ACCT 6010 Advanced Financial Reporting
Fair value adjustments and tax effects
The University of 1
Announcement: Graded Quiz 1 (out of 4)
Copyright By PowCoder代写 加微信 powcoder
Monday 21 March 2021 @ 2:00-2:15pm (Australian Eastern Standard Time)
– Small Quizzes: 10% of total assessment
– Week 5 Quiz: 2.5 marks
– Access through Canvas: Link will be posted via announcements
– Format: Five (5) questions incl. multiple choice and numeric answer questions
– Content: Weeks 1 – 4 inclusive
The University of 2
LS Class 3 1
4.1 Class overview & recap of acquisition method
4.2 Fair value adjustment – Concept
4.3 Fair value adjustment – Discussion
4.4 Application – Example 1: Recognition of fair value adjustment
4.5 Application – Example 2: Subsequent sale of fair value adjusted asset 4.6 Application – Example 3: Fair value adjustment for contingent liabilities 4.7 Further illustrations
The University of 3
Learning objectives.
After completing this topic, students should be able to
Text /other reference
1. Demonstrate an understanding of the acquisition method under AASB 3;
3.1 and 3.2
2. Identify & apply the measurement bases under AASB 3 for an acquiree’s assets, liabilities and contingent liabilities
3. Prepare consolidation journal entries to record fair value adjustments (including tax effects)
3.3 and 3.4
4. Explain the need for consolidation adjustments in accounting periods subsequent to an acquisition and prepare consolidated journal entries in subsequent accounting periods
3.5, 3.6 and 3.7
5. Understand and evaluate arguments rejecting the pooling method of accounting for a business combination.
IFRS 3 BC 29- 54
The University of 4
LS Class 3 2
– Arthur et al Chapter 3 sections 3.1-3.7 inclusive – AASB 3, 112, 138
– AASB 3 Basis for Conclusion
– Class 4 Canvas materials
Refer also:
– Deloitte Guide on IFRS 3 and IAS 27 – IAS Plus summary:
– https://www.iasplus.com/en/standards/ifrs/ifrs3
The University of 5
unilateral
Wholly owned (Class 3-5)
Consolidated Financial Statements • Balance Sheet
Comprehensive Income Statement Statement of Changes in Equity Page 6
The University of Accounting
LS Class 3 3
1. Recap of AASB 3 Requirements
Acquisition method [AASB3.5]
1. Identify an acquirer (previous class);
2. Determine the acquisition date (previous class)
3. Measure and recognise identifiable assets and liabilities acquired (focus of this class) and any non- controlling interest (covered in future class);
4. Measure and recognise goodwill or gain from a bargain purchase (this class and last class).
The University of 7
1. Recap of AASB 3 Requirements (cont.)
The acquirer of a business measures the:
– consideration transferred at fair value at acquisition date; and
– FV (at acquisition date) of the assets, liabilities and contingent liabilities acquired.
– Recall recognition criteria for contingent liabilities: • Present obligation arising from past events; and • FV can be measured reliably
The University of 8
LS Class 3 4
1. Recap of AASB 3 Requirements (cont.)
In acquiring another entity (c.f. group of assets):
The acquirer recognises the investment as an asset
On consolidation we eliminate the investment and replace it with the identifiable assets and liabilities of the acquiree measured at fair value (FV).
Recognition is subject to specified conditions
[AASB 3.11-14]
The University of 9
1. Recap of AASB 3 Requirements (cont.)
Business combination using acquisition method
– Consolidation adjustments include elimination of initial investment
– FVINA = BV @ acquisition date ➙ Last class
– If consideration > FVINA/BV: Recognise goodwill
– If consideration < FVINA/BV: Recognise gain on bargain purchase
– FVINA ≠ BV @ acquisition date ➙ This class
The University of 10
LS Class 3 5
2.1 Why Fair Value Adjustments
– The acquiree may not be recogising and measuring all of its assets and liabilities at fair value;
– On consolidation, recognise certain differences between acquiree’s financial statements carrying amounts for assets and liabilities and their fair values [AASB 3.18]
– FV adjustments can be made in either:
1) the accounts of the aquiree - if permitted by
relevant accounting standards; or 2) as a consolidation adjustment
The University of 11
ACCT 6010 Advanced Financial Reporting
Fair value adjustments on consolidation – Concept
The University of 12
LS Class 3 6
2.2 Where to do Fair Value adjustments
Advantages of FV adjustments in the books of the subsidiary:
– Permanent (one time);
– Normally reduces subsidiary's income
However FV adjustment is usually done on consolidation because:
– Consistency issues (accounting policies);
– Some assets may not be recognised in the acquiree’s separate
financial statements due to IFRS rules e.g., internally generated brand name
– IFRS does not allow some items to be measured at FV e.g. inventory; most intangibles
– Subsidiaries that may be subject to other accounting standards (e.g. US subsidiaries)
– Some liabilities may not be recognised in the books of the
acquiree (IFRS rules) but will be recognised on consolidation.
