Question

You have been engaged to audit the financial statement of Sol Corporation for the fiscal year ended may31, 2020. You discover than on june1, 2019, Mica Company had been merged into Sol Corporation in a business combination. you also find that both Sol corporation and Mika Company (prior to its liquidation) incurred legal fees, accounting fees, and printing costs for the business combination; both company debited these cost to an intangible asset leger account entitled "Cost of Business Combination." in it is journal entry to record the business combination with Mika, Sol increased its Cost of Business Combination account by an amount equal to the balance of Mika's comparable lager account. Evaluate Sol's accounting for the out-of-poke cost of the business combination with Mika in light of IFRS and GAAP guidelines

Answer 1

Step-by-step explanation:

Under IFRS and GAAP guidelines, the costs related to a business combination, such as legal fees, accounting fees, and printing costs, should be expensed as incurred, with the exception of direct acquisition costs. These direct acquisition costs may be capitalized as part of the cost of the business combination. However, the capitalization of indirect costs, such as the costs incurred by Sol Corporation and Mika Company for the business combination, is not allowed under either IFRS or GAAP.

Therefore, Sol Corporation's accounting for the out-of-pocket costs of the business combination with Mika is not in compliance with either IFRS or GAAP guidelines. The costs should have been expensed as incurred, rather than capitalized as an intangible asset in the Cost of Business Combination account. Sol Corporation should adjust its financial statements to properly expense the costs related to the business combination with Mika.