question

Transaction

answer

-one firm gaining control of another firm with both firms continuing to operate as separate legal entities -we are the acquiring firm, the buyer

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Merger

answer

In a merger, the combining companies become one legal entity -statutory merger, statutory combination -no consolidated financial statements (only one company left)

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Acquisition

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In an acquisition, the combining companies continue as separate legal entities and a parent/subsidiary relationship is established -required consolidated financial statements

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Valuation of Business Entities

answer

assessing the overall value of a company often includes: -valuation of individual assets & liabilities -valuation of potential earnings

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Valuation Possibilities

answer

-multiples of current earnings -PV of anticipated future new cash flows generated by the company -sophisticated financial models

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Valuation of Business Entities 2

answer

-Accountants often assess the value of the consideration given in exchange for the asset acquired -problem areas: illiquid or privately held securities or securities with unusual features & contingent consideration

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Valuation of Individual Assets

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-must allocate fair value to each asset and liability acquired, including intangible assets with no book value -Assets: fair value of a company's individual assets, usually determined by appraisal (given in class problems)

question

Valuation of Individual Liabilities

answer

-current liabilities are often viewed as having fair values equal to their book values because they will be paid at face amount within a short time -long-term liabilities must be valued based on current interest rates, fair value is present value of future payments

question

Goodwill in Theory

answer

In theory, goodwill is the excess earnings power of the acquired company -synergy occurs when assets operated together have a value that exceeds the sum of their individual values -this "going concern value" makes it desirable to operate the assets as an ongoing entity rather than sell them individually

question

Goodwill in Practice

answer

In practice, goodwill represents the premium paid to acquire control -amount of the purchase price in excess of the FV of the identifiable assets and liabilities acquired is viewed as the price paid for goodwill

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Goodwill Equation

answer

Amount Paid - (FV assets-FV liabilities)= Amount Paid- net FMV assets

question

Accounting for Goodwill

answer

-goodwill is NOT amortized -goodwill only shows up on consolidated F/S -at date of acquisition, goodwill is assigned to a reporting unit or business segment -tested for impairment on an annual basis for each reporting unit -any impairment loss is reported on the income statement

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Level of Common Stock Ownership

answer

0%-20% Influence, not significant: FMV method 20%-50% Significant Influence: Equity Method 50%-100% Control: Consolidation

question

Fair Value Method

answer

Cash Dividend Income -record only share of the distributed earnings (dividends) -revalue investment account to FMV at each balance sheet date

question

Equity Method: ASC 323

answer

Requires that the equity method be used for reporting investments, other than temporary, in common stock of: -corporate joint ventures -companies in which the investor's ownership of voting stock gives the investor the "ability to exercise significant influence over operating and financial policies" of that company

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IFRS 28

answer

participate in financial & operating policies, but not control over policy -corresponds to ASC 323

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ASC 323 Influence Assumption

answer

"an investment (direct or indirect) of 20 or more of the voting stock of an investee should lead to the presumption that in the absence of evidence to the contrary, an investor has the ability to exercise significant influence over an investee"

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Equity Method: Purchase at BV of Equity

answer

Investment Cash -record at FMV at acquisition

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Equity Method: Recognition of Income

answer

Investment (B/S) Equity Income (I/S)

question

Equity Method: Recognition of Dividends

answer

Cash (B/S) Investment (B/S) -share of income already recorded

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Equity Method Reporting: Balance Sheet

answer

Assets Current Assets Long-term Assets: Investment in XYZ our share of OE

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Equity Method Reporting: Income Statement

answer

Sales Operating Income Other Income: Equity Method Income % of income Net Income

question

ASC 323 Significant Influence

answer

An investor owning less than 20% can still have significant influence. ASC 23 stated a number of factors that could indicate such an influence: -representation on BOD -participation in policy-making -material inter-company transactions -interchange of managerial personnel -technological dependency -size of investment in relation to concentration of other shareholdings

question

ASC 323 Evidence for No Influence

answer

evidence that an investor is unable to exercise significant influence over an investee: -opposition by the investee -investor and investee sign an agreement in which the investor surrenders significant shareholder rights -majority ownership of the investee is concentrated among a small group of shareholders who operate the investee without regard to the views of the investor -the investor, desiring more information than is available to the investee's other shareholders, tries to obtain that information, and fails -the investor tries and fails to obtain representation on the investee's BOD

question

Equity Method: Recognition of Additional Depreciation

answer

Equity Income Investment -if investor wasn't recording full depreciation according to most recent FMV, investor must record additional

question

Upstream & Downstream Sales

answer

Investor sale to Investee: Downstream Investee (Sub) to Investor (Parent): upstream

question

Intuition Underlying Consolidation

answer

-the consolidation of the balance sheets of the parent and subsidiary is accomplished by replacing the Equity Investment account with the assets and liabilities to which it relates -We can't just add the parent & subsidiary balance sheet accounts: subsidiary net assets would be double counted -the Stockholder's Equity reported on the consolidated F/S should be limited to the equity held by the parent's shareholders

question

Cost of Investment (Purchase Price or FMV Paid)

answer

-the value of the consideration given to the owners of the acquired company normally constitutes the largest part of the total cost -Three types of other costs that may be incurred in effecting a business combination: -direct costs (auditor, legal fees) -Costs of issuing securities (underwriter) -Indirect and general costs

question

Historical Cost Principle

answer

Asset cost includes consideration given plus all direct costs incurred in the acquisition -purchase methods adds direct costs -acquisition method expenses direct costs

question

M&A Costs

answer

-purchase method adds direct costs -acquisition method expenses direct costs -stock issuance costs reduce the amount allocated to capitol stock: these do not meet definition of expense -indirect costs expensed as incurred

