Professional Documents
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Learning Objectives
1. Describe the major changes in the accounting for business combinations passed by the
FASB in December 2007, and the reasons for those changes.
2. Describe the two major changes in the accounting for business combinations approved by
the FASB in 2001, as well as the reasons for those changes.
3. Discuss the goodwill impairment test described in SFAS No. 142 [ASC 350–20–35], including
its frequency, the steps laid out in the new standard, and some of the likely implementation
problems.
4. Explain how acquisition expenses are reported.
5. Describe the use of pro forma statements in business combinations.
6. Describe the valuation of assets, including goodwill, and liabilities acquired in a business
combination accounted for by the acquisition method.
7. Explain how contingent consideration affects the valuation of assets acquired in a business
combination accounted for by the acquisition method.
8. Describe a leveraged buyout.
9. Describe the disclosure requirements according to Current GAAP related to each business
combination that takes place during a given year.
10. Describe at least one of the differences between U.S. GAAP and IFRS related to the
accounting for business combinations.
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Historical Perspective on Business Combinations
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LO 1 FASB’s two major changes for business combinations.
Historical Perspective on Business Combinations
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LO 1 FASB’s two major changes for business combinations.
Historical Perspective on Business Combinations
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LO 2 FASB’s two major changes of 2001.
Perspective on Business Combinations
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LO 3 Goodwill impairment assessment.
Perspective on
Business
Combinations
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Perspective on Business Combinations
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LO 3 Goodwill impairment assessment.
Perspective on Business Combinations
Step 1 - 2011
Fair value of reporting unit $400,000
Carrying value of unit:
Carrying value of identifiable net assets 330,000
Carrying value of goodwill 75,000
Total carrying value of unit 405,000
Excess of carrying value over fair value $ 5,000
Step 2 - 2011
Fair value of reporting unit $400,000
Fair value of identifiable net assets 340,000
Implied value of goodwill 60,000
Carrying value of goodwill 75,000
Impairment loss $ 15,000
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LO 3 Goodwill impairment assessment.
Perspective on Business Combinations
Step 1 - 2012
Fair value of reporting unit $400,000
Carrying value of unit:
Carrying value of identifiable net assets 320,000
Carrying value of goodwill 60,000 *
Total carrying value of unit 380,000
Excess of fair value over carrying value $ 20,000
Excess of fair value over carrying value means step 2 is not required.
* $75,000 (original goodwill) – $15,000 (prior year impairment)
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LO 3 Goodwill impairment assessment.
Perspective on Business Combinations
Step 1 - 2013
Fair value of reporting unit $350,000
Carrying value of unit:
Carrying value of identifiable net assets 300,000
Carrying value of goodwill 60,000 *
Total carrying value of unit 360,000
Excess of carrying value over fair value $ 10,000
Step 2 - 2013
Fair value of reporting unit $350,000
Fair value of identifiable net assets 325,000
Implied value of goodwill 25,000
Carrying value of goodwill 60,000
Impairment loss $ 35,000
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LO 3 Goodwill impairment assessment.
Perspective on Business Combinations
Review Question
The first step in determining goodwill impairment involves
comparing the
a. implied value of a reporting unit to its carrying amount
(goodwill excluded).
b. fair value of a reporting unit to its carrying amount
(goodwill excluded).
c. implied value of a reporting unit to its carrying amount
(goodwill included).
d. fair value of a reporting unit to its carrying amount
(goodwill included).
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LO 3 Goodwill impairment assessment.
Perspective on Business Combinations
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LO 3 Goodwill impairment assessment.
Perspective on Business Combinations
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LO 3 Goodwill impairment assessment.
Perspective on Business Combinations
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LO 3 Goodwill impairment assessment.
Perspective on Business Combinations
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LO 3 Goodwill impairment assessment.
Perspective on Business Combinations
Indefinite life
Should not be amortized.
Should be tested annually (minimum) for impairment.
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LO 3 Goodwill impairment assessment.
Perspective on Business Combinations
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LO 5 Use of pro forma statements.
Pro Forma Statements and Disclosure Requirement
Illustration 2-1
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LO 5 Use of pro forma statements.
Pro Forma Statements and Disclosure Requirement
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LO 5 Use of pro forma statements.
Explanation and Illustration of Acquisition Accounting
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LO 6 Valuation of acquired assets and liabilities assumed.
Explanation and Illustration of Acquisition Accounting
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LO 6 Valuation of acquired assets and liabilities assumed.
Explanation and Illustration of Acquisition Accounting
E2-1: Preston Company acquired the assets (except for cash) and
assumed the liabilities of Saville Company. Immediately prior to the
acquisition, Saville Company’s balance sheet was as follows:
Any
Goodwill?
