Professional Documents
Culture Documents
Consolidation of
Financial
Information
McGraw-Hill/Irwin
Business Combinations
Business Combinations
2-3
LO 1
integration
Cost savings
Quick entry into new markets
Economies of scale
More attractive financing opportunities
Diversification of business risk
Business Expansion
Increasingly competitive environment
2-4
2-5
LO 2
LO 3
Business Combinations
Business combinations . . .
can be achieved through transactions or
events in which an acquirer obtains control
over one or more businesses.
Business Combinations
2-8
2-10
Consolidation of Financial
Information
Parents
financial data
Subsidiaries
financial data
brought together
To report the financial position, results of operations,
and cash flows for the combined entity.
What is to be consolidated?
If dissolution occurs:
All account balances are actually consolidated
in the financial records of the survivor.
consolidated.
2-11
2-12
2-12
LO 4
LO 5
Fair Value
Acquisition Method
What if the consideration transferred does NOT
EQUAL the Fair Value of the Assets acquired?
If the consideration is MORE than the
Fair Value of the Assets acquired, the
difference is attributed to GOODWILL
If the consideration is LESS than the
Fair Value of the Assets acquired, we
got a BARGAIN!! And we will record a
GAIN on the acquisition!!
2-16
LO 6
Consideration Transferred =
Net Identified Asset Fair Values
Dissolution of Subsidiary
BigNet Companys Financial RecordsDecember 31
Current Assets . . . . . . . . . . . . . . . . . . . . . . . 300,000
Computers and Equipment . . . . . . . . . . . . . 600,000
Capitalized Software . . . . . . . . . . . . . . . . .1,200,000
Customer Contracts . . . . . . . . . . . . . . . . . . . 700,000
Notes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250,000
Cash (paid by BigNet) . . . . . . . . . . . . . . . . . . . . . . . . . . 550,000
Common Stock (20,000 shares issued at $10 par value) 200,000
Additional Paid-In Capital . . . . . . . . . . . . . . . . . . . . . . 1,800,000
To record acquisition of Smallport Company. Assets acquired
and liabilities assumed are recorded at fair value.
2-18
Dissolution of Subsidiary
BigNet Companys Financial RecordsDecember 31
Current Assets . . . . . . . . . . . . . . . . . . . . . 300,000
Computers and Equipment . . . . . . . . . . . 600,000
Capitalized Software . . . . . . . . . . . . . . .1,200,000
Customer Contracts . . . . . . . . . . . . . . . . . 700,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . .450,000
Notes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250,000
Cash (paid by BigNet) . . . . . . . . . . . . . . . . . . . . . . 1,000,000
Common Stock (20,000 shares at $10 par value) . . . . 200,000
Additional Paid-In Capital . . . . . . . . . . . . . . . . . . . . 1,800,000
To record acquisition of Smallport Company. Assets acquired
and liabilities assumed are recorded at fair value.
2-20
LO 7
Acquisition Method
Separate Incorporation Maintained
Dissolution
Consolidation
Fair value
Subsidiary
Consolidation
Acquiring
LO 7
2-25
5.
6.
7.
2-26
Acquisition Method
Consolidation Workpaper Example
2-27
LO 8
Summary
Consolidation of financial information is required
when one firm gains control of another.
Current financial reporting standards require the
acquisition method to be used in accounting for
business combinations.
Recognize Goodwill if the purchase price > fair
value of net assets acquired; recognize a gain if
purchase price < fair value of net assets.
Particular attention should be paid to the
recognition of intangible assets in business
combinations.
2-30