Chapter 8 Acquisition of Assets

1. Chapter 8 Acquisition of Assets

2. Lecture Topics • Nature of asset acquisitions • Determining the cost of acquisition • Accounting for direct acquisitions • Accounting for indirect acquisitions • Disclosure requirements

3. Lecture References • Text - Chapter 9 • AASBs - 1015 - 1013 - 1036

4. Key Concepts • Direct vs indirect acquisition • Borrowing costs • Net assets acquired • Purchase difference • Goodwill • Amortisation

5. Acquisition of Assets • Purchase of: • individual assets • part of a business • whole business • another company via shares

6. Nature of Asset Acquisitions • Direct acquisition • acquire the assets and liabilities • Indirect acquisition • control via share ownership • offer • stock market

7. Nature of Asset Acquisitions • Direct Acquisition from Vendor • Voluntary arrangement • Shareholders best interest • May result in liquidation

8. Nature of Asset Acquisitions • Indirect Acquisition • Equity purchase • May be hostile -> takeover • Regulation issues • Corporations Act • ASX • Foreign Acquisitions and Takeovers • Trade Practices Act

9. Nature of Asset Acquisitions • Indirect Acquisition • Objective -> control! • 20% without regulation • 3% every 6 months • Off-market bid • Of-market bid: listed entities

10. Nature of Asset Acquisitions • Accounting Standard requirements • AASB 1013: Goodwill • AASB 1015: Acquisition of Assets • AASB 1036: Borrowing Costs

11. Determining the Cost of Acquisition • Exchanges • Swaps of goods and services • Cash purchase • Cost • Purchase consideration • ‘Directly attributable’ costs

12. Determining the Cost of Acquisition • Purchase consideration: • … the fair value as at acquisition date of assets given, equity instruments issued, or liabilities undertaken by the acquiring entity. (AASB 1015)

13. Determining the Cost of Acquisition • Fair value: • … the amount for which an asset could be exchanged,or a liability settled, between a knowledgeable, willing parties in an arm’s length transaction. (AASB 1015)

14. Determining the Cost of Acquisition • Transaction costs: owner’s equity instruments • Cash and monetary assets • Non-monetary assets • Securities • Liabilities undertaken

15. Determining the Cost of Acquisition • Subsequent changes in cost of acquisition • Changes in assets acquired and liabilities undertaken • Deferred payment

16. Determining the Cost of Acquisition • Borrowing costs (AASB 1036) • Qualifying assets • Capitalisation • Recoverable amounts test per AASB 1036 • Evaluation of AASB 1036 • Acquisition date • Subsequent restructuring costs

17. Accounting for Direct Acquisitions from Vendor Dr Assets acquired xx Cr Liabilities acquired xx Cr Cost of acquisition xx Difficulty in determining cost of acquisition!

18. Accounting for Direct Acquisitions from Vendor • Measuring (net) Assets Acquired • Simple direct acquisitions purchase price x FV individual asset total FV of assets acquired

19. Jones Ltd Cost of assets acquired = $500 000 Asset Estimated Portion Cost of Fair Value of total Acquisition $ $ $ B25 Excavator 200 000 .381 190 500 AKB -51 Hauler 150 000 .286 143 000 CD-45 Crawler 175 000 .333 166 500 475 000 500 000

20. Assets and liabs. acquired $ Plant 12 000 Land 6 000 Shares - listed 16 800 A/C’s payable (5000) 29 800 Cost of acquisition $ Legal fees1 000 Consideration: Cash 4 000 Shares- listed 28 000 33 000 Accounting for Direct Acquisitions from Vendor • The purchase difference problem $3 200

21. Accounting for Direct Acquisitions from Vendor • Accounting for purchase differences • Goodwill difference • fair value < consideration • future benefit from unidentifiable asset Dr Identified assets xx Dr Goodwill x Cr Liabilities x Cr Bank (vendor) xx

22. Accounting for Direct Acquisitions from Vendor • Goodwill difference • must be amortised over period of expected benefit Dr Expense - goodwill amortisation xx Cr Goodwill xx

23. Accounting for Direct Acquisitions from Vendor • Difference not goodwill • recognise as expense at acquisition Dr Identified assets xx Dr Expense - Acquisition loss x Cr Liabilities x Cr Bank (vendor) xx

24. Accounting for Direct Acquisitions from Vendor • Discount difference • fair value > consideration proportionately reduce non-monetary assets acquired until discount is eliminated

25. Accounting for Direct Acquisitions from Vendor • Synergy and goodwill • Isolated and reliably measured • Application of recoverable amount test to goodwill • AASB 1010 • AASB 1013 and the conceptual framework • Recognition criteria satisfied?

26. Accounting for Indirect Acquisitions • Goodwill and discount • Pay more /less than fair value of shares • Determined by valuing underlying identifiable net assets • Goodwill/discount adjusted on consolidation

27. Example: company P purchases issued capital of Q for $1.40/share cash • Paid-up capital Q = 50 000 ordinary shares • FV of Q’s net assets = $55 000 acquisition entry for Company P Dr Shares in Co.Q 70 000 Cr Bank 70 000

28. Accounting for Indirect Acquisitions • Return of Pre-acquisition Profits • Profits returned to investor as dividends • Pre/Post-acquisition • Pre -> reduce investment • Post -> revenue

29. Disclosure Requirements • AASB 1015 • Acquisition resulting in control of another entity or operation • AASB 1013 • AASB 1036 • AASB 1033 • General disclosure requirements

30. Where to get more information • Other courses • List books, articles, electronic sources