Beams11 ppt01

Chapter 1:
Business
Combinations
to accompany
Advanced Accounting, 11th edition
by Beams, Anthony, Bettinghaus, and Smith
Copyright 2012 Pearson Education,
Inc. Publishing as Prentice Hall
1-1
TEXTBOOK
ADVANCED ACCOUNTING,
11 EdItion.
Floyd. A. Beams
Joseph H. Anthony
Bruce Bettinghaus
Ken Smith
Pearson Publshing
1-2
MATERI
Ch 1. Business Combinations.
Ch 2. Stock Investment-Investor Accounting
and Reporting
Ch3. An Introduction to Consolidated Financial
Statements.
Ch 4. Consolidations Techniques and
Procedures.
Ch 5. Intercompany Profit TransactionsInventories.
1-3
MATERI
Ch 6. Intercompany Profit Transactions-Plant
Assets.
Ch 7. Intercompany Profit Transactions-Bonds.
Ch 8. Consolidations-Changes in Ownership
Interest.
Ch 9. Indirect and Mutual Holdings.
Ch 10. Subsidiary Prefered Stock.
Materi UTS
Materi UAS
: Ch 1 s/d Ch 5.
: Ch 6 s/d Ch 10.
1-4
KOMPOSISI NILAI
Absensi
10%
Tugas dan Quiz
20%
UTS
30%
UAS
40%
Total
100%

1-5
Chapter 1:
Business
Combinations
to accompany
Advanced Accounting, 11th edition
by Beams, Anthony, Bettinghaus, and Smith
1-6
Business Combinations: Objectives

1. Understand the economic motivations
underlying business combinations.
2. Learn about the alternative forms of
business combinations, from both the legal
and accounting perspectives.
3. Introduce concepts of accounting for
business combinations, emphasizing the
acquisition method.
4. See how firms record fair values of assets
and liabilities in an acquisition.
1-7
Business Combinations
1: ECONOMIC MOTIVATIONS

1-8
Types of Business Combinations

Business combinations unite previously separate
business entities.
Horizontal integration same business lines and
markets
Vertical integration operations in different, but
successive stages of production or distribution, or
both
Conglomeration unrelated and diverse products
or services
1-9
Reasons for Combinations
Cost advantage
Lower risk
Fewer operating delays
Avoidance of takeovers
Acquisition of intangible assets
Other: business and other tax advantages,
personal reasons

1-10
Potential Prohibitions / Obstacles

Antitrust
Federal Trade Commission prohibited Staples
acquisition of Office Depot
Regulation
Federal Reserve Board
Department of Transportation
Department of Energy
Federal Communications Commission
Some states have antitrust exemption laws to
allow hospitals to pursue cooperative projects.
1-11
2: FORMS OF BUSINESS
COMBINATIONS

1-12
Legal Form of Combination

Merger
Occurs when one corporation takes over all the
operations of another business entity and that
other entity is dissolved.
Consolidation
Occurs when a new corporation is formed to take
over the assets and operations of two or more
separate business entities and dissolves the
previously separate entities.
1-13
Mergers:
A+B=A
X+Y=X
Company A acquires the net assets of Company B

for cash, other assets, or Company A debt/equity
securities. Company B is dissolved; Company A
survives with Company Bs assets and liabilities.
Company X acquires the stock of Company Y from
its shareholders for cash, other assets, or
Company X debt/equity securities. Company Y is
dissolved. Company X survives with Company
Ys assets and liabilities.

1-14
Consolidations:
E + F = D
K + L = J
Company D is formed and acquires the net assets

of companies E and F by issuing Company D
stock. Companies E and F are dissolved.
Company D survives with the assets and
liabilities of both dissolved firms.
Company J is formed and acquires the stock of
companies K and L from their respective
shareholders by issuing Company J stock.
Companies K and L are dissolved. Company J
survives with the assets and liabilities of both
firms.
1-15
Keeping the Terms Straight

In the general business sense, mergers and
consolidations are business combinations and may
or may not involve the dissolution of the acquired
firm(s).
In Chapter 1, mergers and consolidations will involve
only 100% acquisitions with the dissolution of the
acquired firm(s). These assumptions will be relaxed
in later chapters.
Consolidation is also an accounting term used to
describe the process of preparing consolidated
financial statements for a parent and its subsidiaries.
1-16
3: ACCOUNTING FOR
BUSINESS COMBINATIONS

1-17
Business Combination (def.)

A business combination is a transaction or
other event in which an acquirer obtains
control of one or more businesses.
Transactions sometimes referred to as true
mergers or mergers of equals also are
business combinations. [FASB ASC 805-10]
A parent-subsidiary relationship is formed when:
Less than 100% of the firm is acquired, or
The acquired firm is not dissolved.
1-18
U.S. GAAP for Business Combinations

Since the 1950s both the pooling-of-interests
method and the purchase method of accounting
for business combinations were acceptable.
Combinations initiated after June 30, 2001 use the
purchase method. [FASB ASC 805]
Firms now use the acquisition method for business
combinations. This began with combinations in
fiscal periods beginning after December 15, 2008.
[FASB ACS 810-10-5-2]
1-19
International Accounting
Most major economies prohibit the use of the
pooling method.
The International Accounting Standards Board
specifically prohibits the pooling method and
requires the acquisition method.

