Australian Requirement for Business Combinations

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Australian Requirement for Business Combinations

The issue of accounting for Business Combinations, according to Australian standards, has been a cause of considerable concerns and controversies for both, accountants and academics. However, due to the enormity of transactions involved in it, it becomes highly important to understand its application.  

In this research, we will outline various concepts and definitions to business combinations and address some important issues such as reporting entity concept, determination of fair value of assets, nature and treatment of goodwill, fair value approach in determining the cost of business combinations. While doing this, we will keep in mind the major accounting practices applied for various issues related to Business Combinations in Australia.

‘Growth’ is the main objective of any business organization. Top management always triggers growth or expansion as their primary goal. A company may grow slowly, gradually expanding its product lines, facilities or services, or it may unexpectedly shoot up overnight. Some managers consider growth so important that they say “a company must either grow or die”. In past hundred years in US and Australia, many companies have achieved their goal of expansion through business combinations.  

Such expansion can be of two types:
1) Internal expansion
2) External expansion
A firm can expand internally by expanding its research and development. External expansion is when a business tries to expand by acquiring one or more other firms. This is also termed as Business Combination or Mergers or Acquisitions. This form of expansion is more popular over recent years, as it attracts rapid attention and growth. In addition to this, external expansion holds comparatively higher advantages as compared to internal expansion.

Definition of Business Combination:
Business Combinations are events or transactions where two or more business enterprises, or their net assets, are brought together under a common control, as a single accounting entity.  
Appendix A of AASB 3 Business Combinations defines business combination as ‘bringing together of separate entities or business into one reporting entity’.  
However, Exposure Draft (ED) 139 (para. 3) shows proposed amendments to such definition described by AASB 3 Business Combinations. According to this, business combination as ‘any transaction or other event in which the acquirer obtains control of one or more businesses’.  

AASB also provides the concept where separate entities or businesses become a single reporting entity.  
An appendix in AASB 3 defines a reporting entity as ‘an entity in respect of which it is reasonable to expect the existence of users who rely on the entity’s general purpose financial report for information that will be useful to them for making and evaluating decisions about the allocation of resources’.  

ASIC Reporting entities are required to prepare financial statements in accordance with Chapter 2M of the Corporations Law, and must comply with the recognition and measurement requirements of accounting standards.  

AASB 1025 has clearly specified the application of this standard applies to companies in relation to its first financial year that ends on or after 30 June 1992 and later financial years.  
Whether a company should be classified as a reporting entity or non-reporting, (which is to be determined by the directors) is an important decision affecting the level of disclosure in a company’s financial statements.  

SAC 1 states that a number of alternative reporting entity concepts are implied in the existing legislation & regulations. These specify which type of entities should prepare general purpose financial reports. This concept includes:

· Legal Entity Concept,
· Fund Concept and
· Concept of Elected Representatives
The legal entity concept is employed in...
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