Module 18: Business Combinations and Consolidations

Question 1

Goodwill

Answer 1

Per ASC Topic 810, in an acquisition of another company, goodwill is recorded as the difference between the cost of the acquired company plus the fair value of the non controlling interests plus the acquisition date fair value of previously held interests in the acquiree less the fair value of its net identifiable assets. When the fair value of the net identifiable assets exceeds the consideration paid, a bargain purchase option occurs and is treated as a gain in the current period.

Question 2

Combined Financial Statements

Answer 2

Combined Financial Statements is the term used to describe financial statements prepared for companies that are owned by the same parent company or individual. These statements are often prepared when several subsidiaries of a common parent are not consolidated. Combined financial statements are prepared by combining all of the separate companies’ financial statement classifications. Inter-company transactions, balances, and profit (losses) should be eliminated in the same way as in consolidated statements.

Question 3

Private companies may choose to not apply VIE accounting if all the following apply:

Answer 3

Both the lessee (private company) and lessor are under common control; the lessee (private company) has a lease arrangement with the lessor; the majority activities between the lessee and lessor are related to leasing activities; and guarantees/ collateral provided by the lessee for the lessor are less in value than the asset leased by the lessee.

Question 4

Acquisition Date

Answer 4

The acquisition date is the date on which the acquirer obtains control over the acquiree. The acquisition date is important for two reasons:

(1) the acquisition date is the date when the identifiable assets and the liabilities of the acquiree are measured at fair value, and
(2) the acquirer includes net income of the acquiree only after the date of acquisition.

Question 5

Acquisition Related Costs

Answer 5

For a business accessions are normally treated as expense in the period in which the cost are incurred or the services are received. Cost may include finder’s fees, advisory, legal, accounting, valuation, consulting and other professional fees.

Question 6

Intercompany Fixed Asset Transactions

Answer 6

Unrealized profit on fixed assets arise through intracompany sales of fixed assets above undepreciated cost. From a consolidated viewpoint, the transaction represents the internal transfer of assets and no gain (loss) should be recognized.