Objectives

Natureofbusinesscombination Accountingforbusinesscombination

Lecture6 Accountingforbusinesscombination Accountingforrevaluationofnoncurrentassets

Directacquisitions Indirectacquisitions

Accountingforgoodwill Accountingforrevaluationofnoncurrentassets

BusinessCombination
Oneentity(knownastheacquirer)obtainscontrolof

BusinessCombination
Directacquisition

oneormoreotherbusinesses(knownastheacquiree). Differenttopurchaseindividualassetsorgroupsof assets(AASB116Property,PlantandEquipment)

acquiretheassets&liabilitiesofa

companydirectly
Indirectacquisition

controlviashareownership

offer stockmarket

AccountingforDirectAcquisitionsBy Acquirer
Dr Cr Cr Assetsacquired Liabilitiesacquired Costofacquisition xx xx xx

CostofBusinessCombination (Acquisition)
Thecostofthebusinesscombinationastheaggregateof:

(Businesscombination)

Thefairvalue,atthedateofexchange,ofassetsgiven, liabilitiesincurredorassumed,andequity instrumentsissuedbytheacquirer,inexchangefor controloftheacquiree.

Otheracquisitionrelatedcosts
Costsdirectlyattributable totheacquisition
Thesecostsarecoststhatacquirerincurstoconductabusiness

FairValue
Fairvalue: theamountforwhichanassetcouldbeexchanged,or aliabilitysettled,betweenaknowledgeable,willing partiesinanarmslengthtransaction.

combination.Forexamples:findersfee;advisory,legal,accounting, valuationandotherprofessionalorconsultingfees.Oldversionof AASB3suggeststhatthesecostsshouldbetreatedascostofbusiness combination Effectiveon1July2009,newversionof AASB3prescribesthatthe acquirershouldtreatacquisitionrelatedcostsasexpenses.Inother wordstheseexpensesarenotpartofpurchaseconsideration orcostof businesscombination

PurchaseDifference
PurchaseDifference[Goodwill(Discount)] = CostofAcquisition

Whatisgoodwill?
Anunidentifiableintangibleassetthatcannotbe

FairValueofNetAssetsAcquired

individuallyidentifiedandisanintrinsicpartofthe business; Couldbebuiltupoveranumberperiodsorobtained byacquiringanexistingbusiness; Cannotbepurchasedorsoldseparately,butonlyas partofanentityinitsentirety; Representsthefutureeconomicbenefitsassociated withanexistingcustomerbase,efficientmanagement, reliablesuppliers,etc.

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Internallygeneratedversus purchasedgoodwill
Goodwillmaybeinternallygeneratedoracquiredby

Howisgoodwillmeasured?
Purchasedgoodwillismeasuredastheexcessofthe

purchasinganexistingbusiness Onlypurchasedgoodwillispermittedtoberecorded
Purchasedgoodwillcanbemeasuredmorereliablythan

costofacquisition(purchaseconsiderationplus incidentalexpenses)incurredbytheacquireroverthe fairvalueoftheidentifiablenetassetsacquired.

internallygeneratedgoodwill,basedontheamountpaid

Internallygeneratedgoodwillcannotbebroughtto

account

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ImpairmentTesting

Amortisationofgoodwill
Therewas arequirementtoamortiseoveraperiod

Now,Goodwillissubjecttoannualimpairmenttesting
Goodwillacquiredinabusinesscombinationshallnotbe

notexceeding20yearsintheoldAASB1013
WiththereleaseofAASB3Business

Combinations,aspartoftheprocessofadopting IFRSsby2005,therequirementtosystematically amortisegoodwillhasbeenabandoned

amortised.Instead,theacquirershalltestitfor impairmentannually,ormorefrequentlyifeventsor changesincircumstancesindicatethatitmightbe impaired,inaccordancewithAASB136Impairmentof Assets

Animpairmentlossrecognisedforgoodwillshallnotbe

reversedinasubsequentperiod

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ImpairmentLoss
Impairmentloss(underAASB136)
Theamountbywhichthecarryingamountofanassetor

ImpairmentLoss(cont.)
Iftherecoverableamountofanassetislowerthanthecarrying amount(amountatwhichassetisrecognisedinthebalance sheet),animpairmentlossshouldberecognized Accountingforimpairmentloss DrImpairmentloss CrAsset(Goodwill) Note: Prohibitiononrevaluing goodwilliftherecoverableamountof goodwillisassessedasbeinggreaterthanthecarryingvaluethen no revaluationmaybemade

cashgeneratingunit(agroupofassets,e.g.carassembly line)exceedsitsrecoverableamount

Recoverableamountofanasset(underAASB136)
Thehigherofitsfairvaluelesscoststosell anditsvaluein

use
Valueinuse Presentvalueof thefuturecashflowsexpectedtobederivedfrom anassetorcashgeneratingunit.

