Mergers Unit 1
Advantages of Acquisitions
Acquiring a going concern is less costly (don't start from scratch, no duplicative efforts), competition reduced, complementary products/services can increase sales
input, process, and output
Acquisition accounting only applies to the acquisition of a business. What are the three elements of a business, per ASC Topic 805? input, process, and output products, services, and workforce facilities, workforce, and contracts assets, liabilities, and equity
Goodwill
Acquisition cost is greater than the fair value of identifiable net assets
Gain on bargain purchase
Acquisition cost is less than the fair value of identifiable net assets
Prospective customer contracts
All of the following are examples of reportable identifiable intangible assets acquired in a business combination, except: Customer lists Advertising jingles Prospective customer contracts Mineral rights
Consolidation
New entity is formed to acquire both investor and investee
Bargain Purchases
Occur when acquisition cost is less than the FV of identifiable net assets at acq date. Report a gain to ensure assets and liabs are correctly valued
Business Combination
One company obtains control over another company - ie: merger, acquisition, takeover. It is not combining two or more companies alread under common control.
Asset acquisition
One firm acquires subset of assets, firm that is acquired may continue as a separate entity. Combine assets and liabs
Control
Over 50% of stock ownership, use equity or cost method + consolidation
Merger
one company is absorbed into another company in exchange for cash, debt or stock. Acquiring company remains. Combine assets and liabs at FV on date of acquisition
Insignificant Influence
ownership of less than 20% of the voting stock, use cost method or FV method. Investments not meant to be held LT are marked-to-market as trading or AFS
IFRS for Joint Ventures
2 Kinds: joint operations (rights to assets and liabs) and joint ventures (rights to returns and disposal value - more common, equity method)
Step Acquisitions
Acquiree obtains shares in more than one transaction. Either obtains remaining shares (no change except to noncontrolling interest account) or control (change from equity method to fair value, with G/Ls in income)
2M loss in income
A HTM bond with BV and par of 6M is impaired due to credit loss. Current FMV is 4M. What is true Directly reduce bond by 2M 2M loss in OCI No loss 2M loss in income
Acquired company's debt is overvalued
A company acquires all of the assets and liabilities of another company. Which one of the following reduces the amount of goodwill the acquiring company reports? Acquired company's equipment is overvalued Acquisition cost is higher Acquired company's debt is overvalued Acquired company's inventory is overvalued
Stock Acquisition
A company acquires all the voting stock of a company and records the transaction by debiting Investment in Company A. This is a Consolidation VIE Joint Venture Stock Acquisition
Increase
A company invests in a 5-year debt security at a discount. The security is classified as HTM. Using the effective interest method, the company will report interest revenue on this security that is: increase, decrease, stay the same
You are buying a business and obtaining control of that business.
ASC Topic 805 only applies to an acquisition if: You are buying all the assets and liabilities of another company. You are buying a business and obtaining control of that business. You are a public company buying the assets and liabilities of another public company. You are buying over 50% of the voting stock of another company.
In the acquisition of a business, the cost may exceed the fair value of the identifiable net assets acquired.
ASC Topic 805 provides standards for reporting acquisition of a business. How does the reporting for the acquisition of a business differ from acquisition of a group of assets and liabilities? In the acquisition of a business, the cost may exceed the fair value of the identifiable net assets acquired. In the acquisition of a business, contingent consideration is not included in the measurement of total cost. In the acquisition of a group of assets and liabilities, consulting fees paid to complete the transaction are expensed In the acquisition of a group of assets and liabilities, previously unreported identifiable intangible assets are likely to be recognized.
Purchase of a controlling interest in an international company
ASC Topic 805 provides standards for reporting business combinations. Which one of the following is most likely to be considered a business combination? Formation of a joint venture by two or more existing companies Formation of a new subsidiary Purchase of a controlling interest in an international company Merger of an existing subsidiary with a parent.
Current market value is below cost, and it is more likely than not that the investor will sell it before the loss is recovered.
An AFS debt security's market value is less than its original cost. The loss is reported in income when Current market value is at least 50% below cost. Current market value is below cost, and it is more likely than not that the investor will sell it before the loss is recovered. Current market value is below carrying value and the decline is due to increases in market interest rates. Current market value is below carrying value.
