Acquisition

Question 1

Recording the acquisition - parent company’s internal journal entry

Answer 1

1) For cash:

dr investment in sub
cr cash

2) For stock
dr investment in sub
cr common stock (parent at par)- use FV at date transaction closes NOT announcement date
cr apic (parent at fv-par)

Total installment = shares of common stock given up * fair value

Question 2

parent’s basis

Answer 2

acquisition price = investment in sub (at fv of the date of close)

Question 3

Steps

Answer 3

CAR IN BIG
CAR: eliminates sub’s entiere equity
I: eliminate’s parent’s investment
n: create non controlling inte

BIG: adjust old sub’s net assets bv to fv and then rem is goodwill
i: identifiable intangibles like covenant not to compete; trademark, etc

Question 4

CAR

Answer 4

assets-liab
net book value
net assets
equity
AT THE DATE OF ACQUISITION

Question 5

Diff between bv and fv

Answer 5

at the date of acquisition;

common stock and apic value will be the same; need to back track to find out beg re

beg re+ni-div=end re where beg re = re at purchase date amount

Question 6

investment in sub

Answer 6

original cost (measured at fv cash or common stock fv) + expenses (none)

expenses:
*out of pocket expenses like finder’s fees or legal fees are expensed (capitalized in cost or equity method)
*stock registration and issuance cost such as SEC filing fee are a direct reduction of the value of the stock issued (APIC of parent)
*

Question 7

investment in subpass key

Answer 7

original cost (measured at fv cash or common stock fv) + expenses (none)

expenses:

• out of pocket expenses like finder’s fees or legal fees are expensed (capitalized in cost or equity method)
• stock registration and issuance cost such as SEC filing fee are a direct reduction of the value of the stock issued (reduce APIC of parent)
• indirect costs are expensed as occurred
• bond issue costs are capitalized and amortized (dr. bond issue costs)

all these fees legal and registration are paid in cash

Question 8

pass key

Answer 8

make sure you look at acquisition related costs that can expensed

Question 9

Noncontrolling interest

Answer 9

must be reported at fair value in the equity section of the consolidated balance sheet separate from the parent’s equity

this will include the NI’s share of any goodwill even when there is no cost basis

• At acquisition date: NInt balance sheet: fair value of sub * NInt %
• After acquisition date: Beg NInt + NonIn NI - Nint Div = End NInt
• allocation of sub’s losses: allocated to nonint even if it exceed’s the nonint’s share of equity (so if you have a negative balance)

OCI or statement of comprehensive income consolidated will show comprehensive income related to the parent and related to nonint

Question 10

NonInt Goodwill

Answer 10

GAAP: Full method: NCI: FV of investment 100% * nonInt%
IFRS: Preferred partial; can use full on a transaction by transaction basis:
NCI= FV of sub’s net identifiable assets * nonint %

Question 11

ONLY THING ON THE SEE SAW THAT IS OF THE PARENT

Answer 11

Investment made by parent and non int; everything else is the sub’s (bv, fv, net identifiable intangibles, goodwill)

Question 12

Identifiable intangibles related to acquisition of sub

Answer 12

recorded at fv; say the company paid premium for in process r&d

recognize as an intangible separate from goodwill at the acquisition date (need valuation)
do not immediately write off
it is an asset that is carried

expense the rest of the cost to complete the project

later:
if the project is a success then r&d
if failure then impair or write off r&d

when acquired adn recorded on acquirer’s book recorded at fv no matter what the cost is

Question 13

gain

Answer 13

if fair value of invest < fair value of sub’s net assets then gain is recognized

gain is now on the creidt side

Question 14

purchase price

Answer 14

of 100% of the investment + nci

Question 15

deprecitation

Answer 15

recalculate based on the new basis of assets after you acquire stuff

Question 16

identifiable intangibles

Answer 16

examples: agreements, contracts, rights, permits, copyrights, customer list, inprocess r&d, non competes etc

finite life: amortize over the remaining life (two step impairment test)
infinite life: one step impairment test; no amortization

Question 17

goodwill (acquisition goodwill)

Answer 17

not impaired, tested for impairment

in the period that it is determined to be impaired, it is written down and charged as an income on i/s

intangibles not subsumed into goodwill: assembled workforce, distribution channels, technical expertise, training and recruiting, advertising programs, technical know how

Question 18

Private company accounting alternative

Answer 18

under us gaap:

private company = not public company or non for profit

goodwill alternative:would not separately recognize the following intangibles for business combinations but just lump everything with goodwill : noncompete agreements, customer related intangibles

this alternative: (elect to amortize goodwill max for 10 years only under US GAAP) this alternative also applies where a private company is required to recognize fair value of intangibles as a result of applying the equity method to jv or adopting fresh start reporting in reorganization
*this alternative can only be elected also if it elects the private company goodwill alternative but a company can elect the goodwill accounting alternative without electing this alternative for a business combination

Question 19

Full vs. partial goodwill

Answer 19

this option of full goodwill or partial goodwill only available when you dont acquire 100% of the business:

Full goodwill (US GAAP or IFRS):
if you acquired 80% of a company you calculated 80% goodwill and you imply the remaining 20%

goodwill = fair value of sub-fair value of sub’s net assets

Partial/blended goodwill (preferred method under IFRS, can use full method on a transaction by transaction basis)

if you acquired 80% of a company and you calculated some goodwill for that 80%, dont imply what that 20% would have been and give credit to non int

goodwill = acquisition cost of that 80%-fair value of sub’s net assets acquired so 80%. (Basically ignore non int)

