Flashcards in Introduction to Business Combinations Deck (23):
What is a business combination?
a transaction or an event where an acquirer obtains control of a business
How is "control" defined in business combinations?
Voting control and is essentially greater than 50% voting interest
What is defined as "an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return?"
A business. Does not have to be profitable to be considered a business
What are the 3 types of business combinations?
What method of accounting must be used to record all business combinations for which the date is on or after December 15, 2008?
Acquisition method. Prior to that could be accounted for using the purchase method or pooling of interest method
What is a merger?
One preexisting entity acquires either a group of assets that constitute a business or controlling equity interest of another preexisting entity and "Collapses" the acquired assets or entity into the acquiring entity.
Only one entity survives. The merged company ceases to exist
What is a consolidation?
A new entity consolidates the net assets or the equity interest of two(or more) preexisting entities
Only one entity exists. The consolidated entities cease to exist as legal entities
What is an acquisition?
One preexisting entity acquires controlling equity interest of another preexisting entity, but both continue to exist and operate as separate legal entities.
In a merger or consolidation how are the assets of the merged entity treated?
The acquirer buys either a group of assets that constitute a controlling interest(>50% of common stock) and the assets and liabilities become a part of the acquirer firm.
What is the accounting entry to record the assets and liabilities of a firm that has been merged or consolidated?
CR: Liabilities (Assumed)
CR: Consideration given
using acquisition method of accounting
Does a merger or consolidation result in the need for Consolidated Financial Statements?
No, because only one entity exists in these types of combinations
In an acquisition how are the assets of the acquired entity treated by the acquirer?
One entity buys controlling interest of the voting stock of a target entity. Both entities continue as separate legal and accounting entities, therefore, all assets stay on the books of the acquired company, not the acquirer
What is the accounting entry when an entity acquires another entity? (On the acquirer's books)
DR: Investment in subsidiary
CR: Consideration Given
Does an acquisition result in the need for Consolidated Financials?
Yes, since after the acquisition two entities exist, one controlled by the other
List the primary mean of accomplishing a business combination.
The acquisition by one entity of the common stock of another entity to gain control of the investee
Define "parent company" as it relates to business combinations
Designation of the Investor in a business combination
Describe how income is determined at the date of a combination
Only acquirer's operating results up to the date of combination enter into determination of "consolidated" net income
What is the designation of the investee in a business combination?
Describe how income is determined for subsequent years of a combination
Acquirer's and Acquiree's operating results enter into determination of consolidated net income
Describe how income is determined at the end of the year for a combination.
Acquirer's operating results for the year plus acquiree's operating results after the combination enter into the determination of consolidated income for the year of combination.
Define/describe a "legal acquisition"
One entity acquires controlling interest of another entity, but both continue to exist and operate as separate legal entities
Define/describe a "legal consolidation"
A new entity is formed to combine (consolidate) two or more preexisting entities