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