1-20
Recording Guidelines (1 of 2)
Record assets acquired and liabilities assumed
using the fair value principle.
If equity securities are issued by the acquirer,
charge registration and issue costs against the fair
value of the securities issued, usually a reduction
in additional paid-in-capital.
Charge other direct combination costs (e.g., legal
fees, finders fees) and indirect combination costs
(e.g., management salaries) to expense.
1-21
Recording Guidelines (2 of 2)
When the acquiring firm transfers its assets other than
cash as part of the combination, any gain or loss on
the disposal of those assets is recorded in current
income.
The excess of cash, other assets, debt, and equity
securities transferred over the fair value of the net
assets (A L) acquired is recorded as goodwill.
If the net assets acquired exceeds the cash, other
assets, debt, and equity securities transferred, a gain
on the bargain purchase is recorded in current
income.
1-22
Example: Pop Corp. (1 of 3)

Pop Corp. issues 100,000 shares of its $10 par
value common stock for Son Corp. Pops stock
is valued at $16 per share. (in thousands)
Investment in Son Corp. (+A)

Common stock, $10 par (+SE)
Additional paid-in-capital (+SE)

1,600
1,000
600
1-23

Pop Corp. pays cash for $80,000 in finders and
consulting fees and for $40,000 to register and issue
its common stock. (in thousands)
Investment expense (E, -SE)
Additional paid-in-capital (-SE)
Cash (-A)
80
40
120
Son Corp. is assumed to have been dissolved. So, Pop

Corp. allocates the investments cost to the fair value
of the identifiable assets acquired and liabilities
assumed. The excess cost is goodwill.
1-24

Receivables (+A)
Inventories (+A)
Plant assets (+A)
Goodwill (+A)
Accounts payable (+L)
Notes payable (+L)
Investment in Son Corp. (-A)

XXX
XXX
XXX
XXX
XXX
XXX
1,600
1-25
4: RECORDING FAIR VALUE

USING THE ACQUISITION
METHOD

1-26
Identify the Net Assets Acquired

Identify:
Tangible assets acquired,
Intangible assets acquired, and
Liabilities assumed
Include:
Identifiable intangibles resulting from legal or
contractual rights, or separable from the entity
Research and development in process
Contractual contingencies
Some noncontractual contingencies
1-27
Assign Fair Values to Net Assets

Use fair values determined, in preferential
order, by:
Established market prices
Present value of estimated future cash flows,
discounted based on an observable measure, such
as the prime interest rate
Other internally derived estimations

1-28
Exceptions to Fair Value Rule

Use normal guidance for:
Deferred tax assets and liabilities
Pensions and other benefits
Operating and capital leases
[FASB ASC 740]
Goodwill on the books of the acquired firm is
assigned no value.

1-29
Goodwill
Goodwill is the excess of
The sum of:
Fair value of the consideration transferred,
Fair value of any noncontrolling interest in the
acquiree, and
Fair value of any previously held interest in
acquiree,
Over the net assets acquired.

1-30
Contingent Consideration
The fair value of contingent consideration is
determined or estimated at the acquisition
date and it is included along with other
consideration given as part of the
combination.
Classifying contingencies:
Contingent share issuances are equity
Contingent cash payments are liabilities
Estimated contingencies are revalued to fair
value at each subsequent reporting date.
1-31
Example Pit Corp. Data

Pit Corp. acquires the net assets of Sad Co. in
a combination consummated on 12/27/2011.
The assets and liabilities of Sad Co. on this
date, at their book values and fair values, are
as follows (in thousands):

1-32
Cash
Net receivables
Inventory
Land
Buildings, net
Equipment, net
Patents
Total assets
Accounts payable
Notes payable
Other liabilities
Total liabilities
Net assets
Book Val.
$50
150
200
50
300
250
0
$1,000
$60
150
40
$250
$750
Fair Val.
$50
140
250
100
500
350
50
$1,440
$60
135
45
$240
$1,200
1-33
Acquisition with Goodwill

Pit Corp. pays $400,000 cash and issues 50,000
shares of Pit Corp. $10 par common stock
with a market value of $20 per share for the
net assets of Sad Co.
Total consideration at fair value (in thousands):
$400 + (50 shares x $20)
$1,400
Fair value of net assets acquired: $1,200
Goodwill
$ 200
1-34
Entries with Goodwill

The entry to record the acquisition of the net
assets:
Investment in Sad Co. (+A)
Cash (-A)
1,400
400
500
500
The entry to record Sads assets directly on

Pits books:
1-35
Cash (+A)
Net receivables (+A)
Inventories (+A)
Land (+A)
Buildings (+A)
Equipment (+A)
Patents (+A)
Goodwill (+A)
Notes payable (+L)
Other liabilities (+L)
Investment in Sad Co. (-A)
50
140
250
100
500
350
50
200
60
135
45
1,400
1-36
Acquisition with Bargain Purchase

