Understanding Goodwill And Bargain Purchase In Business Combinations Essay.

1.What is a ‘business combination’? What is the method of accounting that must, according to AASB 3 Business Combinations, be used to account for a business combination? What are the steps involved in applying this method?  

2.Does your company report any goodwill? How is goodwill defined? In what circumstances can an entity recognise goodwill and how is goodwill measured?

3.What is a gain from a bargain purchase? How is a gain from a bargain purchase measured and how is it accounted for?  

4.Is goodwill amortised? Is goodwill subject to impairment testing? If it is subject to impairment testing then when is goodwill be tested for impairment?

5.Can an impairment loss in relation to goodwill be subsequently reversed when there are indicators that an impairment loss recognised in prior periods may no longer exist or may have decreased?          

Assume that Company A obtained control of Company B. Explain the application of AASB 3 Business Combinationsand AASB 10 Consolidated Financial Statements if (1) Company A obtained control through purchasing all of the issued shares of Company B; and (2) Company A obtained control through purchasing all the assets and assuming all of the liabilities of Company B.     

• Is your company part of a consolidated group? If it is, state the number of individual companies that comprise the group and the number of the note in the financial statements that includes this information.  

• Explain the concept of ‘control’ and how it differs from ‘significant influence’.

• Briefly explain the process involved in preparing consolidated financial statements.     

• When preparing consolidated financial statements: (1) what is the purpose of the acquisition analysis; (2) why might a subsidiary’s assets be revalued to fair value as part of the consolidation process?   

• Does your company have any associates? If it does, state the number of associates and the number of the note in the financial statements that includes this information.  

• What is the method of accounting used by investors to account for investments in associates? Briefly explain this method of accounting. When this method is used, does it make a difference whether the investor is also a parent company?

• Is your company a party to any joint arrangements? If so, state the number of the note in the financial statements that includes this information.  

• Explain ‘joint control’ and distinguish between joint ventures and joint operations. Briefly explain the accounting requirements for joint arrangements. 

What is goodwill and how is it defined?

a)Business combination is the process of transaction whereby the acquirer takes control over another business. A business can also be described as a collection of integrated activities and assets which can be conducted and managed with the aim of giving out return to those who invested in the business or other participants, members and owners. Normally, business combination means a transactions where one firm gain Control, or acquire controlling interest, in a different company(Lusch Brown and O’Brien 2011). Business combination can also mean amalgamation of the properties of more than two business entities. It can be managed easily through a hostile takeover, a merger and voluntary acquisition. Such business combination must use the techniques of accounting known as the Acquisition method-This technique of accounting requires that liabilities assumed and assets acquired to be determined at the fair value mostly at the date of the acquisition (Gokcen & Teraman, 2018).

The application of the acquisition method involves the following steps:

Identify acquirer- the first step is the identification of the acquirer. The acquirer is the organization that takes control of another business (Silva, Sancovschi & Amaral, 2018). The control process is being dealt with under the international financial reporting standard. An investor should have gain control after fulfilling the following: has gained power over the investee and has the ability of using the power in managing the return.

The steps taken in applying the Acquisition method include the following:

Determination of acquisition date- the second step is to determine the date when the acquisition was created through writing in the form of a contract, the date of the acquisition is mostly the closing date, when the acquirer obtains legal possession of all the assets as well as assuming the liabilities of the target firm. The date of the acquisition can be earlier than the agreed date by the parties that are involved in the transaction. The reasons why the two parties has to ascertain date of the acquisition is because it can be used in the determination of the fair value of items such as assets acquired, consideration paid, non- controlling interest and liabilities assumed. The date of the acquisition is essential because it help in considering the post and pre acquisition dividends.  

Identify and measure liabilities, assets and Non- controlling Interest in acquire- this is the third steps, it require acquirer to recognize liabilities assumed, assets acquire and any NCI in the acquire. Accounting standards should be taken into consideration when assessing and measuring the assumed liabilities and assets of the business.

How is a gain from a bargain purchase measured and accounted for?

Bargain purchase/Goodwill- This is the last steps acquisition method and it involve calculation of Bargain purchase or Good will. A bargain purchase mostly happens when an entity acquire an assets with lesser amount than the fair market value of the Assets.

b)The report of the Netcomm Wireless suggests that it recognized Goodwill.

Goodwill is defined as the intangible asset that emerges when a buyer obtains an existing business. Goodwill is being recognized when the fair value is more than the purchase consideration (Negative good will) or when the fair value is less than acquisition costs.

Good will is measured using this formula: Goodwill = price paid for the acquired organization minus fair market value.

Goodwill= (fair value of non-controlling rate of interest + consideration paid) – (Assets- liabilities).

c)Again from a bargain purchase is the process where the acquirer records the differences that exist between purchase price and fair value as a gain. It is another name of the negative goodwill (Rousseau, 2015).

