Accounting for Business Combinations.ppt

,Accounting for Business Combinations,Advanced Accounting,Fourth Edition,2,Describe the major changes in the accounting for business combinations passed by the FASB in December 2007,and the reasons for those changes.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.Discuss the goodwill impairment test described in SFAS No.142 ASC 3502035,including its frequency,the steps laid out in the new standard,and some of the likely implementation problems.Explain how acquisition expenses are reported.Describe the use of pro forma statements in business combinations.Describe the valuation of assets,including goodwill,and liabilities acquired in a business combination accounted for by the acquisition method.Explain how contingent consideration affects the valuation of assets acquired in a business combination accounted for by the acquisition method.Describe a leveraged buyout.Describe the disclosure requirements according to SFAS No.141R ASC 8051050,“Business Combinations,”related to each business combination that takes place during a given year.Describe at least one of the differences between U.S.GAAP and IFRS related to the accounting for business combinations.,Learning Objectives,Whats New?SFAS No.141R ASC 805,“Business Combinations,”would replace FASB Statement No.141.Continues to support the use of a single method.Uses the term“acquisition method”rather than“purchase method.”The acquired business should be recognized at its fair value on the acquisition date rather than its cost,regardless of whether the acquirer purchases all or only a controlling percentage.,LO 1 FASBs two major changes for business combinations.,Historical Perspective on Business Combinations,Issued on December 2007,Whats New?ASC 810,“Noncontrolling Interests In ConsolidatedFinancial Statements,”will replace Accounting Research Bulletin(ARB)No.51.Establishes standards for the reporting of the noncontrolling interest when the acquirer obtains control without purchasing 100%of the acquiree.Additional discussion in Chapter 3.,Historical Perspective on Business Combinations,Issued on December 2007,LO 1 FASBs two major changes for business combinations.,Historically,two methods permitted:purchase and pooling of interests.,LO 2 FASBs two major changes of 2001.,Historical Perspective on Business Combinations,Pronouncements in June 2001:SFAS No.141,“Business Combinations,”-pooling method is prohibited for business combinations initiated after June 30,2001.SFAS No.142,“Goodwill and Other Intangible Assets,”-Goodwill acquired in a business combination after June 30,2001,should not be amortized.,Goodwill Impairment Test SFAS No.142 ASC 350-20-35 requires impairment be tested annually.All goodwill must be assigned to a reporting unit.Impairment should be tested in a two-step process.,LO 3 Goodwill impairment assessment.,Perspective on Business Combinations,Step 1:If fair value is less than the carrying amount of the net assets(including goodwill),then perform a second step to determine possible impairment.Step 2:Determine the fair value of the goodwill(implied value of goodwill)and compare to carrying amount.,Perspective on Business Combinations,LO 3,E2-10:On January 1,2010,Porsche Company acquired the net assets of Saab Company for$450,000 cash.The fair value of Saabs identifiable net assets was$375,000 on this date.Porsche Company decided to measure goodwill impairment using the present value of future cash flows to estimate the fair value of the reporting unit(Saab).The information for these subsequent years is as follows:,LO 3 Goodwill impairment assessment.,Perspective on Business Combinations,*,*Not including goodwill,E2-10:On January 1,2010,the acquisition date,what was the amount of goodwill acquired,if any?,LO 3 Goodwill impairment assessment.,Perspective on Business Combinations,Acquisition price$450,000,Fair value of identifiable net assets 375,000,Recorded value of Goodwill$75,000,LO 3 Goodwill impairment assessment.,Perspective on Business Combinations,Fair value of reporting unit$400,000,Carrying value of unit:,Carrying value of identifiable net assets330,000,Step 1-2011,Carrying value of goodwill75,000,Total carrying value of unit405,000,Excess of carrying value over fair value$5,000,E2-10:Part A&B:For each year determine the amount of goodwill impairment,if any,and prepare the journal entry needed each year to record the goodwill impairment(if any).,Excess of carrying value over fair value means step 2 is required.,LO 3 Goodwill impairment assessment.,Perspective on Business Combinations,Fair value of reporting unit$400,000,Fair value of identifiable net assets 340,000,Implied value of goodwill60,000,Step 2-2011,Carrying value of goodwill75,000,Impairment loss$15,000,Impairment loss15,000,Goodwill15,000,JournalEntry,E2-10:Part A&B(continued),LO 3 Goodwill impairment assessment.,Fair value of reporting