Chapter 2: Business Combinations

Question 1

Business

Answer 1

an integrated set of activities and assets that can be conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors.

Question 2

Business Combination

Answer 2

occurs when one company, the acquirer, obtains control of one or more business.

Question 3

What are three reason for business combinations?

Answer 3

1) defend a competitive position.
2) diversify into a new market and/or geographic region.
3) access to new customers, products or services, expertise or capabilities.

Question 4

Control

Answer 4

the power to direct the relevant activities of the investee.

Question 5

Control can be obtained by:

Answer 5

1) buying the assets of an operating business.
2) buying enough shares to control the company and its assets.
3) gaining control through a contractual arrangement.

Question 6

Control can be present with less than 50% of voting shares if other factors indicate control such as:

Answer 6

• irrevocable agreement with other shareholders to convey voting rights to parent.
• if there are contractual agreements which give control.
• if shareholders do not actively cooperate when they exercise their vote.

Question 7

Five Steps Process of the Acquisition Method

Answer 7

1) identify the acquirer.
2) determine the acquisition date.
3) calculate the fair value of the purchase consideration transferred.
4) recognize and measure the identifiable assets and liabilities and NCI net of goodwill.
5) recognize the measure goodwill (or negative goodwill).

Question 8

Acquirer

Answer 8

the corporation whose shareholders control the combined economic entity. The acquirer obtains control on closing date.

Question 9

Disclosures in Notes Include:

Answer 9

• nature of relationship of associate and % ownership
• FV of investment
• summary of financial info of associate
• significant restrictions or ability to transfer funds
• contingent liabilities