Acquisition Method

Under the IFRS partial goodwill method, goodwill is calculated as follows:

Acquisition cost - Fair value of net assets acquired.

Bale Co. incurred $100,000 of acquisition costs related to the purchase of the net assets of Dixon Co. The $100,000 should be: Expensed as incurred in the current period.

Acquisition costs associated with a business transaction must be expensed as incurred in the current period.

Fair value of Subsidiary =

Acquisition price + noncontrolling interest at fair value

Subsidiary's net income * Noncontrolling interest %

Net income attributable to the noncontrolling interest. (Goes to NCI retained earning in general ledger)

A 70%-owned subsidiary company declares and pays a cash dividend. What effect does the dividend have on the retained earnings and non controlling interest balances in the parent company's consolidated balance sheet?

No effect on retained earnings and a decrease in noncontrolling interest (NCI). The parent's balance would reflect 70% of the sub's earnings. Receipt of 70% of the dividends would simply transfer cash from one company to another.

If the parent acquires the remaining 40% from the noncontrolling interest shareholders, it is an equity transaction (not an acquisition).

No gain or loss is recognized on the income statement. Additional paid-in capital is adjusted.

When acquiring a subsidiary with an acquisition cost that is less than the fair value of 100% of the underlying assets acquired, adjust all balance sheet accounts to

fair value and allocate remaining acquisition costs to the fair value of 100% of identifiable intangible assets. This creates a negative balance in the acquisition cost account, which is allocated to gain.

When the acquisition price exceeds the fair value of net assets acquired, assets and liabilities should be presented at

fair value.

Before acquired 20% then another 70%->20% of Sago's net income to June 30 and 95% of Sago's net income from July 1 to December 31.

in an acquisition, the net income of a newly acquired subsidiary will only be included in consolidated net income from the date of acquisition. Therefore, only 20% of Sago net income is included in consolidated earnings until June 30 and 95% thereafter.

The acquisition method has two distinct account characteristics:

(1) 100% of the net assets acquired (regardless of percentage acquired) are recorded at fair value with any unallocated balance remaining creating goodwill, (2) when the companies are consolidated, the subsidiary's entity equity (including its common stock, A.P.I.C., and retained earnings) is eliminated (not reported).

An acquiring corporation should adjust the following items during consolidation:

(CAR)1. Common stock, A.P.I.C. and Retained Earnings of Subsidiary are Eliminated. (I)2. Investment in Subsidiary is eliminated. (N)3. Noncontrolling interest (NCI) is created (B)4. Balance Sheet of Subsidiary is Adjusted to Fair Value. (I)5. Identified Intangible Assets of the Subsidiary are Recorded at their Fair value (G)6. Goodwill (or Gain) is Required.

Consolidated net income is the same as parent company net income

, when the equity method is used.

When a subsidiary is acquired with an acquisition cost that is less than the fair value of the underlying assets, the following steps are required:

1. The balance sheet is adjusted to fair value, which creates a negative balance in the acquisition account. 2. Identifiable intangible assets are recognized at fair value, which increases the negative balance in the acquisition account. 3. The total negative balance in the acquisition account is recorded as a gain.

Good will

100% cost to acquired an investment (NCI + INV IN SUB) -fair value greater than value of land and equipment - non-complete agreement with fair value.

CAR - Subsidiary equity

= BV of assets - BV of liabilities

Noncontrolling interest at year end

= NCI share of net income + Noncontrolling interest at the beginning of the year -share of dividends

Fair value

= acquisition price=investment in subsidiary

Balance sheet FV adjustment

=FV net asset - BV net asset

Control-Non-control

>> Recognize the gain or loss of the sale of the stock >> Remeasure the remaining non-consolidating interest to fair value >> Recognize the adjustment to fair value on the income statement.

Non control -> Control (step transition)

>> Remeasure previously held equity interests to fair value >> The income statements will reflect this adjustment

Control -> "More" or "Less" control

>>Equity transaction (no gain or loss recognized on the income statement--additional paid-in capital adjusted)

In Process Research and Development (Carry as an asset)

>>Expense continuing R&D to complete project. >> Late: 1. Project success->amortize IP R&D 2. Project failure -> impair/write off IP R&D >> Recognize as an intangible asset separately from goodwill at the acquisition date (need valuation). >> Do not immediately write off. >> In process research and development meets the definition of an "asset"-- it has probable future economic benefit.

