Presentation on theme: "Analysis of FASB Exposure Drafts for Business Combinations by Impact on Chapters 1 - 5 Fundamentals of Advanced Accounting 1 st Edition Fischer, Taylor,"— Presentation transcript:
1 Analysis of FASB Exposure Drafts for Business Combinations by Impact on Chapters 1 - 5 Fundamentals of Advanced Accounting 1 st Edition Fischer, Taylor, and Cheng SA SPECIAL APPENDIX
2 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Special Appendix, Slide #2 FASB Exposure Drafts Issued on June 30, 2005 –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
3 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Special Appendix, Slide #3 Identifiable assets and liabilities of acquired company will always be recorded at fair value –Price above net fair value of identifiable assets results in goodwill –Price below fair value results in a gain All value measurements are made on “acquisition date” All acquisition costs to be expensed Liability for contingent consideration must be estimated and included in price paid Summary of Major Changes
4 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Special Appendix, Slide #4 Summary of Major Changes - Continued Subsidiary assets would be 100% adjusted to fair value even when controlling interest is less than 100% NCI portion of equity is included as a single amount in the equity section of the consolidated balance sheet –Income statement must show consolidated net income and then the distribution to the controlling interest and the NCI
5 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Special Appendix, Slide #5 Summary of Major Changes - Continued Block purchases procedures are specified Procedures for the sale of a controlling interest not resulting in loss of control are specified When a portion of the controlling interest is sold and results in a loss of control, both the shares sold and the shares retained are adjusted to fair value
6 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Special Appendix, Slide #6 Chapter 1 Changes All identifiable assets and liabilities recorded at fair value using fair value measurements –in-process R&D estimated and included as asset Contingent gains and losses of acquired business are estimated at fair value Record gain when price is less than fair value of net identifiable assets All acquisition costs are to be expensed Contingent payments are estimated and recorded as liability for fair value –Increases purchase price
7 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Special Appendix, Slide #7 Purchase Price Rules Premium price – Price high enough to record all accounts at fair value; excess price is goodwill with no amortization, but required impairment testing Bargain – Price is less than sum of fair values of net identifiable assets –The excess of the fair value of the net identifiable assets over the price paid would become an ordinary gain
8 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Special Appendix, Slide #8 Basic Purchase: Example Johnson Inc. to be acquired by Acquisitions, Inc. Johnson Inc. financial information at date of acquisition: Total assets460,000 Total liabilities125,000 Common stock10,000 APIC140,000 RE185,000 Total net assets335,000
9 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Special Appendix, Slide #9 1.Calculate the market value of net identifiable assets: At fair value, net assets = $703,288 2.Determine the 2 price zones: Premium: Over $703,288 All accounts at fair value, goodwill for price over $703,288 Bargain: Below $703,288 All accounts at fair value; gain for excess of accounts at fair value accounts over price paid Price Zone Analysis
10 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Special Appendix, Slide #10 Value analysis – Price > FV Acquisitions Inc. issues 40,000 shares of its $1 PV common stock with a market value of $20 each to purchase Johnson Co. They pay $35,000 in acquisition costs. Total price paid$800,000 Total fair value of net assets acquired(703,288) Goodwill96,712 Expense acquisition costs$35,000
11 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Special Appendix, Slide #11 Value analysis – Price < FV Acquisitions Inc. issues 25,000 shares of its $1 PV common stock with a market value of $20 each to purchase Johnson Co. They pay $35,000 in acquisition costs. Total price paid$500,000 Total fair value of net assets acquired(703,288) Gain on purchase of business(203,288) Expense acquisition costs$35,000
12 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Special Appendix, Slide #12 Chapter 2 Changes Purchase price for less than 100% interest represents the full fair value of the sub’s net assets Purchase price will no longer include direct acquisition costs
13 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Special Appendix, Slide #13 Value Analysis – 80% Purchase $420,000 Price Parental Inc. issues 16,800 shares of its $1 PV common stock for 80% of Sample Company shares. Fair value of $25 each for Parental stock. Parental pays $20,000 in acquisition costs. Parental purchase price is $420,000 –16,800 shares x $25 per share The purchase price of $420,000 represents 80% of the fair value of the sub’s net assets AND goodwill.