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NegativeGoodwill(Discount)on Acquisition
NegativeGoodwill = Sumofthefairvalue ofnetassets acquired Greaterthan (minus) Costofacquisition Negativegoodwill(Discount)shallberecognisedasagain
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Example 1 Big Ltd agrees to purchase assets & liabilities of Small Ltd for: $400,000 Cash 50,000 $1 ordinary shares in Big Ltd Bigs shares are currently trading for $4.50 each, the proposed issue is not expected to affect the market trading price. Smalls balance sheet at the date of purchase is

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Bighasdeterminedthefollowingfairvaluesintheprocessof pricenegotiation: Debtors 95,000 Stock 200,000 Land&buildings 600,000 Patents 100,000 BankOverdraft 30,000 Creditors 75,000 Loan 325,000 (1)Preparethegeneraljournalentrytoreflecttheacquisition ofSmallsassetsandliabilitiesbyBigLtd.

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Solution: Purchaseconsideration: Cash Shares($4.50*50,000) FairvalueofAssets: Debtors Stock Landandbuildings Patents $400,000 $225,000 $625,000 $95,000 200,000 600,000 100,000 $995,000
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FairValueofLiabilities: BankOverdraft Creditors Loan FairValueofNetAssets Goodwill

$30,000 75,000 325,000 $430,000 $565,000 60,000

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Dr.

Debtors 95,000 Stock 200,000 Land&Buildings 600,000 Patents 100,000 Goodwill 60,000 Cr. BankOverdraft Creditors Loans Acquisitioncostspayable

Dr. Cr. 30,000 75,000 325,000 625,000

Acquisitioncostspayable Cash Paidupcapital ($4.50*50,000)

625,000 400,000 225,000

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(2)Usingthepreviousexample,assumethepurchaseconsideration hadbeen$520,000.Provideaproformageneraljournalentryto reflecttheacquisition

Solution: Purchaseconsideration: Cash FairvalueofAssets: Debtors Sotck Landandbuildings Petents

$520,000

FairValueofLiabilities: BankOverdraft Creditors Loan FairValueofNetAssets NegativeGoodwill

$95,000 200,000 600,000 100,000 $995,000

$30,000 75,000 325,000 $430,000 $565,000 45,000

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Dr.

Debtors 95,000 Stock 200,000 Land&Buildings 600,000 Patents 100,000 Cr. BankOverdraft 30,000 Creditors 75,000 Loans 325,000 Discountonacquisition 45,000 Acquisitioncostspayable 520,000 Acquisitioncostspayable Cr. Cash 520,000 520,000

Negative goodwill (discount) should be recognised as a gain Dr Discount on acquisition Cr Gain 45,000 45,000

Dr.

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(3)UsingExample1,assumetheimpairmentlossongoodwillis 3,000forthecurrentyear Solution:

IndirectAcquisition
Equitypurchase Objective >control! 20%withoutregulation

Dr. Impairmentloss Cr. Goodwill

3,000 3,000

3%every6months formaloffer takeoverannouncement

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AccountingforIndirect Acquisitions
Investmentwillbestatedininvestorsaccountasthe

Example 2: Indirect Company acquisition Use the same information as in Example 1, except that Big Ltd purchase 100% Small Ltd shares directly on the stock exchange at $6.85 per share. Prepare journal entries in Big Ltd. Dr. Cr. Investment Cash 685,000 685,000

fairvalueofthesharespurchased
Goodwill&discountisadjustedonconsolidation

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Cost of acquisition 685,000 Fair value of net assets acquired 565,000 Goodwill 120,000 Goodwill is not shown in Big Ltd account, it will be accounted in Consolidation. 32

Relevantaccountingstandards
1. AASB116Property,PlantandEquipment

Requirementsforrevaluations,depreciationand determiningacquisitioncostofproperty,plantand equipment 2. AASB138IntangibleAssets Revaluationofintangible assetsandotherissues 3. AASB136ImpairmentofAssets

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Introduction
InAustralia,entitiesmayrevaluemanynon