Goodwill (with NCI)

Acquired cost of investment (Not FV)- CAR (@FV)- Difference of the cost of assets-dividend -the difference of acquired cost (FV-BV)+NCI

In a business combination accounted for as a purchase, the appraised values of the identifiable assets acquired exceeded the acquisition price. How should the excess appraised value be reported?

As a gain, after adjusting the balance sheet, including identifiable intangible assets, to fair value.

BV Nets Assets =

Assets - Liabilities

FV Net Assets =

Assets - Liabilities

Net book value=

Assets - Liabilities

The non controlling interest is calculated by multiplying the total subsidiary fair value times the noncontrolling interest percentage:

At acquisition date: Fair value of subsidiary x noncontrolling interest %

After the acquisition date, the noncontrolling interest reported on the consolidated balance sheet is accounted for using the equity method:

Balance noncontrolling interest +NCI share of subsidiary net income - NCI share of subsidiary dividends ______________________________________________ = Ending noncontrolling interest. (BASE)

Retained Earnings-Sub =

Beginning retained earnings + income- dividends

Partial Goodwill Method: Under the partial goodwill method, noncontrolling interest is calculated as follows:

NCI = Fair value of subsidiary's net identifiable assets x Noncontrolling interest %

Assets - Liabilities =

CAR

. Dallas' consolidated stockholders' equity will be the parent company stockholders' equity plus the noncontrolling interest on December 31, Year 1:

Common stock + Additional paid-in capital + Noncontrolling interest + Retained earnings

What amount of total stockholders' equity should be reported in Dallas' December 31, Year 1, consolidated balance sheet?

Common stock (at year end) + Additional paid-in capital (at year end) +Noncontrolling interest (at year end =adding NCI share of net income and subtracting share of dividends )+ Retained earnings (at year end)

In the consolidated balance sheet prepared immediately after the acquisition, the consolidated stockholders' equity should amount to:

Common stock + Retained earnings

Under the IFRS partial goodwill method, noncontrolling interest (NCI) is calculated as follows:

NCI = FV of subsidiary net assets × NCI %

>> Investment in subsidiary >> Noncontrolling interest

Credit

FV subsidiary net assets =

Current assets + Plant and equipment, net - Liabilities +the difference of fair value of an asset+ identifiable intangible.

>> Balance sheet adjustments to FV >> Identifiable intangible assets to FV >> Goodwill

Debit

>> Common stock-subsidiary >> A.P.I.C-Subsidiary >>Retained earnings-Subsidiary

Debit

Journal entry to record the acquisition for parent common stock: (Parent company internal journal entry)

Debit : Investment in subsidiary Credit: Common stock Credit: APIC (parent/fv-part)

A business combination is accounted for properly as an acquisition. Direct costs of combination, other than registration and issuance costs of equity securities, should be:

Deducted in determining the net income of the combined corporation for the period in which the costs were incurred.

BS FV Adjustment =

FV Net Assets - BV Nets Assets

NCI=

FV of subsidiary net assets x NCI %

Goodwill =

Fair value of Subsidiary - Fair value of subsidiary net asset

Acquisition Price:

Fair value x the amount of stocks acquired.

Goodwill is Debit

Gain is credit

Under IFRS partial goodwill method, goodwill is calculated as follows:

Goodwill = Acquisition - Fair value of net assets acquired.

Partial Goodwill Method

Goodwill = Acquisition cost - Fair value of subsidiary's net asset acquired

What amount of goodwill related to Star's acquisition should Penn report on its consolidated balance sheet under the IFRS partial goodwill method?

Goodwill = Acquisition cost - Fair value of subsidiary's net assets acquired (acquired percentage x (Current asset + Plant and equipment, net - Liabilities + the different of the fair value of the asset))

Full Goodwill Method:

Goodwill= Fair value of subsidiary - Fair value of subsidiary's net assets.

Under U.S. GAAP, noncontrolling interest (NCI) is calculated as follows:

NCI = Fair value of subsidiary x NCI %

Placid company acquired 80% of Serene company's 100,000 shares of common stock for $1,600,000.

