1 Acquisition of Assets TEXT CHAP 10 TEXT CHAP 10.

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Acquisition of AssetsAcquisition of Assets

TEXTCHAP 10

TEXTCHAP 10

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ObjectivesObjectives

Prepare the entries in the acquiring company for Prepare the entries in the acquiring company for the acquisition of assets the acquisition of assets

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Applicable accounting standardsApplicable accounting standards

AASB 1015 Acquisition of AssetsAASB 1015 Acquisition of Assets AASB 1013 Accounting for GoodwillAASB 1013 Accounting for Goodwill

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Single assetSingle asset Set of AssetsSet of Assets Acquisition of an entity (collection of net assets)Acquisition of an entity (collection of net assets)

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Acquisition of an entityAcquisition of an entity

AA company is allowed to acquire the net company is allowed to acquire the net assets of another company and is also assets of another company and is also allowed to indirectly acquire the net assets allowed to indirectly acquire the net assets by purchasing the shares of another by purchasing the shares of another companycompany

Their are 4 principal forms of acquisition Their are 4 principal forms of acquisition of net assets of a companyof net assets of a company

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Four principal forms of Four principal forms of acquisition of an entityacquisition of an entity

A Ltd A Ltd purchases the net assets of B Ltd. B Ltd purchases the net assets of B Ltd. B Ltd continues with its assets and liabilities continues with its assets and liabilities replaced with purchase consideration replaced with purchase consideration

A Ltd acquires the net assets of B Ltd . B Ltd A Ltd acquires the net assets of B Ltd . B Ltd liquidatesliquidates

C Ltd is formed to acquire the net assets of A C Ltd is formed to acquire the net assets of A Ltd & B Ltd. Both A Ltd & B Ltd are Ltd & B Ltd. Both A Ltd & B Ltd are liquidatedliquidated

A Ltd acquires the issued shares of B Ltd , B A Ltd acquires the issued shares of B Ltd , B Ltd continues with its shares owned by A LtdLtd continues with its shares owned by A Ltd

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Accounting entries for acquisitionAccounting entries for acquisition

– cost of acquisition ie Assets given upcost of acquisition ie Assets given up

– fair value of assets acquiredfair value of assets acquired

– in the case of purchase of an entity whether in the case of purchase of an entity whether goodwill/discount on acquisition AASB 1013goodwill/discount on acquisition AASB 1013

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Cost of acquisitionCost of acquisition

The cost of acquisition consists of the The cost of acquisition consists of the purchase consideration & any incidental purchase consideration & any incidental costs incurredcosts incurred

The purchase consideration is rarely in a The purchase consideration is rarely in a single form usually it consists cash, shares single form usually it consists cash, shares and other assets (e.g. Land & Buildings)and other assets (e.g. Land & Buildings)

These assets given up as per AASB 1015 These assets given up as per AASB 1015 must be valued at their fair valuemust be valued at their fair value

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Fair Value of Assets Given UpFair Value of Assets Given Up

Cash - normally equivalent but if settlement date deferred - Cash - normally equivalent but if settlement date deferred - discount to present valuediscount to present value

Non-monetary assets Non-monetary assets

– e.g. Land & Buildings (valued by use of experts)e.g. Land & Buildings (valued by use of experts) SecuritiesSecurities

– listed companies (current market price)listed companies (current market price)

– unlisted (various techniques but may have to use a unlisted (various techniques but may have to use a surrogate eg fair value of assets acquired)surrogate eg fair value of assets acquired)

Liabilities Liabilities

– Present value of future amountPresent value of future amount Acquisition Date Acquisition Date

– Important -(date rights & obligations exchange)Important -(date rights & obligations exchange)

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Accounting entriesAccounting entries

Single assetSingle asset– entry recorded at the cost of acquisitionentry recorded at the cost of acquisition

Set of assetSet of asset– Where the asset consists of more than one asset then the Where the asset consists of more than one asset then the

cost of the asset is apportioned over the assets acquired.cost of the asset is apportioned over the assets acquired.

– The process is to allocate in proportion to fair values of The process is to allocate in proportion to fair values of assets acquiredassets acquired

eg Purchased for $300 000eg Purchased for $300 000

Land FV 40 000Land FV 40 000

Buildings FV 200 000Buildings FV 200 000

Furniture FV 80 000Furniture FV 80 000

$320 000$320 000

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Single assetSingle asset– entry recorded at the cost of acquisitionentry recorded at the cost of acquisition

Set of assetSet of asset– Where the asset consists of more than one asset then the Where the asset consists of more than one asset then the

cost of the asset is apportioned over the assets acquired.cost of the asset is apportioned over the assets acquired.

