Advanced FA I&II (1).pdf

ADVANCED FINANCIAL
ACCOUNTING I&II

1. Joint Arrangements
A joint arrangement is an arrangement over which
two or more parties have joint control. The parties
are bound by a contractual arrangement
Contractual arrangements define :
 The purpose, activity and duration of joint
arrangement
 The decision making process
 Capital or other contributions required of the parties
 How the parties share assets, liabilities, revenues,
expense or profit/loss relating to joint arrangements
That contractual arrangement gives two or more of
those parties joint control of the arrangement

Classification of joint arrangements
Joint arrangement is classified as a joint
operation or a joint venture depending on the
assessment of the rights and obligation of the
parties to the arrangement.
1. Joint Operation
Joint Operation is joint arrangements where
parties with joint control have the rights to
assets & obligation for liabilities, relating to the
arrangements.
established as unstructured separate form
No separate entity is established to conduct joint
activities

a joint operator enters into an agreement with one or
more joint operator to produce, market, and
distribute a specific product each joint operator
provides its specific operating expertise
each may agree to use their own assets, incur their
own expenses and liabilities, and finance their own
requirements
A joint operator shall recognize in relation to its
interest in joint Operation :
a. Its asset, including its share of any assets held
jointly
b. Its liabilities, including its share of any liabilities
incurred jointly.
c. Its revenue from the sale of its share of the output
arising from joint operation
d. Its expense, including its share of any expense
incurred jointly.

2. Joint venture
Joint Venture is joint arrangements where parties
with joint control have the right to net asset of the
arrangements
It is established through structured separate form.
 Legal form of the separate vehicle
 The terms of the contractual arrangements
This may be a corporation, a partnership, or other
form of organization
Each venturer usually has an ownership interest
in the venture and is entitled to a share of its
profits or output
when organized, the individual venturers
contribute cash or other assets in return for an
ownership interest contributions are recognized
by each venturer as an investment in the JV and
is required to account it using equity method

Example
• AB Company and BD Company each invested Br
400,000.00 for a 50% interest in AD joint
venture on January 1, 2019. At December 31,
2019, AD reported a Net Income of Br
300,000.00 and also on December 21, 2019 it
declared a dividend of Br 100,000.00
For AB and BD personal account
Jan 1: Investment in AD……..400,000.00
Cash…………..…………400,000.00
Dec31: Investment in AD……..150,000.00
Income from AD…………150,000.00
Dec 21: Dividend receivable………..50,000.00
Investment in AD……..50,000.00

Accounting for Sales
Agencies
and Branch Operations

2. Accounting for Sales Agencies
and Branch Operations
2.1. Distinction between agencies and branch
 An agency relationship refers a contract under which one
or more persons (the principals) engage another person
(the agent) to carry out some service on their behalf
 The sales agency is not an autonomous operation but acts
on behalf of the home office or principal.
The agency may display and demonstrate sample
merchandise, take orders, and arrange for delivery.
The orders typically are filled by the home office
because a sales agency usually does not stock
inventory
Merchandise selection, advertising, granting of credit,
collection of accounts, and other aspects of operating
the business usually are conducted by the home office
or principal

As a business enterprise grows, it may establish
one or more branches to market its products over
a large territory
The term branch is used to describe a business
unit located at some distance from the Home
Office
This business unit carries merchandise obtained
from the H/O, makes sales, approves customers‟
credit, and makes collections from its customers.
A branch may obtain merchandise solely from the
H/O, or a portion may be purchased from outside
suppliers.

The cash receipts of the branch often are
deposited in a bank account belonging to H/O; the
branch expenses then are paid from an Imprest
Cash Fund or A Bank Account provided by the
H/O.
As the Imprest Cash Fund is depleted, the
branch submits a list of cash payments supported
by vouchers and receives a check for a transfer
from the H/O to replenish the fund.
The use of an Imprest Cash Fund gives the H/O
considerable control over the cash transactions
of the branch.

