Final answer:
Companies may overstate gain on acquisition by inflating the fair value of net assets, understating acquisition costs, manipulating financial statements, or misrepresenting the value of acquired assets. This overstatement presents a misleading financial picture, potentially impacting stakeholders and incurring legal consequences.The right answer is option 3)
Step-by-step explanation:
Companies might overstate the gain on acquisition by inflating the fair value of the identifiable net assets acquired. When the acquisition cost is less than the fair value of these net assets, it leads to a gain on a business combination. If a company intentionally reports a higher than actual fair value for these assets, the gain recognized on consolidation will be artificially increased. Similarly, by understating the acquisition cost, the company would again show a larger gain as the difference between the fair value of the net assets and the cost would appear greater.
Manipulating financial statements can also lead to overstatement. If a company misreports information or employs other means to misrepresent the value of the acquired assets, it can lead to an inaccurate portrayal of its financial health. This manipulation can take many forms but ultimately aims at portraying a financially beneficial acquisition that may not reflect reality.
Furthermore, misrepresentation of the value of acquired assets can occur if the company uses incorrect or misleading valuations. These actions can distort the true financial picture presented to stakeholders, including shareholders and potential investors, and can have significant ramifications including legal consequences.