class 2 slides final - Fall 2010 Advanced Financial...

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1 Fall 2010 Advanced Financial Accounting RSM 321 Class 2: Business Combinations
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2 Chapter 3 – Business Combinations A business combination occurs in one of two ways: 1) when one company acquires enough voting shares of another company to control the use of the net assets of that company. 2) when one enterprise acquires the net assets of another business. Business definition: a business is an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return.
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3 Business Combinations Payment for net assets or shares acquired can be in cash, promises to pay cash in the future, or the issuance of shares, or a combination of these
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4 Forms Of Business Combinations Purchase of assets – Control over another company’s assets can be obtained by purchasing the assets outright, leaving the selling company only with the consideration received for the asset sale and any liabilities present before the sale Purchase of shares – an alternative to the purchase of assets is for the acquirer to purchase enough voting shares from the shareholders of the acquiree that it can determine the acquiree’s strategic operating, investing, and financing policies Share purchase can be less costly since control can be achieved by purchasing less than 100% of the voting shares. Share purchases can also have important income tax advantages.
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5 Forms Of Business Combinations Both forms of business combination result in the assets and liabilities of the acquiree being combined with those of the acquirer If control is achieved with the purchase of net assets, the combining takes place in the accounting records of the acquirer If control is achieved by purchasing shares, the combining takes place when the consolidated financial statements are prepared
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6 The Acquisition Method Method of accounting which must be adopted on or before January 1, 2011. Prior to this time, the purchase method was used.
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7 The Acquisition Method Note: all discussion of the acquisition method in Session 2 will assume a 100% acquisition. The acquiring company records the identifiable net assets at fair values regardless of price paid. If purchase price is > FV of identifiable net assets the excess is reported as goodwill similar to purchase method If price paid is < FV of identifiable net assets the difference is reported as gain on purchase Not consistent with historical cost principle but consistent with general trend toward use of fair values
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8 Acquisition Method Acquisition method applies to all business combinations Acquirer should be identified for all business combinations Acquisition date is the date the acquirer obtains control of the acquiree Acquirer should reflect the identifiable assets and liabilities acquired at fair value separately from goodwill
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9 Identifying the Acquirer Identifying the acquirer using IFRS 3 – The acquirer usually is the party that ends up with control; that is, the
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This note was uploaded on 05/09/2011 for the course RSM 323 taught by Professor Lisaharvey during the Spring '11 term at University of Toronto- Toronto.

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class 2 slides final - Fall 2010 Advanced Financial...

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