Set 7 FR 26 Business Combinations - Date of Acqusition

Question 1

What are the two types of purchases?

Answer 1

Purchase of net assets

Purchase of shares

Question 2

In which scenario is consolidation required?

Answer 2

Purchase of shares

Question 3

Define parent

Answer 3

The entity that controls the net assets of another entity through voting control of its shares

Question 4

Define subsidiary

Answer 4

A separate legal entity controlled by another entity

Question 5

Entry for net assets purchase on books of acquirer

Answer 5

DR all assets at FV
CR all liabilities at FV
CR consideration given up

Any difference between FV and consideration paid is recorded as goodwill

Question 6

Initial entry for purchase of shares

Answer 6

DR investment in subsidiary

CR consideration given up

Question 7

5 steps to determine goodwill and NCI

Answer 7

1. identify acquirer
2. determine date of acquisition
3. determine acquisition price
4. analyze acquisition differential
5. allocate NCI

Question 8

Step 1 - identifying acquirer - who is this? what factors are looked at?

Answer 8

whichever entity obtains control over the other.

• which of the original companies shareholders hold most voting shares? Over 50% determines control. Include potential rights from convertible shares, warrants etc.
• an entity with more board members on combined company may have control
• composition of senior management. if all from one entity, may indicate control.
• which entity initiated the combination?

Question 9

Step 2 - identifying date of purchase. when is this usually? exceptions?

Answer 9

legal date of closing of merger. unless voting rights of parent become effective before closing.

Question 10

Step 3 - determining purchase price. what does this equal? what about transaction costs and share issuance costs?

Answer 10

FV of consideration paid. transaction costs expensed as incurred. share issuance costs netted against share capital.

Question 11

Step 4 - Acquisition Differential - what is this made up of?

Answer 11

Excess of purchase price over BV.
Made up of FV differential (FV - BV)
Deferred income taxes on FV differentials
Goodwill

Question 12

Step 4 - Acquisition Differential - identifable assets/liabilities of investee - recognition

Answer 12

All are recognized - even those that don’t exist on the books of the investee as long as they are IDENTIFIABLE

Question 13

Step 4 - Acquisition Differential - existing goodwill on investee’s books

Answer 13

FV of nil on books of investor

Question 14

Step 4 - Acquisition Differential - remaining goodwill - what if there is a bargain purchase?

Answer 14

Recheck all liabilities to make sure valued correctly and accounted for. If actual BP exists, there is no goodwill. Recognize as gain in income.

Question 15

Step 5 - allocating NCI. When is this done?

Answer 15

if less 100% ownership of subsidiary

Question 16

2 choices for determining NCI.

Answer 16

1. identifiable net assets approach

2. fair value enterprise approach

Question 17

Elimination entries

Answer 17

• set up goodwill - DR
• set up NCI - CR to equity
• Bump up or down assets/liabilities to FV
• eliminate subsidiary’s common shares
• eliminate subsidary’s RE
• eliminate investment

Question 18

Direct calculation of consolidated balance sheet

Answer 18

Parent’s BV + Subsidary’s BV +/ FV differential +/ i/co balances. DIT not included in calcs.

Question 19

ASPE differences

Answer 19

choice of method - acquisition / cost / equity