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Slide 2-2
Accounting for Business Accounting for Business CombinationsCombinations
Advanced Accounting, Fourth Edition
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Slide 2-3
1. Describe the major changes in the accounting for business combinations passed by the FASB in December 2007, and the reasons for those changes.
2. Describe the two major changes in the accounting for business combinations approved by the FASB in 2001, as well as the reasons for those changes.
3. Discuss the goodwill impairment test described in SFAS No. 142 [ASC 350–20–35], including its frequency, the steps laid out in the new standard, and some of the likely implementation problems.
4. Explain how acquisition expenses are reported.
5. Describe the use of pro forma statements in business combinations.
6. Describe the valuation of assets, including goodwill, and liabilities acquired in a business combination accounted for by the acquisition method.
7. Explain how contingent consideration affects the valuation of assets acquired in a business combination accounted for by the acquisition method.
8. Describe a leveraged buyout.
9. Describe the disclosure requirements according to SFAS No. 141R [ASC 805–10–50], “Business Combinations,” related to each business combination that takes place during a given year.
10. Describe at least one of the differences between U.S. GAAP and IFRS related to the accounting for business combinations.
Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives
Slide 2-4
What’s New?
SFAS No. 141R [ASC 805], “Business Combinations,” would replace FASB Statement No. 141.
Continues to support the use of a single method.
Uses the term “acquisition method” rather than “purchase method.”
The acquired business should be recognized at its fair value on the acquisition date rather than its cost, regardless of whether the acquirer purchases all or only a controlling percentage.
LO 1 FASB’s two major changes for business LO 1 FASB’s two major changes for business combinations.combinations.
Historical Perspective on Business Historical Perspective on Business CombinationsCombinationsHistorical Perspective on Business Historical Perspective on Business CombinationsCombinations
Issued on December 2007
Slide 2-5
What’s New?
[ASC 810], “Noncontrolling Interests In ConsolidatedFinancial Statements,” will replace Accounting Research Bulletin (ARB) No. 51.
Establishes standards for the reporting of the
noncontrolling interest when the acquirer obtains
control without purchasing 100% of the acquiree.
Additional discussion in Chapter 3.
Historical Perspective on Business Historical Perspective on Business CombinationsCombinationsHistorical Perspective on Business Historical Perspective on Business CombinationsCombinations
Issued on December 2007
LO 1 FASB’s two major changes for business LO 1 FASB’s two major changes for business combinations.combinations.
Slide 2-6
HistoricallyHistorically, two methods permitted: purchase and pooling of interests.
LO 2 FASB’s two major changes of 2001.LO 2 FASB’s two major changes of 2001.
Historical Perspective on Business Historical Perspective on Business CombinationsCombinationsHistorical Perspective on Business Historical Perspective on Business CombinationsCombinations
Pronouncements in June 2001:
1. SFAS No. 141, “Business Combinations,” - pooling method is prohibited for business combinations initiated after June 30, 2001.
2. SFAS No. 142, “Goodwill and Other Intangible Assets,” - Goodwill acquired in a business combination after June 30, 2001, should not be amortized.
Slide 2-7
Goodwill Impairment Test
SFAS No. 142 [ASC 350-20-35] requires impairment be tested annually.
All goodwill must be assigned to a reporting unit.
Impairment should be tested in a two-step process.
LO 3 Goodwill impairment assessment.LO 3 Goodwill impairment assessment.
Perspective on Business CombinationsPerspective on Business CombinationsPerspective on Business CombinationsPerspective on Business Combinations
Step 1: If fair value is less than the carrying amount
of the net assets (including goodwill), then perform a
second step to determine possible impairment.
Step 2: Determine the fair value of the goodwill
(implied value of goodwill) and compare to carrying
amount.