In Year 1, Placid purchased 80,000 shares (80% x 100,000) for $1,600,000 or $20 per share ($1,600,000 /80,000 shares = $20/share).

Goodwill=

Investment in Subsidiary - Book Value (CAR-BV Nets Assets) - Balance Sheet FV Adjustment

Sayon Co. Issues 200,000 shares of $5 par value common stock to acquire Trask Co. in an acquisition-business combination. The market value of Sayon's common stock is $12.

Investment in Trask (2.4M) -Common stock (1M) -Registration and issuance costs for the common stock.

Goodwill=

Investment in sub- book value (CAR) - Balance sheet FV adjustment

Gain =

Investment in subsidiary +non-controlling interest- CAR-subsidiary equity - Balance sheet adjustment - Identifiable intangibles

Determining Acquisition with Gain

Parent acquired at discount/ Parent paid less than NBV

Determining Acquisitions with Goodwil (CAR In BIG)

Premium paid to buy company. Parent paid more than : NBV + FV of assets

In the December 31, Year 1 consolidated financial statements of Purl and its subsidiary, total current assets should be:

Purl $ 310,000 +Scott 135,000 +Inventory adjust to FV 10,000 ______________________________________ $ 455,000

Seed also had unpatented technology with a fair value of $225,000 and in-process research and development with a fair value of $365,000.

Recognize identifiable intangible at fair value = 590,000

Fair value of subsidiary (Acquisition Cost + Noncontrolling interest)

Reconciliation to Book Value of Subsidiary Net Assets

Balance sheet=

Report NCI in consolidated equity.

When acquiring a corporation/subsidiary with a fair value that is less than the fair value of 100% of the underlying assets acquired, the following steps are required:

Step 1--Balance sheet adjusted to fair value Step 2-- Identifiable intangible assets to fair value Step 3--Gain

Computation of net income attributable to the noncontrolling interest

Subsidiary's Income <subsidiary's expenses> ________________________________ Subsidiary's net income x Noncontrolling interest % _________________________________ Net income attributable to the NCI (Goes to NCI-R/E in GE)

Subsidiary's income - Subsidiary's expense

Subsidiary's net income

Dividend affects noncontrolling interest but not retained earnings.

Th dividend does not affect retained earnings.

The acquisition was announced on March 31, Year 1, when Poppy's common stock was selling for $45 per share, and finalized on October 15, Year 1, when the market price of Poppy's common stock was $15 per share.

The acquisition price paid by Poppy is calculated on the date the acquisition is finalized: Acquisition price on 10/15/Year 1= 250,000 shares x $50/share = $1,250,000

With acquisition accounting the net assets acquired are based on fair market value.

The fair value of finished goods and merchandise inventory are based upon selling price less disposal costs and reasonable profit allowance.

The fair value of raw materials should be based upon replacement costs.

The fair value of work in process should be based upon the estimated selling price of finished goods less the costs to complete and dispose and a reasonable profit allowance.

Full Goodwill Method:

The full goodwill method is used under U.S. GAAP (as described above), in which noncontrolling interest on the balance sheet is calculated as follows: NCI = Fair value of subsidiary x Noncontrolling interest %

The acquisition cost of the stock does not include any measure of the relocation costs associated with East's company headquarters. (such costs are accounted for separately from the acquisition according to the requirements for exit or disposal costs in FASB ASC 420.)

The investment would be valued at the fair value of the consideration given which is $800,000.

What amount of gain from this transaction will Parker record in Year 2?

The latest fair value of the acquired assets x percentage of ownership -Investment in smith 12/31/Year 1 (amount of investment NBV +percentage share of earnings - percentage share of dividends)

At date of acquisition, the consolidated equity will be equal to the parent company's equity plus the fair value of any noncontrolling interest.

The subsidiary company's equity accounts are eliminated.

Passey's consolidated financial statements as of December 31, Year 1, would report plant assets at: The acquisition method requires that 100% of the fair value of the subsidiary's assets be recognized.

Therefore, plant assets reported on the consolidated balance sheet would be the fair value of Solomon's plant assets plus the book value of Passey's plant assets: FV subsidiary plant assets + BV parent's plant assets.

