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  Solutions Manual to accompany Company Accounting 10e  prepared by Ken Leo John Hoggett John Sweeting Jeffrey Knapp Sue McGowan ©   John Wiley & Sons Australia, Ltd 2015  Chapter 12: Business combinations © John Wiley and Sons Australia Ltd 2015   12.1 Chapter 12  –   Business Combinations   REVIEW QUESTIONS 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 paras. 39-40  Solutions manual to accompany Company Accounting 10e © John Wiley and Sons Australia Ltd 2015   12.2 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 of AASB 137 as appropriate. 4. Explain the key components of “core” goodwill.   Core goodwill has two main components: (i)   Going concern goodwill : relates to the net assets of the acquiree, in that the acquiree’s net assets together are worth more than the net assets separately, caused by the synergy created by the acquiree’s net assets within the acquiree as a going concern.  (ii)   Combination goodwill: relates to the extra benefits accruing because of the synergy created by the acquirer and the acquiree combining together eg if the raw materials available to the acquiree are of particular use to the acquirer. These benefits could affect the recorded earnings of the acquirer or the acquiree [or both] depending on the nature of the benefits. 5. What recognition criteria are applied to assets and liabilities acquired in a business combination? See pages 354-5 of the text. Para 10 of AASB 3 states that the identifiable assets acquired and liabilities assumed shall be recognised separately from goodwill. Because the assets and liabilities are measured at fair value, the assets and liabilities are recognised regardless of the degree of probability of inflow/outflow of economic benefits. The fair value reflects expectations in its measurement. The assets and liabilities recognised must meet the definitions of assets and liabilities in the  Framework.  [Para 11] The assets and liabilities recognised must also be part of the exchange transaction rather than resulting from separate transactions [para 12].  Chapter 12: Business combinations © John Wiley and Sons Australia Ltd 2015   12.3 6. How is an acquirer identified? Para 6: For each business combination, one of the combining entities shall be identified as the acquirer. Appendix A: The acquirer is the entity that obtains control of the acquiree. Appendix A: Control is the power to govern the financial and operating policies of the acquiree so as to obtain benefits from its activities. Determination of the acquirer requires judgement. Paragraphs B13-B18 of AASB 3 provides indicators/guidelines to assist in this judgement: -    form of consideration : did one entity transfer cash or other assets for the shares of the other? [para B14]; did one entity issue its own equity interests in exchange for another entity’s equity interests? [para B15]  Was there a premium paid by one of the entities? [para B16(e)] -    subsequent management  : which entity’s management sub sequently controls the  business combination? What are the relative voting rights after the business combination? [para B15(a)] What is the composition of the senior management of the combined entity? [para B15(d)] -   large minority voting interest  :   The acquirer normally holds the largest minority voting interest in the combined entity. [para B15(b)] -    predator or target  : which entity initiated the combination? [B17]. -   relative size of the businesses : is the fair value of one entity significantly greater than another? [para B16]]. Large entities normally takeover small entities; 7. Explain the key steps in the acquisition method. AASB 3 para 5: 1.   identify the acquirer 2.   determine the acquisition date 3.   recognise and measure the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree 4.   recognise and measure goodwill or a gain from a bargain purchase. 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.
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