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Australian Accounting Standards Editing Assignment Paper (Editing Sample)




The herein below is the critical evaluation of the Australian requirements for accounting for business combinations as instructed:
* Exclusion from the scope of Accounting Standard AASB3 Business Combinations
On the outset, AASB3 Business Combinations’ objective is to identify how financial reports are to be presented when a business entity enters into a Business combination undertaking with another. It stipulates that the business combinations must be accounted for by applying the Purchase Method. This will force the Business Entity acquiring the other to fully acknowledge and recognize all the identifiable assets, liabilities and contingent liabilities at a fair price, at the date of acquisition. At the acquisition date, the Acquirer will also recognize the Acquiree’s goodwill which will eventually be tested for impairment rather than amortization.
This Standard will excludes Entities where:
* Two or more mutual Business Entities join hands to form Business combinations
* Separate Entities are combined to form Business Combinations of a joint venture nature
* Separate Business/Entities come together with the intention of forming a contractual reporting Entity without necessarily entering into any agreement of ownership interest as a
Business combinations.
* The Business combinations involve Business Entities under one single, central or common control like a chain of Supermarkets under one Common Control.
* Business combinations that involve two or more mutual entities
It is worth noting that the Standard will not apply to entities that are not required to prepare reports in accordance with Part 2M 3 of the Corporation Act as stipulated in Aus 1.1. Another exclusion to this Standard is outlined in Aus 1.3 of the AASB3 Business Combinations Standard where Annual reporting periods commence before 1st of January 2005.
* The implications of the acquisition-method requirement for accounting of merged business:
The AASB3 Business Combinations standards will: • impact on acquisition negotiations and structure the setup in an effort to minimize unsupported earnings impacts; • potentially influence the scope and nature of due diligence and data collection exercises before the acquisition; • bring up new policies and procedures to evaluate changes in the fair value of some assets and liabilities; • require prior assessment by the accounting and legal fraternity as well as that of valuation experts;
• influence the ‘how, when and what’ of stakeholder commune
The International Financial Reporting Standard 3 (IFRS3) -Business Combinations, states that costs of acquisition (expenses incurred by the acquirer to effect a business combination-such as the broker’s fees; cost of advice, legalization cost, accounts charges, valuation and other fees); General administrative costs (such as the costs arising from internal acquisitions services); securities registration and transfer charges, way down on the acquirer. The Acquirer will account for all the acquisition-related costs as expenses in the periods the costs are incurred and services rendered, with an exception of the costs of issuing debt or equity securities, which shall be recognized in accordance with IAS 32 and IAS 39.
* The identification of an acquirer in a business combinations
By definition, Business combination is bringing separate Entities together into a reporting Entity. In such an event, one of the Entities will tend to dominate or have a controlling edge over the other(s). This Domineering Entity is the Acquirer and the one(s) dominated or controlled is the Acquiree(s). The Acquirer is the coalescing entity with controlling powers over the other entities. The Acquirer has powers to set policies related to finance and operations on the other entity so as gain from its operations. Such powers of control by the Acquirer are obtained by obtaining more than half the voting powers of that other entity, within the business combination. Other ways of acquiring such powers other than acquiring more than half voting right of the other Entity will be by obtaining:
* power over more than one-half of the voting rights on agreement with other investors;
* power to govern the financial and operating policies under the agreement;
* appointment powers on the majority of the members of the board of directors/governing body of the other entity;
* power to cast the most of votes at meetings of the board of directors/governing body of the other entity.
In some cases identifying the Acquirer isn’t easy; thus the indicators below will be a guide:
* when the fair value of one of the combining entities is more than the other combining entity;
* when business combination is put in place by substituting ordinary equity instruments for other assets, the entity giving up cash equivalent is deemed to be the acquirer;
* when business combination end up in the administration of one entity being able to control the selection of the management team of the final combined entity, the entity whose management is able to govern is likely to be the acquirer.
* The determination of fair values of assets in a business combination
Fair value by definition means a balanced/coherent and impartial estimate of the probable market price of a particular good, service, or asset.
It objectively consider:
* purchase/production/delivery/surrogate costs or costs of close alternates
* actual usage at any level of progress of social productive potential
* supply vs. demand and prejudiced factors such as:
* threat distinctiveness
* cost of and return on capital
* independent superficial utility
Thus fair value standards’ determination has considered the following requirements and concepts:
* Prohibition against use of blockage factors: (Discounts applied to measure the value of any security to mirror the effect on the cited price of selling a large block of the security at ago. Kindly note that both the IFRS 13.69 and ASC 820-10-35-36B forbid the use of blockage factors in the valuation of assets or liabilities to measure the financial instruments in any level of the fair value hierarchy.
* Valuation of restricted securities: The fair value standards call for a reporting entity to value all securities reported at fair value based on market participant assumptions.
* Transaction costs are not considered a trait of the asset or liability and thus should not be part of the measurement of fair value although the costs should be considered to decide on the most beneficial market.
* The reasons for the choice of fair value of measurements for assets and liabilities in a business merger
Fair value provides information about what an entity might realize if it sells an asset or pays to transfer a liability.
By referring to ASC 820 as well as IFRS 13, (Value Standards), the fair value choice to measure assets and liabilities will weed out inconsistencies such as blockade factors, restricted securities and transaction costs ...
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