Accounting System for a Branch & Home
Office
Business enterprise with branches may provide
for a complete set of accounting records at each
branch.
Branch may maintain a complete set of accounting
records consisting of:
 Journals
 Ledgers
 Chart of accounts
 Similar to those of an independent business
enterprise

Reciprocal Ledger Accounts
The accounting records maintained by a branch
include a Home Office ledger account.
H/O account is Credited for all merchandise, cash,
or other assets provided by the H/O;
H/O account is Debited for all cash, merchandise,
or other assets sent by the branch to the H/O or
to other branches.
The H/O account is a quasi-ownership equity
account that shows the net investment by the H/O
in the branch.
At the end of an accounting period when the
branch closes it accounting records, the Income
Summery account is closed to the H/O account

A net income increases the Credit balance of the
H/O account; a net loss decreases this balance.
In the H/O accounting records, a reciprocal
ledger account with a title such as Investment in
Branch is maintained.
Investment in Branch is a non-current asset
account, which is debited for cash, merchandise,
and services provided to the branch by the H/O,
and for net income reported by the branch.
Investment in Branch is credited for cash or
other assets received from the branch, and for
net losses reported by the branch.
Thus, the Investment in Branch account reflects
the equity method of accounting.

A separate investment account generally is
maintained by the H/O for each branch.
If there is only one branch, the account title is
likely to be Investment in Branch; if there are
numerous branches, each account title includes a
name or number to identify each branch.
Expenses Incurred by H/O and Allocated to
Branches
Some business enterprises follow a policy of
notifying each branch of expenses incurred by
the H/O on the branch‟s behalf.
Plant assets located at a branch generally are
carried in the H/O accounting records.

If a plant asset is acquired by the H/O for the
branch, the journal entry for the acquisition is a
debit to an appropriate asset account such as
Equipment: Branch and a credit to Cash or an
appropriate liability account.
If the branch acquires a plant asset, it debits
the H/O ledger account and credits Cash or an
appropriate liability account. The H/O debits an
asset account such as Equipment: Branch and
credits Investment in Branch.

Alternative Methods Of Billing Merchandise
Shipments To Branches
 Three alternative methods.
 Billing at home office cost – simplest of all.
 Billing at a percentage above H.O cost.
 Billing at the branch‟s retail selling price.
 Shipment of merchandise to a branch does not
constitute a sale b/c ownership title has not
changed

EXAMPLE
 Assume BIRHAN TRADING Company bills merchandise to
AGARO Branch @ H/O Cost and that AGARO Branch
maintains complete accounting records and prepares FS‟s.
 Both the H/O and the branch use the perpetual inventory
system.
 Equipment used at the branch is carried in the H/O
accounting records.
 Certain expenses, such as advertising, insurance, incurred by
the H/O on behalf of the branch, are billed to the branch.
 Transactions and events during the first year (2005) of
operations of AGARO Branch are summarized below (start-up
costs are disregarded)

1. Cash of Br 1,000 was forwarded by the Home
Office to AGARO Branch.
2. Merchandise with a Home Office cost of Br 60,000
was shipped by the Home Office to AGARO
Branch.
3. Equipment was acquired by AGARO Branch for Br
500, to be carried in the Home Office accounting
records. (Other plant assets for AGARO Branch
generally are acquired by the Home Office.)
4. Credit sales by AGARO Branch amounted to Br
80,000; the branch‟s cost of the merchandise sold
was Br 45,000

5. Collections of trade accounts receivable by AGARO
Branch amounted to Br 62,000.
6. Payments for operating expenses by AGARO Branch
totaled Br 20,000.
7. Cash of Br 37,500 was remitted by AGARO Branch
to the Home Office.
8. Operating expenses incurred by the Home Office
and charged to AGARO Branch totaled Br 3,000.
 Required: Record the above transactions and events
by the Home Office and the Branch. (omit
explanations for the journal entries)

 If a branch obtains merchandise from outsiders as well
as from the H/O, the merchandise acquired from the
H/O may be recorded in a separate Inventory account
from H/O ledger account.
 In the H/O accounting records, the Investment in
AGARO Branch ledger account has a debit balance of
Br 26,000 before the accounting records are closed and
the branch net income of Br 12,000 (Br 80,000 – Br
45,000 – Br 20,000 – Br 3,000 = Br 12,000) is
transferred to the Investment in AGARO Branch
ledger account, as illustrated on the next slide:

 In the accounting records of AGARO Branch, the H/O
ledger account has a credit balance of Br 26,000
(before the accounting records are closed and the net
income of Br 12,000 is transferred to the H/O
account), as shown bellow:

3. Income taxes
Income tax: is a type of tax that governments impose on income
generated by business and individuals with in their jurisdiction .
Income taxes include all domestic and foreign taxes that are based
on taxable profits.
 Pre-tax financial income: is a financial reporting term. It also
is often referred to as income before taxes, income for financial
reporting purposes, or income for book purposes.
 Taxable income (income for tax purposes): is a tax
accounting term. It indicates the amount used to compute
income taxes payable.
 Income tax expenses: amount of current and deferred tax
expense in profit or loss for the period
 Current tax expense: the amount of income taxes payable for
the period.

