A. Prepare the Business combination valuation journal entries at 30 June 20X7 and the Pre-acquisition journal entries at 30 June 20X7 (narrations are required).
B. The consolidated worksheet (using Excel or similar) and
C. Consolidated Financial Reports for the year ended 30 June 20X7 (Notes are not required):
(i) Consolidated Statement of Profit or Loss and Other Comprehensive Income;
(ii) Consolidated Statement of Changes in Equity and
(iii) Consolidated Statement of Financial Position
Consolidation or business combination is one of the most important and tricky aspects of accounting for the managers (Finney, 2011). Consolidation refers to the acquisition or merger of two or more entities either or the purpose of formation of a new entities or absorption into the existing entities (Henrekson, 2014).. The given report discusses about one of such cases where two companies come together for consolidation and subsequent amalgamation of the entities. The report provides a brief case background and related regulations made by the Australian Accounting Stands Board (AASB) in this regard. The report, at the subsequent section, provides detailed calculation as to how the consolidation takes place in the form of journal entries in the books of accounts of the firms. Furthermore, the paper also shows the detailed calculation by way of consolidated worksheet. In addition, the paper presents the consolidated financial reports post acquisition. Finally, the paper wraps up the assignment with concluding note.
The instant case study deals with two companies namely Griffin Ltd and Frank Ltd. Griffin Ltd purchases all the shares of Frank Ltd in the year 20X4. While buying the shares, fair value of assets and liabilities of Frank Ltd are taken into consideration by the management of Griffin Ltd. In addition, Griffin Ltd has considered few unrecorded assets and contingent liabilities of Frank Ltd. Post acquisition, few non-current assets and current assets of Frank Ltd has been sold off by Griffin Ltd. Moreover, few fixed assets have been revalued with respect to their remaining useful life. Furthermore, one of the aforesaid contingent liabilities matured partly in 20X6 and as a result Frank Ltd is required to pay off the obligations. It has been assumed that the applicable tax rate is 30%. Financial statements for both the firms for 20X7 have been provided. The case study requires passing the necessary business combination valuation entries and pre-acquisition entries for 20X7. The case study also demands to prepare consolidated financial reports including the detailed calculation in the form of consolidated worksheet.
As per AASB-112 (Income Taxes), increase in value of assets by way of revaluation towards fair value should be subject to taxation (Aasb.gov.au. 2010). However, the same is a temporary tax differences and as a result, deferred tax liability will arise (Finney, 2011). It may be interesting to note that the same has also been discussed in AASB-116 (Property, Plant & Equipment) (Aasb.gov.au. 2012). The adjustment and corresponding journal entries in the paper have been performed in line with the AASB-112 and the AASB-116.
The below tables show the business combination valuation entries for 20X5, 20X6 and 20X7. In this context, it may be noted that the acquisition has taken place in 20X5 and hence corresponding valuation entries may be passed in 20X5. However, subsequent to acquisition, there have been several adjustments which should also be passed in the books of accounts by way of journal entries.
