2) accounting for mergers & acquisitions

8/20/2019 2) Accounting for Mergers & Acquisitions

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Accounting for Mergers &

Acquisitions


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PURCHASE ACCOUNTINGFOR BUSINESSCOMBINATIONS


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Cost of Investment (Purchase Price)

• The value of the consideration given to theowners of the acquired company normallyconstitutes the largest part of the total cost

• There are three types of other costs that may!e incurred in e"ecting a !usinesscom!ination#

• $irect costs• Costs of issuing securities

• Indirect and general costs


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Purchase Price%%$irect Costs

• All direct costs associated with purchasinganother company are capitalied as part ofthe total cost of the acquired company

• 'amples#• inders* fees

• Accounting fees

• +egal fees

• Appraisal fees


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Purchase Price%%Costs of Issuing ,ecurities

• Costs incurred in issuing equity securities inconnection with the purchase of a companyshould !e treated as a reduction in Additional%Paid%In Capital 'amples include# +isting

fees- Audit and legal fees related to theregistration- and. /ro0ers* commissions

• Costs incurred in issuing !onds paya!le in

connection with the purchase of a companyshould !e accounted for as !ond issue costsand amortied over the term of the !onds


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Purchase Price%%Indirect and 1eneral Costs

• All indirect and general costs related to a!usiness com!ination or to the issuance ofsecurities in a com!ination should be

expensed as incued


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,u!sequent Accounting for 1oodwill

• 1oodwill is carried forward to su!sequentaccounting periods at the original amount.without amortiation. unless it !ecomes

impaired

• 1oodwill must !e evaluated for impairment atleast annually. at the same time each year.

and more frequently if events occur that areli0ely to impair the value of goodwill


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Com!ination '"ected ThroughPurchase of 3et Assets

• Acquiring company records on its !oo0s the individualassets and lia!ilities acquired in the com!ination andconsideration given in echange

• 4nce the total purchase price of an acquisition has !een

determined it must !e assigned to the individual assetsand lia!ilities acquired

• 'ach identi2a!le asset and lia!ility acquired is valued atits fair value at the date of com!ination

• An intangi!le asset should !e recognied separately from

goodwill if its !ene2ts can !e separately identi2ed• Any amount of the purchase price in ecess of the fair

value of the identi2a!le asset and lia!ility acquired isviewed as the price paid for goodwill


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• 4n 5anuary 6789. Point Corporationpurchases all the assets andlia!ilities of ,harp Company !y

issuing the shareholders of ,harp97.777 shares of :97 par commonstoc0 The shares have a total

mar0et value of :;77.777• Point incurs legal and appraisal fees

of :


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Fair value of stock issued !"##"###

Other acquisition costs $#"###

Total Purchase Price !"$#"###

Fair value of stock issued !"##"###

Stock issue costs %&'"###Recorded amount of stock '"('"###


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Shap Co)pan*Assets, Liabilities and Equities Boo+

,alue

Fai

,alueCash and Receivables $'"### $'"###nventor! !'"### ('"###Land $#"### (#"###"uildin#s and Equi$ment $"##"##

#

-"'#"##

#Accumulated %e$reciation %

."'#"###

Patent /#"###

$"##"### !""###

Current Liabilities ."##"###

.".#"###

Common Stock &'( $ar) ."##"###


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Cost of investment !"$#"###

Fair value of net identifiable assets '".#"###

."-#"###

Fair value of net identifiable assets '".#0###

"ook value of net identifiable assets -"##"###&".#"###


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• The :suspense?accounts as incurred

%eferred +er#er Costs $#"###

Cash $#"###

Record Costs related to $urchase of Shar$ Cor$oration

%eferred Stock ssue Costs &'"###

Cash &'"###

Record Costs related to issuance of common stock


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4n the date of com!ination. Point

records the com!ination with thefollowing entryCash and Receivables $'"###nventor! ('"###

Land (#"###

"uildin#s and Equi$ment -"'#"###Patent /#"###

ood-ill ."-#"###

Current Liabilities .".#"#

## Common Stock &'( $ar) ."##"#

## Additional $aid in ca$ital $"('"#

##

%eferred +er#er Costs $#"###%eferred Stock ssue Costs &'"###


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'ntries recorded !y the acquiredCompany

nvestment in Point Stock !"##"###

Current Liabilities ."##"###

Accumulated %e$reciation ."'#"###

Cash and Receivables $'"###

nventor! !'"###

Land $#"###

"uildin#s and Equi$ment $"##"#

## ain on sale of *et Assets -"##"#

##Record Transfer of assets to Point Cor$oration


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$istri!ution of Point Corporation,hares and liquidation of ,harp

