Accounting Issues Related To Business Combination And Consolidation: Memorandum Assignment Answer

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Question :

Assume that you are a graduate accountant working for Power Ltd a public company situated at 510 William Street, Melbourne, VIC 3000. The CFO of the company, Ms. Julia Edwards has asked you to draft a memorandum in response to an email received from one of the directors – Mr. Daniel Ford, Independent director of Power Ltd, raising key accounting issues related to Business combination and Consolidation– see the copy of the email on the next page. 

The maximum length of the memo is 1500 words. You should address all the technical issues/discussion in the memo, followed by a Reference List. 

  • Part A: Technical component 12% - This mark covers the technical content of your advice and the explanation on each of the issues, the calculations, and the sources used. 
  • Part B: Communication Skills – Memo Writing 3% - This mark covers the generic skills of Memo writing; layout, clear meaning, structure and organisation, appropriate tone and grammar, spelling, and punctuation etc. throughout the whole assignment. 
  • Part C: Communication Skills – Video Presentation 5% - You have to prepare a 9-12-minutes video presentation that will keep the audience engaged; the presentation should be well-rehearsed and supplementary material, such as slides, and visual aids must be of a professional standard. 

The assignment is designed to test the following skills: 

  1. Your knowledge and your ability to research the issues and then apply the information appropriately using judgment to correctly identify the relevant standards and legislation that relate to the issues raised by the client. 
  2. Your written and oral communication strategies to enable the effective presentation of accounting information to accountants and non-accountants. – Memo writing and video presentation. 

Please note: Any work which has been copied or shared between students will result in a Fail grade for all students concerned. Therefore, please make sure that the answer to this assignment is your work and not copied or bought from any source. In completing this assignment make sure you follow the guidelines for assignments especially those relating to the presentation of written work, late assignment policy and academic integrity. 

Re: Accounting Issues: Business combination and consolidation 

From: Daniel Ford (
Sent: 1 March 2019
To: Julia Edwards ( 

Dear Julia, 

Thank you for your phone call this morning, as agreed I am emailing you regarding the accounting issues we briefly discussed. By the way to assist the Board of Directors in our decision-making process could you please make sure you reference any relevant sources relating to your advice, for example, AASBs, Corporations Act, and relevant websites? 

Here are the issues we are most concerned about: 

Power Ltd has acquired all the shares of a major manufacturer Cargo Ltd. The CFO of the company, Ms. Julia, has shown the board of directors of Power Ltd, the financial information regarding the acquisition. The directors are not sure whether all the identifiable assets and liabilities of Cargo Ltd must be recognised in the consolidated financial statements at fair value. Although the directors are happy about the valuation of these items, they are unsure of a number of other matters associated with accounting for these assets and liabilities. 

Issue 1 

The Board of directors is wondering should the adjustments to fair value be made in the consolidation worksheet or in the accounts of Cargo Ltd. 

Issue 2 

What equity accounts should be used when revaluing the assets, and should different equity accounts such as income (similar to recognition of an excess) be used in relation to recognition of liabilities? 

Issue 3 

Do these equity accounts remain in existence indefinitely, since they do not seem to be related to the equity accounts recognised by Cargo Ltd itself? 

Could you please explain this to the Board (most of them are not accountants)? Please respond by memo (not email) as I would like to present this to the Board. I look forward to hearing from you shortly. 


Daniel Ford
Director, Power Ltd 510 William Street, Melbourne, VIC 3000 

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Answer :


Subject: Accounting issues related to Business combination and Consolidation


This memo is in reference to the accounting issues that the Board of Directors need further clarification on. 

AASB, an abbreviated form of the Australian Accounting Standards Board, is an organization of the Australian Government that offers and updates all the standards of financial reporting for the public and private sectors in Australia. It also works to simplify relations between the Australian companies and the overall economy, and even provide support for developing of the financial reporting standards in a global scale. It mainly aims to improve and uphold principles-based accounting of the Australian Government as well as standards of external reporting and a proper guidance that fulfill the needs of users and develop the quality and consistency of the external reporting. 

According to AASB 13, paragraph 2, the term fair value has been considered as a market-oriented measurement, but not as a system-specific measurement. Noticeable market entries or market data might sometimes be available for some of the assets and liabilities. Whereas, for the sake of the rest assets and liabilities, these noticeable market entries and market data might not be available. Though, the prime motive of a fair value measurement is basically same for both cases—to decide an approximate rate at which a well-ordered transaction for selling the asset or to relocate the liability would come out between market partakers at the measurement period under recent market situations. When a rate for an asset or liability is not noticeable, a system measures fair value by means of another valuation method that firstly increases the use of appropriate noticeable inputs and secondly, the use of unobservable inputs gets reduced.  On the other hand, book value means the total worth of a company when it liquidate its assets and pays back all its liabilities after taking accumulated depreciation into account. According to AASB 3, Paragraph 11 and 12, on the date of acquisition, in this section, the acquirer wants to be aware of, the recognizable assets gained, the expected liabilities and any non-controlling interest in the gain, plus the goodwill.

