Module 1: Ch 2 - Business Combinations/Consolidation (Intro)
identified
Current accounting standards require that acquired intangible assets be separately recognized if they can be...
issues its equity interests
Determining the Acquiring Company: In a business combination effected primarily by exchanging equity interests, the investor usually is the entity that....
transfers the cash or other assets or incurs the liabilities
Determining the Acquiring Company: In a business combination effected primarily by transferring cash or other assets or by incurring liabilities, the investor usually is the entity that....
1. The relative voting rights in the combined entity after the business combination 2. The 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 management of the combined entity 5. The terms of the exchange of equity interest
Determining the Acquiring Company: In a stock purchase, we need to consider what factors in determining the acquiring company? (5)
1. is a variable interest entity 2. is in bankruptcy 3. has business activities that are controlled by a foreign government
Even if >50% of voting shares are acquired, control may NOT exist if the investee company..... (3)
customer lists, databases, unpatented technology
Examples of intangibles arising from being "separable" include.... (3)
1. has begun planned principal activities 2. has employees, intellectual property, and other inputs and processes that could be applied to those inputs 3. is pursuing a plan to produce outputs 4. will be able to obtain access to customers that will purchase the outputs.
For an Asset Acquisition to be considered a Business Combo, it is not necessary that the investee company currently produce products or generate a positive return. All that is necessary is that the entity..... (4)
1. Market approach 2. Income approach 3. Cost approach
GAAP broadly defines what 3 general valuation techniques that can be used to estimate fair values?
Purchase price - FV of subsidiary (unidentifiable difference)
Goodwill is equal to..... (formula)
expensed in I/S of investor in period of acquisiton
How are acquisition-related costs accounted for?
increases/decreases net income
How are changes in the FV of a contingent earnings liability reflected?
at fair value
How do investors value tangible R&D assets acquired in a business combination?
it doesnt (no change to accounting records or G/L of either)
How do the consolidated journal entries (from the consolidation WS) affect the balance sheets and G/Ls of the parent and subsidiary?
as a gain (net income)
How is a "Gain from Bargain Purchase" (negative goodwill) recognized?
Gain from Bargain Purchase
If goodwill is negative, it is called a....
"bargain purchase" gain
If the purchase price is less than the fair value of the subsidiary's acquired net assets, the parent company will recognize a.....
DR - APIC CR - C/S (affects equity, not profit)
In regards to measuring contingent consideration, if additional shares are issued, what is the journal entry to record this?
1. Arises from contractual or other legal rights (ex: trademarks) 2. intangible is separable (can be separated or divided from the acquired entity and sold, rented, licensed, or otherwise transferred)
Intangible assets are considered to be identifiable if they meet the following criteria (2)....
acquirer measures an acquired long-lived asset (or disposal group) that is classified as held for sale at the acquisition at FV - cost to sell
Occasionally, a parent company will acquire a subsidiary with the intention of subsequently disposing of a portion of the subsidiary's net assets. What is the guidance regarding this situation according to APPENDIX 2A?
1. Determine the acquirer 2. Determine the acquisition date 3. Recognize & measure identifiable assets and liabilities and any noncontrolling interests 4. Recognize and measure goodwill or gain from bargain purchase
Steps in the Acquisition Method (4)
1. Contract-based (ex: lease agrmt, construction contracts) 2. Marketing-related (ex: brand names, trademarks, and Internet domain names) 3. Customer-related (ex: customer contracts, relationships) 4. Technology-based (ex: patent rights, computer software, and trade secrets) 5. Artistic-related (ex: TV programs, advertising jingle)
The category of intangibles arising from contractual or other legal rights can be grouped into what categories? (5)
contingent consideration
Acquisitions sometimes include a provision adjusting the purchase price of the subsidiary for future events. This is called....
considered idefinite-lived until R&D activities are completed or abandoned (no capitalization)
After initial recognition, how are In-Process INTANGIBLE R&D assets acquired in a business combination accounted for?
account for assets in accordance with their nature (capitalize if needed)
After initial recognition, how are TANGIBLE R&D assets acquired in a business combination (like an R&D building) accounted for?
NO
Are costs the investor *expects but is not obligated to incur* in the future to affect its plan to exit an activity of an investee or to terminate the employment of or relocate an investee's employees considered liabilities at the acquisition date?
