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CH-1 Advanced FA
CH-1 Advanced FA
ONE
CONSOLIDATION OF FINANCIAL
INFORMATION/ACCOUNTING
FOR BUSINESS COMBINATION
(IFRS 3)
Advanced Financial Accounting,
22/02/2023 1
prepared by Sisay Mulate (PhD)
Advanced Financial
Accounting (ACFN 612)
Sisay Mulate (PhD)
Department of Accounting and Finance
College of Business and Economics
Debre Birhan University
Advanced Financial Accounting,
22/02/2023 2
prepared by Sisay Mulate (PhD)
Meaning of Accounting
Accounting is the financial information system that
provides reports to users about the economic activities
and condition of a business.
Accounting consists of three basic activities—it
identifies,
records, and
communicates the economic events of an organization to
interested user
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Advanced Financial Accounting, prepared by Sisay Mulate (PhD)
What constitute s a controlling financial
interest?
controlling is related to ownership (>50% voting
stock).
Control means decision making ability that is not
shared with others.
Financial information from the members of a business co
mbination must be
consolidated into a single set of financial statements repre
senting the entire economic entity.
1. If the acquired company is legally dissolved, a permanent c
onsolidation is produced on the date of acquisition by
entering all account balances into the financial records
of the surviving company.
2. If separate incorporation is maintained, consolidation is
periodically simulated whenever financial statements are to
be prepared. This process is carried out through the use of
22/02/2023
worksheets and consolidation entries
Advanced Financial Accounting,
13
prepared by Sisay Mulate (PhD)
Accounting for business combination
There are two methods of accounting to record
business combination.
1. Purchase method/acquisition –IFRS use this only
2. Pooling of interest method/merger method
We will see purchase method under two cases:-
a. Purchase method when dissolution takes place
b. Purchase method when separate incorporation is
maintained
The purchase method employ the cost principle in
recording business combination i.e the total value
assigned to the net assets received equal the total cost
of acquisition.
There are four cases:
1. Purchase price = FMV of net assets
2. Purchase price > FMV of net assets
3. Purchase price <FMV of net assets
4. Purchase price substantially less than the FMV of the
net assets
Advanced Financial Accounting,
22/02/2023 29
prepared by Sisay Mulate (PhD)
Case 1:Purchase price = FMV of net assets
Example 1: Bignet Company owns Internet communications
equipment and other business software applications that
complement those of Small port. Bignet wants to expand its
operations and plans to acquire Smallport on December 31. The
accounts reported by both Bignet and Smallport on that date
are listed below.
Small port net assets (assets less liabilities) have a book value
of $600,000 but a fair value of $2,550,000. only the assets and
liabilities have been appraised here; the capital stock, retained
earnings, dividend , revenue, and expense accounts represent
historical measurements rather than type of future values.
Although these equity and income accounts can give some
indication of the overall worth of the organization, they are not
property and thus not transferred in the combination .
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PP=550,000+2,000,000=2,550,000
Current assets ---------------------- 300,000
Computers &equipment--------- 900,000
Capitalized software------------ 1,600,000
Notes payable ----------------------------------- 250,000
Cash------------------------------------------------- 550,000
Common stock (5*20,000)--------------------- 100,000
Additional paid in capital(95*20,000)----1,900,000
PP= 3,000,000=1000000+2000000
Mode of payment
Cash= $1,000,000
Common stock 20,000 shares with $100 mkt price
PP-FMV = Good will
3,000,000 – 2,550,000=450,000
Good will recognized when purchase made.
The price paid to Smallport’s owners is assumed to be
$2,000,000.
No cash payment
Bignet issues 20,000 shares of common stock having a $100 per
share fair value.
When a purchase price is less than total fair value of the net
assets, non current accounts, such as computers and
Equipment and Capitalized software, are consolidated at
reduced balances.
Because Bignet paid $550,000 less that fair value ($2,000,000-
$2,550,000), the balances of the non current assets being
acquired must be decreased by that amount.
22/02/2023 37
Advanced Financial Accounting, prepared by Sisay Mulate (PhD)
FMV-PP
2550,000-2000,000=550,000
Non Current asset accounts Fair value % Amt reduce
Assume pp=$40,000
Mode of payment is cash
Whenever a purchase price is less than fair value so that
the acquired applicable non current assets balances are
eliminated entirely, an additional reduction is needed.
the additional reduction is reported as an extraordinary
gain.
Extraordinary gain comes into existence only after the
applicable noncurrent assets are first decreased to zero.
22/02/2023 43
Advanced Financial Accounting, prepared by Sisay Mulate (PhD)
Cont…
One company obtains all of the capital stock of another in exchange
for cash, other assets, liabilities, stock, or a combination of these.
After gaining control, the acquiring company can decide to transfer all
assets and liabilities to its own financial records with the second
company being dissolved as a separate corporation.
The business combination is, once again, a statutory merger because
only one of the companies maintains legal existence.
This statutory merger, however, is achieved by obtaining equity
securities rather than by buying the target company’s assets. Because
stock is obtained, the acquiring company must gain 100 percent
control of all shares before legally dissolving the subsidiary
I/S
Revenues (1,000,000) (1,000,000)
Expenses 800,000 800,000
Net income (200,000) (200,000)
Statme of RE
R/E,1/1 (870,000) (870,000)
NI (above) (200,000) 200,000
Dividend paid 110,000 (110,000)
RE, 12/31 (960,000) (960,000)