Advanced Financial Accounting & Reporting
Advanced Financial Accounting & Reporting ACCT 415
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This 15 page Class Notes was uploaded by Johnnie Little on Friday October 23, 2015. The Class Notes belongs to ACCT 415 at University of Idaho taught by Staff in Fall. Since its upload, it has received 32 views. For similar materials see /class/227953/acct-415-university-of-idaho in Accounting at University of Idaho.
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Date Created: 10/23/15
Acct 415515 Prof Teresa Gordon ccounting for Business Com6inatiom GAAP SFAS 94 1987 SFAS 141 2001 What s new in SFAS N0 141 as compared to APB Opinion 16 1 All business combinations are accounted for by the purchase method no pooling of interest 2 New criteria for recognizing identi able intangibles other than goodwill 3 Additional disclosure requirements including a Primary reasons for the business combination b The allocation of purchase price paid to the assets acquired and liabilities assumed by major balance sheet caption c When signi cant disclosure of other information such as amount of goodwill by reportable segment and the amount of purchase price assigned to each major intangible asset class What did NOT change Guidance for determining the cost of an acquired entity Guidance for allocating the cost to the assets acquired and liabilities assumed Accounting for contingent consideration Accounting for preacquisition contingencies Writeoff of RampD assets acquired 959 What39s in the works Issued June 30 2005 7 Two Exposure Drafts Consolidated Financial Statements including Accounting and Reporting of Noncontrolling Interests in Subsidiaries a replacement of ARB No 51 Business Combinations a replacement of FASB Statement No 141 Probably won t be nalized until 2007 since FASB and IASB are attempting to coordinate standards in this area New terminology Acquisition Method replaces purchase method and is based on fair values of the acquiree as a whole NCI will be part of owners equity separate line and not on mezzanine level Subsequent acquisitions of stock in a controlled subsidiary would be treated as equity transactions Proposed standards also include some revisions to FAS 128 EPS computations ngYcJYsT6doc as of 071310 Page 1 Acct 415515 Prof Teresa Gordon To use the purchase method one company must be designated as the acquiring company Here are the guidelines from FAS 141 If cash or other assets are distributed or liabilities are incurred In a business combination effected solely through the distribution of cash or other assets or by incurring liabilities the entity that distributes cash or other assets or incurs liabilities is generally the acquiring entity FASl4l Par 17 If stock is exchanged In a business combination effected through an exchange of equity interests the entity that issues the equity interests is generally the acquiring entity FASl4l Par 18 In some business combinations commonly referred to as reverse acquisitions however the acquired entity issues the equity interests Commonly the acquiring entity is the larger entity However the facts and circumstances surrounding a business combination sometimes indicate that a smaller entity acquires a larger one In some business combinations the combined entity assumes the name of the acquired entity Thus in identifying the acquiring entity in a combination effected through an exchange of equity interests all pertinent facts and circumstances shall be considered in particular a The relative voting rights in the combined entity after the combinationiall else being equal the acquiring entity is the combining entity whose owners as a group retained or received the larger portion of the voting rights in the combined entity In determining which group of owners retained or received the larger portion of the voting rights consideration shall be given to the existence of any unusual or special voting arrangements and options warrants or convertible securities b The existence of a large minority voting interest in the combined entity when no other owner or organized group of owners has a significant voting interestiall else being equal the acquiring entity is the combining entity whose single owner or organized group of owners holds the large minority voting interest in the combined entity c The composition of the governing body of the combined entityiall else being equal the acquiring entity is the combining entity whose owners or governing body has the ability to elect or appoint a voting majority of the governing body of the combined entity d The composition of the senior management of the combined entityiall else being equal the acquiring entity is the combining entity whose senior management dominates that of the combined entity Senior management generally consists of the chairman of the board chief executive officer chief operating officer chief financial officer and those divisional heads reporting directly to them or the executive committee if one exists e The terms of the exchange of equity securitiesiall else being equal the acquiring entity is the combining entity that pays a premium over the market value of the equity securities of the other combining entity or entities ngYcJYsT6doc as of 071310 Page 2 Acct 415515 Prof Teresa Gordon Determining the Total Cost of the Acquired Business Include 1 Fair value of the consideration given 2 Fair value of any contingent consideration given after acquisition date 3 Direct costs incurred in connection with acquisition except costs of registering