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LO 6 Valuation of acquired assets and liabilities assumed.
Explanation and Illustration of Acquisition Accounting
E2-1: Preston Company acquired the assets (except for cash) and
assumed the liabilities of Saville Company. Immediately prior to the
acquisition, Saville Company’s balance sheet was as follows:
Fair value
of assets,
without cash
$1,824,000
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LO 6 Valuation of acquired assets and liabilities assumed.
Explanation and Illustration of Acquisition Accounting
Calculation of Goodwill
Fair value of assets, without cash $1,824,000
Fair value of liabilities 594,000
Fair value of net assets 1,230,000
Price paid 1,560,000
Goodwill $ 330,000
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LO 6 Valuation of acquired assets and liabilities assumed.
Explanation and Illustration of Acquisition Accounting
Receivables 228,000
Inventory 396,000
Plant and equipment 540,000
Land 660,000
Goodwill 330,000
Liabilities 594,000
Cash 1,560,000
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LO 6 Valuation of acquired assets and liabilities assumed.
Explanation and Illustration of Acquisition Accounting
Bargain Purchase
When the fair values of identifiable net assets (assets less
liabilities) exceeds the total cost of the acquired company,
the acquisition is a bargain.
In the past, FASB required that most long-lived assets be
written down on a pro rata basis before recognizing a gain.
Current standards require:
fair values be considered carefully and adjustments
made as needed.
any excess of acquisition-date fair value of net assets
over the consideration paid is recognized in income.
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LO 6 Valuation of acquired assets and liabilities assumed.
Explanation and Illustration of Acquisition Accounting
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LO 6 Valuation of acquired assets and liabilities assumed.
Explanation and Illustration of Acquisition Accounting
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LO 6 Valuation of acquired assets and liabilities assumed.
Explanation and Illustration of Acquisition Accounting
Receivables 228,000
Inventory 396,000
Plant and equipment 540,000
Land 660,000
Liabilities 594,000
Cash 990,000
Gain on acquisition (ordinary) 240,000
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LO 6 Valuation of acquired assets and liabilities assumed.
Contingent Consideration in an Acquisition
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LO 7 Contingent consideration and valuation of assets.
Contingent Consideration in an Acquisition
Goodwill 150,000
Liability for Contingent Consideration 150,000
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LO 7 Contingent consideration and valuation of assets.
Contingent Consideration in an Acquisition
On the other hand, assume that the target is not met. The
adjustment will flow through the income statement
in the subsequent period, as follows:
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LO 7 Contingent consideration and valuation of assets.
Contingent Consideration in an Acquisition
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LO 7 Contingent consideration and valuation of assets.
Contingent Consideration in an Acquisition
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LO 7 Contingent consideration and valuation of assets.
Contingent Consideration in an Acquisition
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LO 7 Contingent consideration and valuation of assets.
Contingent Consideration in an Acquisition
Review Question
Which of the following statements best describes the current authoritative
position with regard to accounting for contingent consideration?
a. If contingent consideration depends on both future earnings and future
security prices, an additional cost of the acquired company should be
recorded only for the portion of consideration dependent on future
earnings.
b. The measurement period for adjusting provisional amounts always ends
at the year-end of the period in which the acquisition occurred.
c. A contingency based on security prices has no effect on the
determination of cost to the acquiring company.
d. The purpose of the measurement period is to provide a reasonable time
to obtain the information necessary to identify and measure the fair
value of the acquiree’s assets and liabilities, as well as the fair value of
the consideration transferred.
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LO 7 Contingent consideration and valuation of assets.
Leveraged Buyouts
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LO 10 Differences between U.S. GAAP and IFRS .
IFRS Versus U.S. GAAP
Other differences and similarities:
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LO 10 Differences between U.S. GAAP and IFRS .
IFRS Versus U.S. GAAP
Other differences and similarities:
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LO 10 Differences between U.S. GAAP and IFRS .
IFRS Versus U.S. GAAP
Other differences and similarities:
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LO 10 Differences between U.S. GAAP and IFRS .
IFRS Versus U.S. GAAP
Other differences and similarities:
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LO 10 Differences between U.S. GAAP and IFRS .
IFRS Versus U.S. GAAP
Other differences and similarities:
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LO 10 Differences between U.S. GAAP and IFRS .
Deferred Taxes in Business Combinations
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Deferred Taxes in Business Combinations
Assets 700,000
Goodwill 100,000
Common Stock 150,000
Additional Contributed Capital 650,000
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Deferred Taxes in Business Combinations
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