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Business Combinations: Americas Most Popular Business Activity, Bringing an End to the Controversy
Fundamentals of Advanced Accounting 1st Edition Fischer, Taylor, and Cheng
Business Combinations
All acquisitions of one firm by another Two categories of business combinations: 1) Merger 2) Consolidation
Chapter 1, Slide #2 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Economic Advantages of Combinations (continued) Defer capital gains on sale of stock Owner accepts Purchasers stock in exchange for their stock Structure combination as tax-free reorganization New shares are at basis of old shares Taxable to owner when new shares are sold
Chapter 1, Slide #5 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Additional tax benefits: Tax losses are transferable in a business combination. Combined operations may reduce taxable income.
Chapter 1, Slide #6 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Obtaining Control
Two methods to obtain control of another company: Purchase assets of an existing company
May assume liabilities as well
Acquisition of stock
Acquiring firm (parent) records a single investment account Parent and subsidiary remain separate legal entities Parent/subsidiary financial statements are combined (consolidated).
Chapter 1, Slide #8 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Chapter 1, Slide #9 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Goodwill - Price paid in excess of Fair Market value of the net assets.
Chapter 1, Slide #10 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Chapter 1, Slide #12 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Basic Purchase: Example with Goodwill Purchased with Stock Assume same facts as in prior example. Acquisitions, Inc. issues $1 par value common stock for the $350,000 purchase price. Calculation of shares required: Fair value of shares = $50 Shares required = 7,000 ($350,000 / $50)
Chapter 1, Slide #14 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Required Disclosures
Schedule of fair value of accounts Name and description of firm purchased Reason for purchase Cost of acquisition
Valuation of stock (If payment method)
Tangible assets and liabilities normal depreciation and amortization procedures. Intangible assets amortized over useful lives. Goodwill is not amortized
Subject to impairment Tested on an annual basis
Chapter 1, Slide #18 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Goodwill Impairment
Test: Goodwill is impaired if estimated value of business unit is less than remaining book value of net assets (including goodwill). New goodwill estimate:
Estimated value of business unit New estimate of identifiable net assets at fair value = New goodwill estimate
Impairment Loss:
Book value of goodwill New goodwill estimate = Impairment loss
Chapter 1, Slide #19 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Bargain purchase price of acquisition is less than Fair Value of Net Assets No Goodwill exists (none recorded) Cost of acquisition is allocated to individual asset and liability accounts.
Priority accounts always recorded at fair value Non-priority accounts discounted
Chapter 1, Slide #20 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Priority Accounts
All current assets All liabilities All investments (exception- controlled entities) Excess assets included in purchase Deferred tax assets and liabilities Prepaid assets relating to postretirement benefits
Chapter 1, Slide #21 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Non-priority
Chapter 1, Slide #23 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Allocation Table
and uilding uip ent atent oyrig t 0,000 0,000 0,000 30,000 40,000 1 16 3 0 0 163,000 163,000 163,000 163,000 163,000 3 ,600 ,160 3 ,600 1 , 60 6,0 0
Chapter 1, Slide #24 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Purchase Complications
May have to calculate market value of debt issues Leases retain classification; related accounts recorded at market value Deferred tax liability (DTL) goes with assets in nontaxable exchange Tax loss carryover is usually recorded as an asset; if realization is uncertain, it is not recorded and is buried in goodwill
Chapter 1, Slide #27 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Chapter 1, Slide #28 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Chapter 1, Slide #29 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Fair Value
50,000 (80,000) 100,000 300,000 (30,000) $340,000
Example of Tax-Free Exchange - Continued The tax rate is 30% A $30,000 DTL goes with the machine
($100,000 x 30%)
Goodwill = $130,000
$39,000 z (1.0 .3)
Chapter 1, Slide #31 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.