 Deferred tax expense: the amount of tax due to the tax
authorities in future periods.
 A temporary difference: is the difference between the tax basis
of an asset or liability and its reported (carrying or book) amount
in the financial statements, which will result in taxable amounts
or deductible amounts in future years.
 Deferred tax liability represents the increase in taxes payable in
future years as a result of taxable temporary differences existing
at the end of the current year.
 Deferred tax asset: represents the increase in taxes refundable
(or saved) in future years as a result of deductible temporary
differences existing at the end of the current year.

Companies also must file income tax returns following
the guidelines developed by the appropriate
tax authority. thus they:
Calculate taxes payable based upon tax regulations,
Calculate income tax expense based upon IFRS.
Amount reported as tax expense will often differ from
the amount of taxes payable to the taxing authority.

• Illustration: Chelsea, Inc. reported revenues of
$130,000 and expenses of $60,000 in each of its first
three years of operations. For tax purposes, Chelsea
reported the same expenses to the tax authority in each
of the years. Chelsea reported taxable revenues of
$100,000 in 2022, $150,000 in 2023, and $140,000 in
2024.What is the effect on the accounts of reporting
different amounts of revenue for IFRS versus tax?

Temporary Differences
Taxable temporary differences - Deferred tax
liability
Deductible temporary differences - Deferred tax
Asset

Permanent differences are caused by items that (1)
enter into pretax financial income but never into taxable
income or (2) enter into taxable income but never into
pretax financial income.

Net operating loss (NOL) = tax - deductible
expenses exceed taxable revenues.
The federal tax laws permit taxpayers to use the
losses of one year to offset the profits of other years
(carryback and carry forward).
Under this provision, a company pays no income taxes
for a year in which it incurs a net operating loss. In
addition, it may select one of the two options.

Loss Carryback
a company may carry the net operating loss back two
years and receive refunds for income taxes paid in
those years.
Losses must be applied to earliest year first
It may carry forward any loss remaining after the two-
year carryback up to 20 years to offset future taxable
income.

4. Share -Based Compensation
Share-based payment transaction‟, defined as
follows:
“A transaction in which the entity receives
goods or services as consideration for
equity instruments of the entity (including
shares or share options), or acquires goods
or services by incurring liabilities to the
supplier of those goods or services for
amounts that are based on the price of
the entity‟s shares or other equity
instruments of the entity.”

Reason for share based payment
• Principal –agent theory
• Reward for past services/acknowledgment
• Other reasons (to maintain liquidity or
preserve cash)
Share-based payment awards have been
used as common forms of compensation for
a variety of types of employees (such as
directors, executives, and “regular”
employees) and nonemployees.

Basic concepts
Grant date: date on which both parties agreed to
terms of share based payment arrangements
Vesting conditions: these are the condition
mentioned in share based payment arrangement
which need to be satisfied by the counterparty to
become entitled.
A vesting condition is either a service condition
or a performance condition.
 Service condition: A vesting condition that
requires the counterparty to complete a
specified period of service during which
services are provided to the entity. A service
condition does not require a performance
target to be met.

Cont’d….
 Performance condition: A vesting condition
that requires:
1. the counterparty to complete a specified
period of service (i.e. a service condition);
the service requirement can be explicit or
implicit; and
2.specified performance target(s) to be met
while the counterparty is rendering the
service required in point 1 above.
Performance condition further classified in
two A. Market related condition
B. non market related condition

Cont’d….
• Market related condition: includes a
performance targets with reference to price of
equity instruments of entity or its group entity.
• Non market related condition: includes a
performance target with reference to the
entity own operation or its group entity.
Non vesting condition: it can be understood
that these conditions do not have any impact on
eligibility to have share based payments. These
are neither service nor performance.
Vesting period: The period during which all the
specified vesting conditions of a share-based
payment arrangement are to be satisfied.