Further as per paragraph 18, the acquiring company is mandatory to evaluate the recognizable assets and liabilities at the fair market value as on the date of acquisition. Additionally, the firm also requires to measure things of non-controlling interests in the acquiree firm as on the date of acquisition.

Issue 1: This issue regarding whether the fair value adjustments should be prepared in the consolidation worksheet or in the Cargo Ltd. accounts- 

As per Australian Accounting Standards Board 3, paragraph 48 and 49, any adjustments to the worth of gained assets or expected liabilities can be made by adjusting the amount of goodwill in the attained firm’s books. The attaining firm will require to make the necessary amendments to the short-term amounts because the business combination accounting had been finished at the date of acquisition. Therefore, the acquirer must review comparative data for preceding periods displayed in financial accounts as required.

As per the guidelines it is possible for some fair value amendments to be prepared directly in the subsidiary books, but the common practice is to make these adjustments on consolidation. For some accounts the Fair value amendments is not allowable to be prepared in the subsidiary’s books, e.g. inventory. As per AASB 102, inventory of the acquiree company must be recorded at Net Realizable Value or quite low costs. For most cases where the inventory of the fair value is more than the price, and then the adjustment in the valuation can only be prepared in the consolidation journal. Whereas recognition of some specific assets and liabilities, along with their valuation amendments is merely permitted in the consolidation worksheet, e.g. For intangible assets, goodwill, contingent liabilities.

Another revaluation case is of Property, plant and equipments, wherein as per AASB 116, paragraph 31, once PP&E item is identified its fair value is recognized, it should be measured on the acquisition date not as much of any later gathered depreciation and later gathered impairment losses. The assets revaluations must be prepared at regular intervals to make sure that the assets with the real carrying value does not vary significantly from the value that would be determined by using fair value at the reporting period end.

Though, the drop can only be identified in OCI to the level of any existing credit balance in the surplus revaluation with regard to that asset. The drop identified in some other wide-ranging income decreases the sum gathered in equity under the revaluation surplus heading. 

The surplus of the revaluation added in equity in relation to a thing of material goods, plant and tools may be relocated right to retained earnings in a situation when the asset is liquidated or disposed. This might include relocating the entire surplus in a case when the asset is discharged or destroyed. On the other hand, some surplus may be relocated as the asset is utilized by a system. In this situation, the total sum of the surplus relocated would become the dissimilarity between depreciation amount depending on the revalued carrying sum of the asset and depreciation with respect to the original amount of the asset. There is no case of profit or loss in these relocations from the surplus of revaluation to retained earnings.

Issue 2: Business Combination Valuation Reserve is mainly used for revaluation purposes of assets as well as liabilities

All the excess of revaluation of assets as well as liabilities is transferred in the direction of the Business Combination Valuation Reserve A/c. No separate equity account is maintained in relation of liabilities. Business Combination Valuation Reserve is a reserve which is created in the company’s Balance Sheet where the excess amount and deficit amount related to the performed asset revaluation is recorded. During the revaluation it has been discovered that the recent or possible future value of the asset is comparatively more than its noted historic cost and in this situation, Business Combination Valuation Reserve is created. Under this reserve, the assignments are needed to combine financial statements of 2 or more companies.

Multiple revaluation entries are passed in the BCVR Account for the purpose of making consolidation adjustments. The effect of these entries is represented in the combined balance sheet where the recognizable assets, liabilities as well as contingent liabilities of the supplementary company are stated at fair rate. As per AASB 3, paragraph 5, the acquisition process includes the given below steps-

 (a) Recognizing the acquirer;

(b) Deciding the date of acquisition;

(c) Identifying and measuring the recognizable assets attained, the liabilities expected as well as any non-controlling interest in the acquiree; and

(d) Identifying and measuring goodwill or an advantage from a purchase of bargain.

BCVR account is created to fulfill the requirement of step (c) of the above mentioned process to suitably account for business arrangements.

Issue 3: The BCVR account is a temporary account which gets realized when an asset is fully depreciated or sold to an external party. 

The balance in the BCVR account that was recognized upon its revaluation doesn’t stay the same after the selling or disposing of assets and liabilities realization. The BCVR amount for that asset requires to be relocated to the account of the Retained Earnings. This is basically prepared in order to avoid the situation of double entry in the consolidated worksheet as the BCVR A/c is recognized by Cargo Ltd. and is not related to Power Ltd. 

I hope after going through the memo, the board will gain clear insight about the accounting treatment of the concerned items. Please