Purchase method of accounting
Get assignment help for this.Mail us for query at
assignment4finance@gmail.com
Purchase Method of Accounting
All business combinations must be accounted for by applying the purchase method. This involves 3 key steps:
You are also like some related topices;
a) Identifying an acquirer,
b) Measuring the cost of the business combinations and
c) Allocating the cost of the business combination to the identifiable assets and liabilities acquired.
b) Measuring the cost of the business combinations and
c) Allocating the cost of the business combination to the identifiable assets and liabilities acquired.
a) Identifying the Acquirer
The acquirer should be identified for all business combinations, The acquirer is the entity which obtains controls over the other entity, There are a number of ways in which control can be achieved, Control is normally assumed where the acquirer obtains more than 50% of the voting rights in the acquiree.
The acquirer should be identified for all business combinations, The acquirer is the entity which obtains controls over the other entity, There are a number of ways in which control can be achieved, Control is normally assumed where the acquirer obtains more than 50% of the voting rights in the acquiree.
b)
Measuring the cost of the business combination.
The cost of a business combination includes the fair values at the date of exchange of assets given, liabilities incurred or assumed and equity instruments issued by acquirer. Quoted equity investments should be valued at their published price. Deferred consideration should be measured.
Contingent consideration should be measured..
Costs directly attributable to the combination should be recognized as part of the cost of the combination.
The cost of a business combination includes the fair values at the date of exchange of assets given, liabilities incurred or assumed and equity instruments issued by acquirer. Quoted equity investments should be valued at their published price. Deferred consideration should be measured.
Contingent consideration should be measured..
Costs directly attributable to the combination should be recognized as part of the cost of the combination.
c) Allocating the cost of the business combination
The acquiree’s net identifiable assets, liabilities and contingent liabilities should be recognized at the fair value at the date of acquisition. When certain criteria are met, the acquiree’s assets, liabilities, contingent liabilities should be recognized separately. Provisions for future re-organization plans and future losses should not be recognized as liabilities at the acquisition date. Contingent liabilities which can be measured reliably should be as liabilities at the acquisition date. An intangible asset can only be recognized if it is separate or arises from contractual or other legal right and can be measured reliably.
Acquisition Method of Accounting:
The acquiree’s net identifiable assets, liabilities and contingent liabilities should be recognized at the fair value at the date of acquisition. When certain criteria are met, the acquiree’s assets, liabilities, contingent liabilities should be recognized separately. Provisions for future re-organization plans and future losses should not be recognized as liabilities at the acquisition date. Contingent liabilities which can be measured reliably should be as liabilities at the acquisition date. An intangible asset can only be recognized if it is separate or arises from contractual or other legal right and can be measured reliably.
Acquisition Method of Accounting:
A business combination must be accounted for by applying the acquisition method, unless it is a combination involving entities or businesses under common control. One of the parties to a business combination can always be identified as the acquirer, being the entity that obtains control of the other business (the acquiree). Formations of a joint venture or the acquisition of an asset or a group of assets that doesn’t constitute a business are not combinations. The IFRS establishes principles for recognizing and measuring the identifiable assets acquired, the liabilities assumed and non controlling interest in the acquire. Any classifications and designations made in recognizing these items must be made in accordance with the contractual terms ,economic conditions, acquirer’s operating or accounting policies and other factors that exist at the acquisition date Each identifiable asset liability is measured at its acquisition date fair value. All other components of non controlling interests shall be measured at their acquisition date fair value, unless another measurement basis is required by IFRS. The IFRS provides some limited exception to these recognition and measurement principles: Leases and Insurance contracts are required to be classified on the basis of the contractual terms. Only those contingent liabilities assumed in a business combination that are a present obligation and can be measured reliably are recognized. Some assets and liabilities are required to be recognized or measured in accordance with IFRS, rather than at fair value. There are special requirements for measuring a required right. Disclosure:
The IFRS requires the acquirer to disclose information that enables users of its financial statements to evaluate the nature and financial effect of business combination that occurred during the current reporting period. The Differences between the Acquisition Method & the Purchase Method The purchase method and the acquisition method are both accounting practices intended to help provide an accurate record of this process. Understanding the differences between them is important for businesses and investors reviewing a business combination. Some differences are given below-
Fair Value: The principle simply states that the assets and liabilities should be accounted for at their fair value, even if their purchase price exceeds that value.
In Purchase method, the cost of a business combination includes the fair values at the date of exchange of assets given, liabilities incurred or assumed and equity instruments issued by acquirer. The acquiree’s net identifiable assets, liabilities and contingent liabilities should be recognized at the fair value at the date of acquisition. The acquisition method is designed to improve the recognition and measurement of the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. Many of the restructuring costs and transaction-related costs factored into fair value under the purchase method are recorded separately as business expenses. In addition, the acquisition method requires the acquirer to measure the fair value of the acquiree as a whole as of the acquisition date rather than over the time period between the acquisition's announcement and its actual occurrence.
Acquisition Method of Accounting:
IFRS 3(2008) requires that all business combinations be accounted for by applying the acquisition method. [IFRS 3(2008).4] In addition to determining whether a transaction or other event is a business combination (IFRS 3(2008).3), four stages in the application of the acquisition method are listed: a) identifying the acquirer;
b) determining the acquisition date;
c) recognising and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree; and d) recognising and measuring goodwill or a gain from a bargain purchase.
You
are required to suggest:
Differences
The fundamental accounting principles remains the same for purchase method and acquisition method, that is, upon business combination, the purchase price is first applied to cover the fair values of the identifiable assets and liabilities, any additional money is accounted for as goodwill. The difference is: purchase method employs a more discretionary purchase price- allocation approach, while acquisition method employs a more market-driven recognition approach. The acquisition method is designed to improve the recognition and measurement of the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. Under acquisition method, business combinations are reflected at full fair value and include non-controlling interests as well as contingencies. These changes are helpful to generate more faithful representation of intangible assets and goodwill, thus make the financial statements more relevant and transparent
No comments:
Post a Comment