Preacquisition contingencies
An acquired entity has business situations that will result in G/Ls if and when future events occur (lawsuits, warranty liabs). Known assets and liabs with determined and determinable FVs on DOA. OR are recognize at DOA FV if probably and reasonably measured
Held-to-maturity securities
Assets at amortized cost. No gains or losses are reported unless securities sold early. Amortize premium/discount over life. Test for impairment, especially as credit losses (set up allowance account) and are reported in income. Only interest on income statement
ASC Topic 810
Consolidation criteria, procedures, and consolidated financial statement format
Market-related loss
Changes in interest rates, reported in OCI and directly reduce investment balance
Contingent Consideration - Liability
Classified as this if buyer is required to transfer cash to seller, agrees to transfer stock. Must be reported at acq date based on PV of expected payment
A worksheet
Company A paid cash for all the voting common stock in Company B. Company B will continue as a separate corporation. Entries for the consolidation would be recorded in A worksheet Company A's GL Both GLs External failure cost
OCI reduced by 2k
Company paid 100k for bonds as AFS. They are carried at 102k. At YE, their FMV is 90k, due to credit losses. Which is true about EOY adjustment for this investment? OCI reduced by 2k Impairment loss of 12k is reported in income No adjustment required Investment account reduced by 10k
Business Strategies for Acquisitions
Control supply, acquire new production/distribution facilities, expand into new markets, acquire new customers, diversify into new LOBs
Available for sale securities
Current or noncurrent assets at fair value, unrealized g/ls are reported in OCI and closed into AOCI (BS). When sold, entire unrealized g/l reclassed into income and other gains are reported in income when earned. Tested for impairment when FV<Cost (NOT CARRYING VALUE). Separate between credit losses and market losses
Credit loss
Decline in PV of expected future cash flows due to investee's ability to pay principal and interest (company is going bankrupt). Accumulated in allowance (contra) account that reduced balance of investment, reversed thru income. Reported in income. Calculated as difference between cost and FMV, reclass unrealized g/l to income
Acquiring Company
Does the acquired company or acquiring company record its assets and liabs at book value?
Acquired Company
Does the acquired company or acquiring company record its assets and liabs at fair value?
Investee goodwill impairment
Equity in NI is affected by all but which of these items related to the investee? Investee goodwill impairment Industry comparisons Markup on inventory sold by investee FV<CV
Restructuring Costs
Expensed as incurred, unless represented by acq-date liabs
Out-of-pocket costs
Expenses, do not increase value
Report acquired items at NBV or FV on date of acquisition
FV
ASC 820 Valuation of Intangibles
Fair Value Hierarchy 1: Quoted prices in an active market 2: Quoted prices for similar assets adjusted for attributes 3: Valuation based on unobservable estimated attributes (discounted PV or book value multiples)
ASC 825
Fair value option for eligible investments - reported at FV and changes are in income, only allowed for noncontrolling investments (commercial paper, corp bonds, pref stock, common stock)
Investments in associates
Following IFRS, significant influence investments are typically called Investments in associates Noncurrent stock investments LT equity method investments Investments in financial instruments
Consolidation worksheet
For entities wanting to use the cost model of accounting, the revaluation of a subsidiary's assets would be undertaken in the Consolidation worksheet Notes to the consolidated financial statements Subsidiary's records Parent entity's records
FV<Carrying value
GAAP impairment test for equity method investments requires recognition of impairment losses when FV<Cost Expected credit losses are significant A significant loss occurs FV<Carrying value
Debt & Equity
IFRS 9 identifies what categories of investments in financial instruments with no significant influence for which reporting purposes? Debt & Equity ST & LT Trading, AFS and HTM Controlled and Uncontrolled
Equity method investments
IFRS requires joint ventures to be reported as: Variable interest entities Trading securities .Equity method investments Available-for-sale securities
Consolidation
If Push Company owned 51 percent of the outstanding common stock of Shove Company, which reporting method would be appropriate? Cost method Consolidation Equity Method Merger Method
An equity method investment