Slide 2-8
Perspective Perspective on Business on Business CombinationsCombinations
Perspective Perspective on Business on Business CombinationsCombinations
LO 3LO 3
Slide 2-9
E2-10: On January 1, 2010, Porsche Company acquired the net assets of Saab Company for $450,000 cash. The fair value of Saab’s identifiable net assets was $375,000 on this date. Porsche Company decided to measure goodwill impairment using the present value of future cash flows to estimate the fair value of the reporting unit (Saab). The information for these subsequent years is as follows:
Present Value Carry Value Fair Valueof Future of SAAB's of SAAB's
Year Cash Flows Net Assets Net Assets
2011 400,000$ 330,000$ 340,000$
2012 400,000$ 320,000$ 345,000$
2013 350,000$ 300,000$ 325,000$
LO 3 Goodwill impairment assessment.LO 3 Goodwill impairment assessment.
Perspective on Business CombinationsPerspective on Business CombinationsPerspective on Business CombinationsPerspective on Business Combinations
*
* Not including goodwill
Slide 2-10
E2-10: On January 1, 2010, the acquisition date, what was the amount of goodwill acquired, if any?
LO 3 Goodwill impairment assessment.LO 3 Goodwill impairment assessment.
Perspective on Business CombinationsPerspective on Business CombinationsPerspective on Business CombinationsPerspective on Business Combinations
Acquisition price $450,000
Fair value of identifiable net assets 375,000
Recorded value of Goodwill $ 75,000
Slide 2-11 LO 3 Goodwill impairment assessment.LO 3 Goodwill impairment assessment.
Perspective on Business CombinationsPerspective on Business CombinationsPerspective on Business CombinationsPerspective on Business Combinations
Fair value of reporting unit $400,000
Carrying value of unit:
Carrying value of identifiable net assets
330,000
Step 1 - 2011
Carrying value of goodwill
75,000Total carrying value of unit
405,000Excess of carrying value over fair value $ 5,000
E2-10: Part A&B: For each year determine the amount of goodwill impairment, if any, and prepare the journal entry needed each year to record the goodwill impairment (if any).
Excess of carrying value over fair value means step 2 is required.
Slide 2-12 LO 3 Goodwill impairment assessment.LO 3 Goodwill impairment assessment.
Perspective on Business CombinationsPerspective on Business CombinationsPerspective on Business CombinationsPerspective on Business Combinations
Fair value of reporting unit $400,000
Fair value of identifiable net assets 340,000
Implied value of goodwill 60,000
Step 2 - 2011
Carrying value of goodwill 75,000
Impairment loss
$ 15,000Impairment loss 15,000
Goodwill
15,000
JournalEntry
E2-10: Part A&B (continued)
Slide 2-13 LO 3 Goodwill impairment assessment.LO 3 Goodwill impairment assessment.
Fair value of reporting unit $400,000
Carrying value of unit:
Carrying value of identifiable net assets
320,000
Step 1 - 2012
Carrying value of goodwill
60,000Total carrying value of unit
380,000Excess of fair value over carrying value $ 20,000
Excess of fair value over carrying value means step 2 is not required.
E2-10: Part A&B (continued)
* $75,000 (original goodwill) – $15,000 (prior year impairment)
*
Perspective on Business CombinationsPerspective on Business CombinationsPerspective on Business CombinationsPerspective on Business Combinations
Slide 2-14 LO 3 Goodwill impairment assessment.LO 3 Goodwill impairment assessment.
Fair value of reporting unit $350,000
Carrying value of unit:
Carrying value of identifiable net assets
300,000
Step 1 - 2013
Carrying value of goodwill
60,000Total carrying value of unit
360,000Excess of carrying value over fair value $ 10,000
E2-10: Part A&B (continued)
* $75,000 (original goodwill) – $15,000 (prior year impairment)
*
Excess of carrying value over fair value means step 2 is required.
Perspective on Business CombinationsPerspective on Business CombinationsPerspective on Business CombinationsPerspective on Business Combinations
Slide 2-15 LO 3 Goodwill impairment assessment.LO 3 Goodwill impairment assessment.
