Purchase, Expansion, or Sale of Business

Question 1

How to change operating asset mix:

Answer 1

• acquire new assets
• enter into strategic alliances/joint ventures
• divest business units/assets

Question 2

Business strategy changes

Answer 2

• vertical/horizontal integration
• expanding current business
• focusing on “core” business

Question 3

Synergies

Answer 3

• when 2 or more business are worth more operating together than separately
• if looking to change operating mix consider synergies (between existing and new units)

Question 4

Issues in changing Asset mix

Answer 4

• specific assets to buy/sell (AR, inventories, PPE, Intangibles, income tax loss cf)
• liabilities to be transferred/assumed (sometimes they can be attached to the asset, such as mortgage, otherwise AP, loans, retirement obligations, contingencies)
• synergies gained (purchase) or lost (sale) (synergies arise when costs/resources can be shared across business units, gains synergies could be revenue enhancements, cost reductions, lower tax rate)
• form of transaction (what will be acquired/divested and what will consideration be)

Question 5

How to acquire new assets

Answer 5

• purchase assets
• purchase group of assets
• purchase net assets of existing corporations
• purchase shares of corporation
• strategic alliance
• joint arrangement

Question 6

Benefits of acquiring assets (group or net) VS shares

Answer 6

• acquirer can pick and choose which assets to purchase
• contingent/hidden liabilities are not unknowingly assumed
• tax basis = acquisition price

Question 7

Disadvantages of acquiring assets (group or net) VS shares

Answer 7

• selling company may not sell certain assets
• higher price may be paid when limited liabilities

Question 8

Recording purchase of single asset

Answer 8

record at acquisition cost

Question 9

recording purchase for group of assets

Answer 9

consideration allocated on a pro-rata basis
- also called ‘basket purchase’

Question 10

Recording purchase of net assets

Answer 10

• if net assets acquired meet the definition of a business under IFFRS3 then consideration is allocated to assets based on FV and the remainder of goodwill

Question 11

Control on purchase

Answer 11

• if control acquired on purchase: consolidate FS (ASPE choice not to)
• if control not acquired on purchase: record as significant influence investment

Question 12

Benefits of acquiring shares VS assets

Answer 12

• control can be had for cheaper (only have to purchase 51%)
• easier to sell shares than assets later
• acquirer can use tax loss cf

Question 13

Disadvantages of acquiring shares VS assets

Answer 13

• non-controlling shareholders still involved
• must purchase all assets and assume all liabilities (not wanted)

Question 14

Hostile takeover

Answer 14

• when target company does not want the company to be purchase and fights against it

Question 15

Forms of consideration (determine FV)

Answer 15

• cash
• preferred shares, options, warrants
• common shares
• note payable
• contingent consideration (payable only if future event occurs)

Question 16

Future implications of share consideration

Answer 16

• future cash flows that may not be wanted by payee or not given up by payer
• consider the tax implication between tax and account difference (CG or deemed dividend)

Question 17

Risk of consideration

Answer 17

• risk is associated with any consideration received other than cash because of risk of value fluctuation

Question 18

Control de jure

Answer 18

• control more than 50% and has ability to appoint directors

Question 19

Control de factor

Answer 19

• control without ownership greater than 50%