Business Combinations

Question 1

When does a business combination occur?

Answer 1

It occurs when 2 or more business enterprises are brought under common control and into one accounting entity

Question 2

What are the 3 traditional business combinations?

Answer 2

1. mergers
2. consolidations
3. acquisitions

Question 3

What is a statutory merger?

Answer 3

It is of the form “A+B=A” in which one enterprise A acquires another enterprise B with the latter B ceasing to exist after the combination

Question 4

What is a statutory consolidation?

Answer 4

It is of the form “A+B=C” which a new enterprise C is created to acquire the net assets of other enterprises (A&B). Enterprises A & B cease to exist after the combination

Question 5

What is an acquisition?

Answer 5

It is of the from “A+B=A+B” in which one enterprise (A) acquires a majority share of stock of another enterprise (B) but both entities continue their legal existence after the combination in a parent-subsidiary relationship

Question 6

How are the statutory merger and statutory consolidation forms of business combinations categorized?

Answer 6

As fusions. In both forms, the acquired enterprise ceases to exist as a legal entity; thus it is fused into the surviving enterprise

Question 7

The acquisition form of business combination may be described as what?

Answer 7

An affiliation, since the combining enterprises continue to exist as affiliated entities

Question 8

How are combination accounted for after the effective date?

Answer 8

Under the acquisition method. The acquisition of all or part of a financial institution that meets the definition of a business combination also should be accounted for by the acquisition method.

Question 9

Under the acquisition method, a business combination is deemed to be the acquisition of one entity by another. The accounting for the combination follows what principle?

Answer 9

The historical cost principle related to acquisitions.

Question 10

Under the acquisition method, a business combination is deemed to be the acquisition of one entity by another. What is the accounting basis?

Answer 10

The fair value of the consideration given or the fair value of the consideration (net assets) received, whichever is more clearly determinable.

Question 11

What is the acquisition date?

Answer 11

It is the date that the acquirer achieves control.

Question 12

If the acquiring corporation gains control with smaller noncontrolling purchases eventually culminating in a purchase that achieves control, what happens to the assets and liabilities?

Answer 12

The assets and liabilities acquired in the series of purchases must all be marked to FV as of the date control is achieved. Gains and losses from revaluing these former purchases must be included in current FS.

Question 13

What is goodwill?

Answer 13

the excess of the consideration transferred plus the FV of any noncontrolling interest in the acquire over the FV of all identifiable net assets acquired.

Question 14

Should the tax basis of an asset or liability be a factor in determining its FV?

Answer 14

No. However, a deferred tax asset or liability should be recognized for any difference between the FV and the tax basis of an asset or liability if the difference represents a temporary difference

Question 15

When should contingent assets and liabilities be included in FV?

Answer 15

a contractual contingency exits or a noncontractual contingency is more likely than not to give rise to an asset or a liability

Question 16

How are in-process and development results classified?

Answer 16

as intangible assets with indefinite lives until the research and development phase is complete or the project is abandoned. These assets are recorded at FV and will subject to impairment tests

Question 17

What is the purchase method of a business combination?

Answer 17

It is deemed to be the acquisition of one entity by another. The accounting follows the historical cost principle related to acquisitions. The accounting basis is the FV of the consideration given or FV received, whichever is more clearly determinable.

Question 18

Under the purchase method, how should the acquiring company allocate the cost of the acquired company?

Answer 18

It should allocate the cost of the acquired company to the assets acquired and liabilities assumed. All identifiable net assets acquired (other than goodwill) should be assigned a portion of the cost equal to their FV at the date of acquisition. A deferred tax asset or liability should be recognized for any difference between the FV and the tax basis of an asset or liability if the difference represents a temporary difference.

Question 19

When should contingent assets and liabilities be included by an acquiring company?

Answer 19

1. when the FV of the preacquisition contingency can be determined during the allocation period or
2. information available prior to the end of the allocation period indicates that it is probable that an asset existed, a liability has been incurred or an asset had been impaired and the amount of the asset or liability can be reasonable estimated.

Question 20

In a purchase-method business combination, what 4 types of consideration may be given?

Answer 20

1. assets
2. debt (payable by acquirer to acquired)
3. stock
4. combination of the above

Question 21

If the values assigned to the identifiable net assets exceed the cost of the acquiring company, how should such excess be allocated?