|
Entries as on 30th June 2015 |
|||
|
Particulars |
Amount ($) |
Amount ($) |
|
|
1 |
Plant A/C …………………………….Dr |
6,000 |
|
|
To Deferred Tax Liability A/C ………………………... Cr |
1,800 |
||
|
To Business Combination Valuation Reserve A/C …… Cr |
4,200 |
||
|
(Being the plant is revalued and corresponding deferred tax liability is considered using tax rate of 30% and balance transferred to Business Combination Valuation Reserve) |
|||
|
2 |
Land A/C …………………………….Dr |
20,000 |
|
|
To Deferred Tax Liability A/C ………………………... Cr |
6,000 |
||
|
To Business Combination Valuation Reserve A/C …… Cr |
14,000 |
||
|
(Being the land is revalued and corresponding deferred tax liability is considered using tax rate of 30% and balance transferred to Business Combination Valuation Reserve) |
|||
|
3 |
Inventory A/C …………………………….Dr |
8,000 |
|
|
To Deferred Tax Liability A/C ………………………... Cr |
2,400 |
||
|
To Business Combination Valuation Reserve A/C …… Cr |
5,600 |
||
|
(Being the inventory is revalued and corresponding deferred tax liability is considered using tax rate of 30% and balance transferred to Business Combination Valuation Reserve) |
|||
|
4 |
Unrecorded Assets A/C ..………………Dr |
12,000 |
|
|
To Business Combination Valuation Reserve A/C …… Cr |
12,000 |
||
|
(Being the unrecorded asset relating to brand of successful clothing in teenage market accounted for in the books of accounts for the purpose of valuation and the corresponding amount transferred to Business Combination Valuation Reserve) |
|||
|
5 |
Business Combination Valuation Reserve A/C …...… Dr |
10,000 |
|
|
To Contingent Liabilities A/C ………………………………..… Cr |
10,000 |
||
|
(Being the contingent liabilities relating to a guarantee accounted for in the books of accounts for the purpose of valuation and the corresponding amount transferred to Business Combination Valuation Reserve) |
|||
|
6 |
Goodwill A/C …………………………………..Dr |
24,200 |
|
|
To Business Combination Valuation Reserve A/C …… Cr |
24,200 |
||
|
(Being the excess of purchase consideration over the fair value of net assets and liabilities acquired are considered as Goodwill and adjusted against Business Combination Valuation Reserve) |
|||
|
7 |
Share capital A/C ………………………………………………….. Dr |
200,000 |
|
|
General reserve A/C ……………………………………….…….... Dr |
20,000 |
||
|
Retained earnings A/C …….………………………………...…….. Dr |
50,000 |
||
|
Business Combination Valuation Reserve A/C ……………….….. Dr |
50,000 |
||
|
To Shares in Frank Ltd A/C ………………………………………...… Cr |
320,000 |
||
|
(Being the pre-acquisition entries passed by transferring equity of Frank Ltd and also adjusting Business Combination Valuation Reserve against the shares in Frank Ltd.) |
|||
|
8 |
Cost of Sales A/C ……………………………………………. Dr |
7,200 |
|
|
To Income Tax Expenses A/C ………………..…………...… Cr |
2,160 |
||
|
To Business Combination Valuation Reserve A/C ………..… Cr |
5,040 |
||
|
(Being 90% of the inventory revalued sold and corresponding income tax expenses accounted for in the books of accounts and balance transferred to Business Combination Valuation Reserve) |
|||
|
Entries as on 30th June 2016 |
|||
|
Particulars |
Amount ($) |
Amount ($) |
|
|
1 |
Depreciation A/C …………………………….Dr |
1,200 |
|
|
To Accumulated Depreciation A/C …………………… Cr |
1,200 |
||
|
(Being depreciation charged against the revalued part of the non-current asset and transferred to accumulated depreciation account) |
|||
|
2 |
Deferred Tax Liability A/C …………………….. Dr |
360 |
|
|
To Income Tax Expenses A/C …………………… Cr |
360 |
||
|
(Being tax corresponding to above mentioned depreciation on revalued part of the non-current asset has been adjusted against the deferred tax liability) |
|||
|
3 |
Bank A/C ……………………………………………. Dr |
250,000 |
|
|
To Land A/C ……………………………………….………… Cr |
210,000 |
||
|
To Capital Reserve A/C .……………………………………… Cr |
40,000 |
||
|
(Being the land sold at a profit and the profit is transferred to capital reserve account) |
|||
|
4 |
Cost of Sales A/C ……………………………………………. Dr |
800 |
|
|
To Income Tax Expenses A/C ………………..…………...… Cr |
240 |
||
|
To Business Combination Valuation Reserve A/C ………..… Cr |
560 |
||
|
(Being balance 10% of the inventory revalued sold and corresponding income tax expenses accounted for in the books of accounts and balance transferred to Business Combination Valuation Reserve) |