A gain from a bargain purchase is being measured by finding the differences between the fair value of any assets and purchase price. Again from a bargain purchase is being recorded on the acquirer income statement because of the negative goodwill (Seim & Sinkinson, 2016).

d)In accounting, Goodwill is not allowed to be amortized.  Goodwill is accumulated when the company pays excess money for the purchase of an asset than the fair value of the asset according to the brand of the company and client base. Companies apply the purchase techniques of accounting, which inhibit the automatic amortization process (goodwill).

Goodwill should not be subjected to amortization. Instead, organizations must perform constant impairment testing. The amount of goodwill being maintained by the organization on its books must be tested to identify whether it has impaired.

The current standards of accounting require all public companies to do annual tests on the impairment of goodwill.

e)Impairment loss can be subsequently revised this is because it will enables for the assessment of the goodwill

a)The acquirer pays for the assets using other assets or in case, by issuing their own share and by the combination of shares and cash. Where the purchase is made by cash, it is easier to determine the costs of the assets. When an asset is used to pay for purchase, then the costs willbe determined by the assets’ fair value. When the company issued share for the purchase, then the value of the share represent cost of purchase.

b)Netcomm wireless is a consolidated group. The number of note is contained in Note 31 (d) to the organization’s financial statement.

c)The process of control is where an organization has the capacity to direct the financial policies and operating of another company with the aim of increasing economic benefits.

The difference between significance of influence and control is that control normally means an individual own over fifty percent of the equity of the company while significant influence means an individual own between 20% to 50%.

Is goodwill amortized and subject to impairment testing?

d)The process which is involved in the preparation of consolidated financial statement includes:

When preparing the statements, the costs of the investments must be replaced with the fair value as well as the liability of the subsidiary.

Goodwill then a rise on acquisition

Double counting should not be allowed. Items that are linked to transfer are being removed.

e)Acquisition analysis helps in setting adjustments for:

Pre-acquisition entries- it is needed to remove the carrying amount of the investments of parents in the subsidiary.

Valuation entries for business combination is required to modify the carrying amount of each of the liabilities assumed and acquired identifiable assets to fair value.

The assets of the subsidiaries are being revalued to fair value so as to establish an accurate amount for a gain or goodwill on purchase.

F)Yes, Netcomm wireless has the associates.

g)The investors use equity method of accounting to account for their investments.

Equity method is used by the investors in holding significant influence over the investee, but lack full control.

When the equity method is used it makes a difference when the investor is a parent company. The investor will record investment as assets.

h) Netcomm wireless is a party to join arrangement

i) Joint control is the control of the substances that forms an estate by connecting organization, another name for joint control is the surety (Manandhar et.al, 2018). Joint control is where more than two undertaking have the ability of exercising influence to another undertaking. Decisive influence refers to the power to prevent which determine commercial behavior of a particular undertaking.

The differences between joint venture and joint operation are that joint venture is the proportionate holding in asset (net asset) of any organization whereas join operations are created when two companies join together and start the task jointly, for example an oil pipeline. The key thing is that both the organizations give a proportion of liabilities/assets (Levi, 2016).  

The accounting treatment for joint arrangements sets two dissimilar techniques of accounting for interest which depend on the kind of the arrangement. The investor will have to use either line-by-line basis or equity method of accounting. The accounting arrangement depend the nature of the interest and substance of the arrangement (Kiehn, 2016).

References

Gokcen, G., & Teraman, O. (2018). Importance of Synergistic Value in the Context of Business Combination: A Case Study From Turkey. Economics, 6(1), 49-60.

Kiehn, O. (2016). Decoding the organization of spinal circuits that control locomotion. Nature Reviews Neuroscience, 17(4), 224.

Levi, M. (2016). The phantom capitalists: The organization and control of long-firm fraud. Routledge.

Lusch, R.F., Brown, J.R. and O’Brien, M., 2011. Protecting relational assets: a pre and post field study of a horizontal business combination. Journal of the Academy of Marketing Science, 39(2), pp.175-197

Manandhar, U., Tummuru, N. R., Kollimalla, S. K., Ukil, A., Beng, G. H., & Chaudhari, K. (2018). Validation of Faster Joint Control Strategy for Battery-and Supercapacitor-Based Energy Storage System. IEEE Transactions on Industrial Electronics, 65(4), 3286-3295.

Rousseau, D. (2015). I-deals: Idiosyncratic Deals Employees Bargain for Themselves: Idiosyncratic Deals Employees Bargain for Themselves. Routledge.

Seim, K., & Sinkinson, M. (2016). Mixed pricing in online marketplaces. Quantitative Marketing and Economics, 14(2), 129-155.

Silva, A. S., Sancovschi, M., & Amaral, C. F. (2018). Ordinary Voluntary Accounting Changes Due to a Business Combination: A Case Study.