far 3-6 Acquisition Method Flashcards
Acquisition Method:
In a business combination accounted for as an acquisition, the subsidiary may be acquired for __________________, etc.
cash, stock, debt securities
Journal entry to record the acquisition for cash:
Dr Investment in subsidiary
Cr Cash
Journal entry to record the acquisition for parent common stock (USE FV AT DATE TRANSACTION CLOSES), not announcement date:
Dr Investment in subsidiary
Cr Common stock (parent at par)
Cr A.P.I.C. (parent / FV - par)
Application of the Acquisition Method:
The acquisition method has two distinct accounting characteristics:
(1) 100% of the net assets acquired (regardless of percentage acquired) are recorded at FAIR VALUE with any unallocated balance remaining creating goodwill.
(2) when the companies are consolidated, the subsidiary’s entire equity (including its common stock, A.P,I.C., and retained earnings) is eliminated (not reported).
Pass key
The parent’s basis is the acquisition price. The easy to remember formula is:
Fair Value = Acquisition price = Investment in subsidiary
Application of the Acquisition Method
CAR IN BIG
CAR 1. Common Stock, A.P.I.C. and Retained Earnings of Subsidiary are Eliminated (SUB’S OLD BOOKS)
I 2. Investment in Subsidiary is eliminated (PARENT’S BOOKS)
N 3. Noncontrolling Interest (NCI) is Created (If not 100% owned)
B 4. Balance Sheet of Subsidiary is Adjusted to Fair Value (100% assets & liabilities)
I 5. Identifiable Intangible Assets of the Subsidiary are Recorded at their Fair Value
G 6. Goodwill (or Gain) is Required
Consolidating Workpaper Eliminating Journal Entry [CAR IN BIG]
C Dr Common stock - subsidiary
A Dr A.P.I.C. - subsidiary
R Dr Retained earnings - subsidiary
I Cr Investment in subsidiary
N Cr Noncontrolling interest
B Dr Balance sheet adjustments to FV
I Dr Identifiable Intangible assets to FV
G Dr Goodwill
B. “CAR” - Subsidiary Equity Acquired [CAR in big]
1. CAR Formula
Assets - liabilities = Equity
Assets - Liabilities = Net book value
Assets - Liabilities = CAR
- Acquisition Date Calculation (of CAR):
The determination of the difference between book value and fair value is computed as of the _________________.
acquisition date
When the subsidiary’s financial statements are provided for a subsequent period, it is necessary to reverse the activity (income and dividends) in the subsidiary’s retained earnings in order to squeeze back into the book value (Assets - Liabilities = CAR) at the acquisition date (which is beginning RE).
C. Investment in Subsidiary [car In big]:
- Original cost is measured by the ____________ (on the date the acquisition is completed) of the consideration given (Debit: investment in sub).
fair value
C. Investment in Subsidiary [car In big]:
- Business combination costs/expenses in an acquisition are treated as follows:
NOTHING IS CAPITALIZED TO “INVESTMENT IN SUB.”
a. Direct out-of-pocket costs such as a finder’s fee or a legal fee are expensed (Debit: EXPENSE).
b. Stock registration and issuance costs such as SEC filing fees are a direct reduction of the value of the stock issued (Debit: ADDITIONAL PAID-IN CAPITAL account of the parent).
c. Indirect costs are expensed as incurred (Debit: EXPENSE).
d. Bond issue costs are capitalized and amortized (Debit: BOND ISSUE COSTS).
D. Noncontrolling Interest (NCI) [car iN big]
= Ｒｅｐｏｒｔ ｉｎ ｃｏｎｓｏｌｉｄａｔｅｄ ｅｑｕｉｔｙ
Noncontrolling interest must be reported at __________ in the equity section of the consolidated balance sheet, separately from the parent’s equity.
fair value
This will include the noncontrolling interest’s share of any goodｗill (even though there is no cost basis).
