MODULE 5B

Question 1

Financial statements prepared as-if a potential transaction has already occurred

Answer 1

Pro Forma Statements

Question 2

Functions of pro forma statements

Answer 2

-To provide information in the planning stages of the combination (i.e., determine whether the combination is a good idea)
-To disclose relevant information subsequent to the combination (i.e., what if the combination had happened earlier than it did)

Question 3

For material business combinations, disclose
(Pro Forma Disclosures)

Answer 3

-Current year results, as-if companies merged at beginning of period
-Results from immediately preceding period, as-if companies merged at beginning of prior period

Question 4

The process of recording the acquired entity at fair value

Answer 4

Acquisition (or purchase) accounting

Question 5

For purchases of entire entity or controlling interest

Answer 5

-Acquired business should be recognized at fair value (rather than cost) as of acquisition date
-If acquired in stages, must revise accounting to fair value method on date controlling interest reached

Question 6

Steps to Aquisition Accounting

Answer 6

1. Identify the acquirer
2. Determine the acquisition date
3. Measure the fair value of the acquired entity
4. Measure and recognize the assets acquired and the liabilities assumed at fair value.

Question 7

Measurement Period

Answer 7

the acquirer may adjust the fair values recorded on the acquisition date

Question 8

Measurement period ends at earlier of

Answer 8

-Date when additional information needed to finalize fair values is obtained or determined to be unattainable
-One year from acquisition date

Question 9

Measurement period helps acquirer identify or obtain more information about

Answer 9

-Identifiable assets, liabilities, and non-controlling interests
-Consideration transferred (other than cash)
-Previous equity interests (if combination achieved in stages)
-Amount of goodwill or gain from bargain purchase

Question 10

Why Measurement Periods?

Answer 10

Fair values are difficult to determine in general and even more so for someone else’s company even when good due diligence is done

Question 11

Goodwill must be tested for impairment annually

Answer 11

Qualitative assessment – is it more likely than not that impairment exists (declining economic conditions, increased competition, etc.)?
Quantitative assessment – whether, and to what extent, impairment exists

Question 12

Goodwill must be assigned to reporting unit

Answer 12

Goodwill Impairment

Question 13

Purchase price does not exceed sum of identifiable assets and liabilities
Acquirer gets bargain – pays less
than acquiree is worth

Answer 13

Bargain Purchase

Question 14

-FASB required proportional write down of asset fair values
-Essentially assumed fair values were wrong

Answer 14

Bargain Purchases in the past

Question 15

Current FASB requirements if acquisition accounting indicates bargain

Search for unidentified assets and liabilities

Review procedures used to measure fair values

If bargain still exists after above steps
Remove any previously recorded
goodwill on the books of the
acquirer

Do not record any new goodwill

 Record a gain on business 
 combination in current year 
 earnings

  Amount is fair value of net 
  identifiable assets less purchase 
  price

Answer 15

Accounting for Bargain Purchase

Question 16

Contingency Requirments

Answer 16

-Payment of cash
- Transfer of assets
- Issuance of additional securities

Question 17

Acquisition Expenses

Answer 17

• Direct
  -Indirect Expenses
  -Security Issuance Costs

Question 18

costs of maintaining a mergers and acquisitions department and any expenses allocated to the merger that would have still existed in its absence

Answer 18

Indirect Expenses

Question 19

directly related to acquisition (e.g., legal, accounting, valuation, etc.)

Answer 19

Direct Expenses

Question 20

included in the securities valuation; reduce contributed capital

Answer 20

Security Issuance Costs