Fair value of reporting unit $350,000
Fair value of identifiable net assets 325,000
Implied value of goodwill 25,000
Step 2 - 2013
Carrying value of goodwill 60,000
Impairment loss
$ 35,000Impairment loss 35,000
Goodwill
35,000
JournalEntry
E2-10: Part A&B (continued)
Perspective on Business CombinationsPerspective on Business CombinationsPerspective on Business CombinationsPerspective on Business Combinations
Slide 2-16
The first step in determining goodwill impairment involves comparing the
a. implied value of a reporting unit to its carrying amount (goodwill excluded).
b. fair value of a reporting unit to its carrying amount (goodwill excluded).
c. implied value of a reporting unit to its carrying amount (goodwill included).
d. fair value of a reporting unit to its carrying amount (goodwill included).
Review QuestionReview Question
LO 3 Goodwill impairment assessment.LO 3 Goodwill impairment assessment.
Perspective on Business CombinationsPerspective on Business CombinationsPerspective on Business CombinationsPerspective on Business Combinations
Slide 2-17
Disclosures Mandated by FASB
SFAS No. 141R [ASC 805] requires:
1. Total amount of acquired goodwill and the amount
expected to be deductible for tax purposes.
2. Amount of goodwill by reporting segment (in
accordance with SFAS No. 131 [ASC 280],
“Disclosures about Segments of an Enterprise and
Related Information”), unless not practicable.
LO 3 Goodwill impairment assessment.LO 3 Goodwill impairment assessment.
Perspective on Business CombinationsPerspective on Business CombinationsPerspective on Business CombinationsPerspective on Business Combinations
Slide 2-18
Disclosures Mandated by FASB
SFAS No. 142 [ASC 350-20-45] specifies the presentation of goodwill (if impairment occurs):
a. Aggregate amount of goodwill should be a
separate line item in the balance sheet.
b. Aggregate amount of losses from goodwill
impairment should be a separate line item in the
operating section of the income statement.
LO 3 Goodwill impairment assessment.LO 3 Goodwill impairment assessment.
Perspective on Business CombinationsPerspective on Business CombinationsPerspective on Business CombinationsPerspective on Business Combinations
Slide 2-19
Disclosures Mandated by FASB
When an impairment loss occurs, SFAS No. 142 [ASC 350-20-50-2] mandates note disclosure:
1. Description of facts and circumstances leading to the
impairment.
2. Amount of impairment loss and method of determining
the fair value of the reporting unit.
3. Nature and amounts of any adjustments made to
impairment estimates from earlier periods, if
significant.
LO 3 Goodwill impairment assessment.LO 3 Goodwill impairment assessment.
Perspective on Business CombinationsPerspective on Business CombinationsPerspective on Business CombinationsPerspective on Business Combinations
Slide 2-20
Other Required Disclosures
SFAS No. 141R [ASC 805-10-50-2] states that disclosure should include:
The name and a description of the acquiree.
The acquisition date.
The percentage of voting equity instruments acquired.
The primary reasons for the business combination,
including a description of the factors that contributed
to the recognition of goodwill.
LO 3 Goodwill impairment assessment.LO 3 Goodwill impairment assessment.
Perspective on Business CombinationsPerspective on Business CombinationsPerspective on Business CombinationsPerspective on Business Combinations
Slide 2-21
Other Required Disclosures
SFAS No. 141R [para. 805-10-50-2] states that disclosure should include:
The fair value of the acquiree and the basis for measuring that value on the acquisition date.
The fair value of the consideration transferred.
The amounts recognized at the acquisition date for each major class of assets acquired and liabilities assumed.
The maximum potential amount of future payments the acquirer could be required to make.
LO 3 Goodwill impairment assessment.LO 3 Goodwill impairment assessment.
Perspective on Business CombinationsPerspective on Business CombinationsPerspective on Business CombinationsPerspective on Business Combinations
Slide 2-22
Other Intangible Assets
Acquired intangible assets other than goodwill:
Limited useful life
Should be amortized over its useful economic life.
Should be reviewed for impairment.
Indefinite life
Should not be amortized.
