Chapter 2 Flashcards
Non-business Asset Acquisition
1. Transaction Costs
Capitalized and assigned as part of the total cost of the bundle of acquired net assets.
Business Combination:
1. Transaction Costs
Expensed as incurred by the acquiring company.
Business Combination:
2. Contingent Consideration
Fair value of contingent consideration on acquisition date is included in the total cost of the acquired business.
Business Combination
3. Asset Measurement
Generally, all identifiable acquired net assets are recognized at acquisition date fair value.
Business Combination
4. Goodwill
Recognized as the difference between the fair value of 100% of the acquired business and the aggregate fair value of the acquired identifiable net assets.
Business Combination
5. Assembled workforce
Cannot be recognized as a separate intangible; it implicitly becomes part of recognized goodwill.
Business Combination
6. In-process research and development
Generally capitalized as an asset upon acquisition.
If more than one net asset is purchased for a single lump-sum payment (“basket purchase”) and the group of net assets does NOT qualify as a business,
the purchaser should proportionately allocate the lump-sum payment to the individual acquired net assets on the basis of the relative fair values of acquired net assets.
When the acquisition of net assets qualifies as the purchase of a “business,” a specialized set of accounting principles, called the _____ , applies.
This method applies only to business combinations, which are most commonly executed via two general types of transaction structure: net asset acquisitions, and stock acquisitions.
Acquisition Method.
An important feature of business combinations is that the acquiring company must apply Acquisition Method accounting, which requires that
the acquired net assets are recorded on the balance sheet at fair value, regardless of the amount paid by the acquirer. This means that the purchase price for the acquired net assets is NOT allocated to those net assets as in our previous example; instead, the net assets are recorded at their respective fair values with any difference between the fair value of those net assets and the purchase price paid for them recorded as Goodwill.
Goodwill is:
an intangible asset that is only that is only recorded in transactions that qualify as business combinations.
Transaction costs related to acquiring a business are
not capitalized in asset values; instead, when a business is acquired, all transaction costs are expensed in the period they are incurred.
Because the parent controls the subsidiary, there is a presumption under GAAP that the parent’s financial statements are more informative
if the subsidiary’s individual net assets are reported by the parent instead of the single-line Equity Investment account. This process of replacing the parent’s Equity Investment account with the subsidiary’s assets and liabilities is called “consolidation”.
The net result of consolidation is that the parent’s
Equity Investment account should be replaced by the subsidiary’s individual assets and liabilities and the consolidated Stockholder’s Equity should be the same as the parent’s Stockholder’s Equity.
After consolidation entries, the result is that the
consolidated SE equals the parent company’s pre-consolidation SE.
“Acquisition Accounting Premium” (AAP).
the difference between the fair value of an acquired subsidiary (purchase price) and the preacquisition recorded carrying value of the subsidiary’s net assets - whether this difference is positive or negative
The unidentifiable positive difference between the ___ is called Goodwill.
fair value given up for a business and the fair value of the acquired identifiable business net assets.