If a U.S. company invests in a joint venture, it reports the investment as: An equity method investment A merger A held-to-maturity investment An AFS investment
Controlling investments
If a company elects the FV option for all eligible investments, which cannot be reported at FV, with unrealized g/ls on investments reported in income? Significant influence investments Equity investments with no sig influence HTM debt investments Controlling investments
In-Process R&D
If acquired in a business combination, must be reported as an asset at FV regarless of alternative future use
At FV
If an acquired company has in-process R&D projects, the value of R&D is reported as an acquired intangible asset At FV Only if it has alternative future use If the probability of success is >50% Only if it already appears on the acquired company's BS
Contingent Consideration - Compensation for Future Services
If former owners become employees, payments are terminated when former owner is no longer employed
Business Criteria
If substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not considered a business
Reported in income
Impairment losses on equity method investments are Not reported Reported in income Reported in OCI Reported as a direct adjustment to beginning RE
Reported in income
Impairment losses on equity method investments are: Reported in income Reported as a direct adjustment to beginning retained earnings Reported in other comprehensive income Not reported
Contingent Consideration
Increases acquisition cost Exists when the acquirer agrees to make additional payments to the prior owners if events occur or conditions are met. When buyer and seller disagree on value, usually based on measure of performance (financial and non-financial). AKA Earnout
IFRS for Significant Influence Investments
Investee = associate Principles-oriented view to significant influence on BOD, participate in policies, material transactions, interchange of management Equity method required, test for impairment
Variable Interest Entity (VIE)
Investee is a separate legal entity controlled by another company Control occurs through legal relationships rather than stock ownership Must obtain guarantees from other parties to obtain financing and Equity holders don't have usual rights and responsibilities (voting, etc). Must have power to direct activities if you control Must absorb risks and rewards Report same as stock investments
Merger
Investor acquires investee and becomes the remaining legal entity
Controlling Investments
Investor has control over operating and financial decisions and financial reports are combined with those of investor for reporting purposes 3 structures: Merger, consolidation or asset acquisition Stock acquisistion Variable interest entity (VIE)
Stock acquisition
Investor obtains control over another company by investing in its voting stock. Separate entities, separate financial records consolidated at end of period
Measurement of Acquisition Cost
Must be measured at FV on date of acquisition. Includes cash/assets transferred, liabs incurred and stocks issued
Increases net income on the income statement
Packard Company acquires the assets and liabilities of Sutton Company, with an acquisition cost that is less than the fair value of its identifiable net assets. The difference between acquisition cost and the fair value of identifiable net assets acquired Reduces goodwill Reduces noncurrent assets acquired Increases other comprehensive income Increases net income on the income statement
Reduce Parish's APIC
Parish Co issues new stock with a $1/share par to the former shareholders of Sanford in a merger. The registration fees Parish pays to issue the new stock will Reduce Parish's APIC Increase previously unreported identifiable assets acquired Reduce Parish's income Increase goodwill
Employee Compensation
Payments for services already performed are part of acquisition cost (severance, stock options) Payments for services to be provided are prepaids
Measurement Period
Period during which value changes may be reported as corrections to the initial acquisition entry. Ends when no more info can be obtained about estimated values (limited to 1 year after acq date)
Identifiable asset, at fair value
Plaza Corporation acquires all of the assets and liabilities of Spiceland Company. How are Spiceland's research and development costs of ongoing projects reported on Plaza's books at the date of acquisition? Identifiable asset, at fair value Included as part of goodwill Operating expense, at fair value Loss on acquisition, at Spiceland's cost
Security registration fees
Reduce net value of equity accounts affected (APIC), do not increase acq cost
Equity Method
Share of income/loss from investee in recorded in investor's books as income and increase in investment. Dividends directly reduce the investment balance.
