Key Rule #8- M&A Accounting

Question 1

What is an intangible asset?

Answer 1

can’t touch but can estimate value, can be monetized

Question 2

What is a purchase premium?

Answer 2

excess that acquirer pays over market value of the shares that have been acquired in an m&a

Question 3

How are financial statements combined in an M&A?

Answer 3

• if acquirer used cash, decrease cash balance
• if debt/ stock used, increase debt/ stock
• write down target’s CSE
• add target and acquirer’s revenue, opex, AR

Question 4

When does goodwill and OIA appear?

Answer 4

If acquirer pays a premium over the target’s CSE, which leaves the balance sheet unbalanced.

Question 5

How to avoid having goodwill and OIA?

Answer 5

Pay target’s CSE, aka what it’s worth. Then balance sheet will balance

Question 6

Does OIA’s value change with time?

Answer 6

Yes, is amortized

Question 7

Does OIA last forever?

Answer 7

No, has definite shelf life

Question 8

Examples of OIA

Answer 8

contracts, licenses etc.

Question 9

How do you tell what percentage of purchase premium OIA is?

Answer 9

OIA/ premium x 100%

Question 10

What is the goodwill formula?

Answer 10

purchase price - (fmv assets - fmv liabilities)

Question 11

What is the percentage of purchase premium of goodwill?

Answer 11

100% - OIA%

Question 12

What is a goodwill impairment?

Answer 12

When a company decides the value of its acquisition isn’t worth as much and writes down the goodwill.

Question 13

Does goodwill last forever?

Answer 13

Indefinite shelf life, no amortization

Question 14

What is goodwill?

Answer 14

Accounting term to reflect the portion of tie purchase price of an acquisition not directly attributable to its net assets
- intangible asset
- arises from an M&A situation

Question 15

Goodwill vs OIA- what are they?

Answer 15

Goodwill is anything not OIA
- catch all category for assets that can’t be monetized directly

Question 16

How do you calculate goodwill?

Answer 16

purchase price - (FMV A - FMV L)