Carrying amount of assets

Carrying amount of assets

currentassets

AASB138specificallyexcludestherevaluation

ofsomeintangibles

Fair value of the assets

Recoverable amount

Assetrevaluations Recognisingareassessmentof thecarrying amountofanoncurrentassettofairvalueasat aparticulardate Excludesrecoverableamountwritedowns(i.e. impairmentlosses)

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Asset Revaluation AASB 116 AASB 138

Impairment Test AASB 136

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Introduction
Ifanoncurrentassetscarryingamountexceeds

Introduction(cont.)
Netsellingprice: amountobtainedfrom

itsrecoverableamount itmustbewrittendown toitsrecoverableamount(AASB136)

Thewritedowniscalledanimpairment loss Carryingamount: costofassetlessaccumulated

depreciationorimpairmentlosses
Recoverableamount: higherofanassetsnetselling

priceandvalueinuse

thesaleofanasset(Marketprice)inan armslengthtransactionbetween knowledgeable,willingpartieslessthe costsofdisposal Valueinuse: presentvalueofthefuture cashflowsexpectedfromanasset

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Example
ALtdhasapieceofland,andthecarryingamountis

Cost $1,000,000

$1,000,000
Netsellingpriceis900,000 Valueinuseis980,000 Marketvalueis950,000 Whataredifferencesb/wALtdwriteslanddowntoits

Recoverable Amount Higher of

recoverableamountandALtdrevalueslandtoitsfair value?

Net Selling Price $900,000

Value in Use $980,000

Market Value $950,000

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Measuringproperty,plantandequipment atcostorfairvalue
ImpairmentTest Dr. Cr. Impairmentloss Land 20,000 20,000
AASB116requireseachclassofproperty,plantand

equipmenttobemeasuredateithercost orfair value

Examplesofclassesarelandandbuildings,machinery

andmotorvehicles

Someclassescanbemeasuredatcostandothersat

RevaluationDecrement Dr. Cr. Revaluationloss Land 50,000 50,000

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fairvalue

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Measuringproperty,plantandequipmentat costorfairvalue(cont.)
Withamixofmeasurementmethods,isthetotal

Measuringproperty,plantandequipmentat costorfairvalue(cont.)
Whereanentitychangesfromcosttofairvaluefor

balanceofnoncurrentassetsmeaningful? Entitiesmayswitchfromfairvaluetocostfor justifiablereasonsandprovidedadequatedisclosures aremade(AASB116)

aclassofnoncurrentassetsandtherewasa previousimpairmentloss(AASB116):
anyincreaseinanassetscarryingamountisfirst

recognisedasincome;and
anyexcessabovetheamountifnoimpairmentlosswas

recognisedistransferredtoarevaluationreserve

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Theuseoffairvalues
Ifaclassofnoncurrentassetsismeasuredatcost, Anyrevaluationofnoncurrentassetsmustbeto

AASB136istobeapplied
Ifanassetscarryingamountisgreaterthanits

recoverableamount,animpairmentlossmustbe recognised Thisisnotarevaluation

fairvalue (AASB116) Fairvalueistheamountforwhichanassetcould beexchangedbetweenknowledgeable,willing partiesinanarmslengthtransaction Fairvalueisdeterminedontheassumptionthat theentityisagoingconcern Marketprice istobeusedwhereanactiveand liquidmarketexistsfortheasset
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Therequireddisclosuresregardingasset revaluations(AASB116)
effectivedateofrevaluation whetheranindependentvaluer wasinvolved methodsandassumptionsapplied extenttowhichfairvaluesweredetermined,withreference

Howoftenshouldassetsberevalued?
Revaluationsmustbemadewithsufficient

toobservablepricesinactivemarketsorrecentmarket transactions foreachrevalued class,thecarryingamountifthecost modelwasused therevaluationreserve,indicatingchangefortheperiod andanyrestrictionsondistributionofthebalanceto shareholders

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regularitysothecarryingamountofeachassetin theclassdoesnotdiffermateriallyfromitsfair value(AASB116) Ifvalueschangeregularlyandchangesarematerial, revaluationsmightbenecessaryeachreporting period Otherwiseeverythreetofive yearsissufficient

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1.Revaluationincrements
Generalprocedure(AASB116): Dr. Asset Cr. Revaluationsurplus Dr.Revaluationsurplus Cr. Deferredtaxliability Revaluationsurplusispartofshareholdersfunds(owners equity) Directorsmayapprovecashdistributionstoshareholders fromrevaluationsurplusbuttheymustexerciseextreme caution

Revaluationdecrements
Inlinewiththeconceptofconservatism,

revaluationdecrementsarerecognisedasaloss in theprofitandlossaccount Journalentry(AASB116):

