Accounting

    For this business combination, one of these two companies must become the acquirer (AASB 20096). In this case Margarett will become the acquirer as it will gain control of the business due to a greater stake in the Company. This type of merger will be treated as acquisition in steps since Margarett Company held previous interest in Josey Company.

     Based on these standards, the date of acquisition by Margaret Company is supposed to be determined (AASB 20098). This will be taken to be the day when legal transfer of consideration will occur. On the day of acquisition, Margarett Company will recognize the acquired assets that are identifiable. This is supposed to be separate from goodwill.

    According to AASB 3, Margarett may apply the recognition principle which will make it to recognize liabilities and assets that Josey Company had not previously included as part of its liabilities and assets in the statement of finance it had prepared (AASB 200910). This includes its intangible assets such as internet domain names, non-competition agreements, and trade names. These are not currently recognized in Joseys financial statements.

    According to AASB 3, the expenses incurred during the acquisition process will be included as expenses for the period during which Josey Company is acquired (AASB 200916) These expenses include legal fees, administrative costs and any other expenses related to the acquisition of Josey Company.

    Plans of Margarett Company to deal with the existing shareholders of Josey Company will be dealt with according to AASB 3 standards on how to arrange for contingent payments to the shareholders who are selling and the employees (AASB 200926). To do this, it will be important to first determine the nature of this arrangement. In this case an important aspect of the arrangement is to note that Josey Company is the initiator of the transaction as it has been proposed for a management buy out. This arrangement will be treated as an arrangement based on contingent consideration. This is because the employees and shareholders of Josey Company will remain in Josey Company. Margaretts decision to retain Joseys management shareholders as key employees shows that this is an arrangement based on profit sharing and its purpose will be to remunerate the employees for services provided after the combination.  

    Use of AASB 3 business combinations which has been revised may lead to unpredictability of earnings especially those that are short term. This unpredictability affects the acquirers accounts (AASB 200939). Thus before Marrgrett company pushes ahead with acquiring Josey company they should know that their short term earnings will be unpredictable. According to the AASB 3, if the acquirer has previously existing interests in the acquiree, the existing interests are remeasured and calculated at fair value on the date of acquisition (AASB 200941). As a result, the immediate loss or gain of the fair value will be reflected in the statement of income. The current AASB 3 points out that an earn-out, for example payment based on meeting a certain target of earnings after acquisition, causes a shift with regard to the contingent consideration which is payable or has been paid thereby directly affecting the statement of income (AASB 200942). This means that after acquisition, higher than expected payments of earn-outs can be triggered and this can negatively affect the earnings. In the case of Margarett Company, it had pre existing interest in the acquiree which is Josey Company. Its previous interest was as an associate. This means that the current interests of Margarett in Josey will be measured and calculated at fair value on acquisition date.

    Regarding measurement of goodwill, the acquirers can choose the type of goodwill they want for the combined business. Freedom of choice is also given regarding measurement of non-controlling interests. According to AASB 3 business combinations, the ownership of a non-controlling partys interest in identifiable assets is recognized in proportion to their interest (AASB 200932). This way, the goodwill that will be recognized on combination will not be full only the interest of parent in goodwill will be recognized. An acquirer can also recognize full goodwill. In this situation, the interest of a non-controlling party in an acquiree is shown as the full fair value. This means that the goodwill that will be recognized upon combination will show the existing goodwill in an acquiree in total. The method where full goodwill is recognized boosts the net value of the combined businesses assets. Margarett Company should know that measuring of the interest of a non-controlling party in subsidiaries based on their proportionate interest in the net assets that are identifiable is not mandatory. This means that Margarett Company can go ahead and apply the method of full goodwill as they wish in which case the goodwill recognized upon combination with Josey Company will show Margaretts existing full goodwill in Josey Company. This will be advantageous for Margarett in that the net value of assets will increase after combination with Josey Company. Its also useful for Margarett Company to know that contingent consideration can be recognized on the acquisition date as part of the total consideration for the combined business even if the contingent consideration is not probable. Another thing is that all the consideration that will be transferred during its combination with Josey Company will be calculated at fair value.

    As part of re-organization, Margarett Company will be required to prepare consolidated financial statements (AASB 20079). The AASB 127 standards points out that the combined financial statements includes all the parents subsidiaries. This means that after merging, the combined financial statements of Margaret Company will include those of its subsidiaries (AASB 20072). To include them, Margarett Company will provide the relevant information regarding the details of their financial accounts. The financial statements of Margarett Company and its subsidiaries should be prepared separately on the same date if possible which will then be used to prepare the consolidated financial statements. The standard advocates for use of similar policies of accounting in preparing the consolidated financial statements in cases where circumstances are the same.