Acquisition Mehod of Accouting pg 42

Question 1

Types of combinations NOT accounted for using the Acquisition Method of Accouting

Answer 1

1. Formation of Joint Venture
2. Acquisition of asset or group of assets that doesn’t constitute a business
3. A combination b/w entities under common control
4. A combination b/w not-for-profit organizations
5. Acquisition of a for-profit by a not-for-profit organization

Question 2

Acquirer in Business Combo should recognize and measure…

Answer 2

1. Identifiable assets acquired/liabilities assumed/any controlling interest in acquired business
2. Goodwill or bargain purchase amt
3. Disclose info about business combo to enable FS users to evaluate business combos

Question 3

Steps to Using Acquisition Method

Answer 3

1. Identify acquiring entity (acquirer)
2. Determine acquisition date and measurement period
3. Determine cost of acquisition
4. Recognize & Measure identifiable assets acquired/liabilities assumed/any controlling interest in acquired business
5. Recognize and Measure goodwill or gain from bargain purchase

Question 4

Determining Measurement Period for Acquisition Method

Answer 4

• Is the period after acquisition date during which acquirer may adjust any provisional amts
• Period provides acquirer reasonable time to obtain info needed to identify and measure AS OF ACQUISITION DATE the:
  1. Identifiable assets/liabilities/noncontrolling interest
  2. Consideration transferred to obtain acquiree
  3. Any precombination interest held in acquiree
  4. Any goodwill or bargain purchase gain
• -During this period new info known at acquisition date will be retrospectively adjusted in the provisional accts and amts
  1. Recognition of add’l identifiable assets will result in decrease in amt of (provisional) goodwill
  2. Recognition of add’l identifiable liabilities will result in increase in amt of (provisional) goodwill
  3. Adj to provisional accts or amts must be reflected in comparative info for prior period FS

Question 5

Measurement of Consideration used to effect a Business Combination

Answer 5

-Generally must be measured @ FV (w/ exception…)
>Exception: If transferred A/L remain under control of acquirer doesn’t have to be remeasured to FV
- If A/L transferred by acquirer have CV before transfer diff than FV @ acquisition, A/L must be adjusted to FV @ date of combination and related G/L recognized in current income by acquirer

Question 6

Contingent Consideration as Cost Elements

Answer 6

-Consideration transferred by acquirer to acquire business may include contingent element
> Obligation of acquirer to transfer add’l assets/equity
interest to former owner of acquired business as part
of consideration if future events occur/conditions met
&raquo_space;>These should be recognized as either liability or
equity @ FV
> Right of acquirer to a return of previously transferred
consideration if specific conditions aren’t met
&raquo_space;> This should be recognized as asset @ FV

Question 7

Changes in FV for contingent consideration

Answer 7

-Changes in FV of contingent consideration after acquisition date that result from new info about facts/circumstances that existed AT acquisition date should be accted for as measurement period adj THEREFORE as adj to cost of acquired business
- Changes in FV of contingent consideration RESULTING from occurrences AFTER acquisition date are NOT measurement period adj and do NOT enter into cost of business combo
> Changes classified as equity are NOT remeasured,
subsequent settlement should be accounted for as
equity adj
> Changes classified as A/L are remeasured to FV @
each BS date until contingency is resolved- changes
recognized in current income

Question 8

Acquirer’s share-based Pmt awards

Answer 8

-May exchange share-based pmt for awards for awards held by acquiree’s employees as part of business combo
-This exchange would be a modification of share-based pmt awards and treated as exchange of original award for new award
-Treatment of exchange of share-based awards depends on whether or not acquirer obligated to make exchange or does so @ own discretion
>Obligated:
1.Portion of replacement awards relating to precombo services based on conditions of acquiree’s awards will be part of consideration transferred in business combo
2. Portion of replacement awards relating to post-combo services will be treated as compensation exp in postcombo FS statements
>Not Obligated: Acquirer elects to replace acquiree share-based awards w/o obligation ALL value of awards will be treated as compensation exp in post-combo FS