– The process is to allocate in portion to fair values of The process is to allocate in portion to fair values of assets acquiredassets acquired

eg Purchased for $300 000eg Purchased for $300 000

Land FV 40 000Land FV 40 000

Buildings FV 200 000Buildings FV 200 000

Furniture FV 80 000Furniture FV 80 000

$320 000$320 000

EntryDr Land (40/320*300) 37 500Dr Blgds (200/320*300) 187 500Dr Furn (80/320*300) 75 000 Cr Cash 300 000

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Accounting requirementsAccounting requirementsAcquisition of an entityAcquisition of an entity

Assets acquiredAssets acquired $ x (fair values) $ x (fair values)

less::less::

Cost of acquisitionCost of acquisition $ x (fair values of $ x (fair values of

assets given up)assets given up)

----------

DifferenceDifference $ x$ x ( (goodwillgoodwill or or

discountdiscount on acquisition on acquisition))

(AASB 1013 ACCOUNTING FOR GOODWILL)(AASB 1013 ACCOUNTING FOR GOODWILL)

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entry::entry::

Dr Dr Assets acquiredAssets acquired (at their fair values) (at their fair values)

CR CR LiabilitiesLiabilities (acquired) (acquired)

Dr Dr GoodwillGoodwill

Cr Cr Share CapitalShare Capital (shares given up) (shares given up)

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AASB 1013 Accounting for AASB 1013 Accounting for GoodwillGoodwill

Goodwill Goodwill

– has to be written off using straight line method has to be written off using straight line method over 20 years or at director’s discretion over 20 years or at director’s discretion provided less than 20 yearsprovided less than 20 years

Discount on acquisitionDiscount on acquisition

– is to be written off the non-monetary assets in is to be written off the non-monetary assets in proportion to their fair valuesproportion to their fair values

non-monetary assets not defined but non-monetary assets not defined but

– monetary assets as per AASB 1010 cash & monetary assets as per AASB 1010 cash & receivablesreceivables

– Therefore allocate against assets other than Therefore allocate against assets other than cash & receivablescash & receivables

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ExampleExample

PAID UP CAPITAL $1 36,000PAID UP CAPITAL $1 36,000

RETAINED PROFITS 21,500RETAINED PROFITS 21,500

EQUIPMENT EQUIPMENT 42,000 42,000

ACC. DEPRECIATION 10,000ACC. DEPRECIATION 10,000

INVENTORY INVENTORY 18,000 18,000

DEBTORS DEBTORS 10,000 10,000

BILLS RECEIVABLEBILLS RECEIVABLE 6,000 6,000

PATENTSPATENTS 3,500 3,500

DEBENTURES 4,000DEBENTURES 4,000

CREDITORS CREDITORS 8,000 8,000

$79,500 $79,500$79,500 $79,500

RABBIT LTDTRIAL BALANCE AS AT 1/1/92


ASSUME::*WOLF LTD TAKES OVER

NET ASSETS OF RABBIT LTD

*COSTS WOLF LTD $2050

*SHAREHOLDERS TORECEIVE I SHARE FOR EVERY 1 SHARE HELD

(M.V. $2)

*DEBENTURE HOLDERS TO BE PAID IN CASH +2%

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ExampleExample



EQUIPMENT 42,000EQUIPMENT 42,000


INVENTORY 18,000INVENTORY 18,000

DEBTORS 10,000DEBTORS 10,000

BILLS RECEIVABLE 6,000BILLS RECEIVABLE 6,000

PATENTS 3,500PATENTS 3,500


CREDITORS 8,000CREDITORS 8,000

$79,500 $79,500$79,500 $79,500



ASSUME::*WOLF LTD TAKES OVER

NET ASSETS OF RABBIT LTD

*COSTS WOLF LTD $2050

*SHAREHOLDERS TORECEIVE I SHARE FOR EVERY 1 SHARE HELD

(M.V. $2)

*DEBENTURE HOLDERS TO BE PAID IN CASH +2%

COST OF ACQUISITION

CASH::COSTS 2,050DEBENTURES 4,080SHARES(36,000* $2) 72,000 $78,130(also have to pay the GST ignored for our examples)

