Question

You have been engaged to audit the financial statements of Solamente Corporation for thefiscal year ended May 31, 2010. You discover that on June 1, 2009, Mika Company hadbeen merged into Solamente in a business combination. You also find that both Solamenteand Mika (prior to its liquidation) incurred legal fees, accounting fees, and printing costsfor the business combination; both companies debited those costs to an intangible assetledger account entitled "Cost of Business Combination." In its journal entry to record thebusiness combination with Mika, Solamente increased its Cost of Business Combinationaccount by an amount equal to the balance of Mika's comparable ledger account. Instructions Evaluate Solamente's accounting for the out-of-pocket costs of the business combination with Mika in light of IFRS and GAAP guidelines

Answer 1

Answer: Under IFRS, the costs of a business combination should be recognized as expenses in the periods in which they are incurred. These costs should not be capitalized as intangible assets, unless they relate to the recognition and measurement of the assets and liabilities acquired in the business combination. Therefore, Solamente's accounting treatment of the costs of the business combination with Mika is not in compliance with IFRS, as it has capitalized these costs as an intangible asset.Under GAAP, the costs of a business combination are generally expensed as incurred. However, GAAP permits some expenses, including legal and accounting fees as well as other directly connected acquisition-related expenses, to be capitalized as part of the cost of the acquired firm.Only if these expenses will benefit the combined firm in the long run financially should they be capitalized.Since the costs of the business combination with Mika are directly related to the acquisition and are anticipated to provide future financial advantages, Solamente's accounting treatment of these expenditures complies with GAAP.As long as the expenses are directly related to the purchase and anticipated to produce future financial benefits, Solamente's accounting for the out-of-pocket costs of the business combination with Mika is in compliance with GAAP even though it may not be fully compatible with IFRS. According to the relevant accounting standards, the auditor would have to assess the type and magnitude of these expenditures to decide whether they should be capitalized or expensed.

Step-by-step explanation:

Answer 2

Under IFRS, the costs of a business combination should be recognized as expenses in the periods in which they are incurred. These costs should not be capitalized as intangible assets, unless they relate to the recognition and measurement of the assets and liabilities acquired in the business combination. Therefore, Solamente's accounting treatment of the costs of the business combination with Mika is not in compliance with IFRS, as it has capitalized these costs as an intangible asset.

Under GAAP, the costs of a business combination are generally expensed as incurred. However, GAAP permits some expenses, including legal and accounting fees as well as other directly connected acquisition-related expenses, to be capitalized as part of the cost of the acquired firm.

Only if these expenses will benefit the combined firm in the long run financially should they be capitalized.

Since the costs of the business combination with Mika are directly related to the acquisition and are anticipated to provide future financial advantages, Solamente's accounting treatment of these expenditures complies with GAAP.

As long as the expenses are directly related to the purchase and anticipated to produce future financial benefits, Solamente's accounting for the out-of-pocket costs of the business combination with Mika is in compliance with GAAP even though it may not be fully compatible with IFRS. According to the relevant accounting standards, the auditor would have to assess the type and magnitude of these expenditures to decide whether they should be capitalized or expensed.