Common Stock ."##"###

Additional $aid in ca$ital '#"###

Retained Earnin#s ."'#"###

ain on Sale of *et Assets -"##"###

nvestment in Point Stock !"##"#

##Record %istribution of Point Cor$oration Stock


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3egative 1oodwill

• ,ometimes the purchase price of anacquired company is less than thefair value of the net identi2a!le

assets acquired This di"erence isoften called negative goodwill

• Acquisition represents a !argain

purchase

Cost of investment $"!#"###Fair value of net identifiable assets '".#"###E.cess of fair value of net identifiable assets over cost '#"###

Fair value of net identifiable assets '".#"###"ook value of net identifiable assets -"##"###E.cess of fair value over cost of net identifiable assets &".#"###


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3egative 1oodwill

• 3egative 1oodwill is allocated as a prorata reduction of the amounts thatotherwise would have !een assigned to

all of the acquired assets ecept – inancial assets other than investments

accounted for !y the equity method

– Assets to !e disposed of !y sale

– $eferred ta assets

– Prepaid assets

– Any other current assets


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Boo+,alue Fai,alue Reduc1ion A)oun1ecoded

Cash andReceivables

$'"### $'"### $'"###

nventor! !'"### ('"### ('"###

Land $#"### (#"### @7.777 B=.77.777 8=7.777@

("###

!-"###

"uildin#s andEqui$ment

&"'#"###

-"'#"### @.=7.777 B=.77.777 8

=7.777@

-'"###

-".'"###

Patent /#"### @D7.777 B=.77.777 8=7.777@

/"###

(&"###

$"##"#

##

!""### '#"#

##

'"(#"##

#Current ."##"# .".#"### .".#"##


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Com!ination '"ected ThroughPurchase of ,toc0

• The acquired company continues to eist

• The purchasing company records an investment inthe common stoc0 of the acquired company

• 'ample#

• Point acquires the all of the common stoc0 of ,harpissuing the shareholders of ,harp 97.777 shares of:97 par common stoc0 The shares have a totalmar0et value of :;77.777

• ,harp continues to operate as a separate entity afterthe !usiness com!ination transaction

• Point incurs :


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'ample# Com!ination '"ectedthrough Purchase of ,toc0

• 'ntries Eecorded /y Acquiring Company

(Point)

$eferred Merger Costs :


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'ample# Com!ination '"ectedthrough Purchase of ,toc0 (Cont*d)

• 'ntries Eecorded /y Acquiring Company(Point)

Investment in ,harp ,toc0 :;


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Accountin# for Control•

Puchase o3 4ne1 asse1s5 – Acquiring company records assetsBlia!ilitiespurchased in its own ledger

– ,elling company distri!utes to its shareholders theassets or securities received in com!ination from

the acquiring company and liquidates. leaving onlythe acquiring company as the surviving legal entity

• Ac6uisi1ion o3 s1oc+ – Acquiring company (parent) records a single

>investment? account

– Parent and su!sidiary remain separate legalentities

– ParentBsu!sidiary 2nancial statements arecom!ined (consolidated)

" i i C bi ti


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"asic ssues in Combinations&continued)

• Purchase versus pooling

– Purchase is group assetacquisition at mar0et values

– Pooling was merging of accountsat !oo0 value


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Purchase Method - Valuation

• All assets and lia!ilities are recordedat air Mar0et Galue – irst identify and value tangi!le assets

– 3et identify and value intangi!le assets

• 1oodwill % Price paid in ecess of airMar0et value of the net assets


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'ample


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"asic Purchase/ E.am$le -ithood-ill

Acquisitions Company purchases netassets of 5ohnson Company#

• 3et assets (per !oo0s) @Es9


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Asse1s Boo+ ,alue Fai ,alueAccounts receiva!le 6D.777 6D.777Inventory


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Accounts Eeceiva!le6D.777

Inventory (fair value)


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"asic Purchase/ E.am$le -ith ood-illPurchased -ith Stock

• Assume same facts as in prioreample

• Acquisitions Company issues Es9

par value common stoc0 for theEs=7.777 purchase price

Calculation of shares required#air value of shares @ Es=7

,hares required @ .777 (Es=7.777

B Es=7)


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Accounts Eeceiva!le6D.777

Inventory (fair value)


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Entry for Johnson, Inc. (Seller)

Investment in Acquisitions Company ,toc0=7.777

Current lia!ilities=.777

/onds paya!le 67.777

Accounts receiva!le 6D.777

Inventory

2) accounting for mergers & acquisitions

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