Purchase of assets at lump sum price

[irfanahmedmeer]

It is common practice there days that a company purchases runing plant of another company at an over all bid price.

These plant comprise of various assets. Assume that company does not have break - up of the purchase consideration paid as it was either a bid or negotiated sum.

How will you allocate purchase consideration to indvidual assets

[smraza]

Well, interesting topic infact situation, there can be two options, but i think Mr. Pervez will better be able to explain,
The assets can be allocated on the basis of cost of these assets appearing in the latest audited financial statements of the seller company, (if there is any restriction in law or accounting pronouncement, then please let me know)
and secondly the company can get its assets revalued, and record the assets on the revalued amount and negative goodwill.

S M R

[Pervez]

Hi Irfan and Raza!

My good friend Raza has put the ball in my court. Now, how can i not answer his post! So here is some food for thought.

Irfan we have to determine the legal form of the transaction.

A)Is it a purchase of shares by A corporation of B corporation.
--In this case we will have two situations
-I)Business Combination The acquirer and acquiree are clearly established.
II)Uniting of Interest The acquirer and acquiree are not established.

For detailed treatment, refer to IAS 22.

B)Is it a purchase of net assets and purchaser is not concerned with whatever happened to the vendor of assets.

The relevant IAS in this case again is IAS 22. If there are any local pronoucements or laws,they take precedence.

I assume that you are talking about the aquisition of net assets. In such cases, the assets should be revalued to FMV and you will end up with three situations(to simplify the matter, let us assume book value is not known)

1)Consideration paid is > FMV - Difference is positive Goodwill(intangible asset)-Assign FMV to assets

2)Consideration paid is = FMV - No Goodwill assign FMV to assets.

3)Consideration paid is < FMV - Negative Goodwill-Assgin FMV to assets.

Now treatment of Negative Goodwill is different in IAS 22 and US GAAP (APB -Accounting Principles Board Opinion 16). The recognition of Goodwill differs widely in different countries i.e Germany, UK and US.

US (APB 16) requires this negative amount to be deducted from non current assets acquired (except long term investments). If these assets are reduced to zero and some balance is left it should be established as deferred credit.

IAS 22 gives you three options
1)If expenses and losses are expected in future from acquisition-recognize this credit balance as revenue in those periods.
2)Any amount allocated to non current assets be amortized over the life of these assets.
3)Any remaining balance should be included in current income.

I hope i have made your life simple (i couldn't come up with a better joke)

Take Care




Edited by - Pervez on Sep 28 2003 065129 AM

Edited by - Pervez on Sep 28 2003 070232 AM

[irfanahmedmeer]

Pervaiz Thank for your

Its not clear to me what does it means by net-assets. There may be two casses
1. Net assets may mean total assets of vender company less total liablities of vendor company; or
2. Net assets can be selected assets of vender company (Meaning not all vendor keeps a part of assets) less selected liablities of vendoer company

Whether IAS-22 will apply to 2nd case.

[Pervez]

Hi Irfan!
Net assets means assets less liabilities that are being acquired by the purchaser. Whether they are total assets less liabilities of the vendor or selected assets less liabilities, does not really matter.
Purchaser is only concerned with what he acquired. He cann't book what he never purchased.

IAS applies to both of them. It makes no distinction in this respect.

Actually the very reason for asset purchase is that buyer can be selective (buy some asset ignore others). Whereas in case of share purchase, the buyer ends up with all the assets and liabilities (if 100% share purchase) or a percentage of all assets and liabilities (if less than 100% purchase).

Take Care.





Edited by - Pervez on Sep 28 2003 94032 PM

[irfanahmedmeer]

Where ever I look at the definition of Net assets it says total assets less total liablities of a entity

IAS has not defined net assets anywhere. So we have to take definition from other places as generally accepted

I agree with you on this totally that for all practical purposes it is an acquisation and should be accounted for as such.

However, I am facing some body who needs to be coninced with something in writing and he is insisting as he has not purchased 100% of assets less liablities of enterprise hence according to generally accepted definition of net assets IAS 22 does not apply its simply a acquisation of fixed assets and take over of liablities relating to those assets

Can you help me convince him

[Pervez]

Hi Irfan!

Very interesting situations. Don't mind me being a little probobing but it will help you.