14 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Special Appendix, Slide #14 Value Analysis – 80% Purchase $420,000 Price Continued Value Analysis Parent Price (80%) NCI Value (20%) Company Value Company fair value420,000105,000525,000 Fair value of net assets Excludes goodwill 292,00073,000365,000 Goodwill128,00032,000160,000 Gainn/a
15 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Special Appendix, Slide #15 Value Analysis – 80% Purchase $420,000 Price Continued Step 1 The $420,000 purchase price is used to calculate the fair value of the entire sub – including goodwill –$420,000 divided by 80% = $525,000 Step 2 The fair value of the sub is compared to the fair value of its net assets to determine total goodwill –$525,000 less $365,000 = $160,000 Step 3 Allocate to controlling interest and NCI –Goodwill of $160,000 allocated 80/20 –Fair value of $365,000 allocated 80/20
16 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Special Appendix, Slide #16 Price is $420,000: D&D Schedule Company Value Parent Price (80%) NCI Value (20%) Fair value of company525,000420,000105,000 Book value200,000160,00040,000 Excess of fair value325,000260,00065,000 Inventory5,000 There is no reason to identify parent and NCI share of adjustments. The identifiable assets and liabilities will be adjusted to 100% fair value no matter what the price paid is. Land30,000 Building100,000 Equipment20,000 Copyright50,000 Goodwill120,000 Total adjustments325,000
17 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Special Appendix, Slide #17 Price is $420,000: Eliminations Dr Cr Investment in SubEL 256,000 D 260,000 InventoryD 5,000 LandD 30,000 BuildingD 100,000 EquipmentD 20,000 CopyrightD 50,000 GoodwillD 120,000 Common stock – Sub EL 8,000 APIC EL 72,000 RE – SubEL 80,000 NCI 105,000
18 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Special Appendix, Slide #18 Value Analysis – 80% Purchase With Gain on Purchase: $250,000 Price Parental Inc. issues 10,000 shares of its $1 PV common stock for 80% of Sample Company shares. Fair value of $25 each for Parental stock. Parental pays $20,000 in acquisition costs. Parental purchase price is $250,000 –10,000 shares x $25 per share The purchase price of $250,000 represents 80% of the fair value of the sub’s net assets AND goodwill.
19 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Special Appendix, Slide #19 Gain On Purchase: Value Analysis $250,000 Price Value Analysis Parent Price (80%) NCI Value (20%) Company Value Company fair value250,00073,000323,000 Fair value of net assets292,00073,000365,000 Goodwilln/a Gain42,000No gain for NCI
20 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Special Appendix, Slide #20 Value Analysis – 80% Purchase Gain on Purchase: $250,000 Price Continued Step 1 The $250,000 purchase price is used to calculate the fair value of the entire sub – including goodwill –$250,000 divided by 80% = $312,500 Step 2 Company fair value (NCI) of the sub is calculated –$312,500 x 20% = less $365,000 = $62,500 Step 3 NCI’s fair value can never be less than FV of identifiable net assets –Fair value of net assets = $365,000 x 20%= NCI fair value $73,000 –Company fair value calculated as $250,000 + $73,000 = $323,000
21 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Special Appendix, Slide #21 Price is $250,000: D&D Schedule Gain on Purchase Company Value Parent Price 80%) NCI Value (20%) Fair value of company353,000250,00073,000 Total equity in book value200,000160,00040,000 Excess fair value123,00090,00033,000 Inventory5,000There is no reason to identify parent and NCI share of adjustments. There is no Goodwill in the calculation of fair value. However, Goodwill has a book value of $40,000. Land30,000 Building100,000 Equipment50,000 Copyright20,000 Goodwill(40,000) Gain on purchase(42,000) Total adjustments123,000
22 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Special Appendix, Slide #22 Chapter 3 Changes Identifiable assets and liabilities are adjusted to 100% of fair value – even if acquisition is less than 100% The entire adjustment to fair value must be amortized in subsequent periods NCI will share in amortizations of excess! Amortizations for prior periods will be allocated to the retained earnings of the controlling interest and NCI If purchase price is less than fair value –Parent records gain on purchase in year of purchase –In later periods, gain is credited to controlling retained earnings
23 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Special Appendix, Slide #23 Amortization of Excess The NCI joins in the asset revaluations; assets are at 100% of fair value Since assets are at 100% of fair value, the excess amortizations are based on adjustment to full fair value. The NCI shares in the amortizations of excess: –Prior year amortizations are allocated to RE based on ownership interests (80/20 in this example) –Current year amortizations flow through subsidiary IDS so as to share them according to ownership interests (80/20)
24 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Special Appendix, Slide #24 Value Analysis – 80% Purchase $720,000 Price Paulos Inc. paid $720,000 for 80% interest of Carlos Company. The purchase price of $720,000 represents 80% of the fair value of the sub’s net assets AND goodwill.
25 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Special Appendix, Slide #25 Value Analysis – 80% Purchase $720,000 Price Step 1 The $720,000 purchase price is used to calculate the fair value of the entire sub – including goodwill –$720,000 divided by 80% = $900,000 Step 2 The fair value of the sub is compared to the fair value of its net assets to determine total goodwill –$900,000 less $773,240 = $126,760 Step 3 Allocate to controlling interest and NCI –Goodwill of $126,760 allocated 80/20 –Fair value of $773,240 allocated 80/20
26 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Special Appendix, Slide #26 Add Amortization Data to Prior D&D $720,000 Price Company Value Parent Price (80%) NCI Value (20%)Life Annual Amort. Fair value of sub900,000720,000180,000 Total equity in B.V.500,000400,000100,000 Excess of fair value400,000320,00080,000 Inventory5,000 Year 1 only Land50,000n/a Building200,0002010,000 Equipment(20,000)5(4,000) Patent25,000102,500 Goodwill126,760n/a Discount on BP13,24043,310 Total adjustments400,000
27 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Special Appendix, Slide #27 Chapter 4 Chapter 4 already eliminates 100% of intercompany profits regardless of parent’s interest. None of the existing procedures are changed.
28 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Special Appendix, Slide #28 Chapter 5 The FASB exposure drafts do not impact this chapter.
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