Let’s look at the following common errors which might have materially misstated your financial statements.
In all honesty, the accounting standards can be pretty confusing at times, especially if you are trying to finalise your year end figures and prepare a set of annual financial statements. From our experience as auditors and accounting advisors, we have encountered various scenarios where critical decisions were made based on a set of wrongly prepared financial statements. It is this kind of decision you want to avoid. We share three common errors in accounting treatment as follows:
Loan funded share arrangement
A loan funded share plan is a type of “employee share scheme” arrangement which effectively allows the employee to acquire shares in the company via a loan. The shares issued can have all rights or limited rights (such as restrictions on voting or dividend rights). Loans linked to the entity’s shares in some way need careful analysis. This type of arrangement may (wholly or partly) be within the scope of AASB 2 Share-based Payment. For example, a loan made to an employee to purchase shares of the entity which is secured only over those shares may in substance represent the grant of a share option. In an option-type arrangement, the loan proceeds are returned to the company in exchange for the shares at the inception of the scheme. The employee receives shares but is obliged either to make the loan repayments or to return the shares. At the maturity of the loan, the employee can choose to:
- surrender the shares, which is equivalent to allowing the notional share option to lapse; or
- repay the loan, which is equivalent to paying the exercise price of the notional share option.
This arrangement gives rise to a share-based payment expense determined in accordance with AASB 2, which is recorded based on grant date fair value of the overall scheme.
Due diligence costs incurred for an intangible asset
Due diligence is an integral part of any potential sale and purchase transaction, ranging from finance, legal to intellectual property. It can be a significant cost as part of the process and understanding how to account for these costs will potentially save you from a whole range of problems.
If the due diligence costs are incurred on intangible assets post acquisition, any development costs incurred post owning the intangible assets that can be demonstrated to enhance and generate probable future economic benefits, can be capitalised as part of intangible assets in accordance with AASB 138 Intangible Assets.
Due diligence costs might relate to business acquisition-related costs if they are costs the acquirer incurs to effect a business combination. Those costs include finder’s fees; advisory, legal, accounting, valuation and other professional or consulting fees; general administrative costs, including the costs of maintaining an internal acquisitions department. Thus, if the due diligence costs incurred are part of the costs/services required to be carried out in order to fulfil the business acquisition, then it should be considered as business acquisition related costs and expensed in the periods in which the costs are incurred and the services are received.
If the costs relate a purchase of a particular asset, then it would not be considered as business acquisition related costs. However, they can be considered as a cost to be capitalised as intangible assets if it has fulfilled the recognition criteria in accordance with AASB 138 Intangible Assets.
Contingent consideration in a business combination
With mergers and acquisitions, it is prevalent for contingent considerations to be part of the obligation of the buyer to transfer additional assets or equity interests to the seller of the business (usually in cash or shares) if future events occur or stipulated conditions are met.
To apply the contingent consideration principles in AASB 3 Business Combinations, the consideration the acquirer transfers in exchange for the acquiree includes any asset or liability resulting from a contingent consideration arrangement. The acquirer shall recognise the acquisition-date fair value of contingent consideration as part of the consideration transferred in exchange for the acquiree. This will no doubt have an impact on the goodwill calculation and is the difference between the consideration and the fair value the acquired assets/business.
This is just one of the complexities that can arise and management should consider the relevant accounting standards, consultation with your auditors and accounting advisors, whilst exercising professional judgement.
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Audit & Assurance Partner