BUSINESS COMBINATIONS

Question 1

When provisional amounts for a business combination are reported in financial statements, what must be disclosed about those amounts?

Answer 1

1. Identification of the items (assets, liabilities, equity or consideration) for which accounting is not complete;2. The reasons why the accounting is not finalized;3. The nature and amounts of any measurement period adjustments made to the provisional amounts during the reporting period.

Question 2

Identify the most significant general information about a business combination that must be disclosed.

Answer 2

1. Name and description of the acquired business;2. The acquisition date;3. The percentage voting interest acquired (if relevant);4. How the acquirer gained control of the acquired business;5. The primary reason for the business combination.

Question 3

What information must be disclosed about Goodwill recognized in a business combination?

Answer 3

1. A quantitative description of the factors that make up the Goodwill;2. The amount of Goodwill expected to be deductible for tax purposes;3. The amount of Goodwill assigned to each reportable segment;4. During the measurement period, a reconciliation of the beginning and ending balance in Goodwill.

Question 4

In which periods does an acquirer have to disclose information about a business combination in its financial statements?

Answer 4

In the reporting period in which the combination occurs and in each reporting period that includes the measurement period.

Question 5

Describe the nature of contingent consideration in a business combination.

Answer 5

Contingent consideration is either:;1. An obligation of the acquirer to transfer additional assets or equity to the former owners of the acquired business if future conditions are met; or 2. A right of the acquirer to a return of previously transferred consideration if future conditions are met.;Contingent consideration is recognized at fair value as of the acquisition date as part of the cost of the acquiree.

Question 6

Under what circumstance is fair value not used to measure assets and liabilities transferred in a business combination?

Answer 6

When the assets and liabilities are transferred to the acquiree but remain under the control of the acquirer because the acquirer obtained control of the acquiree (which holds the transferred asset or liability). In such a case, the asset or liability should be transferred at carrying value, not fair value.

Question 7

How is the exchange of share-based employee awards treated in a business combination?

Answer 7

If the exchange is required:;1. The portion of the value of the replacement awards that relates to precombination services is part of the cost of the acquired business;2. the portion of the value of the replacement awards that relates to post-combination services is expensed.;If the exchange is voluntary, the value of the replacement awards is expensed.

Question 8

List the elements that make up the cost of an acquired business.

Answer 8

Fair value of:;1. Assets transferred;2. Liabilities incurred;3. Equity interest issued.;4. Contingent consideration obligations of the acquirer;5. Required share-based employee awards for precombination services.

Question 9

What values are compared to determine if there is Goodwill or a bargain purchase in a business combination?

Answer 9

The fair value of the total investment in the acquiree (including the acquirer’s consideration transferred and the noncontrolling interest in the acquiree), and the fair value of the net assets (assets - liabilities) of the acquiree.

Question 10

Under what conditions will Goodwill be recognized in a business combination?

Answer 10

Goodwill is recognized when the fair value of the total investment in an acquiree (both the investment of the acquirer and that of any noncontrolling interest) is greater than the fair value of the acquiree’s net assets.

Question 11

Under what conditions will a bargain purchase be recognized in a business combination?

Answer 11

A bargain purchase is recognized when the fair value of the total investment in an acquiree (both the investment of the acquirer and that of any noncontrolling interest) is less than the fair value of the acquiree’s net assets.

Question 12

Under IFRS, goodwill is allocated to _________?

Answer 12

Cash generating units.

Question 13

Under IFRS, are you required to disclose assumptions related to acquired contingences?

Answer 13

Yes, you are required to disclose these assumptions.

Question 14

Contingent assets are recognized in a business combination under U.S. GAAP or IFRS?

Answer 14

These assets are recognized under U.S. GAAP.

Question 15

List the five elements (or steps) involved in applying the acquisition method of accounting to a business combination.

Answer 15

1. Identify the acquirer;2. Determine the acquisition date and measurement period;3. Determine the cost of the acquisition;4. Recognize and measure the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquired entity;5. Recognize and measure Goodwill or a gain from a bargain purchase.

Question 16

Define “measurement period”.

Answer 16

The period after the acquisition date during which the acquirer may adjust any provisional amounts recorded at the acquisition date. It provides the acquirer reasonable time to obtain information needed to identify and measure accounts and amounts that existed as of the acquisition date. It ends when the acquirer obtains that information or determines that no additional information is available, but in no case should it exceed one year.

Question 17

What is the method that is required to be used in accounting for most business combinations?

Answer 17

Acquisition method.

Question 18

When a business combination is effected through an exchange of equity interest, what are five factors to consider that indicate which entity is the acquirer?

Answer 18

Which combining entity/entities:;1. Issued new equity interest;2. Owners have the larger portion of the voting rights;3. Owners can select or remove a voting majority of the governing body;4. Former management dominates that of the combined entity;5. Paid a premium over the precombination fair value of the equity interest of the other combining entities.

