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Week06_Practice_Question_Solutions

Week06_Practice_Question_Solutions - Week 6 Practice...

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Week 6 Practice Questions 16.4 What is a ‘business combination’ and how is it relevant in company accounting? When a collection of acquired assets constitutes a business, the accounting is governed by AASB 3: Business Combinations. The standard defines a business combination as ‘[a] transaction or other event in which an acquirer obtains control of one or more businesses .’ (AASB 3, Appendix A). The entity obtaining control must then reflect that acquisition in its financial statements. When the assets involved are shares in another company, and control over that company is obtained, preparation of consolidated financial statements is also required. Any goodwill or bargain purchase will need to be reported. When assets are acquired directly from the vendor, the goodwill/bargain purchase is reported in the investor’s statements. In the case of a controlling share acquisition, goodwill/bargain purchase is reported in the consolidated statements. 16.5 How is accounting for direct acquisitions from a vendor different from accounting for share acquisitions? The circumstances of acquiring control of a business are broadly outlined by AASB 3 Appendix B and encompass the two main avenues of acquisition, which are: 1. Acquire directly from a vendor a collection of assets that constitutes a business. 2. Acquire sufficient shares to control the board of directors of a company that owns the business. The essential difference is that a share acquisition involves gaining control of an existing entity by acquiring control of the ownership interests in the entity, whereas a direct acquisition does not – the assets are acquired directly. In a direct acquisition the investor merely records the acquisition in its own statements. A share acquisition that results in control of a business will also require preparation of consolidated financial statements for the combined investor-investee accounting entity.
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