Business Combinations

Statutory

A merger that results when one company acquires all the net assets of one or more other companies through an exchange of stock, payment of cash or other property, or issue of debt instruments (or a combination of these methods). A company + B company = A Company

Stock

Advantages of _______ Acquisition: -Lower total cost in many cases. -Direct formal negotiations with the acquired firm's management may be avoided. -Maintaining the acquired firm as a separate legal entity. -Liability limited to the assets of the individual corporation. -Greater flexibility in filing individual or consolidated tax returns. -Regulations pertaining to one of the firms do not automatically extend to the entire merged entity.

Economic Entity Concept

Affiliated companies are a separate, identifiable economic entity. Both controlling and noncontrolling stockholders contribute to the economic unit's capital. -The noncontrolling interest presented as a component of stockholders' equity

Parent Company Concept

Primary purpose of consolidated financial statements is to provide information relevant to the controlling stockholders. Emphasis is placed on the needs of the controlling stockholders. -The noncontrolling interest is presented as a liability or as a separate component before stockholders' equity.

Goodwill impairment test

Step 1: The reporting unit must determine if the carrying value is greater than zero. Step 2: The carrying value of the goodwill is compared to its implied fair value.

Indirect Expenses

ongoing costs include the cost to maintain a mergers and acquisitions department, as well as other general administrative costs such as managerial or secretarial time and overhead that are allocated to the merger but would have existed in its absence - Expensed - Cost of issuing securities is excluded

Takeover premium

the term applied to the excess of the amount offered, or agreed upon, in an acquisition over the prior stock price of the acquired firm. Possible Reasons: -Acquirers' stock prices may be at a level which makes it attractive to issue stock (rather than cash) in the acquisition. -Credit may be generous for mergers and acquisitions. -Bidders may believe target firm is worth more than its current market value or has assets not reported on the balance sheet. -Acquirer may believe growth by acquisitions is essential and competition necessitates a premium.

Statutory Consolidation

when a new corporation is formed to acquire two or more other corporations through an exchange of voting stock; the acquired corporations then cease to exist as separate legal entities. A company + B company = C Company

Stock Acquisition

when one corporation pays cash or issues stock or debt for all or part of the voting stock of another company, and the acquired company remains intact as a separate legal entity. control may be obtained by purchasing 50% or more of the voting common stock (or possibly less).

Public

Goodwill is no longer amortized. - Goodwill of each reporting unit is tested for impairment on an annual basis. Impairment Test: Step 1 - Does potential impairment exist? Step 2 - What is the amount of goodwill impairment?

date

Identifiable assets acquired (including intangibles other than goodwill) and liabilities assumed should be recorded at their fair values at the ____ of acquisition

Vertical

Merger between companies in the same industry, but at different stages of the production process. a merger between a supplier and a customer

Step 2

Estimating GoodWill Apply the rate of return (step 1) to the net assets of the target to approximate "normal earnings".

Step 6

Estimating GoodWill Add the estimated goodwill (step 5) to the fair value of the firm's net identifiable assets to arrive at a possible offering price.

Step 5

Estimating GoodWill Compute estimated goodwill from "excess earnings". -If the excess earnings are expected to last indefinitely, the present value may be calculated by dividing the excess earnings by the discount rate. -For finite time periods, compute the present value of an annuity.

Step 3

Estimating GoodWill Estimate the expected future earnings of the target. Exclude any nonrecurring gains or losses.

Step 4

Estimating GoodWill Subtract the normal earnings (step 2) from the expected target earnings (step 3). The difference is "excess earnings".

Step 1

Estimating GoodWill. Identify a normal rate of return on assets for firms similar to the company being targeted

Direct Expenses

Expenses incurred in a business combination, such as accounting and consulting fees, that would not have been incurred in the absence of the combination. These types of expenses are capitalized (charged to an asset account) under purchase accounting rules. - Expensed - Cost of issuing securities is excluded

141

FASB _______ Business Combinations

160

FASB______ Noncontrolling interest in consolidated financial statements.

Business Combination

Four steps required in accounting for ___________: 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.

zero

Goodwill Impairment Test. If the carrying amount of a reporting unit is _____ or less, the second step is performed when it is more likely than not that a goodwill impairment exists

greater

Goodwill Impairment Test. If the carrying amount of a reporting unit is ________ than zero and its fair value exceeds its carrying amount, goodwill of the reporting unit is considered not impaired; thus, the second step of the impairment test is unnecessary.

less

Goodwill Impairment Test: If the carrying amount of a reporting unit is greater than zero and its fair value is ____ than its carrying amount, goodwill of the reporting unit is considered impaired; thus, the second step of the impairment test is needed.

Horizontal

Merger that decreases competition in the market. a merger between competitors

partial

Under ______ elimination, only the parent company's share of the unconfirmed intercompany profit recognized by the selling affiliate is eliminated.

total

Under ______ elimination, the entire amount of unconfirmed intercompany profit is eliminated from combined income and the related asset balance.

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. - Acquirer must • reassess whether it has correctly identified all of the assets acquired and all of the liabilities assumed before recognizing a gain on bargain purchases and • review procedures used to measure the amounts recognized at the acquisition date.

SFAS

______ 141 R replaced FASB Statement No. 141. -Supports the use of a single method. -Uses the term "acquisition method" rather than "purchase method." -Recognize fair values of all assets and liabilities on the acquisition date rather than cost, reflected in financial statements

Asset Acquisition

a firm must acquire 100% of the assets of the other firm.

Private

can elect an alternative model: amortize goodwill over a period not to exceed 10 years and utilize a simplified impairment model.