Accounting for Business Combinations
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Accounting for Business Combinations - Leaderboard
Accounting for Business Combinations - Details
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| 🇬🇧 | 🇬🇧 |
| The BOD of the potential combining companies negotiates mutually agreeable terms of a proposed combination | Friendly combination |
| The BOD of a company targeted for acquisition resists the combination | Unfriendly combination (hostile takeovers) |
| Acquisition of common stock presently owned by the prospective acquiring (acquirer) company | Greenmail |
| A search for a candidate to be the acquirer in a friendly takeover | White knight or White squire |
| The sale of valuable assets to others to make the firm less attractive to the "would be acquirer" | Selling the "Crown Jewels" or "Scorched Earth" |
| Management desires to own the business, arrange to buy out the stockholders using the company's assets to finance the deal | Leveraged buyouts |
| An attempt to discredit one's competitor, opponent, etc., by malicious or scandalous attacks | Mudslinging defense |
| What are the types of business combinations? | Based on the structure of the combination, the method used to accomplished the combination, the accounting method used |
| What are the Reasons for Business Combinations? Explain each. | Cost advantage, lower risk, avoidance of takeovers, acquisition of intangible assets, other reasons |
| Involves companies within the same industry that have previously been competitors | Horizontal integration |
| Take place between two companies involved in the same industry but at different levels | Vertical integration |
| Entails some diversification, but does not have a drastic change in operation as a conglomerate | Circular combination |
| Involving companies in unrelated industries having little, If any, production or market similarities for the purpose of entering into new markets or industries | Conglomerate combination |
| Books of the acquired company are closed out, its assets and liabilities are transferred to the books of the acquirer | Acquisition of net assets |
| Acquisition by one firm of assets (and possibly liabilities) of another firm, but not its shares | Asset Acquisition |
| Acquirer survives | Statutory Merger |
| Acquired company ceases to exist as a separate legal entity | Statutory Merger |
| New corporation is formed to acquire two or more other corporations | Statutory Consolidation |
| X company + Y company = X company or Y company | Statutory Merger |
| Acquired corporation cease to exist as separate legal entities | Statutory Consolidation |
| Books of the acquirer and the acquired company remain intact and consolidated financial statements are prepared periodically | Acquisition of Common Stock |
| Stockholders of the acquired companies (X,Y) become stockholders in the new entity (Z) | Statutory Consolidation |
| X company + Y company = Z company | Statutory Consolidation |
| Acquisition of Net Assets Classification | Statutory Merger, Statutory Consolidation |
| In accounting, refers to the accounting process or procedures of combining parent and subsidiary financial statements | Consolidation |
| All the combining companies are dissolved | Consolidation |
| "true mergers", "mergers of equals" | Business combination |
| A transaction or other event in which an acquirer obtains control of one or more businesses | Business combination |
| Three elements must involve the acquisition of a business | Inputs, process, output |
| The result of inputs and processes, that provide goods or services to customers, generate income | Output |
| Required method of accounting for a business combination | Acquisition method |
| Approaches a business combination from the perspective of the acquirer | Acquisition method |
| Accounting procedures for a business combination | 1. identify the acquirer 2. determine the acquisition date 3. calculate the fair value of the purchase consideration transferred 4. recognize and measure the identifiable assets and liabilities of the business. if the acquirer gains control by purchasing less than 100% of the acquired entity, the 4th step includes measuring and recognizing the non controlling interest. this applies in the stock acquisition 5. recognize and measure either goodwill or gain from a bargain purchase |
| T/F: One of the combining entities doesn't have to be identified as the acquirer | False, one of the combining entities should be identified as the acquirer |
| In time when the net assets of the acquired company become the net assets of the acquirer | Acquisition date |
| T/F: Business combination does not occurs at the date of the assets or net assets are under the control of the acquirer | False, Business combination occurs at the date of the assets or net assets are under the control of the acquirer |
| T/F: Any profits reports as a result of the acquiree's operation within the business combination should reflect profits earned before the acquisition date | False, Any profits reports as a result of the acquiree's operation within the business combination should reflect profits earned after the acquisition date |
| Cash or other monetary assets fair value = | The amount of cash or cash equivalent dispersed |
| When the settlement is deferred at the time of acquisition date, deferred payment fair value = | The amount the entity would have to borrow to settle the debt immediately (present value of the obligation) |
| When the settlement is deferred at the time of acquisition date, Discount rate used = | Entity's incremental borrowing rate |
| Non-monetary fair value = | If active second-hand market exists, obtained by reference to those |
| Equity instruments fair value = | For listed entities, reference is made to the quoted prices of the shares at acquisition date |
| Liabilities undertaken fair value = | Present values of expected future cash outflows |
| An add-on to the base acquisition price that is based on events occurring or conditions being met some time after the purchase takes place | Contingent consideration |
| Exchanged for awards held by the acquiree's employees | Share-based payment awards |
| Share-based payment awards measurement = | Market based measure |
| T/F: The acquirer is not obliged to replace the acquiree's awards if the acquiree or the employees have the ability to enforce replacement, either all or a portion of the market-based measure of the acquirer's replacement awards is included in measuring consideration transferred in the business combination | False, the acquirer is obliged to replace the acquiree's awards if the acquiree or the employees have the ability to enforce replacement, either all or a portion of the market-based measure of the acquirer's replacement awards is included in measuring consideration transferred in the business combination |
| T/F: Costs of issuing equity instruments/share issuance costs are not excluded from the consideration and accounted for separately | False, they are excluded from the consideration and accounted for separately |
| These costs are accounted for in accordance with PAS 32 | Costs of issuing equity instruments/share issuance costs |
| These outlays should be treated as a reduction in the share capital | Costs of issuing equity instruments/share issuance costs |
| Share premium/Additional paid-in capital from the related issuance not enough to absorb cost of issuing equity instruments/share issuance cost | ▪ excess should be debited to 'Share Issuance Costs' ▪ treated as a contra shareholders' equity account as a deduction in the ff order of priority: 1. Share premium from previous share issuance 2. Retained Earnings with appropriate disclosure |
| T/F: Additional acquisition-related restructuring costs = unless represented by acquisition-date liabilities, are not expensed as incurred because they affect acquisition cost | False, Additional acquisition-related restructuring costs = unless represented by acquisition-date liabilities, are expensed as incurred and do not affect acquisition cost |
| Deemed as yield adjustments to the cost of borrowing | Cost of issuing debt instruments |
| T/F: Cost of issuing debt instruments are excluded in the measurement of the liability as bond issue cost and should not be amortized over the life of the debt | False, they are included in the measurement of the liability as bond issue cost and amortized over the life of the debt |
| Legal fees, finders and brokerage fees, advisory, accounting valuation (valuers) and other professional or consulting fees to affect the combination | Direct attributable cost |
| General and administrative costs | Indirect acquisition costs |
| Transaction costs such as stamp duties on new shares, professional adviser's fees, underwriting costs and brokerage fees might be incurred | Cost of issuing securities |
| Professional adviser's fees, underwriting costs and brokerage fees | Cost of arranging and issuing debt securities or financial liabilities |