If buys 100% of the company then full goodwill = partial goodwill

Question 20

fair value of sub’s net assets

Answer 20

fv of sub’s net assets + fv of identifiable intangibles

Question 21

partial goodwill

Answer 21

total does not add up 100% of the investment

60% + partial investment

since non cont int didnt pay for goodwill we font write up their assets

Question 22

if they eliminating journal entry

Answer 22

at the beg of the year- beg re

at the end of the year- end re

Question 23

Measurement period adjustment

Answer 23

values assigned to assets and liab not always known with certainty on the acquisition date adn may be adjusted during the measurement period: provisional fv best guess

these are offset against against gain or goodwill

dep and amortizations are reported in the period the adjustments are determined
*NO RESTATEMENT is required

Question 24

if affects apic

Answer 24

does affects ni in trms of registration fees

but if expenses as incurred affects ni in that period

Question 25

consolidation

Answer 25

move from sth to acquisition (20% to 95% in july)

till july 20%
after july 95%

Question 26

earnings

Answer 26

%

Question 27

fv of inventories in the big b step

Answer 27

fair value of merchandise and finished goods = selling price- disposal costs - reasonable profit allowance

Question 28

earnings

Answer 28

share of ni that you own so say 80% ownership- 80% ni

Question 29

new equity after consolidation

Answer 29

common stock total + apic total +non controlling int + re

non controlling int on b/s= investment in non controlling int + non int n/i - non int div = non controlling investment

Question 30

equity immediately after acquisition

Answer 30

s/e of parent + fv of any non controlling int

Question 31

once consolidated

Answer 31

parent’s re = consolidated re at year end
parent’s ni = consolidated ni
parent’s div = consolidated div even if exclusive of the sub’s income

Question 32

control to non control total gain

Answer 32

gain on sale + re measurement gain so you remeasure the stocks that you didnt sell to the new price or the fv and that is the remeasurement gain which IS on the i/s

fv adjustment is recognized as gain or loss by the investor in the period of acquisition

Question 33

Non int beg yr vs end yr

Answer 33

non int beg yr= just investment

end yr = inv + ni - div % on b/s

Question 34

consolidated current assets

Answer 34

current assets of both at bv + sub adjusted to fv because we’re only getting rid of se

or bv of parent + fv of sub

Question 35

even if consolidated both companies are shown exclusive of each other

Answer 35

just parent’s se and re

Question 36

paying dividend

DBT only div paid to parent or noncontrolling int also?

Answer 36

no effect on consolidated re because just moves from one company to another

Question 37

Consolidated statement of cf- period of acquisition

Answer 37

1)net cash spent or received in the acquisition process must be reported in the investing section of the statement of cf
example: cash spent to acquire a sub - cash that the sub had
2)assets and liab of the sub on the acquisition date must be added to the parent’s assets and liab at the beg of the year to determine the total change in cf due to op, inve, and fin activities
(*se is eliminate of the sub)

Question 38

final b/s i/s presentation

Answer 38

consolidated Assets+liab = add (fv parent’s assets + fv sub’s assets)
consolidated se= parent’s se + non controlling int
consolidated re/div/ni = just parent’s

Question 39

consolidated statement of cf- sub period

Answer 39

same except: 1) when reconciling net income with net cash provided by operating activities: total consolidated ni (ni of parent + no non controlling int) should be used

2) financing section should report dividends paid by: sub to noncontrolling s/h (NOT div by sub to parent)
3) investing section may report acquisition of additional sub shares by the parent if the acquisition was an open market purchase

Question 40

Step Acquisition:

Answer 40

1) control to non control (cross 50%) -> gain or loss on sale + remeasuring everything else to fv and that is on i/s
2) non control to control (cross 50%) -> remeasure previously held stuff to fv and that is on i/s
at that point the value of the investment (pp+ni-div)- fv of equity not purchase price
3) control to more or less control (beyond the 50% line) -> NO GAIN or LOSS on the i/s; treated like a treasury stock transaction (APIC adjusted)

Example: if bought 10% of 20,000. now after 5 years bought another 50% for 400,000 (100% for 800,000). So 10% of that things is now just 80,000. You bought it initially for 20,000. so the difference is your remeasurement gain.

JE:

dr. Investment in sub 60,000
cr. gain 60,000

total investment in sub = 20,000 (initial) + 60,000 (gain) + 400,000 (additional acquired) = total balance

dont really care about the fv of net identifiable interest and stuff only care about the investment; you can use that to calc goodwill

Question 41

at the date of acquisition

Answer 41

means all the values given are after the acquisition is complete

Question 42

acquisition method disclosures

Answer 42

name, date, %, reasons, description of each transaction

Question 43

disclosure if the business combination is achieved in stages

Answer 43

fv b4 acquisition, gain or loss as a result of re measurement, valuation techniques used

Question 44

disclosure if the acquirer is a public entity

Answer 44

rev and earnings since acquisition, rev and earnings of combines entity as if acquired beg yr, comparables financials as if rev and earnings as if acquired beg yr

Question 45

Consolidation disclosures

Answer 45

policy being followed

Question 46

goodwill

Answer 46

acquired goodwill not amortized subject to impairment test

Question 47

acquisition cost is fv of assets given up not what acquired

Answer 47

so if stock for stock, stock that you are giving up is your acquisition cost

Question 48

contingent consideration

Answer 48

also included in investment

Question 49

bargain purchase

Answer 49

gain situation

pp < fv net assets acquired

Question 50

pp

Answer 50

only fv of consideration given

NOT relocation costs

Question 51

fees

Answer 51

legal fees + due diligence- current year expenses expensed as occured (not amortized); debt securities issued liab; registration capitalized and amortized