Should be tested annually (minimum) for impairment.
LO 3 Goodwill impairment assessment.LO 3 Goodwill impairment assessment.
Perspective on Business CombinationsPerspective on Business CombinationsPerspective on Business CombinationsPerspective on Business Combinations
Slide 2-23
Treatment of Acquisition Expenses
The Exposure Draft requires that:
both direct and indirect costs be expensed.
the cost of issuing securities also be excluded from
the consideration.
Security issuance costs are assigned to the valuation of the security, thus reducing the additional contributed capital for stock issues or adjusting the premium or discount on bond issues.
LO 4 Reporting acquisition expenses.LO 4 Reporting acquisition expenses.
Perspective on Business CombinationsPerspective on Business CombinationsPerspective on Business CombinationsPerspective on Business Combinations
Slide 2-24
Acquisition Costs—an Illustration
Suppose that SMC Company acquires 100% of the net assets of Bee Company (net book value of $100,000) by issuing shares of common stock with a fair value of $120,000. With respect to the merger, SMC incurred $1,500 of accounting and consulting costs and $3,000 of stock issue costs. SMC maintains a mergers department that incurred a monthly cost of $2,000. Prepare the journal entry to record these direct and indirect costs.
LO 4 Reporting acquisition expenses.LO 4 Reporting acquisition expenses.
Professional Fees Expense (Direct) 1,500Merger Department Expense (Indirect) 2,000Other Contributed Capital (Security Issue Costs) 3,000
Cash 6,500
Perspective on Business CombinationsPerspective on Business CombinationsPerspective on Business CombinationsPerspective on Business Combinations
Slide 2-25
Pro forma statements serve two functions in relation to business combinations:
1) to provide information in the planning stages of the combination and
2) to disclose relevant information subsequent to the combination.
Pro Forma Statements and Disclosure Pro Forma Statements and Disclosure RequirementRequirementPro Forma Statements and Disclosure Pro Forma Statements and Disclosure RequirementRequirement
LO 5 Use of pro forma statements.LO 5 Use of pro forma statements.
Slide 2-26
Pro Forma Statements and Disclosure Pro Forma Statements and Disclosure RequirementRequirementPro Forma Statements and Disclosure Pro Forma Statements and Disclosure RequirementRequirement
LO 5 Use of pro forma statements.LO 5 Use of pro forma statements.
P Company Pro Forma Balance SheetGiving Effect to Proposed Issue of Common Stock for All the Net Assets of S Company January 1, 2009
Illustration 2-1
Slide 2-27
If a material business combination occurred, notes
to financial statements should include on a pro
forma basis:
1. Results of operations for the current year as though
the companies had combined at the beginning of the
year.
2. Results of operations for the immediately preceding
period as though the companies had combined at
the beginning of that period if comparative financial
statements are presented.
Pro Forma Statements and Disclosure Pro Forma Statements and Disclosure RequirementRequirementPro Forma Statements and Disclosure Pro Forma Statements and Disclosure RequirementRequirement
LO 5 Use of pro forma statements.LO 5 Use of pro forma statements.
Slide 2-28
Four steps in the accounting for a business combination:
1. Identify the acquirer.
2. Determine the acquisition date.
3. Measure the fair value of the acquiree.
4. Measure and recognize the assets acquired and liabilities assumed.
Explanation and Illustration of Acquisition Explanation and Illustration of Acquisition AccountingAccountingExplanation and Illustration of Acquisition Explanation and Illustration of Acquisition AccountingAccounting
LO 6 Valuation of acquired assets and liabilities assumed.LO 6 Valuation of acquired assets and liabilities assumed.
Slide 2-29
Value of Assets and Liabilities Acquired
Identifiable assets acquired (including intangibles other than goodwill) and liabilities assumed should be recorded at their fair values at the date of acquisition.
Any excess of total cost over the fair value amounts assigned to identifiable assets and liabilities is recorded as goodwill.
SFAS No. 141R [ASC 805-20], states in-process R&D is measured and recorded at fair value as an asset on the acquisition date.
