Chapter 1 Flashcards
Acquisition Method Journal Entry to liquidate acquired company
Distributes shares of acquiring company to stockholders of acquired company and liquidate remaining equity
Dr any remaining equity accounts (including RE and any gain)
Cr investment in acquiring company
Acquisition method
acquisition via net assets
acquired company accounting
Entry at the time of acquisition
Dr investment in acquiring company stock (at FV)
Dr Current liabilities transferred
Dr contra assets to assets transferred
Cr assets transferred
Cr gain (or Dr loss)
Possible treatment of stock issue costs in acquisition method (acquiring company side)
When accrued
Dr Stock Issued costs (temporary/ suspense account)
cr Cash (or AP)
On acquisition:
Cr Deferred stock issue costs (reduces APIC)
Acquisition of company via acquisition of net assets
acquiring company accounting
External subsidiary
Dr Assets at FV (including goodwill)
Cr current liabilities assumed (at FV)
Cr cash or common stock (and APIC)
Cr deferred stock costs (reduces APIC)
Book value/ accounting basis of acquiree is meaningless to acquirer
Acquisition method
recording acquisition costs
acquiring company records
Dr acquisition expense
Cr cash (or payable)
Differential
Difference at acquisition date between FV of consideration exchanged and book value of net identifiable assets
Expanded:
difference between:
- acquisition date fair value of consideration from acquirer AND acquisition date fair value of equity interest in acquired company previously held + fair value of noncontrolling interest
vs Acquisition date book value of identifiable assets acquired and liabilites assumed
Applying acquisition method
Acquirer side
Assets and liabilities recorded at acquisition date fair value
(if acquired via stock listed on a consolidated balance sheet)
excess of consideration over net asset fair value = goodwill
costs of the business combination charged to acquisition expense as incurred
Measuring goodwill: business combination via stock
FV of consideration given
+ FV of noncontrolling interest
= total FV of acquiree
- FV of net identifiable assets acquired
= goodwill
(goodwill potentially recognized proportionally to ownership percentage)
Measuring goodwill: business combination via assets
FV of consideration given
less FV of acquiree’s net identifiable assets
= goodwill
Goodwill
An asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized
separable = can be separated from the business
Acquisition date
usually the closing date for the exchange transaction but may vary based on circumstances
Acquisition method of accounting for business combinations
acquirer recognizes all assets acquired and liabilities assumed measured at acquisition-date fair value (and consideration exchanged fair value)
Any non-controlling interest also measured at acquisition date fair value
any previous ownership investment in the acquired company also measured at acquisition date fair value
Creation of subsidiary: parent side
- Transfer of assets, contra assets (and any liabilities) at book value (no FMV if not at arms length)
- no gain or loss recognized
(impairment loss to lower FMV may be recongized) - plug value to debt investment amount = net assets transferred
Creation of subsidiary: subsidiary side
- transfer of net assets at book value (debit assets, credit contra assets)
- stock at par value
- remaining value of net assets transferred to APIC
Statutory Merger
Business combination in which only one of the combining companies survives and the other loses its separate identity
acquired company’s assets and liabilities transferred to acquiring company. Acquired company dissolved/ liquidated
Acquiring company may transfer stock ad assets to bail out dissenting shareholders (tax free)
Securitization
the process in which certain types of assets are pooled so that they can be repackaged into interest bearing securities
receivables used as collateral for bonds issued to other entities
Leveraged buy outs
LBOs
when the acquiring company borrows funds to buy another company
Special purpose entity
SPE
a financing vehicle that is not a substantive operating entity, usually created for a single, specified purpose
Creation of a subsidiary
an identifiable segment of the parent company’s existing assets are transferred to the new subsidiary entity in exchange for equity ownership (stocks)
Spin-off
when the ownership of a newly created or existing subsidiary is distributed to the parent’s stockholders WITHOUT the stockholders surrendering any of their stock in the parent company
Split-off
when the subsidiary’s shares are exchanged with SOME of the parent company’s shareholders for their parent company shares
- reduces parent company’s outstanding shares
- essentially divides original shareholders between parent and subsidiary company
Business combination
When an acquirer obtains control of one or more businesses
generally by acquiring a majority of a company’s stock
can also be via contractual agreement
Merger
A business combination where the acquired business assets and liabilities are combined with those of the acquiring company. One company ceases to exist
Controlling ownership
A business combination in which the acquired company remains as a separate entity with the majority of its stock owned by the purchasing company (parent-subsidiary relationship, consolidated financial statements)
same treatment even if subsidiary is unincorporated as long as investor has control/ majority ownership
Statutory consoldation
business combination in which both combining companies are dissolved and their assets and liabilities are transferred to a newly created corporation
may be new in form only, substantially one of the combining companies reincorporated with a new name
Stock acquisition
Acquiring company treats stock acquired company as an investment
both continue operating as separate entities
acquiring company issues consolidated financial statements
Holding company
A new corporation created by 2+ companies where they exchange shares in the existing companies for shares of the newly creating holding company
holding company becomes parent entity- existing companies become subsidiaries
Tender offer
an offer made directly to the shareholders of a company being acquired to “tender” (exchange) their shares for securities or assets of the acquiring company
