Acquisition Method Flashcards
Under the acquisition method, how is a parent’s investment in a sub valued?
At the FV of the consideration given or the FV of the consideration received, whichever is more clearly evident
What are the parent’s internal JE to record the acquisition?
Cash:
Dr. Investment in sub
Cr. Cash
Stock:
Dr. Investment in sub
Cr. C/S - P
Cr. APIC - P
When recording an acquisition using parent C/S, how is it valued?
At fair value at date transaction closes
What are the two distinct accounting characteristics of the acquisition method?
- 100% of net assets acquired (regardless of percentage acquired) are recorded at FV with any unallocated balance reamining creating GW
- Sub’s entire equity is eliminated (not reported)
What is the parent’s basis in the investment under the acquisition method?
Fair value = acquisition price = investment in sub
What items should be adjusted during consolidation?
(CAR-IN-BIG) [“The CAR I’m IN is BIG”]
- Common stock, Apic, and Retained earnings of sub. are eliminated
- Investment in sub is eliminated
- Noncontrolling interest (NCI) is created (if not 100% owned)
- Balance sheet of sub is adjusted to FV (100% FV; assets and liabilities)
- Identifiable Intangible assets of sub are recorded at their FV
- Goodwill (or Gain) is required
What is the consolidating workpaper eliminating journal entry (EJE)?
(CAR-IN-BIG)
Dr. C/S Dr. APIC Dr. RE Cr. Investment in sub Cr. NCI Dr. BS adjustments to FV Dr. Identifiable intangible assets to FV Dr. Goodwill (Cr. Gain)
When the acquisition price exceeds the FV of net assets acquired, how should assets and liabilities be recognized?
At fair value
CAR formula
Assets - Liabilities = CAR
Equity = NBV = CAR
What is the carrying amount of the investment in subsidiary account on the parent’s books?
Original cost - measured by the FV (on date acquisition is completed) of consideration given
How are the following costs/expenses treated in an acquisition:
- Direct out-of-pocket costs (i.e. finder’s fee/legal fee)
- Stock registration/issuance costs
- Indirect costs
- Bond issue costs
- Expense
- Direct reduction of APIC
- Expense
- Capitalized and amortized
How is NCI reported?
At FV in the equity section of the consolidated BS, separately from parent’s equity
Includes NCI’s share of any goodwill
How is NCI calculated at acquisition date?
FV of sub x NCI % = NCI
After the acquisition date, how is the NCI accounted for/calculated?
Using the equity method
Beginning NCI + NCI share of sub NI - NCI share of sub dividends = Ending NCI
How are sub. net losses accounted for when there is NCI?
They are allocated to NCI even if allocation exceed equity attributable to NCI (negative carrying balance)
When there is NCI, how much of the sub.’s assets and liabilities are included in the consolidated BS and how much of the sub’s revenues and expenses are included in the consolidated IS?
100%
How is the NI attributable to NCI calculated?
Sub’s income - Sub’s expenses = Sub’s NI
Sub’s NI x NCI % = NI attributable to NCI
Under IFRS, how can NCI (and goodwill) be calculated?
- Partial goodwill method
- – NCI = FV of sub’s net identifiable assets x NCI %
- – Goodwill = Acquisition cost - FV of sub’s net assets acquired
OR
- Full goodwill method
- – NCI = FV of sub x NCI %
- – Goowill = FV of sub - FV of sub’s net assets
Does GAAP require the use of the full goodwill method or the partial goodwill method?
Full goodwill method
Under the acquisition method, what is the fair value of the sub. equal to?
The acquisition cost plus any NCI at FV
If there is a difference between the FV of the sub. and the book value acquired, where must the adjustments be made?
(BIG)
- Balance sheet adjustment of sub’s records from BV to FV
- Identifiable intangible assets related to acquisition of sub recorded at FV
- Goodwill is recognized for any excess of FV of sub over FV of sub’s net assets (or Gain if FV of sub is less than FV of sub’s net assets)
How is In Process Research and Development (IP R&D) accounted for?
Carried as an asset
Recognized as an intangible asset separately from GW at acquisition date
Do not immediately write off
Expense “continuing” R&D to complete project
Later: If project is successful = amortized IP R&D / If project is failure = impair/write off IP R&D
Under US GAAP, what intangible assets may private companies elect to not separately recognize when accounting for a business combination?
- Intangibles that would otherwise arise from noncompete agreements; or
- Customer-related intangibles that cannot be separately sold/licensed
Instead, value would be included in GW. They elect to amortize GW for a max of 10 years
What steps are necessary in order to prepare a consolidated statement of cash flow in the period of acquisition?
- Net cash spent/received in acquisition must be reported in the INVESTING section of statement of CF
- Assets and liabilities of the sub on the acquisition date must be added to parent’s assets and liabilities at BoY in order to determine change in cash due to operating, investing, and financing activities during period
How is the preparation of consolidated statement of cash flows different from the preparation of unconsolidated entity’s?
- When reconciling NI to net cash provided by operating activities, total consolidated NI should be used
- FINANCING section should report dividends paid by the sub to NCI shareholders (not those paid to parent)
- INVESTING section may report the acquisition of additional sub shares by parent if acquisition was an open mkt purchase
What is the accounting treatment for when the owner percentage changes from noncontrolling to controlling?
- Remeasure previously held equity interests to FV
2. IS will reflect adjustment
What is the accounting treatment for when the owner percentage changes from controlling to noncontrolling?
- Recognize the gain or loss of the sale of stock
- Remeasure remaining nonconsolidating interest to FV
- Recognize adjustment to FV on IS
What is the accounting treatment for when the owner percentage changes from control to more or less control?
Treated as equity transaction - No gain or loss recognized on IS / APIC adjusting
What is the required consolidation disclosure?
Consolidated FS should disclose the consolidation policy that is being followed
In an acquisition, from what date would the NI of a newly acquired sub be included in consolidated NI?
From the date of acquisition
Under the acquisition method, how are finished goods and merchandise inventory of sub valued?
At FV, which is based upon selling price less disposal costs and reasonable profit allowance
How should a bargain purchase be accounted for by the acquirer?
Gain in earnings at acquisition date
