Accounting Term Paper (Term Paper Sample)

Individual Assignment
Due: 10am 22 August, 2014
PART – A
AASB 3 gives rules to identify a reverse acquisition. In reverse acquisition, it is not necessary that the acquiring entity is the acquirer for the purpose of accounting. Sometimes a relatively small entity acquires a much larger entity; however the later issues equity interest for the acquiring entity. In this case the conditions to identify the acquirer need to be satisfied to form a reverse acquisition (Paragraph B13-B19 of AASB 3). This is consistent with the control test as stretched out in AASB 10. AASB 10 gives explanation to test the control of an entity in a business combination to identify the acquirer. In reverse acquisition, legal acquirer is treated as the acquiree because the legal acquiree exerts controls over the legal acquirer. And according to AASB 10 if the control of an entity is established then it shall be accounted as the acquirer regardless of the legal form.
PART – B
* An investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. An investor has power over an investee when the investor has existing rights that give it the current ability to direct the relevant activities, i.e. the activities that significantly affect the investee’s returns. While assessing whether Mammoth has control over Greencross, we shall assess the structure of the board. AASB 10 requires assessing the authority and rights of the governing body of the combined business to assess the acquirer of the company. As the managing director and director of Greencross are the owners of Mammoth (The Australian, 2014) it can concluded that Mammoth controls Greencross. AASB 10 explains that the acquirer is the controlling entity, regardless of the legal form of the purchase. Because the controlling entity executes the power over the acquiree.
* A new entity formed to effect a business combination is not necessarily the acquirer. If a new entity is formed to issue equity interests to effect a business combination, one of the combining entities that existed before the business combination shall be identified as the acquirer.
It is seen that Mammoth accounted for reverse acquisition in this case. Mammoth accounted as the accounting acquirer because the conditions outlined in paragraphs B13-B18 of AASB 3 were satisfied that Mammoth has significant control over Greencross because of the relationship of the directors in two companies that is the managing director of Greencross was the owner of Mammoth. (Greencross, 2014).
PART – C
It is historically seen that the goodwill in a merger & acquisition scenario is overstated as a result of huge premium paid off over the fair value of the company which forms part in the statement of financial position as the goodwill. As with any asset IAS 36 requires all assets to be tested for impairment annually. Sometimes initially acquiring company foresees synergies which may not be materialized in the future as per the expectations. Scenarios changes in the given time of one year. In the case of Greencross Mammoth merger it is seen that huge amount of shares were issued to purchase the company Mammoth. In speculation and expectations the company’s share price increased drastically, increasing the goodwill of the company. Now after a year’s time corrective majors have been taken in the share price of the company, the goodwill is impaired by $130 million. It is non cash impairment as the goodwill is impaired because of the adjustment in the fair value of the acquisition. It is believed that the business of the company is not affected in any case. The company has not suffered any loss due to specific event or loss in the business. So the cash position of the company is not affected. However valuation of the company will be affected by this loss. The impairment loss will be presented in the consolidated financial statement of the company. However it will not affect the individual accounts of the company. If there had been an event which causes loss to the business or decline in the value of assets then the ability to pay dividends would be affected because of the decline the cash reserve of the company. In this scenario the loss is merely because of the accounting treatment adopted by the company. So it can be believed tha...