Determining the Cost of the Business Acquired

Question 1

What two ways may an acquirer obtain control of a business?

Answer 1

1. ) By transferring consideration to either another entity or its owners
   a. ) To obtain a group of assets that constitute a business
   b. ) To gain control of another entity
2. ) Without transferring consideration; i.e., by contract or through the lapse of minority veto rights of others

Question 2

What type of consideration can be used by the acquirer in a business combination?

Answer 2

1. ) Transferring cash, cash equivalents or other assets
2. ) Incurring liabilities
3. ) Issuing equity interests, including common and pref stock
4. ) Combination of transferring assets, incurring liabilities, or issuing equity

Question 3

At what measurement is consideration in a business combination measured at?

Answer 3

Fair Value

Question 4

What happens when assets or liabilities transferred by the acquirer in a business combination have a carrying value different than the FV?

Answer 4

The acquirer must adjust the assets and liabilities to FV and recognize a gain or loss, unless the acquirer retains control of the assets and liabilities

Question 5

List the elements that make up the cost of an acquired business.

Answer 5

Fair value of:

1. )Assets transferred;
2. )Liabilities incurred;
3. )Equity interest issued.;
4. )Contingent consideration obligations of the acquirer;
5. )Required share-based employee awards for precombination services

Question 6

How is the exchange of share-based employee awards treated in a business combination?

Answer 6

If the exchange is required:

1. )The portion of the value of the replacement awards that relates to precombination services is part of the cost of the acquired business;
2. )the portion of the value of the replacement awards that relates to post-combination services is expensed.

If the exchange is voluntary, the value of the replacement awards is expensed.

Question 7

Describe the nature of contingent consideration in a business combination

Answer 7

Contingent consideration is either:

1. )An obligation of the acquirer to transfer additional assets or equity to the former owners of the acquired business if future conditions are met; or
2. )A right of the acquirer to a return of previously transferred consideration if future conditions are met.

Contingent consideration is recognized at fair value as of the acquisition date as part of the cost of the acquiree.

Question 8

What are acquisition-related costs?

Answer 8

Costs the acquirer incurs to carry out the acquisition Ex.

1. )Finder’s fees
2. ) Advising, legal, accounting, valuation, and other professional and consulting fees
3. ) G&A costs, including the cost of an internal acquisitions department
4. ) Cost of registering and issuing debt and equity securities in connection with an acquisition

Question 9

How are acquisition related costs treated?

Answer 9

They are expenses in the period in which the costs are incurred and the services are received