1. Quantitative majority of voting equity interest (VIM) 2. Qualitative determined power to direct entity's activities and a majority of the entity's economic risks and rewards (VIEs)
U.S. GAAP includes what 2 ways in which control can be achieved
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). From the perspective of a market participant (seller), the price that would be received for the asset is determined based on the cost to a market participant (buyer) to acquire or construct a substitute asset of comparable utility, adjusted for obsolescence
In an acquisition, companies are permitted to use "provisional" amounts and prospectively adjust those amounts when better information becomes available, provided that the final measurement of all assets and liabilities is completed within one year from the acquisition date
What are "provisional amounts" with respect to business combinations?
eliminate the remaining equity investment balance by assigning AAP to identifiable net assets
What is the "A" in CEADI?
eliminate the shareholders equity of the subsidiary by reducing the equity investment account
What is the "E" in CEADI?
recognized at acq date. contingency will be recognized in the form of a liability and included in computation of goodwill
What is the Acquisition Accounting requirement for recognition of contingent consideration?
Level 1: Quoted Prices in Active Markets Level 2: Inputs other than quoted prices are observable for the A/L either directly or indirectly Level 3: Unobservable inputs
What is the fair value heirarchy?
to see the separate legal entities under common control as a Single Economic Entity (SEE)
What is the goal of consolidation?
Contingent earnings liability
What is the name of the liability account that gets credited for contingent consideration?
If the acquisition-date fair value of the asset or liability arising from a contingency can be determined during the measurement period, that asset or liability is recognized at the acquisition date
When are pre-acquisition contingencies recognized?
always expected to be recognized. if an acquisition target offers warranties, then one of the identifiable liabilities recognized on the date of acquisition is the FVof the estimated "stand ready" obligation to service all future warranty claims
When are warranties (pre-acq contingencies) measured?
1. independent, 2. knowledgable about the A/L, 3. able and willing to transact for the A/L
With respect to the FV defintion, market participants are assumed to be.... (3)
The acquirer shall measure the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at their ACQUISITION-DATE FAIR VALUES
With respect to the assets acquired and the liabilities assumed in a business combination, what is the measurement principle?
As of the ACQUISITION DATE: acquirer shall recognize (separately from goodwill) identifiable ASSETS acquired, LIABILITIES assumed, and any NONCONTROLLING INTEREST in the acquiree
With respect to the assets acquired and the liabilities assumed in a business combination, what is the recognition principle?
treated as a reduction of the proceeds from the stock sale and typically reduce the amount of APIC recognized when the stock is issued
acquisition-related costs do not include costs relating to the issuance of securities. how are these costs recognized?
issuance of securities in the acquisition (ex: cost of registering the stock)
acquisition-related costs do not include costs relating to......
accrued and expensed subsequent to the acquisition
if am investor decides to record a planned restructuring obligation as a post-acquisition obligation of the investor, how is the liability treated?
included in the FV assignment
if am investor decides to record a planned restructuring obligation as a preexisting liability of the investee, how is the liability treated?
yes
if the difference between the FV of an acquired subsidiary (the purchase price) and the preacquisiton recorded carrying value of the subsidiary's net assets is negative instead of positive, is it still called an Acquisition Accounting Premium?
parent company's pre-consolidation SE
if the parent uses the equity method of accounting, the consolidated stockholders' equity equals......
preexisting liability, post-acquisition obligation
investor must decide whether to record a planned restructuring obligation as a ______ of the investee or as a _____ of the investor or investee company
synergies
it is often said that goodwill reflects "corporate _____"
Acquisition Accounting Premium (AAP)
the difference between the FV of an acquired subsidiary (the purchase price) and the preacquisiton recorded carrying value of the subsidiary's net assets
subsidiary BV + AAP
the fair value of the subsidiary is equal to..... (formula)
fair value
the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
income approach
use valuation techniques to convert future amounts (FCF) to a single, discounted present amount (PV). The measurement includes current market expectations about future amounts.
market approach
valuation techniques that use prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including entire companies or businesses).
services provided by attorneys, accts & IBs, indirect costs such as office expenses
what are 2 examples of acquisition-related costs that are expensed in the acquisition period
income approach
what valuation technique is typically used for customer lists and in-process R&D (IPRD)
market approach
what valuation technique is typically used for marketable securties? (stocks, traded option)
cost approach
what valuation technique is typically used for tangible assets and PP&E?
recognize gain/loss in net income
when a company owns a noncontrolling interest in a company, and then gains control, the company must revalue the noncontrolling interest to FV immediately before acquiring the controlling interest. How is this difference recognized?
CEADI, E & A (E - eliminate subsidiary's SH EQ at BoY and A- eliminate AAP)
Consolidation acronym used in this course is? What two letters were mentioned in this chapter?