Explanation and Illustration of Acquisition Explanation and Illustration of Acquisition AccountingAccountingExplanation and Illustration of Acquisition Explanation and Illustration of Acquisition AccountingAccounting
LO 6 Valuation of acquired assets and liabilities assumed.LO 6 Valuation of acquired assets and liabilities assumed.
Slide 2-30
Explanation and Illustration of Acquisition Explanation and Illustration of Acquisition AccountingAccountingExplanation and Illustration of Acquisition Explanation and Illustration of Acquisition AccountingAccounting
LO 6 Valuation of acquired assets and liabilities assumed.LO 6 Valuation of acquired assets and liabilities assumed.
E2-1: Preston Company acquired the assets (except for cash) and assumed the liabilities of Saville Company. Immediately prior to the acquisition, Saville Company’s balance sheet was as follows:
Any Goodwill
?
Slide 2-31
Explanation and Illustration of Acquisition Explanation and Illustration of Acquisition AccountingAccountingExplanation and Illustration of Acquisition Explanation and Illustration of Acquisition AccountingAccounting
LO 6 Valuation of acquired assets and liabilities assumed.LO 6 Valuation of acquired assets and liabilities assumed.
E2-1: Preston Company acquired the assets (except for cash) and assumed the liabilities of Saville Company. Immediately prior to the acquisition, Saville Company’s balance sheet was as follows:
Fair value of assets, without
cash $1,824,000
Slide 2-32
Explanation and Illustration of Acquisition Explanation and Illustration of Acquisition AccountingAccountingExplanation and Illustration of Acquisition Explanation and Illustration of Acquisition AccountingAccounting
LO 6 Valuation of acquired assets and liabilities assumed.LO 6 Valuation of acquired assets and liabilities assumed.
Fair value of liabilities 594,000
Fair value of net assets 1,230,000
Fair value of assets, without cash $1,824,000
Price paid 1,560,000
Goodwill $ 330,000
E2-1: A. Prepare the journal entry on the books of Preston Co. to record the purchase of the assets and assumption of the liabilities of Saville Co. if the amount paid was $1,560,000 in cash.
Calculation of Goodwill
Slide 2-33
Explanation and Illustration of Acquisition Explanation and Illustration of Acquisition AccountingAccountingExplanation and Illustration of Acquisition Explanation and Illustration of Acquisition AccountingAccounting
LO 6 Valuation of acquired assets and liabilities assumed.LO 6 Valuation of acquired assets and liabilities assumed.
E2-1: A. Prepare the journal entry on the books of Preston Co. to record the purchase of the assets and assumption of the liabilities of Saville Co. if the amount paid was $1,560,000 in cash.
Inventory 396,000
Plant and equipment 540,000
Receivables 228,000
Goodwill 330,000
Liabilities 594,000
Land 660,000
Cash 1,560,000
Slide 2-34
Bargain Purchase
When the fair values of identifiable net assets (assets less liabilities) exceeds the total cost of the acquired company, the acquisition is a bargain.
In the past, FASB required that most long-lived assets be written down on a pro rata basis before recognizing a gain.
Current standards require:
fair values be reconsidered and adjustments made as needed.
any excess of acquisition-date fair value of net assets over the consideration paid is recognized in income.
Explanation and Illustration of Acquisition Explanation and Illustration of Acquisition AccountingAccountingExplanation and Illustration of Acquisition Explanation and Illustration of Acquisition AccountingAccounting
LO 6 Valuation of acquired assets and liabilities assumed.LO 6 Valuation of acquired assets and liabilities assumed.
Slide 2-35
Bargain Acquisition Illustration
When the price paid to acquire another firm is lower than the fair value of identifiable net assets (assets minus liabilities), the acquisition is referred to as a bargain.
Under SFAS No. 141R:
Any previously recorded goodwill on the seller’s books is
eliminated (and no new goodwill recorded).
An ordinary gain is recorded to the extent that the fair
value of net assets exceeds the consideration paid.