Cont’d….
Vesting : it means becoming entitled. That is
the counterparty(employee/other party) is
entitled to receive cash or equity instrument of
the entity.
Exercise date: date on which shares or cash
are actually subscribed by employee/other
party
Fair value : IFRS 2 defines fair value as “The
amount for which an asset could be exchanged, a
liability settled, or an equity instrument granted
could be exchanged, between knowledgeable,
willing parties in an arm‟s length transaction.”
NB: always measure fair value of options on
grant date only

Classification of share-based payment transactions
There are 3 types of share based payment
1.Equity-settled share-based payment An equity-settled
share-based payment is made without the medium of cash
and is directly paid in shares or share options. This means
that employees (or supplier) will receive payment for their
services in the form of the equity of the business.
2.Cash-settled share-based payment A cash-settled
share-based payment is made in cash, but the amount of cash
is based on the value of an equity instrument (such as
ordinary shares).
3. Optional (choice of settlement) : called phantom option,
terms of the arrangement provide either the entity or the
supplier of those goods or services with a choice of whether
the entity settles the transaction in cash (or other assets)
or by issuing equity instruments.

Recognition of share-based payment
transactions
 The basic recognition principle is to recognize goods or
services received in a share-based payment transaction
when the goods are obtained or as the services are
received.
 The goods or services received in a share-based
payment transaction may qualify for recognition as an
asset. If not, they are recognized as an expense. That‟s
the debit side of an accounting entry.
The credit side depends on the type of share-based
payment arrangement:
 If the goods or services were acquired in an equity-
settled share-based payment transaction, then the
corresponding increase is recognized in equity.
 If the goods or services were acquired in a cash-settled
share-based payment transaction, then the
corresponding increase is recognized as a liability.

Measurement of share-based payment transactions
The entity measures the expense for the goods or
services received at fair value. There are two
methods measure this fair value. The value chosen
is then based on the method that gives the most
reliable measure.
1. Direct method
The direct method is normally used when paying
external suppliers using a share-based payment.
This based on the fair value of the actual goods or
services received.
For example, if company X decides to pay for
$30,000 worth of inventory purchases in shares,
they will pay the fair value, which is $30,000.

2. Indirect method
The indirect method is more often used for
employee services. It is done by reference to the
fair value of the equity instruments (e.g. shares,
share options, share appreciation rights):
Equity-settled: Equity-settled payments, such
as share options, use fair value at grant date
with no subsequent adjustments. The grant date
is the date the arrangement is agreed between
the entity and another party.
Cash-settled: Cash settled payments, such as
share appreciation rights, use fair value at each
year-end (based on the entity‟s share price or
options model). This continues each year until
the liability is settled. Thus, subsequent
adjustments are allowed adjustments to prior
year values are recognised in the profit and loss.

Rules for Equity-settled transactions

Rules for Cash-settled transactions

5. Accounting for Agriculture
 Agricultural activity is the management by an entity
of the biological transformation and harvest of
biological assets for sale or for conversion into
agricultural produce or into additional biological assets.
 Agricultural produce is the harvested produce of the
entity‟s biological assets.
 A biological asset is a living animal or plant.
 Biological transformation comprises the processes of:
 Growth: An increase in quantity or improvement in
quantity of an animal or plant
 Degeneration: decrease in quantity or deterioration in
quantity of an animal or plant
 Production of agricultural produce
 procreation: creation of additional living animals and
plants

A bearer plant is a living plant that:
a. is used in the production or supply of
agricultural produce;
b. is expected to bear produce for more
than one period; and
c. has a remote likelihood of being sold as
agricultural produce, except for
incidental scrap sales.
Harvest is the detachment of produce
from a biological asset or the cessation
of a biological asset‟s life processes.

Unique nature of biological assets
Natural capacity to grow and/or procreate
directly impacts on value
Great deal of increase in value owing to input of
free goods
Great deal of cost incurred early in the asset‟s
life but economic benefits derived much later
Production cycle might be very long
Not necessarily any direct relationship between
expenditure on asset and ultimate return

Common features of agricultural activity:
 Capability to change
• Living animals and plants are capable of biological
transformation.
 Management of change
• The agricultural activity must be "managed" to
facilitate biological transformation by enhancing or at
least stabilizing conditions necessary for the process
to take place (e.g. nutrient levels, moisture,
temperature, fertility and light). Such management
distinguishes agricultural activity from other
activities. For example, harvesting from "unmanaged"
sources, such as ocean fishing and deforestation, is
not agricultural activity.

