2. Consolidation of Financial Information

Question 1

Why combine?

Answer 1

Enhance profitability through:
Cost savings through elimination of duplicate staff
Quick entry into domestic or foreign markets
Economies of scale for efficiency
Negotiating power
Diversification of business risk

Question 2

When is consolidation of financial information into single set of statements necessary?

Answer 2

When business combination of 2+ entities creates a single economic entity.

Question 3

Type of combinations

Answer 3

1. Statutory merger through asset acquisitioin
2. Statuary merger through capital stock acquisition
3. Statutory consolidation through capital stock or asset acquisition
4. Acquisition of more than 50% of voting stock
5. Control through ownership of variable interests.

Question 4

Qualifications of control in consolidation

Answer 4

if one can determine the other’s entity’s strategic operating and financing policies.

Question 5

Three principles of applying and measuring the acquisition method

Answer 5

1. Consideration transferred for the acquired business plus the fair value of any contingent consideration.
2. Separately identified assets acquired, liabilities a
   assumed, and any noncontrolling interests.
3. Goodwill or a gain from a bargain purchase
4. Direct combination costs are expensed as incurred because they are not part of the acquired business fair value. IPR&D is an asset subject to impairment, and amounts incurred to register and issue securities reduces the value of APIC.

Question 6

If net identified asset fair value of business acquired exceeds the consideration transferred, there is a ____

If net identified asset fair value of business acquired is less than consideration transferred, excess is recorded as _____

Answer 6

Gain on bargain purchase

Goodwill

Question 7

When is an intangible asset recognized in a business combination?

Answer 7

When it is either from a contractual or legal right
OR
When it is capable of being separated or soled separate from the acquired enterprise.

Question 8

Is preexisting goodwill on a subsidiary’s book recognized by the parent?

Answer 8

NO, because it is not identifiable by the parent. The new owner ignores.

Question 9

a) What two other methods were used in the past for business combinations?
b) Why are they significant now?

Answer 9

a)
Purchase method- Very similar to Equity method but no bargain purchase, rather a proportionate reduction of noncurrent assets between the acquisition cost and net fair value of subsidiary’s assets and liabilities.

Pooling of interests method- relies on book values and ignored unrecorded intangible assets. Revenue and expense accounts were combined retrospectively as well as prospectively.

B) It is still significant because current GAAP prohibit retrospective treatment from a consolidation, vestiges (traces) of earlier acquisition methods will remain in statements for years.