Chapter 3 KB - Chapter 3 Business Combinations Chapter 3 1...

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Chapter 3 1 Chapter 3 Business Combinations
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Chapter 3 2 Learning Objectives To define a business combination, and describe the two basic forms for achieving a business combination Purchase method Pooling method To describe the current acceptable method of accounting for a business combination To prepare a balance sheet immediately after a purchase-of-net assets business combination, using the purchase method To prepare a balance sheet following a purchase-of- shares business combination, using the purchase method
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Chapter 3 3 Introduction Definition of Business Combination: A business combination occurs when the enterprise requires net assets that constitute a business, or requires equity interest of one or more other enterprises and obtains control over that enterprise or enterprises [1581.06] Takeover, amalgamation, acquisition, merger
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Chapter 3 4 Introduction Business combination a transaction whereby one economic unit unites with or obtains control over another economic unit regardless of legal avenue by which such control is obtained and regardless of the form of economic unit emerging from the transaction A conglomerate business combination involves regular economic units operating in widely different industries
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Chapter 3 5 Business Combinations A horizontal business combination involves economic units whose products are similar A vertical business combination involves economic units where the outputs from one can be used as inputs from another
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Chapter 3 6 Forms Of Business Combinations There are only two forms of business combinations: One company can obtain control of the net assets of another company by (1) Purchasing its net assets (2) Acquiring enough of its voting shares to control the use of its net assets Note: purchase of some but not all assets is not a business combination because there is no control.
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Chapter 3 7 Forms Of Business Combinations Purchase of assets directly Purchase of shares - the acquirer purchases enough voting shares from the shareholders of the acquiree that it can determine the acquiree’s strategic operating, investing, and financing policies without the cooperation of the others (more common) this method is less costly since less than 100% of the shares must be purchased to get control and has tax adv The acquirer becomes a parent company and must consolidate its subsidiary (acquiree) when it prepares its financial statements
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Chapter 3 8 Business Combinations Can be friendly or hostile: ie. The company being acquired can employ defenses to resist the acquisition: Poison pill – sells rights to existing shareholders to purchase new shares below market price White Knight – looks for another company to purchase it Selling the crown jewels – sells desirable assets to other companies to make itself less attractive to the acquirer
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Chapter 3 9 Methods of Accounting for Business Combinations There are three methods that have been used
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Chapter 3 KB - Chapter 3 Business Combinations Chapter 3 1...

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