Critical Evaluation Of Ifrs 3 In Relation To Clear Reporting Essay

Critical Evaluation Of Ifrs 3 In Relation To Clear Reporting Requirements For Business Combinations - Essay Example With business combination, the surviving company is provided with the immediate availability of the resources of an established enterprise. Furthermore, the union of businesses often results in better utilization of management, in addition to acquisition of new management strength and improved capital bargaining position. In addition, a business combination may be undertaken for the income tax advantages available to one or more parties to the combination. However, business combinations involve certain limitations and risks. Corporate objectives must be taken into consideration. Only those companies which have the same or compatible sets of objectives should combine. On the other hand, successful firms are usually not willing to combine. The acquiring enterprise may also inherit the acquired firm's inefficiencies and problems together with its inadequate resources. The objective of IFRS 3 is to specify the financial reporting by an entity when it undertakes a business combination. In particular, it specifies that all business combinations should be accounted for by applying the purchase method. Therefore, the acquirer recognizes the acquiree's identifiable assets. Liabilities and contingent liabilities at their fair values at the acquisition date, and also recognize goodwill, which is subsequently tested for impairment rather than mortised. (ASC, 2005) Notable words that one must take into consideration when understanding issues of business combinations are; purchase method, fair values, acquisition date and goodwill. Under purchase method of accounting the acquiree's identifiable assets and liabilities must be measured at their fair values at acquisition date. Fair value then is defined as the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing partied in an arm's length transaction. Acquisitio n date is the date on which the acquirer effectively obtains control of the acquiree. Control is the power to govern the financial and operating policies of an entity or business so as to obtain benefits from its activities. Goodwill is a future economic benefits arising from assets that are not capable of being individually identified and separately recognized. SCOPE This IFRS does not apply to business combinations in which separate entities or businesses are brought together to form a joint venture. Joint venture is defined in IAS 31 Interest in Joint Ventures, as a contractual agreement whereby two or more parties undertake an economic activity that is subject to joint control. This IFRS does not also apply to combinations involving entities under common control, or businesses involving two or more mutual entities and a combination in which separate entities are brought together by contract alone to form a dual listed corporation. METHOD OF ACCOUNTING There are two methods for carrying out a business combination, the acquisition and the uniting of interest. Business combination is achieved by acquisition when one of the enterprises, the acquirer, obtains control over the net assets and operations of another enterprise which is the acquiree, in exchange for the transfer of