Cont.…’d
Measurement of change
• The change in quality (e.g. genetic merit,
ripeness, and fibre strength) or quantity (e.g.
progeny, weight, fibre length and number of
buds) brought about by biological transformation
or harvest is measured and monitored as a
routine management function.

An entity shall recognize a biological asset or
agricultural produce when, and only when:
The entity has control over the asset as a result of
past event
It is probable that economic benefits associated
with the assets will flow to the entity and
The cost or fair value can be measured reliably
 Control can be evidenced by legal ownership,
lease, joint venture, license or concession to
harvest
 Economic benefits may be in the form of
physical growth such as size, weight, protein or fat
content, age etc.
Initial recognition-biological asset

Biological assets (exclude “bearer plants” as it is treated as
PPE)
 Measured initially and at each financial year at fair value less
estimated point-of-sale costs.
 Any change in the value is recognized in profit and loss
account.
 The fair value of a biological asset has to be based on its
present location and condition.
 It is advisable to group biological assets or agricultural
produce according to their significant attributes such as by
age or quality.
 The selection of attributes are corresponding to the
attributes used in the market for basis of pricing.
 For example, all „A‟ grade cow is grouped together and a fair
value is determined for that grouped.
Measurement

Point-of-sale costs
Include
 commissions to brokers and dealers
 levies by regulatory agencies and commodity
exchanges, and
 transfer taxes and duties
• Exclude transport and other costs necessary to get
assets to a market are not point-of-sale costs but are
included in determination of fair value
FV at farm = market price less transport cost
(other similar costs) to get BA to market

Gains and losses
Biological Asset: Gain or loss on biological asset will arise
due to
 Changes in fair value (less point-of-sale cost) between
SOFP dates, and
 Initial recognition of a biological asset at fair value
(less point-of-sale cost), for example, when a calf is
born
The change in fair value of biological assets during a period
should be recognized in net profit or loss for the period
as part of profit or loss from operating activities
Agricultural produce
 Gain or loss will arise on initial recognition of the
produce
 The gain or loss is the fair value less point of sale
costs
 The gain or loss is recognized in the profit and loss in
the period of harvest

Recognition & measurement issues
1. Recognition of future agriculture produce still
attached to BA
 not to be recognised separately from BA. i.e. measure BA
as a whole
e.g., Agriculture produce that is attached to a biological asset such as
wool to sheep and grapes to vine is not recognized separately until the point
of harvest.
2. BA attached to agricultural land, e.g.. trees in a
plantation forest.
There may be no separate market for biological assets that are
attached to the land but an active market may exist for the
combined assets, that is, for biological assets and land as a
package.
 Must find FV at each reporting date
 Find FV for combined assets (BA, Land & Land
improvement)
 FV of BA = FV combined assets – (FV Land + Land
improvements)

6. Insurance Contracts
• Insurance contract:- a contract under
which one party – the issuer – accepts
„significant insurance risk‟ from another
party – the policyholder by agreeing to
compensate the policyholder if a specified
uncertain future events (the insured
event) adversely affects the policyholder

Initial Recognition:
WHEN?
• Earliest of
a) Beginning of coverage period;
b) Date when first payment is due; and
c) When a group of contracts become onerous
Onerous Contracts:
If cash flows arising from the contract at the
date of initial recognition in total are a net
outflow i.e., expected to make a loss

Approaches to insurance liabilities
measurement
GMM (general measurement model) and BBA
(building block approach)
PAA (premium allocation approach)
VFA (variable free approach)

7. Business Combinations
A business combination refers to any set of
conditions in which two or more organizations
are joined together through common control.
A transaction or other event in which an
acquirer obtains control of one or more
businesses
Definition of terms under BC
 Combined Enterprise: The accounting entity
that results from a business combination
 Constituent Companies: The business
enterprises that enter into a combination.

 Combinor : A constituent company entering into
a combination whose owners as a group ends up
with control of the ownership interests in the
combined enterprise. The term acquirer, parent
and combinor can be used interchangeably.
 Combinee: a constituent company other than the
combinor in a business combination. The term
acquired, acquiree, subsidiary and combinee can
be used interchangeably.