LO 6 Valuation of acquired assets and liabilities assumed.LO 6 Valuation of acquired assets and liabilities assumed.
Explanation and Illustration of Acquisition Explanation and Illustration of Acquisition AccountingAccountingExplanation and Illustration of Acquisition Explanation and Illustration of Acquisition AccountingAccounting
Slide 2-36
Explanation and Illustration of Acquisition Explanation and Illustration of Acquisition AccountingAccountingExplanation and Illustration of Acquisition Explanation and Illustration of Acquisition AccountingAccounting
LO 6 Valuation of acquired assets and liabilities assumed.LO 6 Valuation of acquired assets and liabilities assumed.
Calculation of Goodwill or Bargain Purchase
Fair value of liabilities 594,000
Fair value of net assets 1,230,000
Fair value of assets, without cash $1,824,000
Price paid 990,000
Bargain purchase $ 240,000
E2-1: B. Repeat the requirement in (A) assuming that the amount paid was $990,000.
Slide 2-37 LO 6 Valuation of acquired assets and liabilities assumed.LO 6 Valuation of acquired assets and liabilities assumed.
Explanation and Illustration of Acquisition Explanation and Illustration of Acquisition AccountingAccountingExplanation and Illustration of Acquisition Explanation and Illustration of Acquisition AccountingAccounting
E2-1: B. Repeat the requirement in (A) assuming that the amount paid was $990,000.
Inventory 396,000
Plant and equipment 540,000
Receivables 228,000
Gain on acquisition 240,000
Liabilities 594,000
Land 660,000
Cash 990,000
Slide 2-38
Purchase agreements may provide that the purchasing company will give additional consideration to the seller if certain future events or transactions occur.
The contingency may require
the payment of cash (or other assets) or
the issuance of additional securities.
SFAS No. 141R [ASC 450] requires that all contractual contingencies, as well as non-contractual liabilities for which it is more likely than not that an asset or liability exists, be measured and recognized at fair value on the acquisition date.
Contingent Consideration in an Contingent Consideration in an AcquisitionAcquisitionContingent Consideration in an Contingent Consideration in an AcquisitionAcquisition
LO 7 Contingent consideration and valuation of assets.LO 7 Contingent consideration and valuation of assets.
Slide 2-39
Illustration: P Company acquired all the net assets of S Company in exchange for P Company’s common stock. P Company also agreed to pay an additional $150,000 to the former stockholders of S Company if the average post-combination earnings over the next two years equaled or exceeded $800,000. Assume that the contingency is expected to be met, and goodwill was recorded in the original acquisition transaction. To complete the recording of the acquisition,P Company will make the following entry:
Contingent Consideration in an Contingent Consideration in an AcquisitionAcquisitionContingent Consideration in an Contingent Consideration in an AcquisitionAcquisition
LO 7 Contingent consideration and valuation of assets.LO 7 Contingent consideration and valuation of assets.
Goodwill 150,000
Liability for Contingent Consideration 150,000
Slide 2-40
Illustration: Assuming that the target is met, P Company will make the following entry:
Contingent Consideration in an Contingent Consideration in an AcquisitionAcquisitionContingent Consideration in an Contingent Consideration in an AcquisitionAcquisition
LO 7 Contingent consideration and valuation of assets.LO 7 Contingent consideration and valuation of assets.
Liability for Contingent Consideration 150,000
Cash 150,000
On the other hand, assume that the target is not met. The adjustment will flow through the income statementin the subsequent period, as follows:
Liability for Contingent Consideration 150,000
Income from Change in Estimate 150,000
Slide 2-41
Illustration: P Company acquired all the net assets of S Company in exchange for P Company’s common stock. P Company also agreed to issue additional shares of common stock to the former stockholders of S Company if the average post-combination earnings over the next two years equalled or exceeded $800,000. Assume that the contingency is expected to be met, and goodwill was recorded in the original acquisition transaction. Based on the information available at the acquisition date, the additional 10,000 shares (par value of $1 per share) expected to be issued are valued at $150,000. To complete the recording of the acquisition, P Company will make the following entry:
Contingent Consideration in an Contingent Consideration in an AcquisitionAcquisitionContingent Consideration in an Contingent Consideration in an AcquisitionAcquisition
LO 7 Contingent consideration and valuation of assets.LO 7 Contingent consideration and valuation of assets.