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EXAMPLEEXAMPLE



EQUIPMENT EQUIPMENT 42,000 42,000


INVENTORY INVENTORY 18,000 18,000

DEBTORSDEBTORS 10,000 10,000

BILLS RECEIVABLEBILLS RECEIVABLE 6,000 6,000

PATENTS PATENTS 3,500 3,500


CREDITORS CREDITORS 8,000 8,000

$79,500 $79,500$79,500 $79,500



COST $78,130ASSUME FAIR VALUE ASSETS ACQUIRED::EQUIPMENT 36,000INVENTORY 20,000DEBTORS 9,000PATENTS 4,000BILLS REC. 6,000CREDITORS (8,000) $67,000


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EXAMPLEEXAMPLE











$79,500 $79,500$79,500 $79,500





ASSETS ACQUIRED 67,000COST 78,130 CASH 6,130 SHARES 72000 (36,000 *$2)GOODWILL $11,130

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EXAMPLEEXAMPLE











$79,500 $79,500$79,500 $79,500





ASSETS ACQUIRED 67,000COST 78,130 CASH 6,130 SHARES 72000 (36,000 *$2)GOODWILL $11,130

GOODWILL EXAMPLE:::entry

DR EQUIPMENT 36,000DR INVENTORY 20,000DR DEBTORS 10,000 CR PROV D, DEBTS 1,000DR PATENTS 4,000DR BILLS REC 6,000DR GOODWILL 11,130 CR CREDITORS 8,000 CR RABBIT LTD 72,000 CR CASH 6,130

DR RABBIT LTD 72,000 CR SHARE CAPITAL 72 000

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Amortisation of GoodwillAmortisation of Goodwill

Goodwill- $11 130Goodwill- $11 130

– Assume that the goodwill is written off over 10 Assume that the goodwill is written off over 10 yearsyears

Journal EntryJournal Entry

Dr Amortisation of Goodwill 1 113Dr Amortisation of Goodwill 1 113

CR Goodwill 1 113CR Goodwill 1 113

(or Provision for Goodwill)(or Provision for Goodwill)

Balance SheetBalance Sheet

Intangibles (Note x) 10 017Intangibles (Note x) 10 017

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EXAMPLEEXAMPLE











$79,500 $79,500$79,500 $79,500





DISCOUNTEXAMPLE

DISCOUNTEXAMPLE

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EXAMPLEEXAMPLE











$79,500 $79,500$79,500 $79,500





ASSETS ACQUIRED 82,000COST 78,130 CASH 6,130 SHARES 72000 (36,000 *$2)DISCOUNT $3.870

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EXAMPLEEXAMPLE











$79,500 $79,500$79,500 $79,500







DISCOUNT::NON-M F.V. ALLOCATION COSTEQUIP 45,000 2,322 (45/75) 42,678INVENT 25,000 1,290 (25/75) 23,710PATENTS 5,000 258 ( 5/75) 4,742 -------- ------- -------- $75,000 $3,870 $71,130

DR EQUIP 42,678DR INVENT 23,710DR PATENTS 4,742DR BILLS REC 6,000DR DEBTORS 10,000 CR PROV D. DEBTS 1,000 CR CREDITORS 8,000 CR CASH 6,130 CR RABBIT LTD 72,000

DISCOUNT::NON-M F.V. ALLOCATION COSTEQUIP 45,000 2,322 (45/75) 42,678INVENT 25,000 1,290 (25/75) 23,710PATENTS 5,000 258 ( 5/75) 4,742 -------- ------- -------- $75,000 $3,870 $71,130

DR EQUIP 42,678DR INVENT 23,710DR PATENTS 4,742DR BILLS REC 6,000DR DEBTORS 10,000 CR PROV D. DEBTS 1,000 CR CREDITORS 8,000 CR CASH 6,130 CR RABBIT LTD 72,000

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Buying Company Purchases the Buying Company Purchases the SharesShares

Where the buying company purchases the net Where the buying company purchases the net assets of another company indirectly by assets of another company indirectly by purchasing the issued shares of that companypurchasing the issued shares of that company

entriesentries

– in selling company nilin selling company nil

entries entries

– - in the buying company- in the buying company– DR INVESTMENTDR INVESTMENT

CR SHARE CAPITALCR SHARE CAPITAL

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Tutorial QuestionsTutorial Questions

Exercise 10.2 (Part B only)Exercise 10.2 (Part B only)

Exercise 10.3Exercise 10.3

Exercise 10.4Exercise 10.4

( Amend ARR $140 000)( Amend ARR $140 000)

Problem 10.1 (Part A only)Problem 10.1 (Part A only)

Problem 10.5 (parts B & C only)Problem 10.5 (parts B & C only)

1 Acquisition of Assets TEXT CHAP 10 TEXT CHAP 10.

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