Types of Business Combinations
There are three types of business combinations:
1. Horizontal Combination: is a combination involving
enterprises in the same industry.
E.g. assume combination of Ethio flour and Sun flour.
2. Vertical Combination: A Combination involving an
enterprise and its customers or suppliers. It is a
combination involving companies engaged in different stages
of production or distribution.
It is classified into two:
A. Backward Vertical Combination – combination with
supplier
B. Forward Vertical Combination – combination with
customers.
E.g.:
 A Tannery Company acquiring a Shoes Company – Forward
 Weaving Company acquiring both Ginning and Spinning
Company - Backward

3. Conglomerate (Mixed) Combination: is a
combination involving companies that are neither
horizontally nor vertically integrated. It is a
combination between enterprises in unrelated
industries or markets.
Methods for Arranging Business Combinations
• The common methods for carrying out a
business combination are:
⮞Statutory Merger
⮞Statutory Consolidation,
⮞Acquisition of Common Stock, and

1. Statutory merger: only one of the original
companies remains in business as legally
incorporated enterprise.
A+B=A
2. Statutory consolidation: assets or capital stock of
two or more companies are transferred to a newly
formed corporation.
Through assets & stock acquisition.
Both combining companies are dissolved
A+B=C
3. Stock acquisition/Acquisition of more that 50%
voting stock. Acquisition by one company of a
controlling interest in the voting stock of a second.
Dissolution does not take place; both parties retain
their separate legal incorporation.

Accounting for business combination
There are two methods of accounting to record
business combination.
1. Purchase method/acquisition –IFRS use this only
2. Pooling of interest method/merger method
Purchase method/acquisition
Recognition Principle - in a business combination
accounted for under purchase accounting, the
acquirer recognizes all of the assets acquired and
all of the liabilities assumed.
Fair Value Measurement Principle - in a business
combination, the acquirer measures each
recognized asset acquired and each liability
assumed and any non-controlling interests at its
acquisition date fair value.

Disclosure Principle – the acquirer should
include the information in its financial statement
so as to help users of financial statements
evaluate the nature and financial effect of
business combinations recognized by the
acquirer.
Applying the acquisition method requires
1. Identifying the acquirer
2. Determining the acquisition date
3. Recognizing and measuring the identifiable
assets acquired, the liabilities assumed and any
non-controlling interest in the acquiree; and
4. Recognizing and measuring goodwill or a gain
from a bargain purchase

Non controlling interest
NCI is arise when one company controls another
company less than 100%. It is also referred as
Minority Interest.
Sometimes NCI is calculated through Implied value.
Implied value = Acquisition cost / % of controlling
interest
NCI = Implied value-Acquisition cost
For example, If Com. A acquired 80% of Com. B at
Br. 800,000. Find the NCI:
Implied value= Br. 800,000/ 0.8 = Br. 1,000,000.00
NCI = Br. 1,000,000-Br. 800,000 = Br. 200,000.00

Determination of Cost of Acquisition
The cost of a combine on a BC accounted for by
Acquisition method is the total of
a. The amount of consideration paid by the
combiner,
b. Any contingent consideration that is
determinable on the date of the business
combination

A. The amount of consideration paid by the
combiner
This is the total amount of
a. Cash paid,
b. The Current fair value of other assets
distributed,
c. The present value of debt securities issued &
d. The Current fair value (Market) value of equity
security issued by the combiner.

B. Contingent Consideration: Relates to an
additional amount paid by the parent to the
shareholders of subsidiary if certain conditions are
met.
It recorded at fair value
Investment in subsidiary………XX
Contingent Consideration……XX
Acquisition cost = Amount of consideration +
Contingent consideration
Implied value = Acquisition cost + Non Controlling
Interest

Other costs
1. Direct combination costs: Associated with
completing the business combination (Legal,
Accounting, Consulting, Appraisal and Finder`s
fee).
Merger Expense………………xx
Cash……………………xx
2. Stock Issuance Cost: When the parent issues
stock in conjunction with a BC, any stock issuance
costs, such as underwriter fee and exchange fee.
Additional paid in capital in excess of par….xx
Cash……………..……………xx

Fair value of net identifiable asset
(FVNIA)
FVNIA = Fair value of Asset-Fair value of
Liabilities
If the acquisition cost(Implied value)
exceed the fair value of net identifiable
asset, then we recognize as goodwill.
If the fair value of net identifiable asset
exceed the acquisition cost(Implied value),
then we recognize as Gain on bargain
purchase.