Pit Corp. issues 40,000 shares of its $10 par
common stock with a market value of $20 per
share, and it also gives a 10%, five-year note
payable for $200,000 for the net assets of Sad Co.
Fair value of net assets acquired

(in thousands)
Total consideration at fair value
(40 shares x $20) + $200
Gain from bargain purchase
$1,200
$1,000
$200
1-37
Entries with Bargain Purchase

The entry to record the acquisition of the net
assets:
10% Note payable (+L)
1,000
200
400
400
The entry to record Sads assets directly on

Pits books:
1-38
Cash (+A)
50
Net receivables (+A)
140
Inventories (+A)
250
Land (+A)
100
Buildings (+A)
500
Equipment (+A)
350
Patents (+A)
50
Notes payable (+L)
Other liabilities (+L)
Gain from bargain purchase (G, +SE)
60
135
45
1,000
200
1-39
5: OTHER ISSUES:
IMPAIRMENTS,
DISCLOSURES, AND THE
SARBANES-OXLEY ACT

1-40
Goodwill Controversies
Capitalized goodwill is the purchase price not
assigned to identifiable assets and liabilities.
Errors in valuing assets and liabilities affect the
amount of goodwill recorded.
Historically goodwill in most industrialized
countries was capitalized and amortized.
Current IASB standards, like U.S. GAAP
Capitalize goodwill,
Do not amortize it, and
Test it for impairment
1-41
Goodwill Impairment Testing

Firms must test for the impairment of goodwill
at the business unit reporting level.
Step 1: Compare the units net book value to its fair
value to determine if there has been a loss in value.
Step 2: Determine the implied fair value of the
goodwill, in the same manner used to originally
record the goodwill, and compare that to the
goodwill on the books.
Record a loss if the implied fair value is less
than the carrying value of the goodwill.
1-42
When to Test for Impairment

Goodwill should be tested for impairment at least
annually.
More frequent testing may be needed:
Significant adverse change in business
Adverse action by regulator
Unanticipated competition
Loss of key personnel
Impairment or expected disposal losses of:
Reporting unit or part of one
Significant long-lived asset group
Subsidiary
1-43
Business Combination Disclosures

Business combination disclosures include, but
are not limited to:
Reason for combination,
Nature and amount of consideration,
Allocation of purchase price among assets and
liabilities,
Pro-forma results of operations, and
Goodwill or gain from bargain purchase

1-44
Intangible Asset Disclosures

Specific disclosures are needed:
In the fiscal period when intangibles are acquired,
Annually, for each period presented, and
In the fiscal period that includes an impairment
Disclosures are needed for:
Intangibles which are amortized,
Intangibles which are not amortized,
Research & development acquired, and
Intangibles with renewal or extension terms
1-45
Sarbanes-Oxley Act of 2002

Establishes the PCAOB
Requires:
Greater independence of auditors and clients
Greater independence of corporate boards
Independent audits of internal controls
Increased disclosures of off-balance sheet
arrangements and obligations
More types of disclosures on Form 8-K
SEC enforces SOX and rules of the PCAOB
1-46
TH E EN D
Mochamad Abadan, Ak., CPA, CPMA, QIA, PIA, CA

0821 228 4869, 0812 1927 7069
Kap_m_abadan@yahoo.co.id
1/26/16
47

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Chapter 1:

Copyright 2012 Pearson Education,

Business Combinations: Objectives

Copyright 2012 Pearson Education,

Types of Business Combinations

Reasons for Combinations

Copyright 2012 Pearson Education,

Potential Prohibitions / Obstacles

Copyright 2012 Pearson Education,

Legal Form of Combination

Company A acquires the net assets of Company B

Copyright 2012 Pearson Education,

Company D is formed and acquires the net assets

Keeping the Terms Straight

Copyright 2012 Pearson Education,

Business Combination (def.)

U.S. GAAP for Business Combinations

Copyright 2012 Pearson Education,

Example: Pop Corp. (1 of 3)

Investment in Son Corp. (+A)

Copyright 2012 Pearson Education,

Example: Pop Corp. (2 of 3)

Son Corp. is assumed to have been dissolved. So, Pop

Example: Pop Corp. (3 of 3)

Copyright 2012 Pearson Education,

4: RECORDING FAIR VALUE

Copyright 2012 Pearson Education,

Identify the Net Assets Acquired

Assign Fair Values to Net Assets

Copyright 2012 Pearson Education,

Exceptions to Fair Value Rule

Copyright 2012 Pearson Education,

Copyright 2012 Pearson Education,

Example Pit Corp. Data

Copyright 2012 Pearson Education,

Acquisition with Goodwill

Entries with Goodwill

The entry to record Sads assets directly on

Acquisition with Bargain Purchase

Fair value of net assets acquired

Entries with Bargain Purchase

The entry to record Sads assets directly on

Copyright 2012 Pearson Education,

Goodwill Impairment Testing

When to Test for Impairment

Business Combination Disclosures

Copyright 2012 Pearson Education,

Intangible Asset Disclosures

Sarbanes-Oxley Act of 2002

Mochamad Abadan, Ak., CPA, CPMA, QIA, PIA, CA

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