Question 9

Gaining Control W/O transferring Consideration

Answer 9

1. Acquiree reacquires sufficient # of its own outstanding shares from selected investors so another acquirer obtains control w/ it’s existing ownership
2. Minority Veto Rights lapse that previously kept acquirer from controlling investee
3. Two entities agree to combine by contract alone, neither entity owns controlling equity interest in other entity

Question 10

Acquisition Costs

Answer 10

Costs to carry out acquisition
-Finders Fees
-Advising, legal, accting, valuation. and other professional and consulting fee
-General admin costs.]Cost of registering and issuing debt
-Equity securities in connection w/ acquisition
>These should be expensed as incurred in period and are NOT part of acquired business

-Cost of issuing debt/equity securities for purposes of business combo are NOT treated as cost of acquired business
>Debt: Recognized as deferred asset and amortized
OR expensed when incurred
>Equity: Reduce proceeds from securities issued and
reduce Add’l paid in capital

Question 11

Summary Cost of Acquired Business

Answer 11

Sum of

1. FV or assets transferred by acquirer
2. FV of liabilities incurred by acquirer
3. FV of equity interest issued by acquirer
4. FV contingent consideration obligations of acquirer
5. FV share-based pmt awards for precombo services that acquirer is obligated to provide

Question 12

Intangible Asset for Acquirer

Answer 12

Is identifiable and recognized by acquirer IF

1. Capable of being separated from acquiree and sold/transferred/leased/rented/exchanged
2. Arises from contractual or other legal rights

Question 13

Classification & Designation of identifiable assets/liabilities

Answer 13

These need classification:

1. Investments in debt/equity securities as being held-to- maturity, trading, or available-for-sale
2. Derivatives as to whether they are hedging instruments or not
3. Embedded derivative as to whether they will be treated as separate from host instrument
4. Long-term assets as to whether they will be used or held for sale

-Leases continue to be classified as established at inception of contract unless subsequent modifications contract have warranted re-classifications

Question 14

Basis for Determining FV for identifiable assets and liabilities

Answer 14

Look @ list on pg 52 book 2 and Exceptions

Question 15

FV of Previously Held Equity

Answer 15

If acquirer has equity interest (35%) then gains more to give it control (40%=75%) the initial 35% is wrote down to FV giving a gain/loss in income on equity interest

The FV of equity owned prior to acquisition date is part of “cost” of investment in acquiree

Question 16

FV of Noncontrolling Interest

Answer 16

• Noncontrolling Interest: Occurs when acquirer obtains less than 100% of equity interest of acquiree (percent NOT owned by acquirer is noncontrolling interest) & measured at FV @ acquisition date
• FV of acquirer’s interest on per-share basis may be diff than FV of noncontrolling interest due to “control premium”

Question 17

Assets Held for Sale

Answer 17

Measured at FV LESS cost to dispose

Question 18

Recognizing/Measuring Goodwill/Bargain Purchase Amt in Business Combo

Answer 18

Amount of Gain is “investment value” of acquired business and FV of net identifiable assets acquired and liabilities assumed in business combination

Question 19

‘Investment Value”

Answer 19

Sum of consideration transferred (cost) to effect business combo & FV of noncontrolling interest in acquiree

=Costs+FV NCI

identifiable net assets of acquired business

Question 20

Goodwill

Answer 20

Goodwill results when Investment Value is > net FV of assets assumed/liabilities incurred @ date of business combo-

–GW is excess of FV of investment in acquiree (including noncontrolling interest) OVER FV of

Question 21

Bargain Purchase

Answer 21

Results when Investment value < net fair vale of assets assumed and liabilities incurred as of date of business combo

–BP is excess of FV of net assets of acquired business OVER FV of investment in acquiree (including FV of noncontrolling interest)

–After reassessment if still bargain purchase gain in earnings as of date of business combination

