Chapter 3: Business combinations

Review questions

7. Explain the key steps in the acquisition method. (LO2)

8. How is the consideration transferred calculated? (LO5)
Case study 1

Applying AASB 3/IFRS 3

Bass Ltd has recently undertaken a business combination with Bream Ltd. At the start of
negotiations, Bass Ltd owned 30% of the shares of Bream Ltd. The current discussions
between the two entities concerned Bass Ltd’s acquisition of the remaining 70% of shares
of Bream Ltd. The negotiations began on 1 January 2019 and enough shareholders in
Bream Ltd agreed to the deal by 30 September 2019. The purchase agreement was for
shareholders in Bream Ltd to receive in exchange shares in Bass Ltd. Over the negotiation
period, the share price of Bass Ltd shares reached a low of $5.40 and a high of $6.20.

The accountant for Bass Ltd, Mr Spencer, knows that AASB 3/IFRS 3 has to be applied in
accounting for business combinations. However, he is confused as to how to account for the
original 30% investment in Bream Ltd, what share price to use to account for the issue of
Bass Ltd’s shares, and how the varying dates such as the date of exchange and acquisition
date will affect the accounting for the business combination.

Required
Provide Mr Spencer with advice on the issues that are confusing him.
Required
Provide Mr Spencer with advice on the issues that are confusing him.

Issue 1: How to account for the original 30% investment in Bream Ltd

- initially recorded at fair value plus transactions cost, based on para 43 of

AASB 139
- subsequently accounted for under IAS 39 eg could be measured at fair value
with changes in value included in profit or loss or changes recognised directly
in equity.
- On formation of the business combination, para. 42 of AASB 3 requires that
the acquirer remeasure its previously held equity interest in the acquiree at its
acquisition-date fair value and recognise the resultant gain/loss in profit or
loss. Where the investment had been measured at fair value with increments
recognised directly in equity, these amounts are transferred at acquisition date
to profit or loss as well, and disclosed as reclassification adjustments.

Issue 2: What share price to use

Para 27 of AASB 3 requires the use of the fair value at the date of acquisition.
This price will include all expectations of the takeover, including any premium
for control. Some argue this does not reflect the cost to Bassl Ltd. See pp 458-
459 for the debate on use of agreement date model and the acquisition date
model.
Issue 3: Effects of different dates

AASB 3 refers to acquisition date only. All measures of fair value are made on
acquisition date, for both the consideration transferred and the assets acquired
and liabilities assumed.

As noted under Issue 1, the 30% investment, originally recognised at the date of
exchange, the date the acquirer initially acquired that investment, must at
acquisition date be remeasured to fair value.
Question 3.3

Accounting by acquirer

On 1 July 2019, Angelina Ltd took control of the assets and liabilities of Jolie Ltd. At this
date the statement of financial position of Jolie Ltd was as follows:

Required
Prepare the journal entries in the records of Angelina Ltd at 1 July 2019 in each of the
following situations, assuming the costs of issuing the shares by Angelina Ltd cost $1600.

(a) Angelina Ltd issued 80 000 shares having a fair value of $2.40 per share in exchange for
the net assets of Jolie Ltd
(b) Angelina Ltd issued 80 000 shares having a fair value of $2.00 per share in exchange for
the net assets of Jolie Ltd.
(c) Angelina Ltd acquired the shares of Jolie Ltd. The agreement was that Angelina Ltd
would pay the shareholders of Jolie Ltd one share in Angelina Ltd for every two shares
held in Jolie Ltd plus $1 in cash for each share held in Jolie Ltd. Shares in Angelina Ltd
have a fair value of $1.80 per share.
(LO5 and LO6)
Question 12.3 Accounting by acquirer

On 1 July 2016, Angelina Ltd took control of the assets and liabilities of Jolie
Ltd. At this date the statement of financial position of Jolie Ltd was as
follows:

Carrying amount Fair value

Machinery $40 000 $67 000
Fixtures & fittings 60 000 68 000
Vehicles 35 000 35 000
Current assets 10 000 12 000
Current liabilities (16 000) (18 000)
Total net assets $129 000
Share capital (80 000 shares at $1.00 per share)80 000
General reserve 20 000
Retained earnings 29 000
Total equity $129 000

Required
Prepare the journal entries in the records of Angelina Ltd at 1 July 2016 in
each of the following situations, assuming the costs of issuing the shares by
Angelina Ltd cost $1600:
A. Angelina Ltd issued 80 000 shares having a fair value of $2.40 per share
in exchange for the net assets of Jolie Ltd
B. Angelina Ltd issued 80 000 shares having a fair value of $2.00 per share
in exchange for the net assets of Jolie Ltd.
C. Angelina Ltd acquired the shares of Jolie Ltd. The agreement was that
Angelina Ltd would pay the shareholders of Jolie Ltd one share in
Angelina Ltd for every two shares held in Jolie Ltd plus $1 in cash for
each share held in Jolie Ltd. Shares in Angelina Ltd have a fair value of
$1.80 per share.

A. Acquisition of net assets of Jolie Ltd: FV of an Angelina Ltd shares is

$2.40
Net fair value of identifiable assets and liabilities acquired:
Machinery $67 000
Fixctures & fittings 68 000
Vehicles 35 000
Current assets 12 000
182 000
Current liabilities (18 000)
$164 000
Question 3.11

Accounting by an acquirer

Denzel Ltd and Washington Ltd are family-owned ginger producing companies operating
in Buderim in Queensland. Denzel Ltd is owned by the Lewis family while the Meninga
family owns Washington Ltd. The Lewis family has only one son, Wally, and he is engaged
to the daughter of the Meninga family. Because the son is currently managing Denzel Ltd,
it is proposed that, after the wedding, Washington Ltd be liquidated and Wally would
manage the whole of the two companies’ assets.

Information about the assets and liabilities of Washington Ltd at 1 January 2020 is as
follows:

Denzel Ltd valued a brand at $40 000 that was used by Washington Ltd but had not been
recognised by Washington Ltd as it was internally generated. The brand was considered to
have an indefinite life. The accounting records of Washington Ltd at 1 January 2020 did
not include accrued interest on the loan of $12 000.

The Lewis and Meninga families agreed to the following terms in relation to the joining
together of the two companies.

 Denzel Ltd is to acquire all the assets of Washington Ltd except for cash and one of the
vehicles (having a carrying amount of $40 500, and a fair value of $43 200) and assume
all the liabilities except for the loan from the Broncos bank and any accrued interest.
The vehicle will be given to Mr and Mrs Meninga. Washington Ltd will go into
liquidation.
 Denzel Ltd is to supply sufficient additional cash to enable the loan from the Broncos
Bank to be paid off and to cover the liquidation expenses of $4950. It will also give
$135 000 to be distributed to the Meninga family to help pay for the cost of the wedding.
 Denzel Ltd is to give a piece of its land in the Buderim Hills overlooking the
Maroochydore coastline to Washington Ltd to be distributed to the Meninga family to
build a retirement home. The land is recorded in the records of Denzel Ltd at $72 000
and has a fair value of $198 000.
 Denzel Ltd is to issue 100 000 shares these having a fair value of $12.60 per share. These
are to be distributed via Washington Ltd to the daughter of Mr and Mrs Meninga to
give her a continuing interest in the family business.
 The business combination occurred on 1 January 2020 as per the agreement with
Denzel Ltd incurring legal and accounting costs of $22 500 and share issue costs of
$16 000.

Required
Prepare the journal entries in the records of Denzel Ltd to account for the business
combination.
(LO5)