Académique Documents
Professionnel Documents
Culture Documents
Business
Combinations
1-2
Business Combinations
1: ECONOMIC
MOTIVATIONS
1-3
1-4
Cost advantage
Lower risk
Fewer operating delays
Avoidance of takeovers
Acquisition of intangible assets
Other: business and other tax advantages,
personal reasons
1-5
Regulation
1-6
Business Combinations
2: FORMS OF BUSINESS
COMBINATIONS
1-7
Consolidation
Occurs when a new corporation is formed to
take over the assets and operations of two or
more separate business entities and dissolves
the previously separate entities.
1-8
Mergers:
A+B=A
X+Y=X
1-9
Consolidations:
E + F = D
K + L = J
1-10
1-11
Business Combinations
3: ACCOUNTING FOR
BUSINESS
COMBINATIONS
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1-13
1-14
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.
1-15
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.
1-16
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.
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3,200
2,000
1,200
1-18
160
80
240
1-19
Receivables (+A)
XXX
Inventories (+A)
XXX
XXX
Goodwill (+A)
XXX
XXX
XXX
3,200
1-20
Business Combinations
4: RECORDING FAIR
VALUES IN AN
ACQUISITION
1-21
Include:
Identifiable intangibles resulting from legal or
contractual rights, or separable from the entity
Research and development in process
Contractual contingencies
Some noncontractual contingencies
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1-23
1-24
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,
1-25
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
1-26
1-27
Cash
Net receivables
Inventory
Land
Buildings, net
Equipment, net
Patents
Total assets
Accounts payable
Notes payable
Other liabilities
Total liabilities
Net assets
Book Val.
$100
300
400
100
600
500
0
$2,000
$120
300
80
$500
$1,500
Fair Val.
$100
280
500
200
1.000
700
100
$2,880
$120
270
90
$480
$2,400
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$2,400
1-29
2,800
800
1,000
1,000
1-30
Cash (+A)
100
280
Inventories (+A)
500
Land (+A)
200
Buildings (+A)
1,000
Equipment (+A)
700
Patents (+A)
100
Goodwill (+A)
400
120
270
90
2,800
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$2,400
$2,000
$400
1-32
2,000
400
800
800
1-33
Cash (+A)
100
280
Inventories (+A)
500
Land (+A)
200
Buildings (+A)
1,000
Equipment (+A)
700
Patents (+A)
100
120
270
90
2,000
400
1-34
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.
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1-37
1-38
1-39
Intangibles
Intangibles
Research &
Intangibles
1-41