PART A
Required:

Critically evaluate the Australian requirements for accounting for business combinations.
In your discussion you should specifically address the following issues:
- Exclusions from the scope of Accounting Standard AASB3 Business Combinations.
- The implications of the requirement to use the acquisition method of accounting for business combinations
- The identification of an acquirer in a business combination
- The determination of fair values of assets in a business combination
- The reasons for the choice of fair value to measure assets and liabilities acquired in a business combination
- The nature and treatment of goodwill or bargain purchase arising on a business combination.
- The two different ways in which a business combination can be accomplished.

PART B

CASE STUDY

Federation Ltd acquired the net assets of an existing business Nigeria Pty Ltd on 1 July 2015. The statement of financial position of Federation Ltd immediately prior to the acquisition is as shown below:

                                           Federation Ltd

                     Statement of Financial Position as at 1 July 2015

Assets             

Cash at bank                           40,000

Accounts Receivable                 95,000

Inventory                                110,000

Shares in Wesfarmer's Ltd           80,000

Plant and Equipment (net)          550,000

Land and Buildings (net)            650,000

Total Assets                                                                  1,525,000

Liabilities

Accounts Payable                    220,000

Provisions                               80,000

Bank Loans                             200,000

Total Liabilities                                                               500,000

Shareholder's Equity

Issued Capital                          900,000

Retained Earnings                     125,000

Total Shareholder's Equity                                           1,025,000 

                                                                              1,525,000

The identifiable net assets of Nigeria Pty Ltd acquired by FederationLtd , valued at fair value at date of acquisition comprise the following:

In addition Nigeria Pty Ltd has unrecorded contingent liabilities estimated at $65,000

The terms of the acquisition are as follows:

- Cash consideration of $120,000 to be paid to Nigeria Pty Ltd on 30 June 2016. This amount is to be raised by a bank loan (Federation Ltd's incremental borrowing rate is 8%)

- The shares in Wesfarmers held by Federation Ltd which have a fair market value of $90,000 at 1 July 2015 are to be transferred to Nigeria Ltd.

- Federation Ltd is to issue 50,000 shares to Nigeria Pty Ltd . At 1 July 2015 Federation Ltd's shares are trading at $4 per share.

- Federation Ltd incurred legal expenses of $10,000 and share issue costs of $4,000 in connection with the acquisition

- Under the terms of the acquisition Federation Ltd is required to issue further shares to Nigeria Pty Ltd if the value of Federation Ltd's shares fall below $4 per share by 30 June 2016. It is estimated that there is a 20% likelihood that the share price will fall to $3.50 by 30 June 2016.

Required:

Prepare the journal entries in the books of Federation Ltd to record the acquisition of Nigeria Pty Ltd and a statement of financial position for Federation Ltd immediately after the acquisition.