Adv Ch 2: Business Combinations + Consolidation Process

Recognition principle

"As of the acquisition date, the acquirer shall recognize, separately from goodwill, the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree" The acquirer shall measure the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at their acquisition-date fair values"

The primary objective of the consolidation is to produce.....

"as if" financial statements for controlled entity instead of the strictly defined separate legal entity

Intangible assets are considered to be separately identifiable if they meet either of the following criteria:

- The intangible asset arises from contractual or other legal rights, or -The intangible is separable, that is, it can be separated or divided from the acquired entityand sold, rented, licensed, or otherwise transferred.

Acquisition-related costs

-Services provided by attorneys, accountants, and investment bankers -Indirect costs, such as office expenses of the investor company **expenses in inc statement of investor during period of acq

Three general valuation techniques:

1. Market Approach 2. Income Approach 3. Cost Approach

2 ways control can be achieved:

1. Quantitative 2. Qualitatively

factors include....

1. relative voting rights in the combined entity after the business combo 2. existence of a large minority voting interest in the combined entity if no other owner or organized group of owners has a significant voting interest 3. the composition of the governing body of the combined entity 4. the composition of the senior mgmt of the combined entity 5. the terms of the exchange of equity interest

The recognition principle is comprised of two central requirements:

1.As of the acquisition date, they must meet the definition of assets or liabilities, and 2.They must be part of the business combination and not the results of a separate transaction.

Steps of Acquisition process

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Stock issuance costs are:

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The consolidation entries _______ actually recorded by either company in their respective general ledgers.

ARE NOT **only entries made in in spreadsheet

If the net assets acquired constitute a "business," a specialized set of accounting principles called __________ applies.

Acquisition method

Which of the following statements best describes how goodwill is measured?

Acquisition price - Fair value of net tangible assets - Fair value of identifiable intangible assets = Goodwill

Non-Business Asset Acq vs. Business Combo 5. Assembled workforce

Asset: If acquired, recognized as separate intangible asset Business: Cannot be recognized as a separate intangible; becomes part of recognized goodwill

Non-Business Asset Acq vs. Business Combo 4. Goodwill

Asset: Never recognized, and existence of implied goodwill as part of the transaction could be an indicator that a business was acquired Business: Recognized as the difference between the total cost of the acq business and the aggregate fair value of the acquired net assets

Non-Business Asset Acq vs. Business Combo 2. Contingent consideration

Asset: Not recognized until the contingency is resolved, often many periods in future Business: fair value of contingent consideration on acquisition date is included in the total cost of acq business

Non-Business Asset Acq vs. Business Combo 1. Transaction costs

Asset: capitalized + assigned as part of total cost of the bundle of acq net assets Business: expensed as incurred by the acquiring company

Non-Business Asset Acq vs. Business Combo 6. In-process research and development

Asset: expensed upon acq Business: capitalized as an asset upon acq

Non-Business Asset Acq vs. Business Combo 3. Asset Measurement

Asset: total cost of net asset bundle is allocated to noncurrent, nonfinancial net assets Business: all identifiable acq net assets are recognized at acq date fair value

Which of the following statements is true regarding the acquisition method of accounting for a business combination?

Assets of the acquired company are recorded at fair values regardless of the acquisition cost.

Current GAAP identifies three approaches to assigning values to assets acquired in a business combination. Which of the following is not a recognized valuation technique for allocating the acquisition price to specific assets?

Book Value Approach

Goodwill

Goodwill in accounting is an intangible asset that arises when a buyer acquires an existing business. Goodwill represents assets that are not separately identifiable

Market Approach

Includes the use of market multiples (and ranges of multiples) derived from a set of comparables.

FV Hierarchy

Level 1: Quoted prices in active markets Level 2: Inputs other than quoted prices are observable for the asset or liability, either directly or indirectly. Level 3: Unobservable inputs

the Equity Investment account is _______ reported on the consolidated B/S

NOT

Companies are permitted to use _________ amounts, and to prospectively adjust those amounts when better information becomes available.

Provisional

In-process research and development acquired in a business combination is:

Recorded as indefinite-lived intangible assets, subject to amortization

Income Approach

Techniques include present value, option-pricing models, and "the multiperiod excess earnings method, which is used to measure the fair value of certain intangible assets."

Which of the following statements is incorrect regarding the recognition of intangible assets in a business combination?

The acquirer in a business combination does not recognize intangible assets unless they appear on the investee company's balance sheet.

Cost Approach

Valuation technique "based on the amount that currently would be required to replace the service capacity of an asset (often referred to as current replacement cost).

subsidiary

a company that is completely controlled by another company

Acquisition vs. Asset: A company might acquire from another company one of its preexisting product lines, or intellectual property (e.g.,patents), or unproven research and development of a potential new product.... these may just be _______, so they may not be classified as ____________.

assets; a business

Definition of business from FASB ASC 805-10-55-4

business consists of inputs and processes applied to those inputs that have the ability to contribute to the creation of outputs. Although businesses usually have outputs, outputs are not required for an integrated set to qualify as a business.

Definition of a business from FASB ASC 805-10-55-3A

business is an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members, or participants.

2. Qualitatively

determined power to direct an entity's activities and a majority of the entity's economic risks and rewards (ie: the primary beneficiary of a variable interest entity), regardless of the level of equity ownership

Acquisition-related costs incurred by the investor for services provided by outside accountants, as well as the investor's employees, are:

expensed immediately

Business test (2017)

if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, then the acquired set of net assets is not a business and the transaction is automatically accounted for as lump-sum acquisition of assets (i.e., it is not a business combination). **An acquiring company that qualifies for this exception does not need to evaluate the inputs, processes or outputs of the acquired group of net assets.**

Determining the acquiring company: Cash Purchase

investor is usually the entity that transfers the cash or other assets or incurs the liabilities

Determining the acquiring company: Stock Purchase

investor usually is entity that issues its equity interests. Consider many factors.....

control may exist if the investee company....

is a variable interest entity, is in bankruptcy, or has business activities that are controlled by foreign government

1. Quantitative

majority of the voting equity interest

Assume the fair values of the investee's net assets approximated the recorded book values of the in-vestee's net assets, except the fair value of receivables and inventories is $10,000 higher than book value, the fair value of land is $5,000 lower than book value, the fair value of property and equipment is $20,000 higher than book value and the fair value of liabilities is $7,000 lower than book value. In addition, the transaction resulted in goodwill in the amount of $25,000. What is the balance in the pre-consolidation "investment in investee" account on the investor company's books on January 1, 2019, immediately after the acquisition of the investee company voting common stock?

not enough info

Equity

ownership of assets that may have debts or other liabilities attached to them. Equity is measured by subtracting liabilities from the value of an asset.

Consolidation

process of REPLACING the parent's Equity Investment account with the subsidiary's assets and liabilities

B/S consolidation is accomplished by....

replacing the Equity Investment account w/ the assets and liabs to which it relates

Intangible assets should be ________________ if they can be identified

separately recognized

the Stockholders' Equity reported in the consolidated financial statements should be limited to....

the equity held by the PARENT's shareholders

Net result of Consolidation:

the parent's Equity Investment account should be replaced by the subsidiary's individual assets and liabilities and the consolidated Stockholders' Equity should be the same as the parent's Stockholders' Equity.

Goodwill is the difference between...

the value of the investee company (purch price) and the value of its net intangle assets

R&D assets acquired in a business combo are recognized at...

their Fair Values just like any other assets acquired