question

SFAS 141(R) Acquisition Cost

answer

fair value of the acquired business as a whole -treat direct costs as expenses -contingent consideration obligations are recognized as part of the purchase price

question

SFAS 141(R) Requirements

answer

requires regular measurement and recognition of the fair values of the separately identified assets and liabilities assumed -intangible assets -contractual or separable

question

SFAS 141(R) IPR&D & GW

answer

-Capitalize purchased in-progress research and development (IPR&D) -test annually for impairment -future R&D expenditures are still expensed as incurred -Treat negative goodwill as a gain on acquisition

question

SFAS 141(R) New Concepts

answer

-the "business fair value" measurement approach involves a departure from the historic cost principle -the board believes FV is more relevant for assessing current financial position- current cash equivalent versus price of past transaction -the capitalization of IPR&D departs from the traditional SFAS 2 approach of expensing R&D as incurred

question

Recording Investment: 3 Methods

answer

1. Acquisition Method: record investment in common stock at fair value paid 2. Purchase Method: record investment in common stock at fair value paid plus acquisition costs using historical cost principle 3. Pooling of Interest Method: record investment in common stock at the book value of investee's equity and transfer the balance in R/E

question

Accounting for Negative Goodwill

answer

-Purchase Method: allocate in proportion to fair values against FMV of non-current assets excluding marketable securities -Acquisition Method: recognize gain on acquisition

question

Disclosure Requirements

answer

1. the name and a brief description of the acquired company 2. a statement of the accounting method used 3. information of the total cost incurred in making the purchase 4. portion of the year for which results of the acquired company have been included 5. information on contingent payments or commitments and their accounting treatment

question

Pro Forma F/S

answer

-operating results as if the acquisition had been made at the start of the period -when comparative F/S are presented, operating results for the preceding period as if the acquisition had occurred at the start of that period

question

Consolidated Statements

answer

-Separate legal entities but only ONE reporting entity -group of corporation under common control -Include only transactions with external parties -eliminate inter-company transactions (inventory sales) -prepared for reporting purposes only -there are no consolidated journals or ledgers -must start with separate company adjusted trial balances each year -must repeat elimination entries each year

question

Equity Elimination Entry (E) (No excess FV)

answer

Common Stock (sub) APIC (sub) Retained Earnings (sub) Investment in subsidiary (parent) -eliminate inter-company stockholdings -can only be posted to the worksheet

question

Elimination Entries Subsequent to Acquisition (100% Owned)

answer

C: eliminate current period change in the parent's investment account E: eliminate beginning balance inter-company stockholdings A: allocated beginning balance of AAP to assets and liabilities D: record current year depreciation/amortization of excess fair value

question

C Elimination Entry

answer

Equity Method Income P's EM income Retained Earnings/Dividend s's div Investment in Subsidiary plug P's EM income= (%owned*NI)-depreciation AAP plug= change in investment account this year

question

Accounting for Goodwill SFAS 142

answer

-goodwill is not amortized -at date of acquisition, goodwill is assigned to a reporting unit or business segment -tested for impairment on an annual basis for each reporting unit -any impairment loss is reported on I/S

question

Step 1 GW Impairment Test

answer

-Compare FV of Reporting Unit to BV of Reporting Unit -If FVBV then stop, no loss is recognized

question

Step 2 GW Impairment Loss

answer

1. Calculate implied value of GW FV of Reporting Unit =implied value of GW 2. Calculate impairment loss BV of GW =impairment loss on I/S

question

All of the following are acceptable methods to account for a majority owned investment in subsidiary except:

answer

Fair Value Method

question

Under the equity method:

answer

Income reported by the subsidiary increases the investment account.

question

When consolidating a subsidiary under the equity method, which of the following statements is true?

answer

All depreciable net assets are revalued to fair value and must be amortized over their useful lives.

question

When is a goodwill impairment loss recognized?

answer

If both the market value of a reporting unit and its associated implied goodwill fall below their respective carrying values.

question

How is the cost of an intangible asset allocated to expense, when the asset has no legal, regulatory, contractual, competitive, economic, or other factors that limit its life?

answer

No amortization, but annually reviewed for impairment and adjusted accordingly.

question

For which of the following accounts of a wholly-owned subsidiary is the FMV adjustment associated with the original combination not amortized?

answer

Land.

question

Direct combination costs and stock issuance costs are often incurred in the process of making a controlling investment in another company. How should those costs be accounted for in a business combination accounting for using the acquisition method?

answer

-Direct Combination Costs: increase expenses -Stock Issuance Costs: decrease paid-in-capital

question

On July 1, 2002, Big acquires 100% of Little. Both companies have a fiscal year end of 12/31/02. At 12/31/02, how much of the accounting acquisition premium associated with inventory should be amortized?

answer

100% of the FMV adjustment.

question

What is the primary accounting difference in accounting for a subsidiary that is dissolved and when the subsidiary retains its incorporation?

answer

If the subsidiary retains its incorporation, the consolidation is not formally recorded in the accounting records of the acquiring company.

question

Which of the following is a reason for a business combination to take place?

answer

A) Cost savings through elimination of duplicate facilities. B) Quick entry for new and existing products into domestic and foreign markets. C) Diversification of business risk. D) Vertical integration. E) All of the above.

question

In a transaction accounted for using the acquisition method where cost exceeds book value, which statement is true?

answer

Net assets of the acquired company are revalued to their fair market values and any excess of cost over fair market value is allocated to goodwill.

question

Which of the following statements is true?

answer

Pooling of interests is no longer acceptable for new combinations as stated in SFAS No. 141, "Business Combinations."

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