Corporate Accounting Aasb3 136 Impairment of Assets

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Part A (6 Marks)
AASB 3 Business combinations para.14 requires that the acquisition method be used to account for business combinations. This method requires the identification of the acquirer. For example, para.17 states that “an acquirer shall be identified for all business combinations”. •Provide and explain a list of factors that may assist management to identify the acquiring entity. •Explain why it is necessary to identify who is the acquirer in a business combination?

(Adapted from Leo et al. Case 2, p.395).

Part B (19 Marks)
Sahara Ltd recently adopted the international accounting standards. The management of Sahara Ltd are seeking your advice regarding impairment testing under AASB 136 Impairment of Assets. Required:

Write a report to the management addressing the following issues: •Explain why impairment testing is carried out.
Explain how often the test needs to carried out
Explain what steps are to be followed in applying the impairment test •Explain the characteristics of goodwill, and how existence of goodwill affects the impairment test •Explain how the International Financial Reporting Standard IAS36 applies to this case. (Adapted from Leo et al. Case 2, p.450).

Part A

AASB 3 Business combinations para.14 requires that the acquisition method be used to account for business combinations. This method requires the identification of the acquirer. For example, para.17 states that “an acquirer shall be identified for all business combinations”.

Q.1) Provide and explain a list of factors that may assist management to identify the acquiring entity.

WHO IS THE ACQUIRER:
(AASB 3 "Business Combinations", 2010) states that, the acquirer is the combining entity that obtains control of the other combining entities or businesses. Therefore, for all business combinations, there is need to identify the acquiring entity.

LIST OF FACTORS TO IDENTIFY THE ACQUIRING ENTITY:
In a business combination there is a list of factors that may assist management of the organizations to identify the acquiring entity (R.Dagwell, G. Wines, C. Lambert & J.Psaros, 2011) & (AASB 3 "Business Combinations", 2010), which is provided as follows:

* The acquirer is usually the entity that transfers the cash or other assets or incurs the liabilities in a business combination. * The acquirer is usually the combining entity whose size measured in terms of assets, revenues or profit is significantly greater than that of the other combining entity or entities. * The acquirer is usually the entity that issues its equity interests as the business combination effects mostly by exchanging equity.

To identify the acquiring entity in a business combination effected by trading equity interests has more significant factors that shall also be considered, which are:

* The relative voting rights in the combined entity after the business combination: The acquirer’s owners as a group retain or receive the largest portion of the voting rights in the combined entity. To determine which group, any unusual or special voting arrangement and options, warranties or convertible securities shall be considered by an entity. * The composition of the governing body of the combined entity: The acquirer has the capability to elect or appoint or to remove a majority of the members of the governing body of the combined entity.

* The existence of a large minority voting interest in the combined entity if no other owner or organised group of owners has a significant voting interest: In the combined entity, the combining entity whose single owner or organised group of owners holds the largest minority voting interest is usually the acquirer. * The composition of the senior management of the combined entity: The combining entity whose management dominates the management of the combined entity is usually the acquirer. * The terms of the exchange of equity...
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