Business combinations Silver Ltd acquired all the assets and liabilities of Jackman Ltd on 30 September...

Business combinations

Silver Ltd acquired all the assets and liabilities of Jackman Ltd on 30 September 2019. At the start of negotiations, Silver Ltd owned 30% of the shares of Jackman Ltd. The current discussions between the two entities concerned Silver Ltd’s acquisition of the remaining 70% of shares of Jackman Ltd. The negotiations began on 1 January 2019 and enough shareholders in Jackman Ltd agreed to the deal by 30 September 2019. The purchase agreement was for shareholders in Jackman Ltd to receive in exchange shares in Silver Ltd. Over the negotiation period, the share price of Silver Ltd shares reached a record high of $6.80 while Jackman ltd share prices dropped from $5.20 to $4.70.

The accountant for Silver Ltd, Mr Michael, knows that AASB 3 has to be applied in accounting for business combinations. However, he is confused as to how to account for the original 30% investment in Jackman Ltd, what share price to use to account for the issue of Silver Ltd’s shares, and how the date of acquisition will affect the accounting for the business combination.

Required Questions:

Provide Mr Michael with advice on the following issues that are confusing him.

How to account for the original 30% investment in Jackman Ltd on 30 Sep 2019 by Silver Ltd?

What share price to use?

Effects of acquisition date in accounting for business combination.

Expert Solution

Issue 1: How to account for the original 30% investment in Jackman Ltd

The 30% investment is initially recorded at fair value plus transactions cost, based on para 43 of AASB 139 and is subsequently accounted for under IAS 39 for e.g. Fair Value Though PL or OCI etc.

On formation of the business combination, para. 42 of AASB 3 requires that the acquirer remeasure its previously held equity interest in the acquiree at its acquisition-date fair value and recognise the resultant gain/loss in profit or loss. Where the investment had been measured at fair value with increments recognised directly in equity, these amounts are transferred at acquisition date to profit or loss as well, and disclosed as reclassification adjustments.

Issue 2: What share price to use?

As per Para 27 of AASB 3, we will use the fair value as on the date of the acquisition. This price is said to include all the expectations of the takeover, and also includes any premium for control.

Issue 3: Effects of different dates

AASB 3 refers to acquisition date only. All measures of fair value are made on acquisition date, for both the consideration transferred and the assets acquired and liabilities assumed. As noted under Issue 1, the 30% investment, originally recognised at the date of exchange, must be remeasured to fair value on the acquistion date.

ekkarill92 answered 2 years ago

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