Purchase Accounting

Question 1

Purchase accounting

Answer 1

The set of accounting standards that governs how an acquirer recognizes and record an M&A Transaction on its balance sheet…GAAP and IAS require the use of this system

Question 2

Net Assets

Answer 2

Assets - Liabilities

Question 3

Identifiable Assets

Answer 3

Assets - Target’s Existing Goodwill

Question 4

Net Identifiable Assets

Answer 4

Assets - Targets Existing Goodwill - Liabilities - Non-controlling interest

Question 5

Non-controlling interest

Answer 5

Also called minority interest. Ex if a company owns 80% of a subsidiary, the 20% it does not own is the non-controlling interest….that 20% is the equity that an outside investors has invested in the subsidiary. It is classified as equity

Question 6

Tangible book value

Answer 6

Same as Net Identifiable Assets…Book value to Common Equity = Assets - Liabilities - Non-controlling interest. Tangible Book Value = Book Value to Common Equity - Target’s Goodwill.

Question 7

Target’s assets and liabilities on the day of the acquisition are recorded at…

Answer 7

Fair Market Value…net identifiable assets that have been increased to FMV are called write ups. Scrapping the target’s inventory after acquiring it would be recorded as a write down. FMV set by professional appraisers

Question 8

Goodwill

Answer 8

The difference between the purchase price (offer value) and the fair market value. Goodwill is an intangible asset representing the portion of the purchase price that cannot otherwise be allocated to, or explained by the fair market value of Target’s net identifiable assets.

Question 9

Purchase price

Answer 9

Purchase price = Fair Market Value (Net Identifiable Assets of Target + Write up of Net Assets) + Goodwill

Question 10

Most common write ups are…

Answer 10

PP&E and brand names and patents

Question 11

Identifiable Intangibles are recognized separately from goodwill if they…

Answer 11

1) Arise from a legal or contractual right or obligation; or 2) are capable of being separated from the acquired entity, meaning that the identifiable intangible can be sold, licensed, rented or exchanged. Patents and brand names are examples of identifiable intangibles that are separate from goodwill.

Question 12

Goodwill created =

Answer 12

Offer value of equity
Less:  Net Identifiable Assets of Target
Less:  Write-ups of Net Identifiable Assets
= Goodwill created  
Simplified version...
Offer value of equity
Less:  Net Identifiable Assets of target (assumed equal to Fair Market Value)
= Goodwill created

Question 13

Write ups

Answer 13

Ex. a PP&E write up can affect depreciation expense and amortization expense…which will have tax implications…deferred income taxes which will affect the goodwill calculation…deferred income taxes are added back in. There is no amortization of goodwill or any indefinite life intangible…but they can be tested for impairment.

Question 14

Transaction expenses

Answer 14

Acquisition related fees paid to investment bankers, consultants, and accountants…together with any costs related to the execution of the transaction. They are expensed as incurred…they are generally “looked past”

Question 15

In Process R&D (IPR&D)

Answer 15

Capitalized into indefinite life intangible

Question 16

Minority interest

Answer 16

Classified as equity; now called non-controlling interest

Question 17

Purchase price determination

Answer 17

Stock paid by acquirer valued at acquisition date