Reasons to expand through corporate takeover
1. Part of overall manager plan to maximize shareholder value by increasing scale and efficiency
2. Vertical integration of one firm's output and another firm's distribution or further processing
3. Cost savings through duplicate elimination
4. Quick entr
3 Book examples of successful mergers and reason why
Campbell Soup and Bolthouse farms - Bolthouse provided Campbell with a new sale point for a shifting demographic ($695M goodwill)
Microsoft and Skype - mainly for the hope of future synergies between the companies ($7.1B Goodwill involved in consideration
Types of Business Combination
Statutory Merger through asset acquisition - assets/liabilities acquired, company dissolves
Statutory merger through capital stock acquisition - acquires all stock and then transfers liabilities, company dissolves and becomes division
Statutory Consolidat
Control
Elusive because of multiple drivers, which is why the FASB is attempting to regulate it
Statutory Merger vs. Consolidation
Statutory Merger - combination on date of acquisition, entity dissolution occurs
Consolidation - separate entities maintained, consolidated only for purposes of financial statements
Regardless of result, the acquisition method recognizes and measures:
1. Consideration Transferred for the Acquired Business - FV is the starting point for consideration; Contingent consideration is used to resolve disagreement over estimate or high valuation uncertainty
2. Assets Acquired and Liabilities Assumed - very dif
Methods of Determining Acquisition Date FV of assets acquired and liabilities assumed
1. Market Approach - comparable market values used to estimate
2. Income Approach - projected cash flows to estimate
3. Cost Approach - replacement cost and effects of obsolescence used to estimate
2 Types of Business Combinations
1. Acquisition Method when Dissolution takes place
2. Acquisition Method when Separate Incorporation in Maintained
Journal Entries for Dissolution
1. FV of the consideration transferred by the acquiring firm to the former owners of the acquiree
2. The identified assets acquired and liabilities assumed at their individual FV
Comparing Consideration transferred to Net Asset FV (3 situations)
1. Equals
D: Assets
C: liabilities, cash, equity if stock is involved
2. Exceeds
D: Asset + Goodwill
C: liabilities, cash, equity if stock is involved
3. Less (Bargain Purchase)
D: Assets
C: liabilities, cash, equity if stock is involved, gain on bargain
Related Costs of Business Combination (3 types)
1. Professional Services (attorneys, lawyers, accountants, etc.) - expensed immediately against cash
2. Internal Costs - secretarial and managerial time for acquisitions
3. Registration and Issuance Costs - decrease the FV of the securities in question pr
Consolidation Worksheet Entries
these adjustments and eliminations are entered on the worksheet and represent alterations that would be required if the financial records were physically united
Investment account initially reflects the acquired firm's transaction date FV
Steps to make Consolidation Worksheet Entries
1. Prepare a formal allocation of the acquisition date FV similar to equity method
The equation depends on what the effects of the entries are
2. Remove any pre-combination subsidiary revenues or expenses in the consolidated statements
3. Consolidation En
Worksheet Mechanics
totals are not extended, the components are simply extended and combined vertically to find new totals
Bargain Purchase of a Separately Incorporated Subsidiary
Can be reported on the consolidated income statement
Additional Issues for Acquisition-Date FV Allocations
Intangibles:
1. Does it arise from contractual or legal rights?
2. Can it be sold or acquired?
Pre-existing goodwill - ignored
Acquired In-Process R&D - measure at ADFV & recognize at an asset; don't amortize but test annually for impairment
Convergence between US and IFRS standards
IFRS 3 - almost identical to GAAP rules with the exception of noncontrolling interest valuation and other limited applications