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Discussion

Describe about the Corporate Accounting for Market Participants.

AASB 3 Business combinations is almost same as the IFRS 3 of the same as issued by the International Accounting Standards boards. The ultimate target of the AASB 3 is to improve the details and information provided about the business combinations by providing the acquirer the established detailed principles.  It is actually an asset or better a group of assets which is not involved in constituting business and therefore consequently it is out of the scope of AASB 3. In accordance with the BDO, their view over the definition of business in AASB can be stated as the acquisition of entities during phase handled with a careful analysis, but they are likely to constitute the business combinations. It is to be marked that in AASB 3 Business combinations for being able to be managed and conducted as a business entity ,there are two most essential elements which are together used to get a fruitful output , they are inputs and processes , however these elements might not be included in the in the business making needs , provided the sellers in the market  are used in operating the business only if the market participants are able to acquire the business and continue to generate the required output (AASB, 2014). It requires entity to access the allowed value of the liabilities and assets, it is allowed in the standard to permit entities who are able to obtain the provisionally fair values of the assets and liabilities in order to alter the fair values and goodwill after the date of acquisition.

Meaning of business combination:

When the two business entities are brought together as one reporting entity then that is regarded as the business combination. The acquirer has the controlling of the business of the acquiree which is the outcome of the business combination. The bringing together of such entities that are not businesses would not leads to business combination. The transactions that lead to the controlling of one or more business is the business combination. When the two economic entities that are viable and independent and are joined together as a single business entity ten this term means the business combination and is the underlying concept. Such independent entities can be a separate portion of the larger entity or it can be an unincorporated entities or corporations. However, the main fact is that the entity would be regarded as the viable and single entity. The transactions may leads to the merger or the acquisition of the business.

Importance of identifying the acquirer of the business combination

There are various types of business combination say the combination of business achieved in stages, combination that is achieved without considering the transfer. When the business combination is done through the stages, the resulting loss or gain of the acquisition would be measured using the value of the previously held equities of the acquiree on the acquisition date. In the latter case, the acquiree is controlled by the acquirer without considering the transfer and in order to obtain the control, the acquiree repurchase its own shares and the contract forms the basis of the business combination (Mills & Woodford, 2015). There are various way in which the business combination can be structured for the legal, taxation and other reasons. The relationship of the parent and subsidiary is the results of the business combination in which the acquiree is the subsidiary and the acquirer is the parent and the standard is applicable to the consolidated financial statements of the reporting or the formed business entity.

As per the definition of the standard, business combination is said to be occurred when the on entity obtain the control of other entity and the date of acquiring of the interest of ownership should not coincide with the date on which the control has been obtained.

The standard of AASB 3 is intended to make the reporting of the financial statements of the business combination relevant, reliable and comparable. The requirements and the principles of the acquirers that is regarding the measurement of the goodwill of the business combination and it provides for the disclosure of the information of the business combination that are used to evaluate the financial statements by the users say, the auditors. The standard applies to the general purpose of the each other reporting entity. The definition of the standard is used to determine whether the transactions or the event would be regarded as the business combination. This would include the liabilities and the assets that constitute the business. The reporting entity would account for the transaction as the asset acquisition of other event if the acquired assets does not constitute the business. In the event of the business combination, the acquirer would be identified as and it is on part of the entities combining to form the business (Stevenson, 2012).

The business combination as per the Australian Accounting Standard Board 3 requires that at the date of transactions, the business entity should assess the fair value of the liabilities. Assets and then contingent liabilities that have been acquired in the business combination. In the event of the acquisition, the standard provide for the obtaining of the provisional value of the liabilities and assets and the goodwill and the assets fair value after the acquisition could be amended. The acquirer of the business should account for the value of business combination using those provisional values.

Examples supporting the assets not recognized by the acquiree but the acquirer

For all the types of business combination, the acquirer, it is necessary to identify the acquirer. The acquirer in the business combination is the one who obtains control of the other business entities that are to be combined. The purchase method of business combination identifies one of the party to the transactions as the acquirer as it has perception of the business combination form the acquirer.


In order to obtain the benefits from the activities of the business entities, the operating and the financial policies of the entities are governed and that power to govern is the control that one of the parties to the business combination obtains. When more than one half of the voting rights are acquired by one of the combining entity then it presumed to have obtained control over the other combining entity. However, such ownership would not demonstrate control. If on eof the entity fails to obtain more than half of the voting right’s then also it would be able to obtain the control if it obtains the following as a result of the combination:

The operating and the financial policies of the other entity would be governed by the other combining entity if it has obtained the power under an agreement or under a statute.

If by the virtue of an agreements with the investors, more power than half of the voting rights are obtained.

