Business Combinations - Week 5 Review Questions 7 and 8 James Nicholls n6900623 Review Questions 1.

. Explain the key steps in the acquisition method 2. How is the consideration transferred calculated

Business combinations as detailed by AASB 3 are defined as a transaction or othe revent in which the acquirer (buyer) obtains control of one or more businesses. A large part of this process is the acquistion method. There are four key steps involved in the acquisition method. These include; 1. Identifying the acquirier 2. Determining the acquistion date 3. Recognising and measuring the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree. 4. Recognising and measuring goodwill or a gain from a bargain purchase Identifying the Acquirer The acquirer is defined in paragraph seven (7) of AASB 3 as the entity that obtains control of the acquiree. In other words, the entity that obtains control of the sellers business/assets/liabilities etc. To take this a little deeper, control is defined in Appendix A of AASB127 as The power to govern the financial and operating policies of an entity or business so as to obtain benefits from its activities. Determining the Acquisition Date The acquisition date is defined in Appendix A of AASB 3 as the date on which the acquirer obtains control of the acquiree. The acquisition date is very important, as the fair values of assets, liabilities and consideration are used as at the date of acquisition. Recongising and measuring the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree To recognise and measure correctly the condition that it is probable that future economic benefits will flow to or from the entity and the condition that the itme has a cost that can be measured reliably must be satisfied.

However, under AASB there are a small amount of exceptions that affect the way we do things. For example if we want to recognise intangible assets, we must recognise them where their fair value can be measured reliably. To do this we must take the expected benefits of an asset and multiply them by the probability of future economic benefits. For example, if my expected benefits are $100 dollars, and the probability of future economic benefits is 50%, my fair value will be $50. Having said this, AASB requires that assets acquired and liabilities assumed will be measured at fair value. Fair value is essentially the market value at the date of acquisition. This is determined by judgement, estimation and the fair value heirachy The fair value heirachy consists of, 1. By reference to observable prices of market transactions for identical assets and liabilities 2. By adjusting observable prices of market transactions for similar assets or liabilities 3. By using other valuation techniques (the best way to do this is by using market inputs as opposed to using an internal company estimate)

How is the consideration transferred calculated? Consideration transferred refers to the sum of the fair values at the date of acquistion of all the assets transferred, liabilities incurred and equity interests issued.

Example.