 is not a strong argument. The acquirer is prepared to incur the costs at acquisition. Hence there must be an expectation on the acquirers part that these will be recouped via future benefits from the business combination. As noted by Ms New, business combinations do not result in immediate losses. However, because the fair value model is used, the assets acquired cannot be stated in excess of fair value compare the initial measurement of financial instruments acquired under para 43 of AASB 139. If goodwill reflects expected future benefits and is measured as a residual, then it may be argued the total benefits acquired by the acquirer are reflected in the cost of the combination being the sum of the consideration transferred and the directly attributable costs. Under this view there would be a larger goodwill measured than currently recognised under AASB 3, but no expense for the acquisition-related costs. Note para BC366 of the Basis for Conclusions for AASB 3, the IASB argues: 1. Acquisition-related costs are not part of the fair value exchange between the buyer and the seller. 2. They are separate transactions for which the buyer pays the fair value for the services received. 3. These amounts do not generally represent assets of the acquirer at acquisition date because the benefits obtained are consumed as the services are received.


Consideration transferred Number of shares issued Cost per share Consideration transferred

= = = = =

(90% x 60 000) 27 000 $6.20 27 000 x $6.20 $167 400

A. Journal entries: Shark Ltd Shares in Squid Ltd Share capital (Cost of shares acquired) Share capital Cash (Costs of shares issued) B. Determining the fair value of shares issued In acquiring the Squid Ltd shares, Shark Ltd gives up 27 000 of its own shares. The problem is to determine which share price should be used to determine the cost to Shark Ltd. $6.20 is used here as it represents the fair value at date of acquisition. See Basis for Conclusions on IFRS 3 para BC342, and section 10.5 of the text. C. SHARK LTD Statement of Financial Position Current Assets Non-current Assets Shares in Squid Ltd Other Total Non-current Assets Total Assets Liabilities Creditors and provisions Net Assets Equity Share capital Reserves Asset revaluation surplus General Retained earnings Total Equity $146 000 $167 400 190 000 357 400 503 400 28 000 $475 400 $245 400 $140 000 60 000 Dr Cr 167 400 167 400

Dr Cr

2 000 2 000

200 000 30 000 $475 400

RQ 15.6. What are relevant activities? Relevant activities are activities of the subsidiary that significantly affect the investees returns. Examples are: (a) selling and purchasing of goods or services; (b) managing financial assets during their life (including upon default); (c) selecting, acquiring or disposing of assets; (d) researching and developing new products or processes; and (e) determining a funding structure or obtaining funding.

CS 15.2 41% Canada Ltd Chile Ltd Canada Ltd NCI 41% 59% - widely held

PART 1 If the NCI is widely held then it may be argued that Canada Ltd has the capacity to control Chile Ltd based on the potential for the NCI to outvote Canada Ltd in determining the directors of Chile Ltd. However, other factors should also be considered, such as: - historical attendance at AGMs of Chile Ltd - interest groups such as Green groups within the NCI - geographical distribution of NCI If the NCI were tightly held would the decision be any different? The other key factor in the definition is the returns criterion. A parent must have the rights to variable returns from the control exercised as well as the ability to use power to affect returns. In this case, many of the key policy decision seem to have been set by contract: - must purchase 90% of TV shows from Canada Ltd - terms & conditions of supply determined by Canada Ltd - limited rights to engage in other businesses - provision of marketing services - lease of rental space. Hence even if the NCI could dominate the Board of Chile Ltd, there is not much they can change to increase or modify their benefits. Canada Ltd is therefore running the business. The NCI are simply investors.

PART 2 Whether the ownership of Chile Ltds shares comes from acquisition on the open market or acquisition at incorporation of the company is not of interest as it has no effect on the determination of control. CS 15. 9 ALBANY LTD-ALICE LTD-DARWIN LTD In each of these circumstances the following principles from the Basis of Conclusions to AASB 10 should be used: B2 To determine whether it controls an investee an investor shall assess whether it has all the following: (a) power over the investee; (b) exposure, or rights, to variable returns from its involvement with the investee; and (c) the ability to use its power over the investee to affect the amount of the investors returns.

B3 Consideration of the following factors may assist in making that determination: (a) the purpose and design of the investee; (b) what the relevant activities are and how decisions about those activities are made; (c) whether the rights of the investor give it the current ability to direct the relevant activities; (d) whether the investor is exposed, or has rights, to variable returns from its involvement with the investee; and (e) whether the investor has the ability to use its power over the investee to affect the amount of the investors returns A. Both Albany Ltd and Busselton Ltd hold 50% of the shares in Dunsborough Ltd, with Busselton Ltd actually directing Dunsborough Ltd because of its management expertise. In this circumstance, Esperence Ltd is not a subsidiary of either company. Neither investor has the power over Esperence Ltd, as neither investor holds existing rights to enable it to direct the relevant activities of Esperence Ltd. Although Albany Ltd allows Busselton Ltd to currently manage the investee, it can step in at any time and challenge the management arrangements. As neither investor holds more than 50% of the shares, neither has power. Hence there is no need for any consolidated financial statements to be prepared. B. Alice Ltd currently has the ability to elect a majority of directors of Springs Ltd. This has occurred potentially just because of its expertise in the mining industry. As in (a) above, this does not give it power over Springs Ltd. There is no information to suggest that the other 65% of shareholders in Springs Ltd could not get together and change the management of Springs Ltd. Alice Ltd does not have power over Springs Ltd. Alice Ltd does not have to prepare consolidated financial statements.

C. Currently Darwin Ltd holds 30% of the shares of Arnhem Ltd. The remaining shareholders consist of 7 shareholders having on average 10% of Arnhem Ltds shares. In relation to these investors: - most live outside Australia - most do not attend AGMs Where an investor has less than a 50% holding of shares in the investee, judgement is required to determine whether control exists. It is necessary to examine the potential actions of the holders of the other shares in Arnhem Ltd. In this case, it is difficult to make a decision as: - The fact that there are only 7 others shareholders with 10% each, only 3 of these need to get together to have the same voting capacity as Darwin Ltd. This lessens the likelihood of Darwin Ltd having control. - The fact that most live outside Australia lessens the probability of these shareholders getting together to take control. However, they could give their proxies to each other. - The attendance at AGMs is low by the other shareholders. This however can change if these shareholders become dissatisfied with Darwin Ltd as a manager. - The other shareholders have an interest in management shown by their appointing 3 of the directors only 1 less than Darwins 4 directors. As the shareholders have an interest as opposed to being apathetic the probability of becoming involved if they become dissatisfied with Darwin Ltd is higher. On balance, Darwin Ltd is probably not a parent of Arnhem Ltd as it does not have sufficient power to continue to direct the relevant activities of Arnhem Ltd.