If at the meeting of the board of directors, the power to cast the majority votes are obtained

When there are more than the two combining entities in the event of business combination then on the basis of availability of evidence the entity that existed before the combination would be recognize as the acquirer. In such cases, the determination of the acquirer would involve the consideration of combination of the entities and the entities initiated the combination would be considered and the revenues and the assets of other entities are less than the combining entities. When the equity instruments is issued by the formation of the new entity and it effects the business combination. The combining entities that existed before the business combination would be identified as the acquirer and this would be done on the basis of evidence available. The guidance as per AASB 127 is used to identify the acquirer that is the entity obtaining the control of the acquiree. If the application of the guidance under the AASB 127 does not clearly indicate which of the combining entity is the acquirer. In the event of happening of the business combination, then the factors mentioned in the paragraph B-14 and B -18 needs to be considered for the determination (Kober et al., 2013).

When the business combination occurred by exchanging the equity interest then the entity issuing the equity interest is the acquirer and the other factors would include:

After the occurrence of the business combination, the voting rights of the combined entity. The group which receives the largest voting rights is the acquirer in the combining entity. The special or the unusual voting arrangement should be considered in determining the voting rights which is received in the largest portion by the group. If there does not exist ant significant voting rights, then the minority voting rights that exists in the combined entity would be considered. If the relative size of the combining entity is greater than the other combining entity, then than entity would be regarded as the acquirer.

The transaction of the business combination might results in the recognition of the assets that were not recognized in the books of accounts of the acquiree. Suppose, the acquiree might have the patent that is developed internally and it has positive value on the date the business was acquired or on the acquisition date. If these assets are not recognized in the books of acquiree, but such assets would be recognized as the assets part in the transaction of the business combination.

The intangibles and the tangibles assets would form a parts of the identifiable assets. However when there are intangibles assets to be recognized then the guidance is provided as per the Paragraph 1582B.32 and this can be explained using the following examples:

Example 1:

If the asset is not transferrable or separable form the acquiree then also the intangible assets become identifiable. Say, a technology patent is owned by the acquiree and the patent has been licensed for the use of the domestic market for which it has exclusive use and this would let them receive foreign exchange of specified percentage in the future. The legal criterion for the recognition is met by the license agreement and the technology patent and this would be separate from the goodwill even if it is not practical to separate the license agreement and the selling of the patent.

Example 2:

The intangible asset that may be identifiable may be related with the operating lease and the participants of the market would be willing to pay the price for lease and it is evident from the same even though it is at the market terms. This can be explained with the help of an example, the future economic benefit of the intangible assets or the entry into the market may be provided by the retail space in the shopping area that is prime or by the lease of gates at the multiplex say, by the customer relationship. In such situation, the acquirer would identify in accordance with the paragraph B-31, the associated intangibles assets that are identifiable.

Example 3:

Suppose, a nuclear plant is operated and owned by the acquirer and the license which is to operate the plant is regarded as the intangible assets that meet the recognition criteria and it is done separately from the goodwill and this is not possible even if the acquirer would not transfer it and not separated for the power plant that is acquired. In such case, the fair value of the license and power plant fair value would be recognized by an acquirer as a single assets for the purpose of financial reporting and this is applicable if those assets would have similar useful lives.

The assets that are not separable from the combined entity or the acquiree is met with the separability criteria. Say, in an exchange transactions, the deposits liabilities exchanged by the market participants and the intangible assets of the depositors’ relationship. This depositor relationship should be recognized by the acquirer as an intangible assets that is separate from the goodwill. The trademark ownership also needs to be transferred to the business combination that is the combined entity as the goods and services produced would be exclusive to the combined entity. This must separate from the combined entity (Bugeja & Loyeung, 2016).

Conclusion:

For the above discussion, it can be concluded that the standards of the Australian accounting standard board for the business combination applies to the compliance of the financial reporting of the combined entity. For the accounting of the business combination, the standard provides for the basic elements of the acquisition method and the methods to be applied for the particular type of the business combination. The standards provides all the guidelines. This standard is regarding the identification of the fair value of the assets of the combined entity. This allowed for the disclosure of the information of the business combination that would enable the users of the financial statements of the combined entities to evaluate the financial effect that  and the nature of the business combination However, the accounting of the business combination needs to be improved for which the projects have been issued. The guidance issued for the business combinations has to be in consistent with the guidelines of the other standards. The earlier standards would not be eliminated by the board if the proposed standard is not issued.

Reference:

AASB, C. A. S. (2014). Business Combinations. Disclosure, 66, 77.

Bugeja, M., & Loyeung, A. (2016). Accounting for business combinations and takeover premiums: Pre-and post-IFRS. Australian Journal of Management, 0312896215614630.

Kober, R., Lee, J., & Ng, J. (2013). GAAP, GFS and AASB 1049: perceptions of public sector stakeholders. Accounting & Finance, 53(2), 471-496.

Mills, A., & Woodford, W. (2015). Company Accounting. Pearson Higher Education AU.

Stevenson, K. M. (2012). The changing IASB and AASB relationship.Australian Accounting Review, 22(3), 239-243.

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