Ｅｖｅｒｙｔｈｉｎｇ, ｅｖｅｎ ＮＣＩ ｉｓ ａｔ １００％ ＦＶ
Noncontrolling Interest (NCI)： Balance Sheet
The consolidated balance sheet will include 100% of the subsidiary’s _______ and ________ (not the sub’s equity/CAR). The noncontrolling interest’s share of the subsidiary’s _________ should be presented on the balance sheet as part of stockholders’ equity, separately from the equity of the parent company.
assets, liabilities, net assets
Noncontrolling Interest (NCI)：
Balance Sheet
(1) Acquisition Date Computation
Fair value of subsidiary
x Noncontrolling interest %
——————————————
Noncontrolling interest ——> In consolidated equity
Noncontrolling Interest (NCI)：
Balance Sheet
(2) Noncontrolling Interest after the Acquisition Date:
After the acquisition date, the noncontrolling interest reported on the
consolidated balance sheet is accounted for using the equity method. Formula?
Beginning noncontrolling interest B
+ NCI share of subsidiary net income A
– Nel share of subsidiary dividends S
——————————————————-
Ending noncontrolllng interest E
Noncontrolling Interest (NCI)： Income Statement:
The consolidated income statement will include 100% of the _________ revenues and expenses (AFTER THE DATE OF ACQUISITION).
subsidiary’s
The consolidated income statement should show, separately, consolidated net income, net income attributable to the noncontrolling interest, and net income attributable to the
parent.
Noncontrolling Interest (NCI)： Income Statement
(1) Computation of Net Income Attributable to the Noncontrolling Interest
Subsidiary’s income
< Subsidiary’s expenses>
—————————————-
Subsidiary’s net income
X Noncontrolling interest %
—————————————–
Net income attributable to the noncontrolling interest ———> GOES TO NCI - Retained Earnings (in general ledger)
[car in BIG]
E. Balance Sheet Adjustment to Fair Value, Identifiable Intangible Asset Adjustment to Fair Value, and Goodwill (gain)
- Fair Value of Subsidiary Reconciliation to Book Value of Subsidiary Net Assets:
Any difference between the FV of the subsidiary and the BV acquired will require an adjustment to the following three areas:
B a. Balance Sheet Adjustment of the subsidiary’s records from book value to FV.
I b. Identifiable Intangible Assets related to the acquisition of the subsidiary are recorded at FV.
G c. Goodwill is recognized for any excess of the FV of the subsidiary over the FV of the subsidiary’s net assets. If the FV of the subsidiary is less
than the FV of the subsidiary’s net assets, a gain is recognized.
Pass key （ＩＭＰＯＲＴＡＮＴ）
CARRY AS ASSET =
In Process Research and Development
－Recognize as an intangible asset separately from goodwill at the acquisition date (need valuation).
－Ｄｏ not immediately write off.
－In process research and development meets the definition of an “asset”－it has probable future
economic benefit.
－－－－－－－－－－－－－－－－－－－－－－－－－－－
－ＥＸＰＥＮＳＥ ＂ＣＯＮＴＩＮＵＩＮＧ＂ Ｒ＆Ｄ ＴＯ ＣＯＭＰＬＥＴＥ ＰＲＯＪＥＣＴ
－ＬＡＴＥＲ：
１． ＰＲＯＪＥＣＴ ＳＵＣＣＥＳＳ－＞ＡＭＯＲＴＩＺＥ ＩＰ Ｒ＆Ｄ
２． ＰＲＯＪＥＣＴ ＦＡＩＬＵＲＥ－＞ＩＭＰＡＩＲ／ＷＲＩＴＥ ＯＦＦ ＩＰ Ｒ＆Ｄ
２．Determining Acquisitions with Goodwill （ｃａｒ ｉｎ BIG）
Ｂ ａ．Step 1/Balance Sheet Adjusted to Fair Value
Ｉ ｂ．Step 2/ldentifiable Intangible Assets to Fair Value
(1) Finite life
AＭＯＲＴＩＺＥ over the remaining life. Subject to the two-step impairment test.