e.g. contingent liabilities (subject to the recognition criteria)
The University of 13
3. Intangible Assets
Intangible assets will only be recognised by the subsidiary if it meets the identifiability requirements of AASB138.12:
– separable; or
– arises from contractual or legal rights
If recognised, generally measurement must be at cost
– The group will also only recognise an intangible asset if it meets the same definition requirements of AASB 138 Intangible Assets
[AASB 3 .B31-B32]
– Refer AASB 3 Appendix B - Recognition of assets and liabilities relating to:
– Operating leases [AASB 3.B28-B30]; and – Intangible assets [AASB 3.B31-B34].
The University of 14
LS Class 3 7
4. Fair Value Adjustments (FVA) on Consolidation
– Adjustments to asset and liability carrying amounts occur when FV ≠ carrying amount
– Adjustments affect measurement of goodwill
– But not net assets (or owners’ equity)
– Can adjust initial (provisional) FV estimates:
– within 1 year of acquisition date; or – when relevant information is received
(whichever comes first) [AASB 3.45-50].
The University of 15
4. FVA on consolidation (cont.)
Step 1 – Write back any accumulated depreciation (if applicable);
Step 2 – Restate carrying amount to FV;
Step 3 – Prepare acquisition analysis (calculate goodwill);
Step 4 – Prepare pre-acquisition elimination consolidation journal;
Step 5 – Calculate income adjustments for: current year (to P&L) & prior years ( to opening retained earnings)
vWhy do we need to adjust ORE?
The University of 16
LS Class 3 8
ACCT 6010 Advanced Financial Reporting
Fair value adjustments on consolidation - Discussion
The University of 17
4. FVA on consolidation (cont.)
Why is this controversial?
Intangible assets:
– Commonly difficult to value
– Especially, brand names and customer relationships
– Some argue they should be recognised only if there is a
market for them
– Customer relationships: Some argue that the value of customer
relationships should be subsumed within goodwill.
Decision relevance:
Su and Wells (2014) find FV adjustments are not associated with future performance
The University of 18
LS Class 3 9
4. FVA on consolidation (cont.)
Why is this controversial (continued)?
Opportunism
– Evidence that managers opportunistically allocate less to depreciable assets where paid bonus based on earnings.
– Evidence also indicates that accounting-based bonus plans lead to more of the purchase consideration to be allocated to goodwill (and less to FVINA). Bugeja and Loyeung (2015)
– Others favour the current practice “because it gives them some insight as to why the entity was purchased”
– Fair value recognition is consistent with historic cost
The University of 19
4. FVA on consolidation (cont.)
Is there an alternative to the acquisition method?
Yes, pre AASB 3, “pooling method” was used (IAS 22) where consideration was equity (mergers).
No fair value adjustments
Pro: Simple, low cost, consolidated profits can be higher
– Arguably mergers and acquisitions are economically the same;
– Book values less relevant to assess future cash flows that FV’s
– May not be easy to hold management accountable for the acquisition
– “True mergers” uncommon
– Book values would not represent historic cost (to the group) Refer AASB 3 BC 29-54
The University of 20
LS Class 3 10
ACCT 6010 Advanced Financial Reporting
Application - Example 1: Recognition of fair value adjustment
The University of 21
4. FVA – Example 1
We will adapt the example from last week – Last class: BV_INA = FV_INA
– This class: BV_INA ⧣ FV_INA
– Requires an adjustment for the difference between book value and fair value as measured at acquisition date
The University of 22
LS Class 3 11
ACCT 6010 Advanced Financial Reporting
Application - Example 2: Subsequent sale of fair value adjusted asset
The University of 24
5. Subsequent sale of assets measured at FV
If FV the adjustment is recognised on consolidation (not in books of acquiree):
– When asset is sold, consolidated profit must be adjusted. v Why?
______________________________________
– In following years, consolidated Opening Retained Earnings (ORE) is adjusted.
v Why? _________________________________________
The University of 25
LS Class 3 12
5. Subsequent sale of FVA assets – Example 1 (cont.)
On 1 December 20X6 Beta sells the land that was owned at the date of acquisition (1 January 20X5) for a gain of $550. Assume the land had a book value (Beta) of 400.
