One of the responsibilities of the group accountant for Southland Ltd., Ms. Yamaguchi, is to explain the accounting principles applied by the company in preparing the annual report to the company’s board of directors.
Having analyzed IFRS 3, Ms. Yamaguchi is puzzled by the requirement that any acquisition-related costs such as fees for lawyers and valuaters should be expensed. Ms. Yamaguchi has analyzed other accounting standards, such as IAS 16
Property, Plant and Equipment, and notes that under this standard such costs are capitalized into the cost of any property, plant, and equipment acquired. She therefore believes that to expense such costs in accounting for a business combination would not be consistent with accounting for acquisitions of other assets.
Further, Ms. Yamaguchi believes that to expense such costs would result in a loss being reported in the statement of comprehensive income in the period the business combination occurs. She is not sure how she will explain to the board of directors that the company makes a loss every time it enters a business combination. She believes the directors will wonder why the company enters into business combinations if immediate losses occur—surely losses indicate that bad decisions have been made by the company.
Required
Prepare a brief report for Ms. Yamaguchi on how she should explain the accounting for acquisition-related costs to the board of directors.