(2) Indefinite life
Do not amortize. Subject to the one-step ＩＭＰＡＩＲＭＥＮＴ ＴＥＳＴ．
Ｇ c. Step 3/Goodwill
－ｎｏｔ ａｍｏｒｔｉｚｅｄ
－ｔｅｓｔ ｆｏｒ ｉｍｐａｉｒｍｅｎｔ
- Determining Acquisition with Gain
a. Step 1-Balance Sheet Adjusted to Fair Value
b．Step 2-ldentifiable Intangible Assets to Fair Value
c. Step 3-Gain
Ｐａｓｓ ｋｅｙ
It is important to note that even if the parent acquired ＿＿＿＿ １００％ of the subsidiary, the adjustment of the subsidiary’s assets to ＿＿＿ (purchase price） will always be the FV (100%).
less than，
FV
G. Consolidated Statement of Cash Flows
1. Period of Acquisition
Ｔｈｅ following steps are necessary：
a. The net cash spent or received in the acquisition must be reported in the investing section of the statement of cash flows.
b. The assets and liabilities of the subsidiary on the acquisition date must be added to the parent’s assets and liabilities at the beginning of the year in order to
determine the change in cash due to operating. investing. and financing activities during the period.
G. Consolidated Statement of Cash Flows
2. Subsequent Periods
a. When reconciling net income to net cash provided by operating activities, total consolidated net income should be used.
b. The financing section should report dividends paid by the subsidiary to noncontrolling shareholders.Dividends paid by the subsidiary to the parent company should not be reported.
c. The investing section may report the acquisition of additional ｓｕbsidiary shares by the parent if the acquisition was an open market purchase.
H. Step Acquisition-Consolidation and Deconsolidation
ａ． Non-control －＞ Control (step transition)
Ａｃｃｏｕｎｔｉｎｇ Ｔｒｅａｔｍｅｎｔ：
－Remeasure previously held equity interests to fair value．（ＰＲＥＶＩＯＵＳ Ｃ／Ｓ ＡＤＪ． ＴＯ ＦＶ）
－The income statements will reflect this adjustment． （ＲＥＣＯＧＮＩＺＥ ＩＮ Ｉ／Ｓ）
ｂ． Control －＞ “More” or “less” control
－Equity transaction (no gaｉn or loss recognized on the income statement－additional paid-in capital adjusted) （ＴＲＥＡＴ ＬＩＫＥ ＴＲＥＡＳＵＲＹ ＳＴＯＣＫ ＴＲＡＮＳＡＣＴＩＯＮＳ）
ｃ．Control －＞ Non-control
－Recognize the gain or loss of the sale of the stock． （ＳＡＬＥ=G/L–>I/S)
－Remeasure the remaining non-consolidating interest to fair value．(ADJ. REMAINING C/S TO FV)
－Recognize the adjustment to fair value on the income statement．(RECOGNIZE IN I/S)
Pass key
If the parent acquires the remaining 40% from the noncontrolling Interest shareholders,
it is an equity transaction (not an acquisition). No gain or loss is recognized on the Income statement. Additional paid-in capital Is adjusted.
Under Acquisition Method Disclosures, in a business combination achieved in stages, the following:
a. The acquisition date fair value of the equity interest in the acquiree held before the acquisition date.
b. The amount of any gain or loss recognized as a result of remeasuring the equity interest held before the business combination to fair value.
c. The valuation techniques used to measure the acquisition-date fair value of the equity interest in the acquiree held by the acquirer immediately before the
business combination and the inputs used to measure fair value.
Under Acquisition Method Disclosures, if the acquirer is a public entity, the following:
a. The amounts of revenue and earnings of the acquiree since the acquisition date included in the consolidated income statement for the reporting period.
b. The revenue and earnings of the combined entity for the current reporting period as though the acquisition date for all business combinations that occurred during
the year had been as of the beginning of the annual reporting period (supplemental pro forma information).
c. If comparative financial statements are presented, the revenue and earnings of the combined entity for the comparable prior reporting period as though the
acquisition date for all business combinations that occurred during the current year had occurred as of the beginning of the comparable prior reporting period.
Consolidation Disclosures:
Consolidated financial statements should disclose the consolidation policy that is being followed.
- Parent companies with one or more less-than-wholly-owned subsidiaries should disclose the following each reporting period:
a. Separately, on the face of the consolidated financial statements:
(1) The amounts of consolidated net income and consolidated comprehensive income.