All of the subsidiary's balance sheet accounts are to be adjusted to fair value on the acquisition date.

This is accomplished as part of the Eliminating Journal Entry (EJE) on the consolidating workpapers. This adjustment is for the full (100%) fair value of the subsidiary's assets and liabilities, even if the parent acquires less than 100% of the subsidiary.

Surge reported net income of $20,000 and paid dividends of $8,000 during the current year. Peace reported income, exclusive of its income from Surge, of $30,000 and paid dividends of $15,000 during the current year.

When the financial statements of Peace and Surge are consolidated, the equity of Surge, including Surge's retained earnings, will be eliminated.

Any difference between the fair value of the subsidiary and the book value acquired will require an adjustment to the following three areas:

a. Balance sheet adjustment of the subsidiary's records from book value to fair value b. Identifiable intangible assets related to the acquisition of the subsidiary are recorded at fair value

Business combination costs/expenses in an acquisition are treated as follows: (nothing is capitalized to investment sub)

a. Direct out-of-pocket costs such as a finder's fee or a legal fee are expensed (debit: expense) b. Indirect costs are expensed as incurred (debit: expense). c. Stock registration and issuance costs such as SEC filing fees are a direct reduction of the value of the stock issued (Debit: additional paid-in capital account). d. Bond issue costs are capitalized and amortized (Debit: bond issue costs).

When acquiring a corporation/subsidiary with a fair value (acquisition price + fair value of NCI) that is greater than the fair value of 100% of the underlying assets acquired, the following steps are required:

a. Step 1--balance sheet adjusted to fair value: Recalculate depreciation b. Step 2--Identifiable intangible assets to fair value

Period of acquisition The following steps are necessary in order to prepare a consolidated statement of cash flows in the period of acquisition:

a. The net cash spent or received in the acquisition must be reported in the investing section of the statement of cash flows. b. The assets and liabilities of the subsidiary on the acquisition date must be added to the parent's assets and liabilities at the beginning of the year in order to determine the change in cash due to operating, investing, and financing activities during the period.

Subsequent periods

a. When reconciling net income to net cash provided by operating activities, total consolidated net income (including net income attributable to both the parent and the noncontrolling assets) should be used. b. The financing section should report dividends paid by the subsidiary to noncontrolling shareholders. Dividends paid by the subsidiary to the parent company should not be reported. c. The investing section may report the acquisition of additional subsidiary shares by the parent if the acquisition was an open market purchase.

Under U.S. GAAP, the consolidated balance sheet of Starlight Enterprises and subsidiary would report goodwill in the amount of

acquired cost / % of ownership - Fair value of net assets.

Subsidiary Net Losses (To NCI even if negative balance)

are allocated to noncontrolling interest even if the allocation exceeds the equity attributable to the noncontrolling interest (negative carrying balance).

With acquisition accounting the net assets acquired are based on fair market value. The fair value of finished goods and merchandise inventory

are based upon selling price less disposal costs and a reasonable profit allowance.

Fees of finders and consultants

are expensed in the period incurred.

Legal fees and due diligence costs

are expensed in the period incurred. Debt securities create liabilities, and debt security registration costs are capitalized and amortized.

Acquisition costs associated with a business transaction

are not allocated on a pro rata basis to the nonmonetary assets but expensed as incurred in the current period.

The carrying value of acquired company's assets and liabilities

are not relevant in calculating gain of parent company in its year 1 consolidated income statement.

In an acquisition method business combination, registration and issuance costs

are recorded as a direct reduction to the value of the stock issued by reducing APIC and direct out-of-pocket costs such as legal and consulting fees are expensed.

Noncontrolling interest must be reported

at fair value in the equity section of the consolidated balance sheet, separately from the parent's equity.This will include the noncontrolling interest's share of any goodwill (even though there is no cost basis). (everything even NCI is at 100% FV)

The dividend would be eliminated in consolidation. However, 30% of the dividends would be paid to the noncontrolling shareholders and would reduce noncontrolling interest on the consolidated balance sheet

because under the equity method, the ending noncontrolling interest is calculated as follows: Beginning noncontrolling interest + NCI share of subsidiary net income - NCI share of subsidiary dividiends. = Ending noncontrolling interest.