Question 19

For the purposes of applying the acquisition method to a business combination, what may constitute a “business?”

Answer 19

A business may be:;1. A group of assets or a group of net assets (that constitute a business);2. A separate legal entity (that is a business).

Question 20

Define “acquisition date”.

Answer 20

The date on which the acquirer obtains control of another business (i.e., group of assets that constitute a business or a separate legal entity). It usually is also the “closing date” for the combination.

Question 21

List the business combinations for which the acquisition method of accounting does not apply.

Answer 21

1. Joint ventures;2. Entities under common control;3. Between not-for-profit organizations;4. For-profit entity acquired by a not-for-profit organization;5. Acquisition of assets that do not constitute a business.

Question 22

Describe how income is determined for subsequent years of a combination.

Answer 22

Acquirer’s and Acquiree’s operating results enter into determination of consolidated net income.

Question 23

List the three legal forms of business combinations.

Answer 23

1. Merger;2. Consolidation; 3. Acquisition.

Question 24

Describe how income is determined at the date of a combination.

Answer 24

Only acquirer’s operating results up to the date of combination enter into determination of “consolidated” net income.

Question 25

Define/describe a “legal consolidation”.

Answer 25

A new entity is formed to combine (consolidate) two or more preexisting entities.

Question 26

List the primary mean of accomplishing a business combination.

Answer 26

The acquisition by one entity of the common stock of another entity to gain control of the investee.

Question 27

Define “parent company” as it relates to business combinations.

Answer 27

Designation of the Investor in a business combination.

Question 28

Identify the legal forms of business combination that will not require preparation of consolidated financial statements.

Answer 28

A legal merger or a legal consolidation will not require preparation of consolidated financial statements. Only a legal acquisition will require preparation of consolidated financial statements.

Question 29

Describe how income is determined at the end of the year for a combination.

Answer 29

Acquirer’s operating results for the year plus acquiree’s operating results after the combination enter into the determination of consolidated income for the year of combination.

Question 30

What may be acquired in a business combination?

Answer 30

A business entity either acquires a group of net assets that constitutes a business or acquires equity interest in an entity.

Question 31

What is the designation of the investee in a business combination?

Answer 31

Subsidiary company.

Question 32

Define/describe a “legal acquisition”.

Answer 32

One entity acquires controlling interest of another entity, but both continue to exist and operate as separate legal entities.

Question 33

Define/describe a “legal merger”.

Answer 33

One entity acquires either a group of assets constituting a business or a controlling interest of another entity and “collapses” the acquired assets/entity into the acquiring company.

Question 34

What assets or liabilities recognized in a business combination require “specialized” post-combination accounting treatments?

Answer 34

1. Reacquired rights asset;2. Assets and liabilities arising from contingencies;3. Indemnification assets;4. Contingent consideration as asset or liability (or equity).

Question 35

How should assets and liabilities arising from contingencies be measured and reported subsequent to a business combination?

Answer 35

1. If the contingency is a liability, measure and report at the higher of:; 1. Its acquisition-date fair value; or; 2. the amount that would be recognized if the requirements of FASB #5 were followed.;2. If the contingency is an asset, measure and report at the lower of:; 1. Its acquisition-date fair value; or; 2. The best estimate of its future settlement amount.

Question 36

How should contingent consideration be measured and reported subsequent to a business combination?

Answer 36

Contingent consideration should be measured and reported at fair value until settled.;1. If changes are of fair value as it existed at acquisition date, the change is an adjustment to the cost of the investment;2. If changes result from events after the acquisition date: (1) Changes in contingent assets or liabilities are recognized in earnings in the period of change; (2) Changes in contingent equity is an adjustment to equity accounts; not an earnings item.

Question 37

What are the differences between a legal merger or legal consolidation and a legal acquisition that determine whether or not consolidated statements will be required?

Answer 37

In a legal merger or legal consolidation only one entity exists after the combination; therefore, there is no need for a consolidated statement. In a legal acquisition two separate legal entities survive, but under common control. Their financial statements must be consolidated.

Question 38

What is a majority-owned subsidiary that is not consolidated called and how is it accounted for?

Answer 38

A majority-owned subsidiary that is not consolidated is an “unconsolidated subsidiary” and would be accounted for as an investment asset by the parent, using either fair value or the equity method of accounting.

Question 39

When are consolidated statements required?

Answer 39

Under two major circumstances:; 1. When a firm is the primary beneficiary of a variable-interest entity (VIE), the VIE must be consolidated with the primary beneficiary; 2. When a firm has a majority owned (>50% of voting stock) subsidiary, the subsidiary must be consolidated with its parent unless the parent lacks actual effective operating or financial control.

Question 40

What is the only legal form of business combination requiring consolidated statements?

Answer 40

Business Combination resulting from a legal acquisition.