Prepare the consolidation adjustment in relation to the disposal of land for the consolidation as at Financial Year Ended 31 December 20X6.
The University of 26
5. Subsequent sale of FVA assets – Example 2 (cont.)
Beta Ltd books
Sale proceeds
Less: Carrying value
Gain on disposal of land (before tax)
The University of 27
LS Class 3 13
5. Subsequent sale of FVA assets – Example 2 (cont.)
2. Consolidation journal entries (in $000)
Gain on Disposal of Land
Cr Income Tax Expense
Note: No adjustment to the DTL on reversal of the temporary difference. v Why? ____________________________________________________
v What accounts require adjustment in YE 31/12/X7? _____________________________________________________
The University of 28
ACCT 6010 Advanced Financial Reporting
Application - Example 3: Fair value adjustments for contingent liabilities
The University of 29
LS Class 3 14
6. Contingent liabilities
Contingent liabilities not recognised by the subsidiary must be recognised separately by the group only if:
– (i) there is a present obligation and
– (ii) its FV can be reliably measured [AASB3.23]
Stringent rule results in less liabilities, – Management may not like this rule.
The University of 30
v Why? ____________________________________________________
6. Contingent liabilities – Example 3
– July 1 20X7, Barilla Ltd acquired the share capital of Smart Ltd for $5,000,000.
– Smart Ltd had a contingent liability at that date of with a FV of $1,000,000.
– This contingent liability was a present obligation arising from a past event [AASB3.22 – 3.23]
– The contingent liability was not recognised by Smart Ltd
– The tax base (TB) of the contingent liability was $0
– Income tax rate is 30%
The University of 31
LS Class 3 15
6. Contingent liabilities – Example 3
– At July 1 20X7, the shareholders’ equity of Smart Ltd was :
Share capital 1,500
Retained earnings 2,000
Shareholders’ equity 3,500
The University of 32
6. Contingent liabilities – Example 3 (cont.)
Part 3a. Recognition of contingent liability at the date of acquisition (in $000)
– Note: No choice with where to recognise
* For liability: CA>TBàDTA
CA = $1m; Tax Base = $0 àTemp. Diff. = $1m
The University of 33
Fair value adjustment (FVA) 1,000
Cr Provision for Contingent Liability 1,000
Deferred tax Asset (DTA) * 300
Cr Fair value adjustment (FVA) 300
LS Class 3 16
6. Contingent liabilities – Example 3 (cont.)
Part 3a. Consolidation adjustment to eliminate the investment as at 1/7/20X7 (in $000)
The University of 34
Share capital 1,500
Opening retained earnings (ORE) 2,000
Goodwill 2,200
Cr Fair value adjustment (FVA) 700
Cr Investment in Subsidiary 5,000
6. Contingent liabilities – What happens at settlement?
– Assume the liability is settled on 30 June 20X8 for $800,000
– Prepare consolidation journal entries for financial year ended 30 June 20X8
– Recall that if settlement occurs within 12 months of acquisition….retrospectively adjust the provisional amounts recognised at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date. [AASB 3.45-50]
The University of 35
LS Class 3 17
6. Contingent liabilities – Example 3 (cont.)
Part b: Fair value adjustment entry from Part a will change to the following (in $000)
The University of 36
Fair value adjustment (FVA) 800
Cr Loss on settlement 800
Income tax expense 240
Cr Fair value adjustment (FVA) 240
6. Contingent liabilities – Example 3 (cont.)
Part b. Consolidation adjustment to eliminate the investment will change to the following (in $000)
The University of 37
Share capital 1,500
Opening retained earnings (ORE) 2,000
Goodwill 2,060
Cr Fair value adjustment (FVA) 560
Cr Investment in Subsidiary 5,000
LS Class 3 18
ACCT 6010 Advanced Financial Reporting
Fair value adjustments on consolidation – Further illustrations
The University of 38
7. More examples
– Inventories
v Lecture illustration 1
– Depreciable non-current assets v Lecture illustration 2
– Internally generated intangible assets
v Lecture illustration 3
ØSee SMH Julian Lee article dated 11 June 2012
Note high value placed on brands and potential for future impairment losses
The University of 39
LS Class 3 19
Next Week: Intragroup Transactions
Prepare for class
– Pre-read Chapter 4 of text
– Review topics from ACCT5001 &6001:
– Inventory (perpetual system only)
LS Class 3 20
程序代写 CS代考 加微信: powcoder QQ: 1823890830 Email: powcoder@163.com