Accounting for Business Combinations (ABC)

Transcription

1 Accounting for Business Combinations (ABC) Lecture 1;; Corporate Financial Reporting & Revision Nature of companies A company is a type of organisation established under the Corporations Act Companies are known as a legal person. They have the same legal capacity and power as an individual Characteristics of companies;; Can own property, borrow money, enter contracts, sue and be sued in its own name, etc. Ability to raise capital Ownership is by share (shareholders) Limited liability of owners (that is;; owners are only liable for the amount they invested). Types of companies Public companies;; o Usually larger companies with widespread ownership o May issue shares to the public and apply to have the shares listed on the stock exchange. Proprietary companies;; o Usually smaller businesses o Cannot issue shares to the public o Limited to 50 shareholders 2 types of proprietary companies;; 1. Small 2. Large A proprietary company is classified as small, if at least two of the following are met;; Ø Revenue < $25mil Ø Assets < $12.5mil Ø Employees < 50 Note;; all public companies must abide by the accounting standards. BUT, small proprietary companies, and some large proprietary companies don t. Who runs a company? Directors elected by shareholders Two types of directors;; 1. Executive full-time employee involved in day-to-day operations (e.g. managing director/ CEO). 2. Non-executive- not full-time employee and not involved in day-to-day operations but involved in policy making and planning.

2 Non-executive directors are expected to monitor the performance of the executive directors on behalf of the shareholders. Represent interests of shareholders. Sources of Corporate Reporting Requirements (3) Corporations Act (2001) o The law o The Corporations Act refers to the AASB, as a guide. Australian Accounting Standards Board (AASB) o Government body that develops accounting standards. Australian Securities Exchange (AS) o AS doesn t affect proprietary companies o Has jurisdictions only over public listed companies. Financial statements to be presented AASB 101 requires the following financial statements;; Statement of Financial position (Balance Sheet) Statement of Comprehensive Income (P/L statement) Statement of Changes in Equity Cash flow statement Notes to the accounts (explains the numbers in the financial statements). Who enforces accounting standards? The ASIC enforces accounting standards. o Enforce the compliance with the Corporations Act (AASBs) Profession;; o Miscellaneous Professional Statement APS1 requires compliance by all CPA Australia and CA Australia and New Zealand members. Australian Securities Exchange (AS) Listed companies must comply with listing rules (the rules set by the AS) Rules aim to ensure that information is disseminated (spread) in an efficient and timely manner. Continuous disclosure requirement;; Ø Listing Rule 3.1: Once an entity is or becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity s securities, the entity must immediately inform AS of that information

3 A = L + E Debit Assets Increase Expenses Increase Credit Liabilities Increase Equity Increase Revenues Increase Accounting for Share Issues When shares are issued for cash;; Dr Cash Cr Share Capital Accounting for Retained Earnings The balance (closing amount) of retained earnings is net income not paid as dividends or transferred to other reserves. Opening Retained Earnings +/- Net Profit/Loss - Dividends paid/declared - Transfer to other reserves = Closing retained earnings (seen in the Balance Sheet, equity section). Note;; Dividends are not an expense;; they come out of the retained earnings account. Accounting for cash dividends The standard practice is for a company to declare (i.e. announce) a dividend which is then paid at a subsequent date. There are 2 stages of dividends;; 1. Dividends declared 2. Dividends paid When declared;; When paid;; Dr Dividends Declared Cr Dividends Payable Dr Dividends Payable Cr Cash Dr Dividends Paid Cr Dividends Declared Note;; Dividends declared is an equity account. Dr Dividends declared decreases equity.

4 Accounting for share dividends/ Bonus Issues A bonus issue is an issue of share to existing shareholders out of retained earnings or reserves Ø NO cash payment. Involves a transfer from one equity account to another, leaving total shareholders equity unchanged. Journal entry Dr Retained Earnings/ General Reserve Cr Share Capital Accounting for transfers to and from reserves Reserves can be created by transfers from retained earnings Attempt to indicate some portion of retained earnings is not available for dividends Ø Does not represent a cash reserve Ø Management can remove the general reserve by simply reversing the above entry. Transfer from retained earnings to general reserve;; Dr Transfer to general reserve Both equity accounts. Cr General Reserve Note;; the transfer to general reserve account is temporary. It will eventually be closed to retained earnings at the end of the reporting period. It declares the decrease of retained earnings. Closing entries Closing entries are required at the end of each financial year to;; Transfer profit/loss to retained earnings Deduct dividends declared/paid from retained earnings Bring Balance of revenues/ expenses/ dividend paid/ declared/ transfer to reserve accounts to ZERO. Accounting for Property, Plant and Equipment (PPE) PPE long-term assets subject to depreciation. AASB 116 requires that asset acquisitions are recorded at cost (paragraph 15);; Purchase price (including taxes) and any costs attributable to bringing the asset to its present location and condition. Depreciable amount of an asset is depreciated over the asset s useful life;; Depreciable amount is cost less residual value (BV). Residual value is the estimated amount to be recovered on disposal of the asset and the end of its life.

5 Measurement after Acquisition After acquisition, an entity is required to choose either the;; 1. Cost model, or the 2. Revaluation model For an entire class of PPE (AASB 116 para. 29). 1. Using the cost model Assets are carried at cost less accumulated depreciation less accumulated impairment losses. AASB 116 requires at each reporting date, that assets be assessed for impairment (par. 9) An impairment loss is recognised if the recoverable amount of the asset is less that its carrying amount (Recoverable amount < Carrying amount).

6 If this happens, the carrying amount of the asset is reduced to it s recoverable amount. What is Recoverable Amount? Recoverable amount is the higher of an assets;; Ø Fair value less costs to sell;; (How much you think you can get to sell the asset minus the costs incurred to sell it). Ø Value in use;; (The NPV you get from using the asset). Fair value is the amount obtainable from the sale of an asset in an arm s length transaction. Value in use is the present value of future cash flows expected to be derived from the asset (NPV). û Cash inflows and outflows from use and subsequent disposal. ß

7 2. Using the Revaluation Model Assets are recorded at fair value. Ø Fair value is the amount obtainable from the sale of an asset in an arm s length. When revaluing a depreciable asset, any balance of accumulated depreciation is credited to the asset amount prior to the revaluation. (The process is reversed). Dr Accumulated Depreciation Cr Asset This entry reduces accumulated depreciation to zero and restates the asset balance to the carrying amount. Revaluation Increments Where the carrying amount is increased, the increase is credited to a revaluation surplus, which is part of owners equity. Dr Asset Cr Revaluation Surplus Subsequent depreciation is based upon the revalued amount Ignored tax effects. Revaluation Surplus Upward revaluation is not considered a normal gain and is not recorded in income statement rather it is directly credited to an equity account called revaluation surplus. Revaluation surplus holds all the upward revaluations of a company's assets until those assets are disposed of. Disposal of a revalued asset The gain or loss is measured as the difference between the carrying amount of the revalued asset at the time of disposal and net proceeds (if any) from disposal. Journal Entry Dr Cash at bank Dr Accumulated depreciation Cr Asset (revalued amount) Dr Loss on sale OR Cr Gain on sale (Selling price carrying amount)

8 Definitions Dividends;; a distribution of cash or equity instruments to the shareholders of the company.

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