CASE STUDY 25.

1 :Applying AASB / IFRS 3

Brass Ltd owned 30% of the shares of Beam Ltd. Brass and Beam are in a negotiation discussion
about Brass ‘s acquisition of the remaining 70% of shares of Beam Ltd. The negotiation began on 1
Jan 2016 and enough shareholders in Beam agreed to the deal by 30 Sep 2016. The purchase
agreement was for shareholders in Beam Ltd to receive exchange shares in Brass Ltd.

Over the negotiation period, the share price of Brass Ltd shares reached a low of $5.4 and a high of
$6.2

AASB 3 / IFRS 3 requires application of the acquisition method when accounting for business
combination

Business combinations of Brass and Beam(when Brass acquire the remaining 70% of shares) are
accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate
of the consideration transferred, measure at acquisition date fair value. So Mr Spencer should not
worry too much about the share prices when the acquisition taking place for the remaining 70% of
shares. As the cost of Beam’s share on the acquisition date would be using fair value and the amount
of 30% non controlling interest either can be measured at fair value or at the proportionate share of
Beam ‘ s identifiable net assets

Appendix A to AASB 3 / IFRS 3 provides the definition of contingent consideration: usually, an

obligation to the acquirer to transfer additional assets or equity interest to the former owners of an
acquire as part of the exchange for control of the acquire if specified future events occur or
condition are met.

In this case, Brass Ltd is uncertain about future market share price of Beam (shares reached a low of
$5.4 and a high of $6.2). Brass Ltd could add the acquisition agreement then contained a clause
whereby if the market value of Beam ‘ shares declined within 12 months following the acquisition
date, Brass Ltd would be entitled to a further cash consideration.

CASE STUDY 25.2 Accounting for goodwill

Silver Ltd has acquired a major manufacturing division from Fern Ltd. Mr Ball, the accountant has
shown the boards of directors of Silver Ltd the financial statement regarding the acquisition and he
also calculated a residual amount of $45000 to be reported as goodwill in the accounts. First of all,
before making any decisions about goodwill. The boards of directors need to understand about the
nature of goodwill:

Goodwill if recognised as an asset in a business combination at acquisition date. It consists of the

economic benefits arising from those assets of the acquire that are not individual identified and
separately recognised.

In a business combination, an acquirer is required to recognise all assets that are capable of being
individually identified and recognised. Goodwill then is an amount representing unidentified assets.
But how is goodwill measured?

 Goodwill is not measured directly, for example, by reference to a market. Instead it is

recognised as a residual based upon Net fair value of net assets acquired and Consideration
transferred

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  Being a residual measure, there is no attempt in a business combination to measure the
total goodwill of the business acquired. If the acquirer was able to acquire a business for less
than its fair value that is goodwill.
 Only acquired goodwill is recognised, entities do not recognize internally generated goodwill

So in this case, the board of director of Silver Ltd should not record goodwill based on the calculation
of the accountant. The goodwill will automatically exist if the consideration transferred is less than
the net fair value of net assets acquired an acquisition date

CASE STUDY 25.3 : IDENTIFYING THE ACQUIRER

1. What factors / indicators should management consider in determining which entity is the
acquirer?

AASB 3 / IFRS 3 states:

For each business combination, one of the combining entities shall be identified as the acquirer

The basic for determining the acquirer is “control”; that is, the acquirer is the entity that obtains
control of the business

Identifying the following factors and circumstances to consider when shares are exchanges between
entities to effect a business combination:

What are the relating voting rights in the combined entity after the business combination?

Is there a large non controlling voting interest in the combined entity?

What is the composition of the senior management of the combined company?

Which of the combining entities is larger?

2. Why is it necessary to identify an acquirer ? in particular, what differences in accounting

would arise it White Ltd or Cloud Ltd were identified as the acquirer ?

The determination of the acquirer is an important step under the acquisition method, as it affects
the accounting for the business. In particular, if White Ltd is the acquirer, White can choose the
accounting policies which suits its most (depreciation method.. ) also White can make decision about
dividens, voting right, the composition of the senior management and so on..

CASE STUDY 25.4: Accounting for Research