Dr. Lossonrevaluationofasset Cr. Asset

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2.Revaluationofdepreciableassets
Example1 FoxLtdacquiredablockoflandatVictoria Harbourfor1.2millionin2000.At30June2001, themarketvalueofthelandatVictoriaHarbouris assessedas1.5million.Incometaxrateis30% Dr Land 300,000 Cr Revaluationsurplus 300,000 Dr Revaluationsurplus 90,000 Cr Deferredtaxliability 90,000
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Ifarevaluedassetisadepreciableasset,any

balanceofaccumulateddepreciationiscreditedto theassetaccountpriorto revaluation(AASB116) Journalentry(netamountmethod): Dr. Accumulateddepreciation

Cr. Asset

Subsequentdepreciationistobebasedonthe

revaluedamountoftheasset

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Example2
At30June2001,Thecostofmachineryin

BlacksmithLtdis$100,000,theaccumulated depreciationis$20,000.Theusefullifeis5years. Allmachineryisdepreciatedusingthestraight linemethod,withazeroresidualvalue. At30June2001,directorsinBlacksmithLtd estimatethatthefairvalueofthemachineryis $90,000.Incometaxrateis30% Required: preparerelevantrevaluationjournal entryasat30June2001.

Dr Cr Dr Cr Dr Cr

Accumulateddepreciationmachinery20,000 Machinery 20,000 Machinery Revaluationsurplus Revaluationsurplus Deferredtaxliability 10,000 10,000 3,000 3,000

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Treatmentofbalancesofaccumulateddepreciation uponrevaluation(cont.)
Alternativemethod(AASB116)(Studyafterlecturebyyourself!)
Accumulateddepreciationmayberestatedproportionately

withthechangeingrosscarryingamountoftheasset,sothe carryingamountafterrevaluationequalstherevalued amount Thisisreferredtoasthegrossmethod Journalentry: Dr. Asset Cr. Accumulateddepreciation Cr. Revaluationsurplus Dr. Revaluationsurplus Cr. Deferredtaxliability
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Example3 Usethesameinformationinexample4,preparerelevant revaluationjournalentriesbyusingthegrossmethod. DrMachinery 12,500 [112,500100,000] CrAccumulatedDepreciation 2,500[112,500/520,000] CrRevaluationsurplus 10,000 Dr Cr Revaluationsurplus 3,000 Deferredtaxliability 3,000
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NetamountoftheMachinery 80,000 revalueto 90,000

Increasedby90,000/80,000=1.125,thatis12.5% GrosscarryingamountoftheMachinery 100,000 revalueto X?

Machinery (100,000+12,500) Accumulated Depreciation (20,000+2,500) Netamount

112,500

Bothgrosscarryingamountandaccumulateddepreciation shouldalsoincreaseby12.5%. X=100,000*(90,000/80,000)=112,500 Accumulateddepreciation=20,000*(1+12.5%)=22,500

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22,500 90,000

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3.Reversalofrevaluationdecrementsand increments
Example4 At30June2001,thecostofmotorvehiclesinSoutherncab Ltdis $200,000,andtheaccumulateddepreciationis$40,000.Motorvehicles aredepreciatedbyusingstraightlinemethodandtheusefullifeisfive years. At30June2001,directorsinthecompanybelievethatthefairvalueof motorvehiclesis$120,000. Required: preparerelevantrevaluationjournalentryasat30June2001. (Incometaxrateis30%) Dr. Accum.Depreciation 40,000 Cr. Motorvehicles 40,000 Dr. Lossonrevaluationasset 40,000 Cr. Motorvehicles (Notaxeffect,lossisrecognisedincurrentyear)

Revaluationshouldbecarriedoutregularly; Ifarevaluationdecrementreversesapreviousincrementfor thesameasset; Theinitialrevaluationincremententriesshallbereversed. Year1:Revaluationincrement20,000 Year2:Revaluationdecrement30,000 Journalentriesinyear2: Dr Revaluationsurplus 20,000 Dr Lossonrevaluation(anyexcess) 10,000 Cr Asset 30,000 Dr Deferredtaxliability 6,000 Cr Revaluationsurplus 6,000 (Assumeincometaxrateis30%)
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40,000

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Reversalofrevaluationdecrementsandincrements (cont.)

Year1
Dr. Asset Cr.Revaluationsurplus 20,000 20,000

Ifarevaluationincrementreversesapreviousdecrementforthesame

asset,

Theinitialrevaluationdecremententriesshallbereversedfirstly. Year1:Revaluationdecrement30,000 Year2:RevaluationIncrement50,000

Dr.