1) Since when net assets only mean total assets less liabilites per generally accpeted accounting principles? That is news to me. Then if some body acquired 95% of another company what will you call 95% of assets less 95% of liabilities. Tell me what term will you use for this amount?

2) Generally accepted auditing principles require that you maintain your indepence. Providing justification to client about treatment of accounting issues is a serious compromise of this principle. I would advise you resign as auditor and you are free to work as staff accountant and provide justification to your boss.

3)IAS 22 does have a section "Identifibile Assets and Liabilities" which envisage partial acquisition of assets. Read it carefully but don't provide a copy to client.

4)Last question is if IAS 22 does not apply in this clear cut case, then which IAS apply. If you say no IAS apply here, then we should go to IASB and tell them "we are facing a situation no body in accounting world has faced before, and please set up a standard for such situations so people are not confused in the future." I hope they don't laugh at us to their hearts' content.

5)This was as comprehensive i could get as possible. No point arguing for arguements sake. If your client is still not convinced, either you accept his argument or qualify the report since you agree that IAS 22 applies in this situation.

Take Care

[smraza]

Well, Pervez,
I was actually enjoying the discussion b/w u and meer,(also researching on the topic behind the scene),
Well pervez, the issue raised by irfan is quite confusing, If u go to IAS 22, it defines only two types of business combinations, i.e. Acquisitions and Uniting of Intersts,
as Uniting of interest is not the case here so i ll not discuss,
well, if we go to IAS 22 para 8, it defines, "Business combinition obtaining control over the net assets and operations of another enterprise."(in short)
I agree with meer that the definition of "net assets" is not clearly written in IAS, but in general form Net assets = Total Assets Less total outsider's liabilities, in other words, Shareholder's equity.
Now if we move on to the Acquisitions, para 10, says, "Control over the other combining enterprise, therby enabling an acquirer to be identified. and 'Control' is presumed to be obtained wehn one of the combining enterprises acquires more than one half of the 'voting right' of the other combining enterprise."
As I think, the confusion of meer starts from here, in case of Partial acquition of assets, it can be control over the operations, but it cant be one half voting right.
and if u look at the disclosure requirements of IAS 22 for acquisitons, the first requirement for aquisition is disclosure of the percentage of voting shares acquired.{para 87 (a)}
Dont you think IAS is silent in the situation laid down by meer, as far as the client is concerned, in Pakistan we have to situations, which is being faced by meer, at every client even if it is a multi national,
and Pervez and Meer, I would like to tell you that matter raised by meer, is already a hot issue in FASB, following is the link of Minutes of Board Meeting of FASB held on Feb 26, 2003, in which there have been discussion on purchase method business acquition. So Irfan meer if your client doesnt treat it "Acquisition" then he is taking the advantange of Silence of IAS 22 on matter laid down by you.
http//www.fasb.org/board_meeting_minutes/02-26-03_purchmethod.pdf
you must have acrobat reader installed on your computer to view that.

S M R

[irfanahmedmeer]

First of all I will thank both Raza and pervaiz for thier valuable input.

Yes I have gone through the link provided by Raza of board meeting of FASB it disscusses that acquisation of bussiness through method other than acquisation of net assets, and sysy these are not covered under Bussiness combination deifinition under IAS-22 currently however they intend to change the definition to include that. The minutes are date some where in Feburary 2003 which is most recent available.

As far as providing justification to a client, I would like to remind you that Financial statements are the responsiblity of management and we as auditor can not change anything in it with out first disscussing and getting them to agree to it. If there is a dis agreement and we are convinced that we are right and the item under disscussion is material to the financial statements than offcourse we have a right to modify our audit report accordingly. Trying to convince the client only means that if he agrees the resulting treatment will be made in accounts otherwise we will modify our report on financial statements. Disscussing something with the client and asking them to do the right thing does not impair our independence in any way. What you suggest is that the client knows nothing about the accounts although he is an FCA and with very good experience behind him and I should insert whatever adjustment I lik ein the accounts. Well on this I would say I am the auditor not the accountant I will work on what I need to insert in my audit report if client does not do the right treatment I will not adjust the account (Unless client agrees to it. It is my duty as a auditor to inform client what he is doing wrong and on what basis.

How would you if I come to you and say you are wrong and I am changing your accounts with out giving you any reasons for it?

Any way thanks Pervaiz. It was nice having disscussion with you <img src=icon_smile.gif border=0 align=middle>

[smraza]

Agreed Meer.

S M R