Answer 21

as a pro rata deduction of the amount that otherwise would have been assigned to all of the assets acquired except for: financial assets other than investments accounted for by the equity method, assets to be disposed of by sale, deferred tax assets, prepaid assets relating to pension or other postretirement benefit plans and any other current assets. Any excess should be recognized as an extraordinary gain.

Question 22

What are the 4 steps involved in determining and allocating any differences between cost and the acquiring company’s (P) equity in the net assets of the acquired company (S)

Answer 22

1. subtract (P) equity in the book value of S from the cost of the investment
2. adjust the differential computed in Step 1 for P’s share of any difference between the FV and book value of the identifiable net assets of S
3. allocate the adjusted differential from Step 2. If positive, allocate to goodwill. If negative, reduce the amounts assigned to noncurrent assets (except for LT investments in marketable securities) on a proportionate basis
4. any adjusted credit differential balance remaining after step 8 should be recognized as a deferred credit amortized.

Question 23

In a fusion, how does the acquiring company record assets and liabilities on its books?

Answer 23

The acquiring company records on its books the individual assets and liabilities of the acquired company at the FV (except for the “eligible” assets in the case of a credit differential). Any goodwill resulting from the combination is also recorded on the books at that time.

Question 24

In an affiliation, how does the acquiring company record assets and liabilities?

Answer 24

The acquiring company debits the investment in the subsidiary account for the FV of the consideration given. The individual assets and liabilities of the acquired company are not recorded on the books of the acquired company. The individual assets and liabilities, the parent’s share of any differences between their FV and book values, and any goodwill arising from the business combination surface only at the time consolidated WP’s are prepared by the parent company.

Question 25

When are consolidated FS required by GAAP?

Answer 25

As a general rule, GAAP requires consolidated FS when one of the entities in the group directly or indirectly has a controlling financial interest in the other entities. FASB ASC 810-10-15-9 specifies that the usual condition for consolidated FS is ownership (direct or indirect) of a majority voting interest.

Question 26

What do consolidated FS present?

Answer 26

The results of operations, financial position and cash flows of a parent company and its subsidiaries as if they were a single company. All intercompany balances and transactions should be eliminated.

Question 27

How should a parent company account for unconsolidated subsidiaries?

Answer 27

under the cost method or the equity method

Question 28

When should the equity method be used for unconsolidated subsidiaries?

Answer 28

when the parent (investor) has the ability to significantly influence the operation and financial policies of the unconsolidated subsidiary (investee); otherwise, the cost method should be used.

Question 29

What is a consolidated worksheet?

Answer 29

It is the vehicle by which data from the various entities involved in a consolidation are combined, adjusted and summarized in a form suitable to serve as a basis for the preparation of consolidated FS.

Question 30

What 3 things should a consolidated worksheet include?

Answer 30

1. the trial balance of each of the entities
2. adjustments and eliminations
3. the consolidated balances for the FS to be prepared

Question 31

The particular adjusting or eliminating entries to be reflected on the consolidated worksheet are a function of what factors?

Answer 31

1. the actual transactions or economic events that have occurred
2. how the transaction or events have been recorded in the accounts
3. what constitutes GAAP for presentation in the consolidated FS

Question 32

How do enterprises maintain their consolidated books during the year?

Answer 32

Some maintain ther books during the year in strict accordance with GAAP. FS can be prepared without making any adjustments in the balances shown in the ledger accounts. Other may elect to maintain their books during the year with the awareness that the accounts will have to be adjusted at the end of the period before FS can be prepared. During the year, the books are merely unadjusted not wrong.

Question 33

What are the 4 things that should be known regarding the comprehensive worksheet?

Answer 33

1. the worksheet contains a section for each FS in the order in which the statements are normally prepared
2. the entire net income line in the income section is carried forward to the net income line in the RE section
3. the end of year RE line is carried forward to the RE line in the balance sheet section
4. the noncontrolling interest’s share of the subsidiary’s net income is shown as a deduction in the consolidated balances column and as an addition to the noncontrolling interest column.

Question 34

What are the 5 types of eliminations in consolidated FS?

Answer 34

1. the investment account
2. current year changes in the investment account
3. year-end reciprocal balance sheet accounts
4. reciprocal income statement accounts
5. intercompany profits and losses

Question 35

Name 3 types of eliminating entries relating to balance sheet accounts?

Answer 35

1. A/R or A/P
2. notes receivable or notes payable
3. advance to sub (parent) or advance from parent (sub)