Goodwill 150,000
Paid-in-Capital for Contingent Consideration150,000
Slide 2-42
Illustration: Assuming that the target is met, but the stock price has increased from $15 per share to $18 per share at the time of issuance, P Company will not adjust the originalamount recorded as equity. Thus, P Company will make the following entry
Contingent Consideration in an Contingent Consideration in an AcquisitionAcquisitionContingent Consideration in an Contingent Consideration in an AcquisitionAcquisition
LO 7 Contingent consideration and valuation of assets.LO 7 Contingent consideration and valuation of assets.
Paid-in-Capital for Contingent Consideration 150,000
Common Stock ($1 par) 10,000
Paid-in-Capital in Excess of Par 140,000
Slide 2-43
Adjustments During the Measurement Period
SFAS No. 141R [ASC 805–10–25] defines the measurement period as the period after the initial acquisition date during which the acquirer may adjust the provisional amounts recognized at the acquisition date.
The measurement period ends as soon as the acquirer has the needed information about facts and circumstances, not to exceed one year from the acquisition date.
Contingent Consideration in an Contingent Consideration in an AcquisitionAcquisitionContingent Consideration in an Contingent Consideration in an AcquisitionAcquisition
LO 7 Contingent consideration and valuation of assets.LO 7 Contingent consideration and valuation of assets.
Slide 2-44
Contingency Based on Outcome of a Lawsuit
Consideration contingently issuable may depend on both
future earnings and
future security prices.
Contingent Consideration in an Contingent Consideration in an AcquisitionAcquisitionContingent Consideration in an Contingent Consideration in an AcquisitionAcquisition
LO 7 Contingent consideration and valuation of assets.LO 7 Contingent consideration and valuation of assets.
In such cases, an additional cost of the acquired company should be recorded for all additional consideration contingent on future events, based on the best available information and estimates at the acquisition date (as adjusted by the end of the measurement period).
Slide 2-45
Which of the following statements best describes the current authoritative position with regard to accounting for contingent consideration?
a. If contingent consideration depends on both future earnings and future security prices, an additional cost of the acquired company should be recorded only for the portion of consideration dependent on future earnings.
b. The measurement period for adjusting provisional amounts always ends at the year-end of the period in which the acquisition occurred.
c. A contingency based on security prices has no effect on the determination of cost to the acquiring company.
d. The purpose of the measurement period is to provide a reasonable time to obtain the information necessary to identify and measure the fair value of the acquiree’s assets and liabilities, as well as the fair value of the consideration transferred.
Review QuestionReview Question
Contingent Consideration in an Contingent Consideration in an AcquisitionAcquisitionContingent Consideration in an Contingent Consideration in an AcquisitionAcquisition
LO 7 Contingent consideration and valuation of assets.LO 7 Contingent consideration and valuation of assets.
Slide 2-46
A leveraged buyout (LBO) occurs when a group of
employees (generally a management group) and third-
party investors create a new company to acquire all
the outstanding common shares of their employer
company.
The management group contributes the stock they
hold to the new corporation and borrows sufficient
funds to acquire the remainder of the common stock.
The old corporation is merged into the new
corporation.
Leveraged buyout (LBO) transactions are to be viewed
as business combinations.
Leveraged BuyoutsLeveraged BuyoutsLeveraged BuyoutsLeveraged Buyouts
LO 8 Leverage buyouts.LO 8 Leverage buyouts.
Slide 2-47
The project on business combinations
Was the first of several joint projects undertaken by the FASB and the IASB.
Complete convergence has not yet occurred.
