AYN417

Topic 6: Growth By Acquisition

1. What is meant by a business combination?

AASB 3 Appendix A:
Business:
an integrated set of activities and assets that is capable of being conducted
and managed for the purpose of providing a return in the form of dividends,
lower costs or other economic benefits directly to investors or other owners,
members or participants
Business combination:
a transaction or other event in which an acquirer obtains control of one or
more businesses
Consider inputs, processes and outputs
Only in a business combination can goodwill be present.
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.
3.

What is meant by contingent consideration and how is it accounted

for?
Appendix A: Contingent consideration:
Usually, an obligation of the acquirer to transfer additional assets or equity
interests to the former owners of an acquiree as part of the exchange for control
of the acquiree if specified future events occur or conditions are met. However,
contingent consideration also may give the acquirer the right to the return of
previously transferred consideration if specified conditions are met.
See AASB 3
Para 39:
The consideration transferred includes any asset or liability resulting from
a contingent consideration arrangement. This is measured at fair value at
acquisition date.
Para 40:
The acquirer shall classify the obligation to pay contingent consideration
as a liability or equity.
Para 58:
Changes in the measurement of the obligation subsequent to acquisition
date resulting from events after the acquisition date are accounted for
differently depending on whether the obligation was classified as equity or
debt.
If classified as equity, the equity shall not be remeasured.
If classified as liability, it is accounted under AASB 139 or AASB 137 as
appropriate.
8. How is the consideration transferred calculated?
AASB 3 para 37 states that the consideration transferred shall be
- measured at fair value, determined at acquisition date, and
- calculated as the sum of the fair values of the assets transferred by the
acquirer, the liabilities incurred by the acquirer, and the equity interests
issued by the acquirer.
11. Why is it important to identify an acquirer in a business combination?
Assume A Ltd and B Ltd combine together by creating C Ltd which acquires all the
shares in A Ltd and B Ltd and issues its own shares in exchange. As noted in AASB 3, C
Ltd is not necessarily the acquirer.

AYN417

Topic 6: Growth By Acquisition

What differences occur if either A Ltd or B Ltd is identified as the acquirer?

2 effects:
(i) the consideration transferred is based on what the acquirer gives up; and
(ii) the acquirees net assets are measured at fair value.
In relation to point (ii), if A Ltd is the acquirer then in the consolidated financial
statements B Ltds net assets are adjusted to fair value while A Ltds net assets are at
the carrying amounts in A Ltd. If B Ltd is the acquirer, A Ltds net assets are adjusted
to fair value while B Ltds net assets are at the carrying amounts in B Ltd.
Question 12.1

Accounting by the acquirer

A. Acquisition analysis in relation to the above acquisition by Hugh Ltd.

Net fair value of identifiable assets and liabilities acquired:
Equipment
Inventory
Accounts receivable
Patent
Investment
Accounts payable
Consideration transferred:
Cash:
Cost
Costs of liquidation
Preference shareholders 6,000 x $0.80c,h

72,000
40,000
18,000
8,000
12,000
(16,000)
134,000

$700
4,800

Ordinary shareholders:
Payable now x 10,000 x $2.50 d,h
Payable later x 10,000 x $2.50 x 0.909091d,h

12,500
11,364

Debentures including premium $8,000 x 1.02

8,160

*Preference shareholders 4,000 x $1.20 f,h

4,800

$37,524

Shares:
**Ordinary shareholders 100,000 x $1.20 f,h

120,000

Purchase consideration transferred

FVINA
Goodwill
*Preference shares: (12,000 6,000) = 6,000 x 2/3 = 4,000 pref. shares
**Ordinary shares: (60,000 10,000) = 50,000 x 2 = 100,000 ord. shares
PV = FV/(1 + i)n; 1/(1+.1)1 = .909091

124,800
162,324
134,000
28,324

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Topic 6: Growth By Acquisition

B. Journal entries in Hugh Ltd at acquisition date, 1 January 2016, are:

Equipment
Inventory
Accounts receivable
Patents
Investments
Goodwill
Accounts payable
Consideration payable
Share capital Ordinary