EXAMPLE
P com acquired S com on Dec. 31 2022 with the
following balances:
 The carrying amount of Assets are Br 440,000.
 The carrying amount of liabilities are Br 140,000.
 The fair value of assets are Br 500,000.
 The fair value of liabilities are Br 170,000
 On Dec.31 2022 P com issued 50,000 shares of
its Br 5par value (CFV of Br 8) Common stock for
all the net asset of S.
 Issuance and out of pocket costs are Br 40,000
and Br 25,000, respectively.

• Journal Entries:
Investment in S…..(8*50,000)…...….400,000
Common Stock…(5*50,000)………………………..250,000
Additional Paid in capital in excess ………….150,000
Merger Expense…………………………………..25,000
Additional Paid in capital in excess..40,000
Cash………………………….65,000

Goodwill Calculation
 Acquisition Cost = Br 400,000
FVNIA = Fair Value of Asset – Fair Value of
Liability = Br 500,000 – Br 170,000
= Br 330,000
Goodwill = AC-FVNIA
= Br 400,000 – Br 330,000
= Br 70,000.

Consolidation on Date of
Acquisition

8.Consolidation on Date of Acquisition
The Parent Co. prepares Parent Financial
Statements while the Subsidiary prepares
Subsidiary Financial Statements.
However, Consolidated Financial Statements
is prepared by the Parent Co. by combining
separate financial statements of the parent
and the subsidiary as the Parent Company is
the Reporting Entity.

Steps for Consolidation
1. Update the balances of accounts affected by
business combination transaction
2. Record the financial information for both
Parent and Subsidiary on the worksheet
3. Remove the Investment in Subsidiary
balance
4. Remove the Subsidiary‟s equity account
balances
5. Remove Intercompany transactions (e.g.
payables and receivables)
6. Adjust the Subsidiary‟s net assets to CFV
7. Allocate any excess of cost over CFV to
identifiable intangible assets or goodwill
8. Combine all account balances

The Effects of Changes in Foreign
Exchange Rates

Foreign Exchange Rates
Exchange rate - ratio between a unit of one
currency and another currency for which that
unit can be exchanged at a particular time.
The difference between the rates at which a
bank is willing to buy and sell currency is
known as the “spread.”

• Exchange rate can be quote in two ways:
1.Direct Exchange Rate
 Units of domestic currency that can be converted into
one unit of foreign currency.
 Direct rate = 27 (27 Ethiopian birr for 1 US dollar).
2.Indirect Exchange Rate
 Units of foreign currency that can be converted into
one unit of domestic currency.
 Indirect rate = 1.00/27 = .037 (1 Ethiopian birr for
.037 US dollar).
DQ=LC/FC
IQ=FC/LC

Spot Rate & Forward Rate
Spot Rate
 Is the price today at which a foreign currency can be purchased or
sold today.
Forward Rate
 Is the price today at which FC can be purchased or sold sometimes
in the future.
 The forward rate can exceed the sport rate on a
given date in which the FC is said to be selling at a
premium in the forward market.
 A discount occurs when forward rate is less than
spot rate.

Accounting issue
• The major issue in accounting for foreign
currency transactions is how to deal with
the change in U.S. dollar value of the sales
revenue and account receivable resulting
from the export when the foreign
currency changes in value.
• There are two methods of accounting for
changes in the value of a foreign currency
transaction:
1. The one transaction perspective
2. The two transaction perspective

1. The one transaction perspective
– An export sale is not completed until the
foreign currency received.
– The change in the value of foreign currency is
accounted for an adjustment to account
receivable and sales.
2. The two transaction perspective
– This treats the export sale and the
subsequent collection of cash as two separate
transactions.
– Any change in the value of FC is treated as
foreign exchange gain/loss; not adjusted to
sale.

Example
• Amerco, a US co. sells goods to a Germen
customer at a price of 1million mark when the
spot rate is $0.55 per mark. Amerco gives 30
days credit to the customer. At the end of 30
days the Germen mark has depreciated to
$0.53.
• Required: Journalize this transaction under the
two methods.

Two transaction perspective
A/R…………… $550,000
Sales……………. 550,000
Adjustment due to depreciation
Foreign exch.los.. $20,000
A/R………………… 20,000
cash collection
Cash………. 530,000
A/R…………… 530,000

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