|||
|
Entries as on 30th June 2017 |
|||
|
Particulars |
Amount ($) |
Amount ($) |
|
|
1 |
Business Combination Valuation Reserve A/C …… Dr |
2,500 |
|
|
To Bank A/C …………………………………………… Cr |
2,500 |
||
|
(Being the contingent liabilities of $10,000 considered earlier for the purpose of valuation has been matured to the extent of $2,500 and the same is paid off and adjusted against Business Combination Valuation Reserve) |
|||
|
2 |
Depreciation A/C …………………………….Dr |
1,200 |
|
|
To Accumulated Depreciation A/C …………………… Cr |
1,200 |
||
|
(Being depreciation charged against the revalued part of the non-current asset and transferred to accumulated depreciation account) |
|||
|
3 |
Deferred Tax Liability A/C …………………….. Dr |
360 |
|
|
To Income Tax Expenses A/C …………………… Cr |
360 |
||
|
(Being tax corresponding to above mentioned depreciation on revalued part of the non-current asset has been adjusted against the deferred tax liability). |
|||
In this context, reference may be drawn to the table in the appendices below. The table shows the calculation of net fair value of assets and liabilities of Frank Ltd acquired by Griffin Ltd. From the table it seems that the total equity acquired is $270,000. In addition, increase in fair value of assets is $23,800 after adjusting 30% tax rate (on account of differed tax liability). Moreover, dividend payable of $10,000 has also been considered as the purchase consideration of $330,000 includes dividend payment. Finally unrecorded assets of $12,000 and contingent liabilities of $10,000 have also been considered for the purpose of calculation of net assets acquired. The given calculation shows that the net asset acquired is $305,800. On the other hand, purchase considered (cum-dividend) has been $330,000. Therefore, the difference may be booked under Goodwill of $24,200.
The table below shows the consolidated worksheet for both income statement including statement of changes in equity and balance sheet.
|
Particulars |
Griffin Ltd |
Frank Ltd |
Gross Total |
Adjustment |
Net Total |
|
Revenue |
190,000 |
110,000 |
300,000 |
0 |
300,000 |
|
Expenses |
80,000 |
76,000 |
156,000 |
0 |
156,000 |
|
110,000 |
34,000 |
144,000 |
0 |
144,000 |
|
|
Gain on sale of non-current assets |
5,000 |
4,000 |
9,000 |
0 |
9,000 |
|
Profit before tax |
115,000 |
38,000 |
153,000 |
0 |
153,000 |
|
Income Tax Expenses |
-40,000 |
-6,000 |
-46,000 |
0 |
-46,000 |
|
75,000 |
32,000 |
107,000 |
0 |
107,000 |
|
|
Gain on revaluation of plant |
0 |
0 |
0 |
0 |
0 |
|
Profit for the year |
75,000 |
32,000 |
107,000 |
0 |
107,000 |
|
Retained earnings (opening) |
80,000 |
88,000 |
168,000 |
0 |
168,000 |
|
155,000 |
120,000 |
275,000 |
0 |
275,000 |
|
|
Dividend paid |
-34,000 |
0 |
-34,000 |
0 |
-34,000 |
|
Transfer to General Reserve |
0 |
-15,000 |
-15,000 |
0 |
-15,000 |
|
Retained earnings (closing) |
121,000 |
105,000 |
226,000 |
100,000 |
126,000 |
|
Particulars |
Griffin Ltd |
Frank Ltd |
Gross Total |
Adjustment |
Net Total |
|
Share Capital |
280,000 |
200,000 |
480,000 |
200,000 |
280,000 |
|
General Reserve |
20,000 |
48,000 |
68,000 |
20,000 |
48,000 |
|
Asset Revaluation Surplus |
24,000 |
0 |
24,000 |
0 |
24,000 |
|
Retained Earnings |
121,000 |
105,000 |
226,000 |
100,000 |
126,000 |
|
Equity |
445,000 |
353,000 |
798,000 |
320,000 |
478,000 |
|
Provisions |
15,000 |
12,000 |
27,000 |
0 |
27,000 |
|
Payables |
40,000 |
8,000 |
48,000 |
0 |
48,000 |
|
Deferred Tax Liability |
0 |
0 |
0 |
0 |
0 |
|
Liabilities |
55,000 |
20,000 |
75,000 |
0 |
75,000 |
|
Equity & Liabilities |
500,000 |
373,000 |
873,000 |
320,000 |
553,000 |
|
Cash |
12,000 |
30,000 |
42,000 |
0 |
42,000 |
|
Accounts Receivable |
28,000 |
12,000 |
40,000 |
0 |
40,000 |
|
Inventory |
30,000 |
51,000 |
81,000 |
0 |
81,000 |
|
Plant |
230,000 |
320,000 |
550,000 |
0 |
550,000 |
|
Accumulated Depreciation |
-120,000 |
-40,000 |
-160,000 |
0 |
-160,000 |
|
Shares in Frank Ltd |
320,000 |
0 |
320,000 |
320,000 |
0 |
|
Assets |
500,000 |
373,000 |
873,000 |
320,000 |
553,000 |
The table below shows the Consolidated Statement of Profit or Loss and Other Comprehensive Income of Griffin Ltd (combining Frank Ltd.) for the year 20X7.