DR
72,000
40,000
18,000
8,000
12,000
28,324

16,000
37,524
120,00
0
4,800

Share capital Preference

(Acquisition of assets and liabilities of
Jackman Ltd)
Consideration payable
*26,160
Cash
(Payment of cash to shareholders of Jackman Ltd)
* $37 524 $11 364 to be paid in 1 years time
Incidental costs expense
Cash
(Incidental costs of acquiring Jackman Ltd)
Share Capital Ordinary
Share Capital Preference
Cash
(Cost of issue of shares on acquisition of
Jackman Ltd)

CR

26,160

2,000
2,000
200
80
280

C: Journal entry in one years time, 1 January 2017:

Consideration payable
Interest expense
Cash
(Payment of deferred consideration)

DR
11,364
1,136

CR
12,500

AYN417
Question 12.2

Topic 6: Growth By Acquisition

Accounting at acquisition date by the acquirer

A. Acquisition analysis:
Net fair value of identifiable assets and liabilities acquired:
Patents
$280,00
0
Equipment
232,000
Inventory
68,000
Cash
2,000
Accounts receivable
10,000
592,000
Accounts payable
(16,000
)
Debentures
(64,000
)
(80,000
)
Net assets
$512,0
00
Consideration transferred: 100,000 shares at $5.20
$520,00
each
0
Goodwill = $520,000 $512,000
=
$8,000
B. Journal entries in records of Brad Ltd at 1 July 2016:
DR
Patents
280,000
Equipment
232,000
Inventory
68,000
Cash
2,000
Accounts receivable
10,000
Goodwill
8,000
Accounts payable
Debentures
Share capital
(Acquisition of the assets and liabilities of Pitt Ltd)
Share capital
1,000
Cash
(Costs of share issue)
Acquisition expenses
1,200
Cash
(Costs associated with the acquisition of Pitt Ltd)

CR

16,000
64,000
520,000
1,000
1,200

C. Journal entries in records of Brad Ltd if FV of shares = $4.80

Fair value of acquirees net assets
$512,00
0
Consideration transferred: 100,000 $480,00
x $4.80
0
Gain on bargain purchase
$32,000
The only entry that changes from Part B is:
Patents
Equipment
Inventory
Cash

DR
280,000
232,000
68,000
2,000

CR

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Topic 6: Growth By Acquisition

Accounts receivable
Accounts payable
Loans
Share capital
Gain on bargain purchase
*Question 12.11 Accounting by an acquirer

10,000
16,000
64,000
480,000
32,000

Acquisition Analysis
Net fair value of identifiable assets and liabilities acquired:
Accounts receivable
$112,500
Land
756,000
Buildings
495,000
Machinery
327,600
Irrigation equipment
202,500
Vehicles (154,800
111,600
43,200)
Brand
40,000
2,045,20
0
Accounts payable
72,000
$1,973,2
00
Consideration transferred:
Shares:

100,000 x $12.60 per

share

Cash:
[$432,000 + $12,000 +$4,950 +
$135,000 $18,000]
Land:
Goodwill

$1,260,0
00
565,950

$2,023,950
$1,973,200 =

198,000
$2,023,9
50
$50,750

The journal entries in Denzel Ltd are:

DR
CR
Land
126,000
Gain
126,000
(Re-measurement as part of consideration transferred: 198 72 = 126)
Accounts receivable
112 500
Land
756,000
Buildings
495,000
Machinery
327,600
Irrigation equipment
202,500
Vehicles
111,600
Brand
40,000
Goodwill
50,750
Payables
72,000
Share capital
1,260,0
00
Payable to Washington Ltd
565,950
Land
198,000
(Acquisition of net assets of Washington Ltd)
Payable to Washington Ltd
565,950

AYN417

Topic 6: Growth By Acquisition

Cash
(Payment of purchase consideration)
Acquisition-related expenses
Cash
(Payment of acquisition-related costs)
Share capital
Cash
(Share issue costs)

565,950
22,500
22,500
16,000
16,000