FAR Module 18 Flashcards
What are the correct current terms that are used to describe the parties in a business combination
Acquiror
acquiree
What are the outdated terms used to describe the parties in a business combination
Parent
subsidiary
This is the party that is being acquired
Acquiree
This is the party that obtains control of another party
Acquirer
This is the date on which the acquirer obtains control of the acquiree
The acquisition date
This is a transaction or event in which the acquirer obtains control of one or more businesses
A business combination
When is a situation considered a business combination? (2)
1) When there is greater than 50% interest and
2) the interest control is permanent
you consolidate using fair value
T/F
After a business combination there is only one set of books
FALSE
each party still keeps their own books, you just consolidate the two on a spreadsheet for the financial statements
This term is defined as a controlling financial interest by ownership of a majority of the voting shares of stock. The general rule is that ownership either directly or indirectly by one company of more than 50% of the outstanding voting shares of another company constitutes control
Control
When is the acquisition method used
If an acquisition qualifies as a business combination then the acquisition method is used
What are the four steps in applying the acquisition method
1) Identify the acquirer
2) Determine the acquisition date
3) Recognize and measure identifiable assets acquired, liabilities assumed, and noncontrolling interest in the acquiree
4) Recognize and measure Goodwill or recognize a gain from a bargain purchase
Why is it important to distinguish between the acquirer and the acquiree
Because only the acquiree’s assets are revalued to fair value at the acquisition date
How do you calculate Goodwill or gain from a bargain purchase
Fair value of consideration transferred \+ FV of previously held equity interest in acquiree \+ FV of noncontrolling interest - FV of net identifiable assets = Goodwill or gain from Bargain purchase
This is defined as an asset representing the future economic benefits that arise from other assets in a business combination that are not individually identified and separately recognized
Goodwill
T/F
In certain instances control over an entity may be achieved through arrangements that do not involve ownership or voting interests
TRUE
What are some ways in which control is achieved other than through ownership of voting interests
Contractual, ownership, or other interests that change with changes in an entities net asset value
Another example is when a primary beneficiary guarantees the losses of a variable interest entity, so they have a controlling interest
What is the entry to record an investment in another business
Debit Investment in XXX
Credit Common Stock
Credit APIC
What is the first worksheet elimination entry in an consolidation?
First eliminate the acquiree’s equity account, eliminate the investment account on the acquirers books, and establish the differential:
Debit capital stock Debit APIC Debit retained earnings Debit differential (PLUG) Credit investment in stock
What is the second worksheet elimination entry in a consolidation?
Eliminate the differential account and record asset write-ups to fair value, new identifiable intangible assets, and goodwill. Basically, debit and credit accounts that increased when converting from BV to FV. If it doesn’t balance, debit Goodwill.
Debit (all asset write-ups)
Debit (new assets)
Debit Goodwill (plug)
Credit Differential
What is the original entry and elimination entry relating to inter-company sales of merchandise
Original for Purchaser:
Debit A/R
Credit Sales
Original for Seller:
Debit CoS
Credit A/P
Elimination Entries:
Debit A/P
Credit A/R
Debit Sales
Credit CoS
What do you do to eliminate fixed asset transactions that are intercompany
Eliminate any gains or losses
bring back accumulated depreciation that you wrote off
What do you do to eliminate any intercompany bond transactions
Eliminate gains and losses
It is generally presumed that an entity is a variable interest entity subject to consolidation if it’s equity is classified how…
This used to be measured quantitatively as a percentage but is now measured qualitatively.
T/F
under IFRS you can value the noncontrolling interest at either fair value (which includes Goodwill) or the proportionate share of the value of the identifiable net assets of the acquiree (which is exclusive of Goodwill)
TRUE
US GAAP requires it to be recorded at FV
Under IFRS an acquirer may exclude an acquiree if what three conditions are met?
1) it is wholly or partially owned and its owners do not object to non-consolidation
2) it does not have any debt or equity instruments publicly traded
3) it’s parent prepares consolidated financial statements that comply with IFRS
Why is the acquisition date important (2)
1) This is the date when the identifiable assets and the liabilities of the acquiree are measured at fair value
2) Also the acquirer recognizes net income of the acquiree only after the date of acquisition
T/F
the acquisition date is when the consideration is transferred
FALSE
the acquisition date is when control has been acquired. This might fall on the same date as the transferring of consideration, but not necessarily all the time
How should direct costs of an acquisition be treated
As an expense of the period in a business combination accounted for by the acquisition method in determining the combined corporations net income for the current period.
How should general expenses related to an acquisition be treated in a business combination
They should be deducted as incurred in determining the combined corporations net income for the current period.
When an acquirer-acquiree relationship exists consolidated financial statements are prepared in recognition of the accounting concept of
Economic entity
T/F
in combined Financial statements, the statements include only the adjusted retained earnings of the acquirer. The acquiree’s retained earnings are not included
TRUE
