You are a non-executive director attending a regular board meeting
Part A
You are a non-executive director attending a regular board meeting for JKY Ltd. At the top of the agenda is the proposed takeover of a smaller company called FAB Ltd, which is an ASX listed entity operating in the same industry. JKY Ltd is considering which acquisition strategy should be used. One director is arguing that the direct “purchase / acquisition method” is the best option, whilst another director is proposing a longer term strategy, which involves acquiring the shares of FAB Ltd by first acquiring “significant influence” over FAB Ltd. Given your experience as a qualified CPA, the Chairman has asked you for your opinion in writing based on your extensive knowledge of accounting for business combinations.
With reference to AASB 3: Business Combinations, AASB 128 Investments in Associates and Joint Ventures and AASB 10 Consolidated Financial Statements, prepare a detailed response to the Chairman and the board, which outlines the key differences in methodology between Consolidation Accounting and Equity Accounting. Provide worked examples within your response which fully explain the two options.
Hint
Accounts & Finance "Acquisition Methods:When an acquirer buys another company and uses GAAP, it has to record the event using the acquisition method and the approach mandates a series of steps to record the acquisitions, like:1) Measuring any tangible assets and liabilities that were acquired2) Measuring any in-tangible assets and liabilities that were acquired3) Measuring the amount of a...
When an acquirer buys another company and uses GAAP, it has to record the event using the acquisition method and the approach mandates a series of steps to record the acquisitions, like:
1) Measuring any tangible assets and liabilities that were acquired
2) Measuring any in-tangible assets and liabilities that were acquired
3) Measuring the amount of any non-controlling interest in the acquired business
4) Measuring the amount of consideration paid to the seller
5) Measuring any goodwill or gain on the transaction
Intra-group transactions:
These are commercial or financial transactions that involves two companies of the same group simultaneously i.e. an intercompany transaction occurs when one unit of an entity is involved in a transaction with other unit of the same entity. Now, while these transaction can occur for a variety of reason, they often occur as a result of the normal business relationship that exist between the units of the entity (these unity may be the parent and subsidiary, two division, two subsidiaries, or two department or one entity)."
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