Question 22

Special Circumstances for Goodwill & Bargain Purchase

Answer 22

1. If Business Combo carried out through exchange of equity, FV of acquiree’s equity interest @ acquisition date may be more reliable measure of FV so use acquiree’s equity interest instead of equity interest transferred by acquirer
2. If no consideration transferred in carrying out business combo, goodwill/bargain purchase amt should be determined using valuation technique instead of value of consideration transferred

Question 23

Items that need Specific Treatment that are acquired/Issued in carrying out Combo

Answer 23

1. Assets & Liabilities arising from Contingencies
2. Indemnification Assets
3. Contingent Consideration

Question 24

Treatment of Assets & Liabilities arising from Contingencies

Answer 24

-Accounted for based on subsequent info about contingency
- Until new info received about poss outcome of contingency it continued to be reported @ FV @ date of combo
-When new info received
>Liability: HIGHER of acquisition-date FV OR Amt
recognized if requirements of ASC 450 were followed
>Asset: LOWER of acquisition-date FV OR Best
Estimate of future settlement amt
-Contingency Recognized in Business Combo will be derecognized ONLY when contingency is settled or expired

Question 25

Treatment of Indemnification Assets

Answer 25

• Indemnification asset recognized should be measured & reported on same basis as liability or asset that is indemnified as long as no contractual limitations
• Indemnification assets recognized will be derecognized ONLY when settled or expires

Question 26

Treatment of Contingent Consideration

Answer 26

• Reported @ FV
  -Changes in info about FV existed AT bus combo measurement period adj and change cost of investment
  -Changes in info about FV AFTER bus combo do not change cost
  >If equity: not remeasured and subsequent settlement
  accounted for within by adjusting equity
  >If asset/liability remeasured @ each reporting date and
  recognized in earnings
  —UNLESS hedging arrangement THEN changes in
  value recognized in OCI

Question 27

Disclosures for Acquisition Method

Answer 27

Look @ pgs 61-63 book 2

Question 28

Recording Legal Merger or Legal Consolidation

Answer 28

DR: Assets Acquired
CR Liabilities Assumed
CR: Consideration Pd

Assets acquired may be tangible(equip)/intangible(patent) and severable(sellable(investments)/nonseverable(trademark)

Assets recognized would NOT include preexisting goodwill of acquiree

Question 29

Variable-Interest Entity

Answer 29

Legal entity which by design either cannot finance its activities w/o add’l subordinated financial support (expected losses EXCEED its total equity investment @ risk) OR it’s equity holders do not have direct/indirect ability to make decisions about the VIE’s activities

Question 30

Summary of VIE structure

Answer 30

Even though equity investors in VIE are its legal owners, bc of contractual or other arrangements they play little role in operation of entity and carry little risk or receive little benefit from ownership; risk and benefits accrue to Variable interest holders

Question 31

Conditions to determine Primary Beneficiary of VIE

Answer 31

1. Has power to direct activities of VIE that most significantly impact VIEs economic performance (power criterion)
   AND
2. Has obligation to absorb losses from or right to receive benefits of VIE that potentially could be significant to VIE

Question 32

If Parent lacks effective control of Subsidiary

Answer 32

Due to : Foreign subsidiary largely controlled by foreign gov’t though dividends/day to day operations OR Domestic subsidiary in bankruptcy and under influence of courts

-If Parent lacks control subsidiary is an “unconsolidated subsidiary” reported as an Investment asset by parent
>Accts for investment using either FV or equity method,
depending on extent of influence it can exercise on
investee

Question 33

VIE Characteristics

Answer 33

1. May be a partnership, joint venture, limited company or corporation
2. Set up for a well-defined, limited purpose
3. Sponsor/Sponsors provide most of its resources
4. Activities governed largely by a contract /agreement and rest w/ sponsors not shareholders
5. Risk/Reward greatly attributable to sponsors
6. Value of sponsor interest increases/decreases w/ changes in net asset value of VIE