Legal Form of Combination Merger Occurs when one corporation takes over all the operations of another business entity and that other entity is dissolved.
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In the general business sense, mergers and consolidations are business combinations and may or may not involve the dissolution of the acquired firm(s).
In Chapter 1, mergers and consolidations will involve only 100% acquisitions with the dissolution of the acquired firm(s). These assumptions will be relaxed in later chapters.
“Consolidation” is also an accounting term used to describe the process of preparing consolidated financial statements for a parent and its subsidiaries.
A business combination is “a transaction or other event in which an acquirer obtains control of one or more businesses. Transactions sometimes referred to as true mergers or mergers of equals also are business combinations. [FASB ASC 805-10]
A parent-subsidiary relationship is formed when: Less than 100% of the firm is acquired, or The acquired firm is not dissolved.
Since the 1950s both the pooling-of-interests method and the purchase method of accounting for business combinations were acceptable.
Combinations initiated after June 30, 2001 use the purchase method. [FASB ASC 805]
Firms now use the acquisition method for business combinations. This began with combinations in fiscal periods beginning after December 15, 2008. [FASB ACS 810-10-5-2]
Record assets acquired and liabilities assumed using the fair value principle.
If equity securities are issued by the acquirer, charge registration and issue costs against the fair value of the securities issued, usually a reduction in additional paid-in-capital.
Charge other direct combination costs (e.g., legal fees, finders’ fees) and indirect combination costs (e.g., management salaries) to expense.
When the acquiring firm transfers its assets other than cash as part of the combination, any gain or loss on the disposal of those assets is recorded in current income.
The excess of cash, other assets, debt, and equity securities transferred over the fair value of the net assets (A – L) acquired is recorded as goodwill.
If the net assets acquired exceeds the cash, other assets, debt, and equity securities transferred, a gain on the bargain purchase is recorded in current income.
Pop Corp. pays cash for $80,000 in finder’s and consulting fees and for $40,000 to register and issue its common stock. (in thousands)
Son Corp. is assumed to have been dissolved. So, Pop Corp. allocates the investment’s cost to the fair value of the identifiable assets acquired and liabilities assumed. The excess cost is goodwill.
The fair value of contingent consideration is determined or estimated at the acquisition date and it is included along with other consideration given as part of the combination.
Classifying contingencies: Contingent share issuances are equity Contingent cash payments are liabilities
Estimated contingencies are revalued to fair value at each subsequent reporting date.
Pit Corp. pays $400,000 cash and issues 50,000 shares of Pit Corp. $10 par common stock with a market value of $20 per share for the net assets of Sad Co.
Total consideration at fair value (in thousands):$400 + (50 shares x $20) $1,400
Fair value of net assets acquired: $1,200Goodwill $ 200
Firms must test for the impairment of goodwill at the business unit reporting level.
Step 1: Compare the unit’s net book value to its fair value to determine if there has been a loss in value.
Step 2: Determine the implied fair value of the goodwill, in the same manner used to originally record the goodwill, and compare that to the goodwill on the books.
Record a loss if the implied fair value is less than the carrying value of the goodwill.
Specific disclosures are needed: In the fiscal period when intangibles are acquired, Annually, for each period presented, and In the fiscal period that includes an impairment
Disclosures are needed for: Intangibles which are amortized, Intangibles which are not amortized, Research & development acquired, and Intangibles with renewal or extension terms
Greater independence of auditors and clients Greater independence of corporate boards Independent audits of internal controls Increased disclosures of off-balance sheet
arrangements and obligations More types of disclosures on Form 8-K