International standards currently allow a choice between
writing all assets, including goodwill, up fully (100% including the noncontrolling share), as required now under U.S. GAAP, or
continuing to write goodwill up only to the extent of the parent’s percentage of ownership.
IFRS Versus U.S. GAAPIFRS Versus U.S. GAAPIFRS Versus U.S. GAAPIFRS Versus U.S. GAAP
LO 10 Differences between U.S. GAAP and IFRS .LO 10 Differences between U.S. GAAP and IFRS .
Slide 2-48
Other differences and similarities:
IFRS Versus U.S. GAAPIFRS Versus U.S. GAAPIFRS Versus U.S. GAAPIFRS Versus U.S. GAAP
LO 10 Differences between U.S. GAAP and IFRS .LO 10 Differences between U.S. GAAP and IFRS .
Slide 2-49
Other differences and similarities:
IFRS Versus U.S. GAAPIFRS Versus U.S. GAAPIFRS Versus U.S. GAAPIFRS Versus U.S. GAAP
LO 10 Differences between U.S. GAAP and IFRS .LO 10 Differences between U.S. GAAP and IFRS .
Slide 2-50
Other differences and similarities:
IFRS Versus U.S. GAAPIFRS Versus U.S. GAAPIFRS Versus U.S. GAAPIFRS Versus U.S. GAAP
LO 10 Differences between U.S. GAAP and IFRS .LO 10 Differences between U.S. GAAP and IFRS .
Slide 2-51
Other differences and similarities:
IFRS Versus U.S. GAAPIFRS Versus U.S. GAAPIFRS Versus U.S. GAAPIFRS Versus U.S. GAAP
LO 10 Differences between U.S. GAAP and IFRS .LO 10 Differences between U.S. GAAP and IFRS .
Slide 2-52
Other differences and similarities:
IFRS Versus U.S. GAAPIFRS Versus U.S. GAAPIFRS Versus U.S. GAAPIFRS Versus U.S. GAAP
LO 10 Differences between U.S. GAAP and IFRS .LO 10 Differences between U.S. GAAP and IFRS .
Slide 2-53
To the extent that the seller accepts common stock rather than cash or debt in exchange for the assets, the sellers may not have to pay taxes until a later date when the shares accepted are sold.
When the acquirer has inherited the book values of the assets for tax purposes but has recorded market values for reporting purposes, a deferred tax liability needs to be recognized.
Deferred Taxes in Business Deferred Taxes in Business CombinationsCombinationsDeferred Taxes in Business Deferred Taxes in Business CombinationsCombinations
APPENDIX A
Slide 2-54
Illustration: Taxaware Company has net assets totaling $700,000 (market value), including fixed assets with a market value of $200,000 and a book value of $140,000. The book values of all other assets approximate market values. Taxaware Company is acquired by Blinko in a combination that qualifies as a nontaxable exchange for Taxaware shareholders. Blinko issues common stock valued at $800,000 (par value $150,000). First, if we disregard tax effects, the entry to record the acquisition would be:
Deferred Taxes in Business Deferred Taxes in Business CombinationsCombinationsDeferred Taxes in Business Deferred Taxes in Business CombinationsCombinations
Assets 700,000Goodwill 100,000
Common Stock 150,000
Additional Contributed Capital 650,000
Slide 2-55
Illustration: Now consider tax effects, assuming a 30% tax rate. First, the excess of market value over book value of the fixed assets creates a deferred tax liability because the excess depreciation is not tax deductible. Thus, the deferred tax liability associated with the fixed assets equals 30% $60,000 (the difference between market and book values), or $18,000. The inclusion of deferred taxes would increase goodwill by $18,000 to a total of $118,000. The entry to include goodwill is as follow:
Deferred Taxes in Business Deferred Taxes in Business CombinationsCombinationsDeferred Taxes in Business Deferred Taxes in Business CombinationsCombinations
Assets 700,000Goodwill 118,000Deferred Tax Liability
18,000Common Stock
150,000Additional Contributed Capital
650,000
Slide 2-56
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