idea to gain sufficient shares to gain voting control
Business combination via acquisition of assets overview
generally statutory merger or consolidation
selling company: distributes assets/ securities received to stockholders and liquidates all else
acquiring company: accounts for assets, liabilities and consideration at FMV
Business combination via acquisition of stock overview
acquiring company: records investment of asset
selling company: records stock equity transaction (or just records change in ownership)
Valuing liabilities
Current liabilities FV = book value
Long-term liabilities value: based on present value calculations with current interest rates (if current rate is different from effective rates at issue date
Valuation of business entities
value of
- individual assets and liabilities (via appraisals)
- potential earnings (based on current earnings or present value of anticipated future cash flows
- valuation of consideration exchanged (if not traded on market the value of this may have to be estimated)
Noncontrolling interest
less than majority interest in another business
NOT usually business combination/ controlling situation
investor shows interest as investment assets with accounting varying by circumstance
noncontrolling interest = total shares not held by controlling shareholder
Primary Beneficiary
A company that has the ability to make decisions significantly affecting the results of another entity’s activities
or
is expected to receive a majority of the other entity’s profits or losses
general issues consolidated statements
based on contractual arrangements
Accounting for business combinations
currently ONLY acquisition method was allowed
previously could used pooling-of-interest or purchase methods
in 2001 pooling-of-interest method ended
in 2007 purchase method replaced with acquisition method
Pooling of interest method
no longer GAAP as of 2001
in a business combination the BOOK VALUES of the combining companies carry forward into the combined company - nothing revalued at fair value
Purchase method
Not GAAP (replaced with Acquisition method in 2007)
Treated business combination like any asset purchase
Assets and liabilities of acquired company recorded at FMV
difference between purchase price and net identifiable assets = goodwill
all direct costs of combination included in purchase price
Acquisition method
GAAP accounting for business combination as of 2007
value of acquired company = FMV of consideration given + FMV non controlling interest (not acquired)
Acquisition related costs are period expense. not capitalized
Accounting for goodwill after acquisition
Carried forward at original amount unless it is determined to be impaired
must have been assigned to an individual reporting units expected to benefit from the combination
Impairment of goodwill
Recorded as own line under income from continuing operations (unless the impairment is on goodwill attached to discontinued operations)
Goodwill must be tested for impairment annually
testing for impairment of goodwill
- test each reporting unit separately
- checking fair value of the whole reporting unit against carrying value of net assets (assets - liabilities) of the unit
- if fair value > carrying value = goodwill is unimpaired
- if fair value < carrying value = impairment recorded for the amount by which carrying value exceeds goodwill (but not beyond the total value of goodwill)
goodwill cannot be written back up after it has been written down
Bargain purchase
When fair value of consideration given in a business combination (FV + any equity already held + FV of the non-controlling interest) is less than the fair value of the acquiree’s net identifiable assets
Accounting for bargain purchase
- acquirer must ensure all acquisition date valuations are appropriate
- if they are, acquirer recognizes a gain at date of acquisition
gain recognized = net identified assets acquired - (sum of fair value given + fair value of equity held + fair value of noncontrolling interest)
must disclose the operating segment where the gain is reported and the factors that led to that gain
Acquisition when company acquired by stock is NOT liquidated
acquirer records investment in acquiree’s common stock at total value of consideration given in exchange
against may record deferred stock costs in holding account and then credit to lower APIC on acquisition
Financial reporting subsequent to a business combination
Depends on when in the fiscal year the combination occurred
income earned by the acquiree prior to combination is NOT report in the income of the combined enterprisze
remember to consider partial years for weighted average shares
Measurement period
If acquirer lacks sufficient information to properly ascertain acquisition date fair values
allowed to take a period of time to gain necessary information (not over a year)
can adjust the provisionally recorded assets bases on new information that clarifies the acquisition date value NOT changes in value post acquisition date
Contingent consideration
When consideration is exchanged by acquirer is contingent on future events (such that total consideration is not known at time of agreement)
Per ASC 805 - contingent consideration valued at FV on acquisition date and recorded as either liability or equity
Asset or liability FV remeasured each period and changes are recognized in income
equity contingent consideration is not remeasured
Acquiree contingencies
When contingencies relate to the acquiree
acquirer must recognize all contingencies that arise from contractual rights and obligations and other contingencies if it is probable they meet the definition of an asset or liability at the acquisition date. they are recorded at acquisition value fair value.
related disclosures required
Acquisition of in-process research and development
Recorded as assets at fair value even if there is no alternative use
classified as indefinite lives - not amortized until completed and brought to the market
tested for impairment
written off if abandoned
When acquirer held non-controlling interest in acquiree prior to the combination
must revalue the equity position to its fair value on the acquisition date and record a gain or loss
Treatment of bonds acquired in merger
Bond premium remains at face value
premium or discount adjusted to reflect fair value (and presumably amortized from there)
