Business Combinations Flashcards
When does a business combination occur?
It occurs when 2 or more business enterprises are brought under common control and into one accounting entity
What are the 3 traditional business combinations?
- mergers
- consolidations
- acquisitions
What is a statutory merger?
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
What is a statutory consolidation?
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
What is an acquisition?
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
How are the statutory merger and statutory consolidation forms of business combinations categorized?
As fusions. In both forms, the acquired enterprise ceases to exist as a legal entity; thus it is fused into the surviving enterprise
The acquisition form of business combination may be described as what?
An affiliation, since the combining enterprises continue to exist as affiliated entities
How are combination accounted for after the effective date?
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.
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?
The historical cost principle related to acquisitions.
Under the acquisition method, a business combination is deemed to be the acquisition of one entity by another. What is the accounting basis?
The fair value of the consideration given or the fair value of the consideration (net assets) received, whichever is more clearly determinable.
What is the acquisition date?
It is the date that the acquirer achieves control.
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?
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.
What is goodwill?
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.
Should the tax basis of an asset or liability be a factor in determining its FV?
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
When should contingent assets and liabilities be included in FV?
a contractual contingency exits or a noncontractual contingency is more likely than not to give rise to an asset or a liability
How are in-process and development results classified?
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
What is the purchase method of a business combination?
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.
Under the purchase method, how should the acquiring company allocate the cost of the acquired company?
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.
When should contingent assets and liabilities be included by an acquiring company?
- when the FV of the preacquisition contingency can be determined during the allocation period or
- 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.
In a purchase-method business combination, what 4 types of consideration may be given?
- assets
- debt (payable by acquirer to acquired)
- stock
- combination of the above
If the values assigned to the identifiable net assets exceed the cost of the acquiring company, how should such excess be allocated?
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.
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)
- subtract (P) equity in the book value of S from the cost of the investment
- 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
- 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
- any adjusted credit differential balance remaining after step 8 should be recognized as a deferred credit amortized.
In a fusion, how does the acquiring company record assets and liabilities on its books?
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.
In an affiliation, how does the acquiring company record assets and liabilities?
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.
