Business Combinations & Consolidations - 18 Flashcards
A normal business consists of what?
Inputs & Processes (Outputs are not required)
The Acquiree is who?
The entity that is being acquired
The Acquirer is who?
The entity doing the acquiring
What are the four steps in applying the acquisition process/
- Identify the acquier
- Determine the acquisition date
- Recognize & measure identifiable assets, liabilities assumed, and noncontrolling (minority) interest in the acquiree
- Recognize & measure goodwill, or recognize a gain from a bargain purchase
When are consolidated financial statements required?
When more than 50% of the oustanding voting stock will be taken over
After the date of impairment, when is Goodwill tested?
Annually
Can you have intercompany accounts open with a consolidation?
No. Because the idea of a consolidation is one set of books. These accounts must be eliminated
What types of Intercompany transactions are there?
- Intercompany Sales Transactions
- Transactions in fixed assets
- Intercompany debt/equity trnasactions
- Intercompany Inventory transactions
How do Intercompany Bond Transactions work?
Acquiree issues bonds to the public.
Acquiree JE:
Cash 120,000
Bonds Payable 100,000
Premium 20,000
Acquiror JE (if 50% of Acquiree Bonds are bought):
Invest Bonds 50,000
Cash 50,000
When Consolidating (Acquiror must eliminate 50% of Debt - Eliminating Entry)
Bond Payable 50,000
Premium 10,000
Investment 50,000
Gain 10,000
What is the worksheet used for?
To consolidate the Acquiror and Acquiree’s books
What is done with a gain from a bargain purchase?
It is recognized as income immediately
Is Goodwill listed with intangible assets?
No
Noncontrolling interest is measured by using what prices on what date for share not held by the acquiror?
Active Market Prices on the Acquisition date
The the fair values of the acquirer’s investment and the non-controlling interest have the be the same on a per-share basis?
No
Acquisition related costs are treated as what kind of expense?
A period expense although costs of registering debt and equity securities are not included as they are recognized in accordance with GAAP (by Debiting APIC & Crediting cash for the amount of the expense)
Can an acquiror & acquiree consolidate of the control is temporary?
No
What is a Variable Interest Entity (also known as Special Purpose Entity)?
An instance where control is achieved through arrangements that do not involve ownership or voting interests
Who is the Primary Beneficiary of a Variable Interest Entity? And does the Primary Beneficiary have to consolidate?
Any entity that has financial controlling interest.
Yes
What two conditions must exist for an entity to have controlling financial interest in a variable interest entity?
- The entity has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance
- The entity has the obligation to absorb the losses of the VIE and recognize the gains
Is a qualitative or quantitative approach used to determine if an entity has power to control a variable interest entity?
Qualitative
If the acquiror issues stock to purchase the acquiree, what is the JE?
Investment DR
C/S CR
APIC CR
What is the first step in calculating Goodwill?
Acquisition Cost \+ FV of previously held shares \+ FV of non-controlling interest - Book Value of Acquiree = Differential (Includes Increase/Decrease in Acquiree's assets + Goodwill)
What is the second step in calculating Goodwill?
Compute the Fair Value of the Net Identifiable Assets
Book Value
+ Asset Write-Ups
+ Newly Identified Intangibles
= Fair Value of Net Identifiable Assets
What is the third step in calculating Goodwill?
Compute Goodwill
Acquisition Cost \+ FV of previously held shares \+ FV of non-controlling interest - FV of Net Identifiable Assets = Goodwill or (Gain on Bargain Purchase)
What is the Differential Account and what makes up this account?
A temporary account to record the difference between the cost of the investment in the Acquiree on the Acquiror’s books and the book value of the Acquiror’s interest in the Acquiree
The difference between the Book Value and FMV of Assets on the Acquiree’s books and Goodwill
What is the first step to complete the Consolidated Trial Balance Worksheet?
Eliminating the acquiree’s equity account, the acquiror’s investment account, and establish the differential account
Ex:
C/S (Acquiree) DR
APIC (Acquiree) DR
RE (Acquiree) DR
Differential DR
Investment (Acquiror) CR
What is the second step to complete the Consolidated Trial Balance Worksheet?
Eliminate the differential account and record asset write-ups to fair value & Goodwill
Ex:
Inventories DR
Equipment DR
Patents DR
Goodwill DR
Accum Depr CR
Differential CR
How would you find the Ending Balance of the non-controlling interest?
Beg Bal NCI
+ NCI Share of Acquiree’s NI
- NCI Share of Dividends Paid
= End Bal NCI
Under IFRS, what are the two ways to report non-controlling interest?
- Fair Value (like US GAAP)
2. Proportionate share of the value of the identifiable net assets of the acquiree
Under IFRS, are acquiror’s required to consolidate?
Not if three conditions are met:
- Owners do not object to non-consolidation
- No debt or equity instruments publicly traded
- The acquirer prepares consolidated financial statements that comply with IFRS
How do you find Ending R/Es in a consolidation?
Beg R/E (Acquirer)
+ N/I (Acquirer)
- Div Paid (Acquirer)
= End R/E (Acquirer
Because R/E of the Acquiree was consolidated using the investment account
Under IFRS, when is Goodwill recognized?
When it is acquired by purchase
What should all assets and liabilities of the acquiree be recorded at when consolidating?
FMV
Are there balances on intercompany accounts when consolidating to the acquirer’s balance sheet?
No. The purpose of consolidating is to put both companies on the same books there for no intercompany transactions would be reported in the FS
Note: The Acquiree still shows the intercompany amounts on their balance sheet, but the amounts are not shown on the Acquirer’s Balance sheet as they are removed when consolidating
When preparing consolidated FS, what is the objective regarding intercompany transactions?
To create the FS with the idea that the intercompany transactions never existed
