Business Combinations and Consolidations Flashcards
How should a company account for a business acquisition?
A business acquisition is accounted for using fair values.
Net assets acquired are recorded at their fair value of the fair value of the stock issued, whichever is more objectively determinable.
What is the accounting treatment of stock that is issued as a finder’s fee?
The finder’s fee is treated as an expense of the period.
What is the accounting treatment for reporting income on combined income statements?
Combined financial statements are prepared by simply combining the subsidiaries’ financial statement classifications, with appropriate elimination of intercompany transactions, balances and profit (loss).
What are combined financial statements?
Combined financial statements are financial statements prepared for companies that are owned by the same parent company or other owner.
Does IFRS or SEC permit the use of push-down accounting?
IFRS does not permit the use of push-down accounting
The SEC requires the use of push-down accounting in certain circumstances.
Under the “full” equity method of accounting, how is the acquirer’s net income calculated.
Under the “full” equity method of accounting, the acquirer’s net income equals consolidated net income.
The calculation is the acquirer’s income from independent operations plus its share of reported acquiree income.
Under the acquisition method, what is the accounting treatment for acquired assets and liabilities?
Under the acquisition method, the acquired assets and liabilities are reported at their fair values.
What is the objective of computing combined cost of goods sold?
When computing combined cost of goods sold, the objective is to restate the accounts as if the intercompany transactions had not occurred.
What are the four considerations for private companies when determining to not apply VIE accounting?
Private companies may choose to not apply VIE accounting if ALL of the following apply:
- Both the lessee (private company) and lessor are under common control.
- The lessee (private company) has a lease arrangement with the lessor.
- The majority of activities between the lessee and lessor are related to leasing activities.
- Guarantees/collateral provided by the lessee for the lessor are less in value than the asset leased by the lessee.
How is goodwill calculated?
Goodwill is calculated as the excess of the acquisition cost of the fair value - NOT the acquisition cost - of the net identifiable assets.
The excess of the cost of the investment over the fair value of the net identifiable assets is allocated to goodwill.
In a business combination that is accounted for as a business acquisition, what is the accounting treatment for:
- The direct costs of acquisition.
- General expenses related to the acquistion.
Direct costs of acquisition and general expenses related to the acquisition are deducted in the combined corporation’s net income as an expense in the period in which the costs are incurred.
In an acquisition, what is the name for the difference between the cost of an acquired company and the fair value of its net identifiable assets (fair value of tangible and identifiable intagible assets less liabilities)?
Goodwill
What is a bargain purchase?
A bargain purchase occurs when the fair value of net identifiable assets exceeds the acquisition cost.
What is the accounting treatment for a bargain purchase?
The bargain purchase is recorded as a gain on the date of the acquisition.
What is the accounting treatment for the costs of registering securities and issuing common stock in a business combination accounted for as an acquisition?
Costs of registering securities and issuing common stock are netted against the proceeds and recorded in the additional paid-in capital account.
Acquisition costs are expensed in the year the costs are incurred or the services are received.
The acquisition is recorded at the fair value of consideration given.