Trading securities
Short-term assets at fair value, with all (unrealized and realized) gains and losses reported as income as market prices change. No impairment testing
Economic entity
The entity that is represented by a single set of consolidated financial statements known as a consolidated financial report is a(n) Parent entity Economic entity Partnership Subsidiary entity
Consolidation
The process of preparing combined financial statements of a group of entities is known as Condensation Accumulation Accrual Accounting Consolidation
Combinations of two or more companies already under common control
The requirements of ASC Topic 805 do not apply to: Acquisitions where control is obtained over one or more businesses Combinations of two or more companies already under common control Acquisitions where control is obtained by acquiring the voting stock of the acquired company Acquisitions of product lines and divisions
Significant influence
Typically 20-50%, but should actually be able to influence policies, like on the BOD or through significant transactions. Must use equity method if control, but can choose FV if not controlling. If investment changes to this, change from FV method to equity method and report changes in income. Transaction costs are added to the investment account.
Synergies in developing future products
Which of the following is least likely to be reported as an acquired identifiable intangible asset? Broadcast rights Production processes Synergies in developing future products In-process research and development
Acquisition Method
Used to report all business combinations Requires careful identification and valuation of the FV of assets and liabs acquired as of the acquisition date
Equity Method
Usually, an investment of 20-50% in another company's voting stock is reported under the Equity Method Cost Method Full Consolidation Method Fair Value Method
ASC Topic 350
Valuation and subsequent reorting for intangible assets acquired, including goodwill
ASC Topic 805
Valuation of assets and liabilities received, valuation of consideration paid
Income method
What is the most common way to value acquired intangible assets? Income method Market approach Cost approach Opportunity cost approach
All
What portion of the subsidiary stockholders' equity account balances should be eliminated in preparing the consolidated balance sheet? RE Common Stock APIC All
Noncompetition agreements
When a private company acquires another company, GAAP for private companies allows which identifiable intangible assets to be combined with goodwill and not separately capitalized? Technology Noncompetition agreements Software licenses Brand names
Identifying Acquiring Company
When no equity interests exchanged, acquiring company distributes cash/assets Larger Entity, entity that selects BOD Entity that issues equity interests Entity's shareholders did not receive a premium over market value in the exchange
Deferred Tax Liability
When the reported value of an acquired asset exceeds its tax basis (transferred), DTL is recorded for additional taxes to be paid in excess of book tax expense as the assets are written off. Changes goodwill amount
AFS and HTM
Which investments in debt securities and equity securities with no significant influence are tested for impairment AFS and HTM HTM Equity Trading and AFS
AFS and HTM debt securities
Which investments in debt securities and equity securities with no significant influence must be tested for impairment? and HTM securities Trading and AFS debt securities AFS and HTM debt securities Equity securities
WHAT's the Answer (Inventory)
Which of the following items cannot be revalued in the books of the subsidiary Goodwill Land Inventory Plant & equipment
Skilled workforce
Which one of the following items is most likely to be reported as goodwill? Skilled workforce Brand names Developed technology In-process research and development
Unrealized gain on trading debt securities
Which unrealized gain affects a company's earnings per share? Unrealized gain on trading and AFS debt securities Unrealized gain on AFS debt securities Unrealized gain on HTM securities Unrealized gain on trading debt securities
Stock acquisition
acquire voting stock, acquiring and acquired companies remain separate entities, do not combine assets and liabs, parent/subsidiary relationship, treat investment as intercorporate investment - same result as merger or consolidation
Acquiring firm must identify any previously unreported intangibles that either
arise from contractual or legal rights OR are separable (separated from entity and able to be sold, rented or transferred)
Goodwill
exists if consideration paid exceeds total fair value of net identifiable assets acquired. Calculated as acquisition cost - FV of identifiable net assets acquired
Business
consists of inputs (assets, intellectual prop and employees) and processes (strategic management, operations and resource management) applied to those inputs that can contribute to the creation of outputs (goods/services, income)
Business combination
control is obtained over one or more businesses. Control may be obtained by direct acquisition of assets and liabs (merger, consolidation or asset acq) or through stock acquisition.
Mergers, consolidations and asset acquisitions
investor directly acquires the assets and liabs of investee and are recorded on investor's BS at FV
Statutory Consolidation
new company is organized to absorb the activities of two or more existing corporations. combine assets and liabs at FV on date of acquisition, acquirer's assets and liabs remain at book value. Same result as merger
Motivations for investments
to invest excess cash in hopes of dividends and gains, develop relationships and gain access to new markets, facilitate activity along a supply chain
Asset acquisition
when an investor acquires a subset of the investee's assets