Business Combinations

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Case Study 1: Applying AASB 3

Issue 1: How to account for the original 30% investment in Blacks Ltd

-initially recorded at fair value plus transactions cost, based on para 43 of AASB 139 -subsequently accounted for under IAS 39 eg could be measured at fair value with changes in value included in profit or loss or changes recognised directly in equity. -On formation of the business combination, para. 42 of AASB 3 requires that the acquirer remeasure its previously held equity interest in the acquiree at its acquisition-date fair value and recognise the resultant gain/loss in profit or loss. Where the investment had been measured at fair value with increments recognised directly in equity, these amounts are transferred at acquisition date to profit or loss as well, and disclosed as reclassification adjustments.

Issue 2: What share price to use

Para 27 of AASB 3 requires the use of the fair value at the date of acquisition. This price will include all expectations of the takeover, including any premium for control. Some argue this does not reflect the cost to All Ltd. See pp 361-2 for the debate on use of agreement date model and the acquisition date model.

Issue 3: Effects of different dates

AASB 3 refers to acquisition date only. All measures of fair value are made on acquisition date, for both the consideration transferred and the assets acquired and liabilities assumed.

As noted under Issue 1, the 30% investment, originally recognised at the date of exchange, the date the acquirer initially acquired that investment, must at acquisition date be remeasured to fair value.
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