Bargainpurchaseelement a fmvgivenfmvofnetassets

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Unformatted text preview: acquirer + < Fair Value of the acquiree’s net identifiable assets 3. Fair Value of the non-controlling interest in the acquiree, if any The acquirer recognizes a gain at the date of acquisition (FASB 141R) 1-36 Bargain Purchase: Example Assume that in the previous example of Point and Sharp, Point is able to acquire Sharp for $500,000 cash even though the fair value of Sharp’s net identifiable assets is estimated to be $510,000. 1-37 Bargain Purchase: Example Cash & Receivables 45,000 Inventory 75,000 Land 70,000 Buildings & Equip. 350,000 Patent 80,000 Cash Current Liabilities Gain on Bargain Purchase of Sharp Co. 500,000 110,000 10,000 1-38 Acquisition Accounting Combination effected through acquisition of stock The acquired company continues to exist, and the acquirer records an investment in the common stock of the acquiree rather than its individual assets and liabilities The acquirer records its investment in the acquiree’s common stock at the total fair value of the consideration given in exchange The acquiree may continue to operate as a separate company, or it may lose its separate identity and be merged into the acquiring company 1-39 Goodwill vs. Bargain Purchase Element a) FMV Given > FMV of Net Assets → Goodwill Goodwill b) FMV Given < FMV of Net Assets → Bargain Purchase Element c) FMV Given = FMV of Net Assets → Neither Goodwill nor Bargain Purchase Neither Goodwill nor Bargain Purchase Element 1-40 Financial Reporting Subsequent to a Business Combination Financial statements prepared subsequent to a business combination reflect the combined entity only from the date of combination When a combination occurs during a fiscal period, income earned by the acquiree prior to the combination is not reported in the income of the combined enterprise 1-41 Acquisition Accounting To illustrate financial reporting subsequent to a business combination, assume the following information for Point Corporation and Sharp Company: 20X0 Point Corporation: Separate income (excluding any income from Sharp) Shares outstanding, December 31 Sharp Company: Net income 20X1 $300,000 $300,000 30,000 40,000 $60,000 $60,000 Point acquires all of Sharp’s stock at book value on January 1, 20X1, by issuing 10,000 shares of common stock. The net income and earnings per share that Point presents in its comparative financial statements for the two years are as follows: 20X0: Net Income Earnings per Share ($300,000/30,000 shares) 20X1: Net Income ($300,000 + $60,000) Earnings per Share ($360,000/40,000 shares) $300,000 $10.00 $360,000 $9.00 1-42 Additional Considerations in Accounting for Business Combinations Uncertainty in business combinations Measurement Period FASB 141R allows for this period of time to properly ascertain fair values The period ends once the acquirer obtains the necessary information about the facts as of the acquisition date May not exceed one year 1-43 Additional Considerations in Accounting for Business Combinations Contingent consideration Sometimes the consideration exchanged is not fixed in amount, but rather is contingent on future events E.g. A contingent­share agreement FASB 141R requires contingent consideration to be valued at fair value as of the acquisition date and classified as either a liability or equity Acquiree contingencies Under FASB 141R, the acquirer must recognize all contingencies that arise from contractual rights or obligations and other contingencies if it is more likely than not that they meet the definition of an asset/liability at the acquisition date Recorded by the acquirer at acquisition­date fair value 1-44 Additional Considerations in Accounting for Business Combinations In­process research and development The FASB concluded that valuable ongoing research and development projects of an acquiree are assets and should be recorded at their acquisition­date fair values, even if they have no alternative use These projects should be classified as indefinite­ lived and, therefore, should not be amortized until completed or abandoned They should be tested for impairment 1-45 Additional Considerations in Accounting for Business Combinations Noncontrolling equity held prior to combination An acquirer that held an equity position in an acquiree immediately prior to the acquisition date must revalue that equity position to its fair value at the acquisition date and recognize a gain or loss on the revaluation 1-46...
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This document was uploaded on 02/23/2014.

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