Valuation of assets and liabilities both tangible and

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and liabilities at fair value. - Valuation of assets and liabilities both tangible and intangible, as well as non-controlling interest - Net value of the target firm is compared to the value of the transaction - If net value is less than the transaction value = creation of goodwill - Benefits 1.) Companies assets and liabilities will be reflected at fair value accurate 2.) The value of the transaction is reflected due to the creation of goodwill - Makes it possible to analyse and determine whether the price paid was a fair price - Draw back – the goodwill that is created has to be reassessed every year, identify impairment - If fair value is less than the goodwill reflected in the financial statements – difference must be impaired - Charged to the statement of comprehensive income expense Steps in the Acquisition Accounting Method Four steps need to be completed when applying the acquisition accounting method. Step 1: Identification of the Acquiring Company - Must determine who the acquiring company is - The company that acquires control of the target company - Very NB step effect of the transaction need to be reflected in the acquiring company’s financial statement Step 2: Determining the Acquisition Date - Date on which the acquiring company gains control of the target company - Important as this is the dates that the values of the assets and liabilities must be calculated - Formulation of goodwill is based on valuation on this date Step 3: Recognition & Measurement of the assets, liabilities & non-controlling interest in the target company - Very important step - The following groups need to be considered 1.) Tangible Assets and Liabilities Measured at their fair value on the acquisition date Not too complex to calculate the values since they are all tangible 2 | P a g e Fair Value of Net Tangible Assets = Total Assets – Total Total Assets = sum of all tangible assets of target company Total Liabilities = sum of all liabilities of target company
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P a g e Example (page 171) Sassoil Ltd, a South African chemical company, is in the process of acquiring Namsoil Ltd. You are required to advise them on the accounting treatment of the transaction. The following historical cost values from the statement of financial position for Namsoil, as well as their corresponding fair values, are provided to you below. Historical Cost Fair Value Property, Plant & Equipment (PPE) at cost 550 - Accumulated Depreciation (300) PPE at Carrying Value 250 275 Share Investments 200 250 Non-Current Assets 450 Inventory 50 75 Trade Receivables 50 50 Cash 25 25 Current Assets 125 TOTAL ASSETS 575 Ordinary Shares 150 500 Retained Earnings 50 Ordinary Shareholders’ Equity 200 Long-Term Loans 100 90 Debentures 200 220 Non-Current Liabilities 300 Trade Payables 50 50 Taxation Payable 25 25 Current Liabilities 75 TOTAL EQUITY AND LIBILITIES 575 Based on the information provided, you will measure the value of the net tangible assets of the acquired company as follows: The fair value of the net tangible assets is therefore R675 – R385 = R290 PPE 275 Share Investment 250 Inventory 75 Trade Receivables 50 Cash 25 TOTAL ASSETS 675 Long-Term Loans 90 Debentures 220 Trade Payables 50 Tax Payable 25 TOTAL LIABILITIES 385
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2.) Intangible Assets Valuation process is very complex and complicated Decide if recognisable according to IAS 38 Only considered an asset if identifiable, under the control of the company and has future economic
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  • Fall '19
  • Balance Sheet, Generally Accepted Accounting Principles, Acquiring Company

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