Business combination

Question 1

How to calculate acquisition cost ?

Answer 1

A- the acquisition price is determined by the amount of proceeds paid/received for the transaction

B- If acquisition is made through common stock then the acquisition price calculated using stock price on the date of transaction closing not the announcement.

C-actual out of pocket cost to be expended however any registration legal cost is added to the (investment in subsidiary account ) to be debited to APIC not expense.

D-Contingent consideration

E- When new owners promises the subsidiary with consideration the is conditioned with occurrence of specific event using the probability percentage and added to investment account on parent’s books and corresponding liability.

Question 2

how eliminating journal entries EJE is made and for what purpose ?

Answer 2

EJE - CAR IN BIG

A- The Subsidiary equity is totally eliminated including ( Common Stocks - Retained Earnings - And additional paid in capital ) CAR = Assets - liabilities = NET Assets of subsidiary

B-Investment account on parent books
This account include acquisition cost + registration and legal fees + Probability percentage of contingent consideration ( promise )

C-Non controlling interest
= Subsidiary fair value X % of non controlling interest

Non controlling interest is created when preparing elimination journal entries for consolidated financial statement preparation purpose for external reporting only.

D- Balance sheet fair value adjustment.

All subsidiary assets and liabilities are adjusted to fair value when preparing Consolidated financial statement

E- identifiable intangible assets
Are recognized when existed

F- Goodwill

Any excess of fair value or acquisition price than the net assets + fair value adjustment - Non controlling to be recognized as goodwill

Question 3

how full and partial goodwill are calculated ?

Answer 3

Full goodwill method is US GAAP and equal

Fair value of the subsidiary X % of non-controlling interest

Partial goodwill

= Fair value of subsidiary identifiable assets X % of non controlling interest

In partial goodwill the non controlling interest doesnt obtain any interest on the goodwill or balance sheet fair value adjustment and it will be attributable only for the parent company.

Question 4

What are the steps to measure excess of subsidiary fair value ( acquisition price ) than subsidiary net identifiable assets.?

Answer 4

A) Excess to be allocated to fair value

B) if excess still exist to be allocated to goodwill

Question 5

How to account for Non controlling interest on subsequent periods of acquisition ?

Answer 5

The non controlling interest is accounted for using equity method

Subsidiary Net Income X % of non controlling interest = income attributable to non controlling interest

The consolidated income statement must show the income attributable to non controlling interest separate from parents income from subsidiary.

Question 6

EJE ?

Answer 6

Dr.Subsidiary Common stock
Dr.Subsidiary APIC
Dr.Subsidiary retained earnings
Cr. Investment ( parent )
Cr. Non-controlling interest ( created)
Dr.Balance sheet fair value adjustment
Dr.Identifiable intangibles
Dr.Goodwill

Question 7

How to calculate impairment of goodwill arising from combination

Answer 7

impairment of good will first arises if after testing qualitiative approach management decided that its probable that fair value of the reporting unit is less than its fair value.