(2) The amounts attributable to the parent and noncontrolling interest.
b. In the notes or on the face of the consolidated income statement, amounts attributable to the parent for income from continuing operations. discontinued operations, and extraordinary items.
c. In the consolidated statement of changes in equity or the notes, a reconciliation at the beginning and end of the period of the carrying amount of total equity, equity attributable to the parent, and equity attributable to the noncontrolling interest. The reconciliation should separately disclose net income, transactions with owners, and each component of other comprehensive income.
d. In the notes, a schedule that shows the effects of any changes in a parent’s ownership interest in a subsidiary on the equity attributable to the parent.
Pass key
Acquired (purchased) goodwill is not amortized;
it is subject to the impairment test.
In Acquisition Method, the investment is valued at the __________ of the consideration given or the __________ of the consideration received, whichever is the more clearly evident.
fair value, fair value
In Acquisition Method, he accounting for an acquisition begins at ___________________.
the date of acquisition
In Acquisition Method, 100% of the net assets acquired (regardless of percentage acquired) are recorded at ____________ .
FAIR VALUE
Acquisition Method:
when the companies are consolidated, the subsidiary’s entire equity (including its common stock, A.P,I.C., and retained earnings) is _______________ (not reported).
eliminated
If there is an excess of the fair value of the subsidiary (acquisition cost plus any noncontrolling interest) over the fair value of the subsidiary’s net assets, then the remaining/excess is debited to create _________.
Goodwill
If there is a deficiency in the acquisition cost compared to the subsidiary’s fair value, then the shortage/negative amount is recorded as a ________.
gain
C. Investment in Subsidiary [car In big]:
Direct out-of-pocket costs such as a finder’s fee or a legal fee are ____________.
expensed (Debit: EXPENSE).
C. Investment in Subsidiary [car In big]:
Stock registration and issuance costs such as SEC filing fees are _________________________
a direct reduction of the value of the stock issued (Debit: ADDITIONAL PAID-IN CAPITAL account of the parent).
C. Investment in Subsidiary [car In big]:
Indirect costs are __________________________
expensed as incurred (Debit: EXPENSE).
C. Investment in Subsidiary [car In big]:
Bond issue costs are ______________________________
capitalized and amortized (Debit: BOND ISSUE COSTS).
Noncontrolling Interest (NCI)：
Balance Sheet
(3) Allocation of Subsidiary Net Losses
Subsidiary ___________ are allocated to noncontrolling interest even if the allocation exceeds the equity attributable to the noncontrolling interest
(negative carrying balance).
net losses
FV of Subsidiary (Noncontrolling Interest at FV)
- FV of Subsidiary Net Assets =
Goodwill
Fair value of Subsidiary Net Assets - BV of Subsidiary Net Assets =
Asset FV difference
Gearty Co. acquires 60% of Foxy, Inc. for $69,000,000. The fair value of Foxy Inc. is $115,000,000 ($115,000,000x 60% = $69,000,000) Noncontroll1ng interest is $46,000,000 ($115,000,000)x 40% = $46,000,000)
Fair value of Foxy, Inc. (includes goodwill) $115,000,000
Fair value of Foxy, Inc. identifiable net assets $100,000,000
Book value of Foxy, Inc. net assets $ 80,000,000
Goodwill : $15.000,000
Increase to the FV of assets : $20,000,000
[car in BIG]
E. Balance Sheet Adjustment to Fair Value, Identifiable Intangible Asset Adjustment to Fair Value, and Goodwill (gain)
- Fair Value of Subsidiary Reconciliation to Book Value of Subsidiary Net Assets
Under the acquisition method, what is the fair value of the subsidiary?
the acquisition cost + any noncontrolling interest at fair value
On the acquisition date, the FV of the subsidiary must be compared to the respective assets and liabilities of the subsidiary.
Company J acquired all of the outstanding common stock of Company K in exchange for cash. The acquisition price exceeds the fair value of net assets acquired. How should Company J determine the amounts to be reported for the plant and equipment and long-term debt acquired from Company K?
Both are fair value.
When the acquisition price exceeds the fair value of net assets acquired, assets and liabilities should be
presented at fair value.