|
Consolidated Statement of Profit or Loss and Other Comprehensive Income Griffiin Ltd (along with Frank Ltd.) |
|
|
Particulars |
Amount ($) |
|
Revenue |
300,000 |
|
Expenses |
156,000 |
|
Gross Profit |
144,000 |
|
Gain on sale of non-current assets |
9,000 |
|
Profit before tax |
153,000 |
|
Income Tax Expenses |
-46,000 |
|
Profit for the year |
107,000 |
The table below shows the Consolidated Statement of Changes in Equity of Griffin Ltd (combining Frank Ltd.) for the year 20X7.
|
Consolidated Statement of Changes in Equity |
|
|
Griffiin Ltd (along with Frank Ltd.) |
|
|
Particulars |
Amount ($) |
|
Retained earnings (opening) |
|
|
- Griffin Ltd |
80,000 |
|
- Frank Ltd |
88,000 |
|
168,000 |
|
|
Less: Adjustment on account of consolidation |
100,000 |
|
68,000 |
|
|
Add: Profit for the year |
107,000 |
|
175,000 |
|
|
Dividend paid |
-34,000 |
|
Transfer to General Reserve |
-15,000 |
|
Retained earnings (closing) |
126,000 |
The table below shows the Consolidated Statement of Financial Position of Griffin Ltd (combining Frank Ltd.) for the year 20X7.
|
Consolidated Statement of Financial Position |
|
|
Griffiin Ltd (along with Frank Ltd.) |
|
|
Particulars |
Amount ($) |
|
Share Capital |
280,000 |
|
General Reserve |
48,000 |
|
Asset Revaluation Surplus |
24,000 |
|
Retained Earnings |
126,000 |
|
Equity |
478,000 |
|
Provisions |
27,000 |
|
Payables |
48,000 |
|
Liabilities |
75,000 |
|
Equity & Liabilities |
553,000 |
|
Cash |
42,000 |
|
Accounts Receivable |
40,000 |
|
Inventory |
81,000 |
|
Plant |
550,000 |
|
Accumulated Depreciation |
-160,000 |
|
Shares in Frank Ltd |
0 |
|
Assets |
553,000 |
Conclusion
The above report shows the practical aspects of accounting of business combination valuation. It may be noted that the accounting should be performed considering AASB regulations in this regard (Kampf et al. 2016). Finally, it may be concluded that the accounting for valuation or combination is a complex affair and hence management should carefully perform the task in order to properly present the scenario to the shareholders in the form of financial statements (Karimi Torghabeh et al. 2014).
References
Aasb.gov.au. (2010). Property, Plant and Equipment. [online] Available at: https://www.aasb.gov.au/admin/file/content102/c3/AASB116_07-04_ERDRjun10_07-09.pdf [Accessed 7 May 2017].
Aasb.gov.au. (2012). Income Taxes. [online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB112_07-04_COMPsep11_07-12.pdf [Accessed 7 May 2017].
Finney, S. (2011). Stakeholder perspective on internal marketing communication. Business Process Management Journal, 17(2), 311–331.
Henrekson, M. (2014). Entrepreneurship, innovation, and human flourishing. Small Business Economics, 43(3), 511–528.
Kampf, R., Majer?ák, P., and Švagr, P. (2016). Application of break-even point analysis. Naše more, 63(3), 126–128.
Karimi Torghabeh, M. R., Parsian, H.,and Shams Kolookhi, A. (2014). A study on relationship between earnings before tax, interest and operational cash flows with stockholders’ equity. Management Science Letters1699–1706.
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