Standards for Accounting for Business Combinations - Case Study Example

BUSINESS COMBINATIONS CASE STUDIES Name of Institution: Tittle: Unit code: Student’s Name: Date: Instructors Name: Globally, there has been a tread in the business accounting systems due to the increased business combinations and consolidations. Due to the dynamic world and arising issues in the business sector in any economy, there has been strategic business planning which leads to the formation of mergers. Stiff competition stands the major factor leading to the organisations coming together to form one, or operate under the same management to fulfil both short term and long term goals. Management belief that by doing this the firms under the consideration enjoy the economies of scale, they potentially increase in size. They are able to control a large market share hence high profits. Customer satisfaction is also promised workers are due to the high provisional workers and employees. The decisions made by the firm is also more viable since they made by bringing together the ideas. As for the internationally accepted standards for accounting for business combinations provide a clear guideline on the procedures to follow when consolidating two or more firms. This provision is given by IFRS 3[Cha13]. The firms under considerations are expected to follow the procedures strictly. The firm should conduct valuations of their assets, determination of the goodwill, hence ability to calculate the consideration for the purchase of the one company. The acquirer obtains control over the acquired firm. In the first case of Xplorer company and the mouse ltd which was a project of Xplorer. To determine the potential of Xplorer Company to acquire Mouse Company, there are guidelines that should be followed to letter. In an instance, the two entities are found to be operating in the same line of business hence business feasibility[Joh10]. The two businesses are able to consolidate, their accounting methods are found to be following the GAAP hence the overall determination of a price for acquiring the Mouse ltd. For this reason, the mouse ltd company is able to acquire fully the Mouse Company. This will increase the company’s competitiveness and efficient of the Xplorer company. The company assets, movies and television shows are the Products offered by the Xplorer. Xplorer had transferred the cable assets and television shows to the Mouse ltd company. This means the company by acquiring Mouse ltd it will able to gain full control of mouse ltd. This will enable the company to control the operations of the subsidiary mouse[Mic13]. The voting power of the company will be divided into majority and minority shareholders. The mouse company ltd has been acquired by Xplorer under a debt and due to this reason it’s not good for the Xplorer to acquire this company. The company to be acquired is deemed to be purchased by a plan of debt which may form a bad capital structure by including a big debt function in the capital. Debt capital attracts an interest to the financed firm’s incomes. Due to this reason the acquired mouse company will there be under a debtor program which may be expensive to the company. As illustrated in the case mouse company ltd is said to have assumed $200million approximate figure as debt for acquired companies. The company mouse ltd is also focused to have incurred further debt by acquiring television cable system of $2 million not guaranteed by Explorer. This is a clear indication that mouse ltd capital structure is major composed of debt financing which may not be very favourable in the future of the company operations and profitability[Ral12]. Debt capital reduces the company’s ability to diversify its finances in different activities as per the decisions and goals of the management. Since, as an additional capital, mouse ltd decided to issue shares which brought about a capital of $1million hence reducing the controlling power of Explorer company to 41% and hence the mouse ltd 59% voting interest was greatly held. Still Explorer Company still had significant influence to the mouse company. This was facilitated by the fact Xplorer company was the major supplier to mouse ltd for its products. Secondly, in mouse ltd the Xplorer company ltd was well represented by several directors who have significant influence in decision making process in mouse ltd. Additionally, under their agreement mouse company ltd is limited in selling and distribution rights for business purposes. Its exclusively trades in the Explorers products only. In this case, there is a clear indication that mouse ltd although was not fully under the control of Xplorer it was under the significant influence. It was therefore not wise for Xplorer to acquire the mouse ltd since still it could influence its operations under the current position it held in the company management. If Xplorer purchase the mouse company ltd to an extent of 41% of its share capital, it will therefore be easy to for the company to adopt Mouse Company. This so because as the company shows its ability to meet a large portion of shares price in mouse company ltd. This shows the degree of interest Xplorer company ltd has in the mouse ltd. As the company is being acquired, there are plans and arrangements to be tied to the purchasing company assets in forms interests to the financing lenders. The benefits are found to exceed the expenses to meet considerations/costs made on acquiring mouse company ltd. For instance, this is also influenced by the voting power of Xplorer Company. It holds considerable voting ability and thus can influence the decision making of the companies by fully acquiring or partial control of mouse limited shares and significant representation in the management of mouse company ltd. Also the parts of capital leases from explorer for the headquarters can also be absorbed in acquiring agreement between the entities. At this position, Xplorer will find a great opportunity to buy/ purchase mouse company and exercise control over it. The control of and the combination will lead to benefits in both the firms. These include: control of market share, enjoy economies of scale due to the large size of the organisation, viable decision making process due to good combined managerial systems, quality products and services. Due to this reason, it will be good to affect the acquisition process of Mouse company ltd by Xplorer. In the second case of bass and bream ltd, the varying price of the share price was as a result of the dynamicity of the economy and changing prices in the market. The period of the negotiations poses a stretch which should be a basis for determining the price of shares as at the period of conversion. The accountant was confused since IFRS 3 does not give the exact assertion to follow in this kind of a scenario. The change of share price was initially $5.4 and rose to $6.20 over the negotiation period. In order to portray the true and fair value of share the bream share capital has to be revalued to the existing current market price of shares. After revaluation of shares the shares the company will be able to update the books of accounts such as the balance sheet equity share holdings and the comprehensive income statement of both the companies. This is all to be done in order to ensure the true worth of the firms are determined with a view of avoiding both under casting and overcasting the accounting financial statements which may have