Acquisition Method

Question 1

main principles

Answer 1

recognition principle

measurement principle

Question 2

recognition principle

Answer 2

acquirer recognizes all of sub’s assets/liabilities including identifiable intangibles

Question 3

measurement principle

Answer 3

acquirer measures each recognized asset/liability and any noncontrolling interest at its acquisition date FV

Question 4

valuation

Answer 4

consolidate at 100% FV regardless if you own less than 100%

noncontrolling interest will get credit for implied FV based on purchase price

Question 5

CAR IN BIG

eliminating journal entry

Answer 5

DR common stock (eliminate old sub’s)
DR apic (eliminate old sub’s)
DR retained earnings (eliminate old sub’s)
CR investment in subsidiary (eliminate parent’s)
CR noncontrolling interest (create if not 100%)
DR b/s adjustments (adjust to fv)
DR identifiable intangibles (adjust to fv)
DR goodwill (adjust to fv)

Question 6

CAR formula

Answer 6

subsidiary entity acquired
= assets - liabilities
at acquisition date

ending RE
+ dividends
+ income
= beginning RE (R in CAR)

Question 7

I formula

Answer 7

investment in subsidiary

original cost is measured by FV
business combination costs are expensed:
- finder's/legal fees
- registration/issuance costs (decrease APIC)
- indirect costs

bond issue costs are capitalized and amortized

Question 8

acquisition price > FV of net assets

Answer 8

A/L presented at FV

Question 9

N formula

Answer 9

non controlling interest

businesses that do not establish 100% allocate remaining portion of sub’s equity to NCI

reported at FV in consolidated equity
includes NCI share of goodwill

Question 10

N formula

B/S

Answer 10

at acquisition date
= FV of subsidiary
x NCI %age

after acquisition date, use equity method
beg NCI
\+ NCI share of sub NI
- NCI share of dividends
= ending NCI

allocate sub net losses to NCI even if allocation exceeds equity attributable to NCI

Question 11

N formula

I/S

Answer 11

include 100% of sub’s revenues/expenses (AFTER date of acquisition)

sub income
- sub expenses
= sub NI
x NCI %age
= NI attributable to NCI (goes to NCI RE in G/L)

Question 12

NCI

IFRS

Answer 12

can be calculated using partial goodwill method or full goodwill method

Question 13

full goodwill method

GAAP vs IFRS

Answer 13

GAAP
= FV of sub
x NCI %age

IFRS
= FV of sub
- FV of sub’s net assets

Question 14

partial goodwill method

GAAP vs IFRS

Answer 14

GAAP
= FV of sub’s net identifiable assets
x NCI %age

IFRS
= acquisition cost
- FV of sub’s net assets x %age owned

Question 15

FV of subsidiary

Answer 15

acquisition cost + NCI

any difference b/w FV and BV will require adjustments to “BIG”

Question 16

B/S adjustments to FV

B in BIG

Answer 16

adjust from BV to FV

recalculate depreciation

Question 17

identifiable intangibles
(I in BIG)

Answer 17

related to acquisition of sub are recorded at FV

finite life

• amortize over remaining life
• subject to 2-step impairment test

indefinite life

• do not amortize
• subject to 1-step impairment test

Question 18

goodwill

G in BIG

Answer 18

recognized for any excess of FV of sub over FV of sub’s net assets

not amortized
test for impairment

Question 19

gain

Answer 19

recognized if FV of sub < sub’s net assets

CR, gain instead of DR, goodwill

Question 20

in process R&D

Answer 20

carry as an asset
recognize as an intangible
do not write off immediately

Question 21

continuing R&D

Answer 21

expense to complete project:

• success, amortize IP R&D
• failure, impair write off IP R&D

Question 22

acquisition at a premium

Answer 22

parent paid more than NBV of sub

determine acquisition with goodwill

Question 23

acquisition at a discount

Answer 23

parent paid less than NBV of sub

determine acquisition with gain

Question 24

consolidated RE/NI

Answer 24

same as parent’s RE/NI when F/S are consolidated under acquisition/equity method