unit$400,000,Carrying value of unit:,Carrying value of identifiable net assets320,000,Step 1-2012,Carrying value of goodwill60,000,Total carrying value of unit380,000,Excess of fair value over carrying value$20,000,Excess of fair value over carrying value means step 2 is not required.,E2-10:Part A&B(continued),*$75,000(original goodwill)$15,000(prior year impairment),*,Perspective on Business Combinations,LO 3 Goodwill impairment assessment.,Fair value of reporting unit$350,000,Carrying value of unit:,Carrying value of identifiable net assets300,000,Step 1-2013,Carrying value of goodwill60,000,Total carrying value of unit360,000,Excess of carrying value over fair value$10,000,E2-10:Part A&B(continued),*$75,000(original goodwill)$15,000(prior year impairment),*,Excess of carrying value over fair value means step 2 is required.,Perspective on Business Combinations,LO 3 Goodwill impairment assessment.,Fair value of reporting unit$350,000,Fair value of identifiable net assets 325,000,Implied value of goodwill25,000,Step 2-2013,Carrying value of goodwill60,000,Impairment loss$35,000,Impairment loss35,000,Goodwill35,000,JournalEntry,E2-10:Part A&B(continued),Perspective on Business Combinations,The first step in determining goodwill impairment involves comparing the implied value of a reporting unit to its carrying amount(goodwill excluded).fair value of a reporting unit to its carrying amount(goodwill excluded).implied value of a reporting unit to its carrying amount(goodwill included).fair value of a reporting unit to its carrying amount(goodwill included).,Review Question,LO 3 Goodwill impairment assessment.,Perspective on Business Combinations,Disclosures Mandated by FASB SFAS No.141R ASC 805 requires:Total amount of acquired goodwill and the amount expected to be deductible for tax purposes.Amount of goodwill by reporting segment(in accordance with SFAS No.131 ASC 280,“Disclosures about Segments of an Enterprise and Related Information”),unless not practicable.,LO 3 Goodwill impairment assessment.,Perspective on Business Combinations,Disclosures Mandated by FASB SFAS No.142 ASC 350-20-45 specifies the presentation of goodwill(if impairment occurs):Aggregate amount of goodwill should be a separate line item in the balance sheet.Aggregate amount of losses from goodwill impairment should be a separate line item in the operating section of the income statement.,LO 3 Goodwill impairment assessment.,Perspective on Business Combinations,Disclosures Mandated by FASB When an impairment loss occurs,SFAS No.142 ASC 350-20-50-2 mandates note disclosure:Description of facts and circumstances leading to the impairment.Amount of impairment loss and method of determining the fair value of the reporting unit.Nature and amounts of any adjustments made to impairment estimates from earlier periods,if significant.,LO 3 Goodwill impairment assessment.,Perspective on Business Combinations,Other Required DisclosuresSFAS No.141R ASC 805-10-50-2 states that disclosure should include:The name and a description of the acquiree.The acquisition date.The percentage of voting equity instruments acquired.The primary reasons for the business combination,including a description of the factors that contributed to the recognition of goodwill.,LO 3 Goodwill impairment assessment.,Perspective on Business Combinations,Other Required DisclosuresSFAS No.141R para.805-10-50-2 states that disclosure should include:The fair value of the acquiree and the basis for measuring that value on the acquisition date.The fair value of the consideration transferred.The amounts recognized at the acquisition date for each major class of assets acquired and liabilities assumed.The maximum potential amount of future payments the acquirer could be required to make.,LO 3 Goodwill impairment assessment.,Perspective on Business Combinations,Other Intangible Assets Acquired intangible assets other than goodwill:Limited useful life Should be amortized over its useful economic life.Should be reviewed for impairment.Indefinite lifeShould not be amortized.Should be tested annually(minimum)for impairment.,LO 3 Goodwill impairment assessment.,Perspective on Business Combinations,Treatment of Acquisition Expenses The Exposure Draft requires that:both direct and indirect costs be expensed.the cost of issuing securities also be excluded from the consideration.Security issuance costs are assigned to the valuation of the security,thus reducing the additional contributed capital for stock issues or adjusting the premium or discount on bond issues.,LO 4 Reporting acquisition expenses.,Perspective on Business Combinations,Acquisition Costsan IllustrationSuppose that SMC Company acquires 100%of the net assets of Bee Company(net book value of$100,000)by issuing shares of common stock with a fair value of$120,000.With respect to the merger,SMC incurred$1,500 of accounting and consulting