other financial effects the principal and subsidiary company. The accountant for Bass Ltd, Mr. Spencer should therefore apply the current share price as in the current market situations. This will also be very useful in ensuring the books of both companies are updated and costs of capital are not maintained at the historical costs but revalued with a view of ensuring the share capital price is kept in the range of the existing market situations. The updated consolidated balance sheet and the income statement will be fair to the minority and majority shareholders in case one they would like to withdraw. Recording and recognising the share price at $6.20 will also facilitate the balancing of the statement of financial position and revaluations done in the capital share structure since the capital should remain the same. On the other hand, recording the price of shares at the initial stage of $5.40 will be erroneous and not presenting the true and fare view of the true image of the capital image of the bream company ltd during its acquisition. This will lead to the purchasing consideration to seem low will acquiring a higher value capital shares. Case study 3. ACSICS media platform groups in Australia are considered to be large companies in the companies are expected to be registered with the registrar of companies. The firm must have to meet all the requirement of a limited liability company. Its operations and objective are well noted in the articles of association and the capital structure or formation is also well drafted in the document known as the memorandum of association. For the company to start it has to raise the minimum capital as expected for certification. The company uses the prospectus to raise its capital from the public. Interested parties are invited to buy the shares in the stock markets at the pre-determined share price. Although in most case the market forces of demand and supply are the key determinants of the share prices[Ire14]. The issue of a prospectus is also applicable where the company wants to call the public to buy their shares for purposes of capital expansion. The funds are collected for the ability of the firm to venture into new businesses. This may include acquiring another existing company to gain the competitive advantage such as the economies of scale, better decisions, and acquiring higher professional employees, and also due to capital revaluations. The company also bound to follow the accounting as long as it operates in the Australian economy for the provision of goods and services with the aim of making profits. These range from the sole proprietor’s business, the partnerships, limited and unlimited liability companies. In addition to these are the non-profit making organisations e.g. clubs and the state corporations amongst many more businesses. The purpose of adhering to the accounting standards is for purposes of taxations, method of measuring profitability of the entity, ensure comparability of business ventures, also to make it easy for the monitoring of the company’s compliance with the statutory regulations and enable the firm a chance to measure the performance of the firm in relation to other firms in the same industry. Additionally, they maintain the accounting standards due to the dynamic world and the treads in the expanding economies. These may include advancement in technology and globalisation which has lead stiff competition worldwide. Reduced Disclosure Requirement is found to be affecting many companies in Australia. The ACSICS company media group is also affected. RDR has been there to ensure that the companies’ information is only available to the authorised persons only. The disclosure is done and exercised in the areas of interests to the firms. The trade secrets and financial information to ensure the firm remain relevant to the market. The company coca-cola Amitil products are found to some chemical formulas that are not entrusted to any one hence meeting the RDR[TVC14]. The implications of RDR to this company are quite useful as they try to safeguard the company’s strategic plan key to its success through competing with other companies manufacturing and selling refreshments in the Australian economy. The company has dominated the Australian economy with the provision of very high quality refreshment drinks. Actually, they are nature taste for natural refreshment. With my company the RDR apply as shown above. Case 4. The cash generating units are the units in the Burge Queen restaurants which provide an income in form cash or its equivalent. The first unit is the sales unit. This is where the products and services produced are sold in exchange for cash. This increases the cash account while reducing the stock account (food sale). The cash proceeds are obtained. The unit consists the employee training. This although it’s not directly related to the cash generation, its indirect relation that the trained employees will acquire technical skills that enable the firm to obtain more cash from the employee expertise[Cat11]. The training will thus lead to an increase in cash and its equivalents. The marketing unit is also very crucial since it creates awareness to the customers for purposes of buying the company’s products. This will increase the sale either in the form of sales or its equivalents. In conclusion, firms come together to form mergers in business combinations. This offer the firms some benefits such as new market share, and the enjoyment of economies of scale. The company’s consolidations are done by the acquiring company paying price considerations and revaluations of the assets to obtain the fair values. These range from the sole proprietor’s [Owe14]business, the partnerships, limited and unlimited liability companies. In addition to these are the non-profit making organisations e.g. clubs and the state corporations amongst many more businesses. The purpose of adhering to the accounting standards is for purposes of taxations[Kar10], method of measuring profitability of the entity, ensure comparability of business ventures, also to make it easy for the monitoring of the company’s compliance with the statutory regulations and enable the firm a chance to measure the performance of the firm in relation to other firms in the same industry. The accountant for Bass Ltd, Mr. Spencer should therefore apply the current share price as in the current market situations. This will also be very useful in ensuring the books of both companies are updated and costs of capital are not maintained at the historical costs but revalued with a view of ensuring the share capital price is kept in the range of the existing market situations[Bri15]. The updated consolidated balance sheet and the income statement will be fair to the minority and majority shareholders in case one they would like to withdraw. The cash generating units are the units in the Burge Queen restaurants which provide an income in form cash or its equivalent. The first unit is the sales unit. This is where the products and services produced are sold in exchange for cash. This increases the cash account while reducing the stock account (food sale). The cash proceeds are obtained. References Cha13: , (Baller, 2013), Joh10: , (Herz, 2010), Mic13: , (Whalley, 2013), Ral12: , (Kurney, 2012), Ire14: , (Angelico, 2014), TVC14: , (Productions, 2014), Cat11: , (Gowthorpe, 2011), Owe14: , (Nee, 2014), Kar10: , (Schmidt, 2010), Bri15: , (Coyle, 2015), Read More