with SEC any securities given as consideration by the acquiring company See chart below Direct costs INCLUDE EXCLUDE Finders fees Salary and overhead of intemal acquisitions department Travel costs Allocation of general expenses Accounting fees Fees associated with registering securities with SEC Legal fees Investment banker fees for underwriting registered equity securitiesa Investment banker advising fees Investment banker fees for underwriting registered debt securitiesb a Decreases additional paidin capital b Decreases proceeds higher interest expense over life of debt Note The computation of acquisition cost under the proposed new FASB standards will be irrelevant since the acquisition will be recorded at fair value All of the acquisition costs will be expensed in the year of the acquisition This is tentative and not yet GAAP but stay tuned for further developments TG 9804 ngYcJYsT6doc as of 071310 Page 3 Acct 415515 Prof Teresa Gordon Accounting for a Business Acquisition 1 2 Note Pushdown accounting Record assets and liabilities at their fair values as of the acquisition date If the cost of the acquired company exceeds the sum of the amounts assigned to the assets and liabilities acquired record the excess as goodwill If the values assigned to the assets acquired and the liabilities assumed exceeds the cost of the acquired company a Reduce by a proportionate amount the values assigned to the noncurrent assets acquired other than longterm investments in marketable securities After the noncurrent assets have been reduced to zero any excess of assigned values over cost of the acquired company is recorded as an extraordinary gain at acquisition Any goodwill is NOT amortized since it has an inde nite life It is subject to impairment test at least annually Only postacquisition income statements can be consolidated In some situations when common stock is acquired the subsidiary will adjust its books to re ect the current values at date of acquisition In other words adjusting entries are made on the subsidiaries books rather than just workpaper entries Therefore subsequent workpapers will not have to deal with the excess value elements as they will be taken care of by the subsidiary s accounting department depreciation amortization etc SEC Staff Bulletin No 54 requires pushdown accounting in the separate nancial ngYcJYsT6doc as of 071310 statements of a subsidiary acquired in a purchase transaction Parent s ownership Guidelines percentage 90 or more Substantially owned 7 pushdown accounting is required 80 to 89 Pushdown quot is A but not required Below 80 Pushdown accounting may not be appropriate e g subsidiary has substantial preferred stock or public debt outstanding Page 4 Acct 415515 Prof Teresa Gordon Leveraged Buyout Equivalent to combination of acquisition and a re nancing 7 acquirer uses an extremely high percentage of debt and thus a very low percentage of equity The debt is secured by the assets of the target company Thus the resulting company is generally not a publicly traded company and the debt is often privately issued In most LBOs the new ownership group forms a new corporation to acquire the common stock of the target company Technically this is NOT a business combination because there is only one operating company involved If a change in control has occurred then a new basis of accounting should be established for the assets and liabilities of the new company In some cases the writeup is only partial see Pahler Chapter 7 ngYcJYsT6doc as of 071310 Page 5 Acct 415515 Prof Teresa Gordon QBminess Comliinations at cquis ition Example Sun Inc PA Corp Cash 1 M 190 M Current Assets 5 M 300 M Plant Assets 90 M 400 M Other Assets 4 M 10 M Total Assets 100 M 900 M Liabilities 60 M 400 M Common Stock 20 M 200 M Retained Earnings 20 M 300 M Shares outstanding 2 M 20 M Par value of common stock 1000 1000 Market value of common stock 2500 5000 Book value per share 2000 2500 Market value of company 50 M 1000 M Sun Inc assets include a patent with a book value of 1 M but a fair value of 10 M The fair value of PA Corp plant assets is 1000 M ngYcJYsT6doc as of 071310 Page 6 Acct 415515 Acquisition of Assets Before the Acquisition of Assets PA Corp Sun Inc the acquiring the selling company company After Acquisition PA Corp Sun Inc the acquiring the selling company company Dr Teresa Gordon 1 PA Corp purchases the noncash assets of Sun Inc 120 M ngYcJYsT6doc as of 071310 Page 7 Acct 415515 Acquisition of Common Stock Before the Business Combination Dr Teresa Gordon After the Business Combination PA Corp the acquiring company Sun Inc the target company PA Corp the parent company Sun Inc the subsidiary company PA Corp acquires Sun Inc by paying 55 M in cash to purchase all the outstanding common stock Sun Inc becomes a subsidiary of PA Corp ngYcJYsT6doc as of 071310 Page 8 Acct 415515 Acquisition of Common Stock Before the Business Combination Dr Teresa Gordon After the Business Combination Sun Inc the acquiring company PA Corp the target company Sun Inc the parent company PA Corp the subsidiary company 3 Sun Inc acquires 100 of PA Corp by exchanging 2 shares of its own common stock for each share of PA Corp common stock in a business combination PA Corp becomes a subsidiary of Sun Inc ngYcJYsT6doc as of 071310 Page 9 Acct 415515 Dr Teresa Gordon Statutory Merger After the Before the Business Combination Business Combination PA Corp Sun Inc PA Corp the acquiring the target the surviving company company company 4 PA Corp acquires 100 of Sun Inc by exchanging 1 share of its own common