Revaluationsurplus 6,000 Cr.Deferredtaxliability(DTL) 6,000

JournalentriesinYear2: Dr. Asset Cr. Cr.

50,000 Gainonrevaluation 30,000 Revaluationsurplus 20,000 (anyexcess) Dr. Revaluationsurplus 6,000 Cr. Deferredtaxliability 6,000 9Assumeincometaxrateis30%)

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Year1
Dr. Lossonrevaluation Cr. Asset 30,000 30,000

Example5 AsdiscussedinExample1,FoxLtdacquiredablockof landatVictoriaHarbourfor1.2millionin2000.At30 June2001,themarketvalueofthelandatVictoria Harbourisassessedas1.5million.Incometaxrateis 30%,Howaboutifthemarketvaluebecomes1.3million at30June2002? 30/6/2002 DrRevaluationsurplus 200,000 Cr Land 200,000 DrDeferredtaxliability 60,000 Cr Revaluationsurplus 60,000

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Accountingforprofitondisposalofarevalued noncurrentasset
Gainorlossfromderecognition ofanitemof

Example6 Inpreviousexample,ifthemarketvaluedecreases to1.1million at30June2002. DrRevaluationsurplus Lossonlandrevaluation Cr Land DrDeferredtaxliability Cr Revaluationsurplus 300,000 100,000 400,000 90,000 90,000
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property,plantandequipmentistobecalculated asthedifferencebetween(AASB116):
netdisposalproceeds(ifany);and theassetscarryingamount

Derecognition:
thepointintimewhenanassetisremovedfromthe

balancesheet
whenanassetissold;or whennofutureeconomicbenefitsareexpectedfroman

assetsuseordisposal
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Accountingforprofitondisposalofarevalued noncurrentasset(cont.)
Whenanassetissold,anyresultingbalanceinthe
Example7: ALtdpurchasedapieceoflandfor$500,000on1July 2005,revalueditto$600,000on30June2006andsold itfor800,000on1January2007. Profitfromsale:200,000 ProfitfromsaleifALtdhadnotbeenrevaluedthe land$300,000($800,000$500,000)

revaluationreserve(AASB116):
maybetransferreddirectlytoretainedearnings cannotbetransferredtotheprofitandlossaccount

Ifanoncurrentassetisrevaluedupwards,any

gainonsalewillbelessthanthegainiftheasset wasnotrevalued

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Considerationofpresentvalues
Recoverableamountisthehigherofanassetsnet

Offsettingrevaluationincrementsand decrements
TheoldAASB1041requiredincrementsand

sellingprice anditsvalueinuse(AASB136) Valueinuse(AASB136):

isthepresentvalueofthefuturecashflowsexpectedfrom

anasset

Estimatingvalueinuse(AASB136)involves:
estimatingfuturecashinflowsandoutflowsfromthe

decrementstobeoffsetagainsteachotherwithina class ofnoncurrentassets. Now,incrementsanddecrementsmaybeoffsetonly totheextentthattheyrelatetoaparticularasset (AASB116)onanassetbyassetbasis.

continueduseandsubsequentdisposaloftheasset;and
applyingtheappropriatediscountratetothefuturecash

flows

Discountingfuturecashflowswilldecreasethe

calculatedrecoverableamount
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Summary
Iftherecoverableamountisbelowthecarrying

Summary(cont.)
Whenarevaluationisundertaken:
anyexistingaccumulateddepreciationshouldbe

amount,animpairmentlossshouldberecorded Forupwardsrevaluations:
assetsaretoberevalued tofairvalue anyincreaseistobetransferredtoarevaluationsurplus,

creditedagainstthenoncurrentasset;and
thenoncurrentassetshouldbeincreasedbythe

amountoftherevaluation

unlessitisareversal

Wherearevaluedassetissold,thegainorlossis

Fordownwardsrevaluations:
anydecreaseistobetreatedasanexpense,unlessitisa

thedifferencebetweenthecarryingamountand thenetdisposalproceedsoftheasset.

reversal
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MidSemesterExamination
On 24th April 2013, Wednesday, 1 hours 10 Multiple Choice Questions 1 Practical Question: Preparing FSs along with notes in

accordance with applicable accounting standards.

Coverage: Lectures 2 and 3, Tutorials in week 3 and 4. Formats for the statements will be provided. You will NOT be permitted to bring the Accounting

Handbook.
Bring a calculator

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