5. Business Combinations

Question 1

What is business combinations

Answer 1

A transaction or other event in which an acquirer obtains control of one or more businesses

Question 2

What is control?

Answer 2

An investor controls an investee when the investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee

Question 3

What does the term business mean?

Answer 3

An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants.

Question 4

Does AASB 3 exclude certain businesses from its scope?

Answer 4

Yes, including those estab­lished as joint ventures or under common control.

Question 5

What does AASB 3 apply to?

Answer 5

Only to combinations involving ‘businesses’, thereby excluding other exchanges of assets between entities.

Question 6

What are all businesses generally capable of?

Answer 6

Providing a return to the owners, and would generally (but not always) involve entities whose activities have inputs, processes and outputs

Question 7

What is acquirer?

Answer 7

The entity that obtains control of the acquire

Question 8

What is the acquisition date?

Answer 8

The date on which the acquirer obtains control of the acquiree

Question 9

T or F - AASB 3 requires application of the acquisition method when accounting for business combinations.

Answer 9

True

Question 10

What does the determination of the acquisition date effect?

Answer 10

The measurement of fair value of a number of amounts in the accounting for a business combination.

Question 11

What are the 4 key steps of the acquisition method?

Answer 11

(1) identify the acquirer,
(2) determine the acquisition date
(3) recognise and measure the identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquiree
(4) recognise and measure goodwill or a gain from a bargain purchase.

Question 12

T or F - Identification of an acquirer may require judgement by the accountant, and AASB 3 provides indicators to assist in making this judgement.

Answer 12

True

Question 13

What is the contingent liability?

Answer 13

(a) a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control
of the entity; or
(b) a present obligation that arises from past events but is not recognised because (i) it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation, or (ii) the amount of the obligation cannot be measured with sufficient reliability

Question 14

What is fair value?

Answer 14

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date

Question 15

What must the aquiree recognise?

Answer 15

The identifiable assets acquired and liabilities assumed at fair value at acquisition date.

Question 16

What happens when fair values are not measureable prior to end of the reporting period?

Answer 16

Where fair values are not measurable prior to the end of the reporting period, provisional measures may be required.

Question 17

The recoginition of assets and liabilities is not subject to normal recognition criteria although …

Answer 17

Although AASB 3 makes recognition subject to two main conditions, namely the definitions of assets and liabilities must be met, and the item acquired or assumed must be part of the business acquired.

Question 18

T or F - Fair value may be measured in a number of ways.

Answer 18

True

Question 19

What is contingent consideration?

Answer 19

A possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity

Question 20

What is goodwill and does it have to be disclosed?

Answer 20

Goodwill is a residual measured after determining the consideration transferred. Movements in goodwill including impairment must be disclosed.

Question 21

What does goodwill consist of?

Answer 21

Basically assets that are unidentifiable, or do not meet asset recognition criteria.

Question 22

Can an acquiree continue to exist as an entity subsequent to a business combination, or go into liquidation?

Answer 22

Yes, either options

Question 23

Is goodwill amortised?

Answer 23

No, but is subject to an annual impairment test.

Question 24

Does AASB 3 require extensive discourses relating to business combinations?

Answer 24

Yes, so that users of financial statements can understand the economics of the transactions.

Question 25

Do subsequent events require adjustments to goodwill?

Answer 25

No

Question 26

Can contingencies recognised at acquisition date be effected?

Answer 26

Yes, by expected events not occur­ring or expected estimates needing to be revised. Adjustments are regarded as being post­ acquisition effects

Question 27

When an acquiree liquidates what key accounts are raised?

Answer 27

The Liquidation account and the Shareholders’ Distribution account.

Question 28

Is a gain on a bargain purchase recognised in profit or loss?

Answer 28

A gain on bargain purchase is recognised in profit or loss in the year it arises.

Question 29

T or F - Where the net fair value of the identifiable assets acquired and liabilities assumed exceeds the cost of the combination, a gain on purchase is recognised, affecting current period income.

Answer 29

True

Question 30

Is goodwill directly measured?

Answer 30

No, but is a residual — that is, the difference between the cost of the combination and the sum of the net fair values of the identifiable assets acquired and liabilities assumed.

Question 31

What is a gain on bargain purchases recognised?

Answer 31

Only after reassessments are made.

Question 32

What does core goodwill consist of?

Answer 32

Going ­concern goodwill and combination goodwill.

Question 33

What is the sum of the consideration transferred?

Answer 33

The fair values of the components given up by the acquirer, but does not include any directly attributable costs, which are expensed