stock for each 2 shares of Sun Inc common stock in a statutory merger Direct costs in connection with the acquisition are 3 M ngYcJYsT6doc as of 071310 Page 10 Acct 4 1 55 1 5 Dr Teresa Gordon Statutory Combination After the Before the Business Combination Business Combination PA Corp Sun Inc Integrated Sunpacon 5 PA Corp and Sun Inc enter into a statutory combination agreement A new entity called Integrated Sunpacon IS is formed Each former stockholder of PA Corp receives two shares of IS stock and each former stockholder of Sun Inc receives one share of IS stock for each share of stock they own Immediately after the combination the 1 par value IS stock is traded at 25 per share ngYcJYsT6doc as of 071310 Page 11 Acct 415515 Formation of a Holding Company Before the Business Combination PA Corp Sun Inc 6 Integrated Sunpacon IS is formed to be a holding company It exchanges 2 Dr Teresa Gordon After the Business Combination Integrated Sunpacon the parent company 1 1 PA Corp Sun Inc a subsidiary a subsidiary company company shares of its 10 par value stock for each share of PA Corp common stock and 1 share for each share of Sun Inc common stock Costs associated with SEC filings related to the IS stock is 2 M ngYcJYsT6doc as of 071310 Page 12 Acct 415515 Prof Teresa Gordon SOLUTION Created with N CI Notes Conceptual analysis not required but probably helpful Parent s investment account at beginning of year net assets 80 or 800000 350000 80 360000 Cost of stock 10000 5 par 50000 Noncontrolling Controlling Common Stock Retained Earnings Equity Method Cost Method 360000 48000 7 8000 8000 5 40000 Investment in Saxel 400000 60000 80 48000 80 10000 8000 Revenue account Account title Accounting title Equity in earnings of subsidiary Dividend Revenue I Y t quot39 C Interest in Net Assets I Y t quot39 C Interest in Earnings 80000035000020 90000 12000 60000 NI 20 12000 share ole 7 2000 dividends 100000 Yqunghrzdoc as of 7152010 Page 1 Acct 415515 Prof Teresa Gordon SOLUTION Acquired with N CI Notes Noncontrolling Interest Acquired Subsidiary old exam question Compete the matrix provided for the following facts Show your computations On 1104 Patz acquired 70 of Satz s outstanding common stock for 500000 cash For 2004 Satz reported 100000 ofnet income and declared dividends of 30000 for the year a What amount appears in Patz s December 31 2004 balance sheet if it accounts for its investment in Satz using the cost method b What amount appears in Patz s 2004 income statement if it accounts for its investment in Satz using the cost method Show the title of the account Under the equity method assume that in 2004 Patz recorded 10000 of amortization of cost in excess of book value in its general ledger c What amount appears in Patz s December 31 2004 balance sheet if it accounts for its investment in Satz using the equity method d What amount appears in Patz s 2004 income statement if it accounts for its investment in Satz using the equity method Show the title of the account Cost Method Equity Method 21 c 500000 500000 Share of earnings 70000 Share of dividends 21000 InVeStmem 1 satz Amortization given 10000 Balance Sheet Account 539000 b d 100000 70 30000 dividends declared 70000 70 amortization 10000 Revenue account 60000 21000 Account title Account title Dividend Revenue Equity in earnings of sub Yqul thrzdoc as of 7152010 Page 2 Acct 415515 Prof Teresa Gordon SOLUTION On 7104 Pane acquired 60 of Sill s outstanding common stock for 480000 cash The book value of Sill s net assets is 500000 Sill s only overor undervalued asset or liability is a building that has a book value of 700000 and a current value of 900000 The building has a remaining life of 20 years a Goodwill Parent Company or GAAP Economic Unit Concept BV 500000 FV 700000 500000 200000 on PPampE 60 of 700000 FV acquired 420000 Good will Purchase price 7 fair value 480000 420000 60 000 b Under the parent company concept at what amount would the noncontrolling interest be reported in the consolidated balance sheet at acquisition 7104 No writeup of assets is performed so just 40 of book value or 40 500000 200 000 c Under the GAAP economic unit concept at what amount would the noncontrolling interest be reported in the consolidated balance sheet at acquisition 7104 There would be no writeup related to goodwill but other assets would be written up so fair value 40 700000 40 280 000 Under a pure form of the economic unit concept we would add 40000 for implied goodwill to get 320000 Divide 60000 by 60 to get total implied goodwill of 100000 and multiply by NCI percent Assume that Sill reported 200000 in net income for the year ended 63005 and declared 30000 in dividends The building is being depreciated over 20 years d Under the parent company concept at what amount would the noncontrolling interest be reported in the consolidated balance sheet one year after acquisition 63005 Book value only so NCI in net assets would increase by 40 200000 reported earnings less 30000 dividends declared or 40 of 170000 68000 Therefore NCI in net assets would be 200000 from b above 68000 268000 e Under the GAAP economic unit concept at what amount would the noncontrolling interest be reported in the consolidated balance sheet one year after acquisition 63005 NCI in net assets would increase by share of eainings 7 dividends but earnings would be adjusted for depreciation expense 20000020 years 10000 So earnings 190000 and increase in RE attributable to NCI 40 190000 7 30000 64000 NCI in net assets 280000 from c 64000 344000 quqnghrzdoc as of 7152010 Page 3