costs and$3,000 of stock issue costs.SMC maintains a mergers department that incurred a monthly cost of$2,000.Prepare the journal entry to record these direct and indirect costs.,LO 4 Reporting acquisition expenses.,Professional Fees Expense(Direct)1,500Merger Department Expense(Indirect)2,000Other Contributed Capital(Security Issue Costs)3,000Cash 6,500,Perspective on Business Combinations,Pro forma statements serve two functions in relation to business combinations:to provide information in the planning stages of the combination and to disclose relevant information subsequent to the combination.,Pro Forma Statements and Disclosure Requirement,LO 5 Use of pro forma statements.,Pro Forma Statements and Disclosure Requirement,LO 5 Use of pro forma statements.,P Company Pro Forma Balance SheetGiving Effect to Proposed Issue of Common Stock for All the Net Assets of S Company January 1,2009,Illustration 2-1,If a material business combination occurred,notes to financial statements should include on a pro forma basis:Results of operations for the current year as though the companies had combined at the beginning of the year.Results of operations for the immediately preceding period as though the companies had combined at the beginning of that period if comparative financial statements are presented.,Pro Forma Statements and Disclosure Requirement,LO 5 Use of pro forma statements.,Four steps in the accounting for a business combination:Identify the acquirer.Determine the acquisition date.Measure the fair value of the acquiree.Measure and recognize the assets acquired and liabilities assumed.,Explanation and Illustration of Acquisition Accounting,LO 6 Valuation of acquired assets and liabilities assumed.,Value of Assets and Liabilities AcquiredIdentifiable assets acquired(including intangibles other than goodwill)and liabilities assumed should be recorded at their fair values at the date of acquisition.Any excess of total cost over the fair value amounts assigned to identifiable assets and liabilities is recorded as goodwill.SFAS No.141R ASC 805-20,states in-process R&D is measured and recorded at fair value as an asset on the acquisition date.,Explanation and Illustration of Acquisition Accounting,LO 6 Valuation of acquired assets and liabilities assumed.,Explanation and Illustration of Acquisition Accounting,LO 6 Valuation of acquired assets and liabilities assumed.,E2-1:Preston Company acquired the assets(except for cash)and assumed the liabilities of Saville Company.Immediately prior to the acquisition,Saville Companys balance sheet was as follows:,Any Goodwill?,Explanation and Illustration of Acquisition Accounting,LO 6 Valuation of acquired assets and liabilities assumed.,E2-1:Preston Company acquired the assets(except for cash)and assumed the liabilities of Saville Company.Immediately prior to the acquisition,Saville Companys balance sheet was as follows:,Fair value of assets,without cash$1,824,000,Explanation and Illustration of Acquisition Accounting,LO 6 Valuation of acquired assets and liabilities assumed.,Fair value of liabilities594,000,Fair value of net assets1,230,000,Fair value of assets,without cash$1,824,000,Price paid1,560,000,Goodwill$330,000,E2-1:A.Prepare the journal entry on the books of Preston Co.to record the purchase of the assets and assumption of the liabilities of Saville Co.if the amount paid was$1,560,000 in cash.,Calculation of Goodwill,Explanation and Illustration of Acquisition Accounting,LO 6 Valuation of acquired assets and liabilities assumed.,E2-1:A.Prepare the journal entry on the books of Preston Co.to record the purchase of the assets and assumption of the liabilities of Saville Co.if the amount paid was$1,560,000 in cash.,Inventory396,000,Plant and equipment540,000,Receivables228,000,Goodwill330,000,Liabilities594,000,Land660,000,Cash1,560,000,Bargain PurchaseWhen 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 reconsidered and adjustments made as needed.any excess of acquisition-date fair value of net assets over the consideration paid is recognized in income.,Explanation and Illustration of Acquisition Accounting,LO 6 Valuation of acquired assets and liabilities assumed.,Bargain Acquisition IllustrationWhen the price paid to acquire another firm is lower than the fair value of identifiable net assets(assets minus liabilities),the acquisition is referred to as a bargain.Under SFAS No.141R:Any previously recorded goodwill on the sellers books is eliminated(and no new goodwill recorded).An ordinary gain is recorded to the extent that the fair value of net assets exceeds the consideration paid.,LO 6 Valuation of acquired assets and liabilities assumed.,Explanation and Illustration of Acquisition Accounting,Explanation and Illustration of Acquisition Accounting,LO 6 Valuation of acquired assets and liabilities assumed.,Calculation of Goodwill or Bargain Purchase,Fair value