Replacement costs are an appropriate measure of fair market value for materials inventory,

but not finished goods.

Any difference between the fair value of the subsidiary and the book value acquired will require an adjustment to the following three areas:

c. Goodwill is recognized for any excess of the fair value of the subsidiary over the fair value of the subsidiary's net assets. If the fair value of the subsidiary is less than the fair value of the subsidiary's net assets, a gain is recognized.

Under IFRS, noncontrolling interest (and goodwill as discussed below))

can be calculated using either "partial goodwill" method or the "full goodwill" method.

Registration fees for equity securities issued

decrease additional-paid-in capital (stockholders' equity).

Gaining control/losing control

is a remeasurement event because the parent exchanges a noncontrolling investment asset for a controlling financial interest in all of the underlying assets and liabilities of the target.

Acquisition Date Calculation (CAR): The determination of the difference between book value and fair value

is computed as of the acquisition date.

100% of a purchased subsidiary's shareholders' equity (including common stock/retained earnings) as of the date of acquisition

is eliminated in consolidation.

Stockholder's equity

is irrelevant in calculating goodwill.

Original cost

is measured by the fair value (on the date the acquisition is completed) of the consideration given (Debit: investment in sub).

Acquired (purchased) goodwill

is not amortized; it is subject to the impairment test.

Goodwill

is not recognized in the statement of financial position in a bargain purchase but is recognized in the statement of financial position of the acquirer when the amount paid for the net assets exceeds the fair of the net asset acquired.

The partial goodwill method

is the preferred method under IFRS, but entities can elect to use the full goodwill method on a transaction by-transaction basis.

Consolidated net income

is the same as parent company net income, when the equity method is used.

Noncontrolling interest

is the value that we did not buy

when an investor goes from non-control to control of a subsidiary through a step acquisition, the previously held equity investment

must be adjusted to fair value.The fair value adjustment is recognized as a gain or loss by the investor in the period of the additional acquisition.

When an investor sells shares and goes from control to non control, the investor

must recognize a gain or loss from the sale of the stock and then remeasure the remaining non-consolidating interest to fair value.The fair value adjustment is recognized as an additional gain or loss on the income statement.

Identifiable intangibles=

noncompete agreement with a fair value of $300,000

The dividend

reduces noncontrolling interest.

As the sub loses money

retained earnings goes down

As the sub earns money

retained earnings goes up

when the acquisition price exceeds the fair value of net assets acquired, assets and liabilities

should be presented at fair value.

Assets and liabilities acquired in a business combination must be valued at their fair value. In a bargain purchase where the fair value of the net assets acquired is more than the consideration exchanged for the net assets,the difference is recognized as a gain by the acquirerat the time of

the acquisition. The difference between the fair value of the net assets acquired and the amount paid for the business is recorded as a gain by the acquirer at the time of the acquisition and would not be recorded as negative goodwill in the statement of financial position by the acquirer.

When the subsidiary's financial statements are provided for a subsequent period, it is necessary to reverse

the activity (income and dividends) in the subsidiary's retained earnings in order to squeeze back into the book value (Assets- Liabilities = CAR) at the acquisition date.

The accounting for an acquisition begins at

the date of acquisition.

The acquisition method requires that 100% of the fair value of the subsidiary's assets be recognized. Therefore, plant assets reported on the consolidated balance sheet would be

the fair value of Solomon's plant assets plus the book value of Passey's plant assets: FV subsidiary plant assets + BV parent's plant assets

The investment is valued at

the fair value of the consideration given or the fair value of the consideration received, whichever is the more clearly evident.

Consolidated retained earnings are the same as

the parent company retained earnings, when financial statements are consolidated under the acquisition method.

At date of acquisition, the consolidated equity will be equal to

the parent company's equity plus the fair value of any noncontrolling interest. The subsidiary company's equity accounts are eliminated.

Consolidated retained earnings are the same as the parent company retained earnings,

when financial statements are consolidated under the acquisition method.

The consolidated income statement

will include 100% of the subsidiary's revenues and expenses (after the date of acquisition).

The consolidated statement of retained earnings

will include only the $15,000 dividend paid by Peace during the current year.