Académique Documents
Professionnel Documents
Culture Documents
Business
Combinations
to accompany
Advanced Accounting, 11th edition
by Beams, Anthony, Bettinghaus, and Smith
Copyright 2012 Pearson Education,
Inc. Publishing as Prentice Hall
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Business Combinations
1: ECONOMIC MOTIVATIONS
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Cost advantage
Lower risk
Fewer operating delays
Avoidance of takeovers
Acquisition of intangible assets
Other: business and other tax advantages,
personal reasons
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Business Combinations
2: FORMS OF BUSINESS
COMBINATIONS
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Mergers:
A+B=A
X+Y=X
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Consolidations:
E + F = D
K + L = J
Company D is formed and acquires the net
assets of companies E and F by issuing
Company D stock. Companies E and F are
dissolved. Company D survives with the assets
and liabilities of both dissolved firms.
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Business Combinations
3: ACCOUNTING FOR
BUSINESS COMBINATIONS
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International Accounting
Most major economies prohibit the use of the
pooling method.
The International Accounting Standards Board
specifically prohibits the pooling method and
requires the acquisition method.
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Recording Guidelines (1 of 2)
Record assets acquired and liabilities assumed
using the fair value principle.
If equity securities are issued by the acquirer,
charge registration and issue costs against the fair
value of the securities issued, usually a reduction
in additional paid-in-capital.
Charge other direct combination costs (e.g., legal
fees, finders fees) and indirect combination costs
(e.g., management salaries) to expense.
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Recording Guidelines (2 of 2)
When the acquiring firm transfers its assets other
than cash as part of the combination, any gain or
loss on the disposal of those assets is recorded in
current income.
The excess of cash, other assets, debt, and equity
securities transferred over the fair value of the net
assets (A L) acquired is recorded as goodwill.
If the net assets acquired exceeds the cash, other
assets, debt, and equity securities transferred, a
gain on the bargain purchase is recorded in current
income.
Copyright 2012 Pearson Education,
Inc. Publishing as Prentice Hall
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1,600
1,000
600
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80
40
120
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XXX
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Business Combinations
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Goodwill
Goodwill is the excess of
The sum of:
Fair value of the consideration transferred,
Fair value of any noncontrolling interest in the
acquiree, and
Fair value of any previously held interest in
acquiree,
Over the net assets acquired.
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Contingent Consideration
The fair value of contingent consideration is
determined or estimated at the acquisition
date and it is included along with other
consideration given as part of the
combination.
Classifying contingencies:
Contingent share issuances are equity
Contingent cash payments are liabilities
Estimated contingencies are revalued to fair
value at each subsequent reporting date.
Copyright 2012 Pearson Education,
Inc. Publishing as Prentice Hall
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Cash
Net receivables
Inventory
Land
Buildings, net
Equipment, net
Patents
Total assets
Accounts payable
Notes payable
Other liabilities
Total liabilities
Net assets
Copyright 2012 Pearson Education,
Inc. Publishing as Prentice Hall
Book Val.
$50
150
200
50
300
250
0
$1,000
$60
150
40
$250
$750
Fair Val.
$50
140
250
100
500
350
50
$1,440
$60
135
45
$240
$1,200
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$1,200
$ 200
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1,400
400
500
500
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Cash (+A)
Net receivables (+A)
Inventories (+A)
Land (+A)
Buildings (+A)
Equipment (+A)
Patents (+A)
Goodwill (+A)
Accounts payable (+L)
Notes payable (+L)
Other liabilities (+L)
Investment in Sad Co. (-A)
Copyright 2012 Pearson Education,
Inc. Publishing as Prentice Hall
50
140
250
100
500
350
50
200
60
135
45
1,400
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$1,200
$1,000
$200
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1,000
200
400
400
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Cash (+A)
50
Net receivables (+A)
140
Inventories (+A)
250
Land (+A)
100
Buildings (+A)
500
Equipment (+A)
350
Patents (+A)
50
Accounts payable (+L)
Notes payable (+L)
Other liabilities (+L)
Investment in Sad Co. (+A)
Gain from bargain purchase (G, +SE)
Copyright 2012 Pearson Education,
Inc. Publishing as Prentice Hall
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135
45
1,000
200
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Business Combinations
5: OTHER ISSUES:
IMPAIRMENTS,
DISCLOSURES, AND THE
SARBANES-OXLEY ACT
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Goodwill Controversies
Capitalized goodwill is the purchase price not
assigned to identifiable assets and liabilities.
Errors in valuing assets and liabilities affect the
amount of goodwill recorded.
Historically goodwill in most industrialized
countries was capitalized and amortized.
Current IASB standards, like U.S. GAAP
Capitalize goodwill,
Do not amortize it, and
Test it for impairment
Copyright 2012 Pearson Education,
Inc. Publishing as Prentice Hall
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