Business Combinations Flashcards
What is a business combination?
is a transaction or an event where an acquirer obtains control of a business
What is control?
is currently defined as voting control and is essentially greater than 50% voting interest.
What are the three legal forms of business combinations?
Merger, Acquisition and Consolidation
What is a merger?
One preexisting entity acquires either a group of assets that constitute a business or controlling equity interest of another preexisting entity and “collapses” the acquired assets or entity into the acquiring entity
Note, that only one entity (A) survives. (B) (a group of assets or another entity) ceases to exist separate from (A).
A + B = A
What is a consolidation?
A new entity consolidates the net assets or the equity interests of two (or more) preexisting entities
A + B = C
Waht is an acquisition?
One preexisting entity acquires controlling equity interest of another preexisting entity, but both continue to exist and operate as separate legal entities
A + B = A + B
What happens in a Merger or Consolidation?
The acquirer records (picks-up) the group of assets or the assets and liabilities of the acquiree(s) onto its book. (The acquired entity/entities will no longer exist.)
Does not prepare consolidated financial statements
What happens in an acquistion?
The acquirer does not record (pick up) on its books the assets and liabilities of the acquiree.
The assets and liabilities of the acquiree stay on that entity’s (separate) books.
Since after an acquisition two entities exist, one controlled by the other, an acquisition usually does require preparation of Consolidated Financial Statements, those of the acquirer together with those of the acquiree(s).
How do you determine income at the date of combination?
Only the acquirer’s (acquiring firm’s) operating results (income/loss) up to the date of combination enter into determination of consolidated net income as of the date of the combination.
The acquiree’s (acquired firm’s) operating results (income/loss) up to the date of combination are part of what the acquirer purchases when it acquires the acquiree (i.e., makes its “Investment” in the acquiree), and are not part of consolidated net income as of the date of combination.
a. The acquiree’s operating results up to the date of the combination will be closed (or treated as closed) to its retained earnings.
b. The acquiree’s retained earnings as of the date of the combination is part of the equity “paid for” by the acquirer when it makes its investment.
c. The acquiree’s retained earnings as of the date of the combination will be part of the acquiree’s equity eliminated against the acquirer’s investment account in the consolidating process. (The consolidating process is covered as the next major topic.)
How do you determine income in a combination at the end of the year of combination?
The acquirer’s operating results (income/loss) for the entire year plus the acquiree’s operating results (income/loss) after the date of the combination enter into the determination of consolidated income for the year of combination.
How do you determine income in a combination in future years?
In periods subsequent to the period in which the combination occurs, both the acquirer’s and the acquiree’s operating results (income/loss) for the entire reporting period enter into the determination of consolidated net income or loss.
What method must be used to account for business combinations?
Acquisition Method
The acquisition method of accounting is not used for the following:
The formation of a joint venture.
The acquisition of an asset or group of assets that does not constitute a business.
A combination between entities under common control.
A combination between not-for-profit organizations.
The acquisition of a for-profit entity by a not-for-profit organization.
What steps are taken to record a business combination using the acquisition method?
- Identifying the acquiring entity (the acquirer).
- Determining the acquisition date and measurement period.
- Determining the cost of the acquisition.
- Recognizing and measuring the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquired business (the acquiree).
- Recognizing and measuring goodwill or a gain from a bargain purchase, if any.
Can a business be a group of assets/net assets or a separate legal entity?
Yes, both
How do you determine the acquirer?
the entity that distributes assets or incurs liabilities is generally the acquiring entity.
ownership by one entity (investor), directly or indirectly, of more than 50 percent of the outstanding voting shares of another entity (investee) establishes the investor as the acquiring entity
What is the acquisition date?
The acquisition date is the date on which the acquirer obtains control of the acquiree (i.e., business).
- It is normally the date on which the acquirer legally transfers consideration for, and acquires the assets and assumes the liabilities of, the acquiree.
- It is also called the “closing date” for the combination.
- The acquisition date can be before or after the closing date, if by agreement or otherwise the acquirer gains control of the acquiree at an earlier or later date.
What is the measurement period for a business combination?
The measurement period is the period after the acquisition date during which the acquirer may adjust any provisional amounts.
The measurement period provides the acquirer reasonable time (usually one year) to obtain information needed to identify and measure, as of the acquisition date, the following:
a. Identifiable assets, liabilities and noncontrolling interest in the acquiree;
b. Consideration transferred to obtain the acquiree;
c. Any precombination interest held in the acquiree;
d. Any goodwill or bargain purchase gain.
How do you determine the cost of an acquired business?
The consideration used to effect a business combination generally must be measured at fair value
If any assets or liabilities transferred by the acquirer have a carrying value before transfer that is different than fair value at acquisition, the assets or liabilities must be adjusted (remeasured) to fair value at the date of the combination and the related gains or losses recognized in current income by the acquirer.
An exception to the requirement that assets and liabilities to be transferred as consideration in a business combination be remeasured to fair value applies when the transferred assets or liabilities remain under the control of the acquirer.
1. In that case, the assets or liabilities are not adjusted to fair value, but are transferred at carrying value and no gain or loss is recognized.
What is contingent consideration?
An obligation of the acquirer to transfer additional assets or equity interest to the former owner(s) of the acquired business as part of the consideration if future events occur or conditions are met, or
A right of the acquirer to a return of previously transferred consideration if specific conditions are met.
How do you recognize contingent consideration?
Contingent consideration should be recognized on the acquisition date at fair value as part of the consideration transferred in exchange for the acquired business.
a. An obligation to pay contingent consideration should be recognized as either a liability or as equity (according to the provisions of ASC 480, “Distinguishing Liabilities from Equity”).
b. A right to the return of previously transferred consideration should be recognized as an asset.
How do you treat share based payment awards that are part of a business combination?
If the acquirer is obligated to exchange awards:
a. The portion (all or part) of the replacement awards (measured in accord with the provisions of ASC 718) that relates to precombination services based on conditions of the acquiree’s awards will be part of the consideration transferred in the business combination.
b. The portion (all or part) of the replacement awards (measured in accord with the provisions of ASC 718) that relates to post-combination services (the amount not allocated to precombination services) will be treated as compensation expense in post-combination financial statements.
If the acquirer elects to replace acquiree share-based awards, even though it is not obligated to do so, all of the value of the awards (measured in accord with the provisions of ASC 718) will be treated as compensation expense in post-combination financial statements.
Can an entity acquire another entity without exchaning consideration?
Yes:
An entity (acquiree) reacquires a sufficient number of its own outstanding shares from selected investors so that another investor (acquirer) obtains control with its existing ownership.
Minority veto rights lapse that previously kept a majority owner (acquirer) from controlling the investee (acquiree).
Two entities agree to combine by contract alone; neither entity owns controlling equity interest in the other entity.
What items are included in an acquisition cost?
- Finder’s fees;
- Advising, legal, accounting, valuation (appraisal) and other professional and consulting fees;
- General administrative costs, including the cost of an internal acquisitions department;
- Cost of registering and issuing debt and equity securities in connection with an acquisition.
