Page 466 - SBR Integrated Workbook STUDENT S18-J19
P. 466
Chapter 25
Example 4
Business combinations
Consolidated financial statements are produced when one entity achieves
control over an entity that meets the definition of a ‘business’. A business is
defined as an integrated set of activities that is capable of being managed in
order to provide economic returns. A business will have inputs and a range of
processes applied to those inputs. The processes should have the ability to
create outputs.
Apple owns a building, which is an input. This input could produce economic
returns if processes are in place. However, Banana has not acquired any
processes because Apple has no staff members. Without processes in place
to market and manage the building, no economic returns can be produced
(outputs).Therefore Apple does not meet the definition of a ‘business’.
The transaction will be accounted for as an asset purchase, rather than as a
business combination. The asset will be classified as an investment property,
because it is held to earn rental income.
460
