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Transcript of Chap 002 slides
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ConsolidationConsolidation
of Financialof Financial
InformationInformation
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc !llrights reser"e#
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A business combination occurs when
two or more separate businesses joininto a single accounting entity.
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Cost advantage Finding New Facilities Human resources Side-
Research evelopment .
!ower ris" # purchase new products and mar"ets less ris"y $han trying to
develops new mar"et %new products. $his help Company to Reduce ris"
by diversi&y their investment in di&&erent products
Fewer operating delays- '(isting )usiness reduce delays operation#
)ecause *overnment regulation inspection % many things you have to do
+n order to start your business. $his will ,inimie operation delays.
Avoidance o& ta"eovers. #small companies a&raid big Com. aggressive in )uying other small business# to de&end their companies against
ta"eover )y bid Companies
Acuisition o& intangible assets # )usiness combinations bring both
$angible and intangible resources /atent% management '(pertise researchcustomer data base 0ther reason ta( Advanta es savin
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Business Combination
,erger
Acuisitions
Consolidation
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$he concept emphasies
the creation o& a single entity and the independence o& the combining companies be&ore their union.
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0ne or more corporations become subsidiaries.
0ne company trans&ers its net assets to another .
'ach company trans&ers its net assets to a newly &ormed corporation.
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Accounting &or )usiness Combination is one o& the most important and
interesting topic 0& accounting theory and practice and its comple( topic.Since 1234 /ooling o& interest been generally accepted. 5ntil 6441 accountin
reuirements &or business combination recognied )oth pooling 7 purchase
methods.
+n 1222 FAS) issued a report supporting its proposed decision to eliminate
/ooling o& interest &or the &ollowing Reasons8 /ooling provides less relevant
in&ormation to statement users 7 ignore economic value e(change in
the transaction. /ooling creates these problem because it uses Historical boo"
9alue rather than Fair value o& net assets at the transaction date.
*AA/ reuires recording asset Acuisitions at &air value. *aap 'liminated the pooling o& interest method o& accounting initiated a&ter :une ;4% 6441.
)usinesses must use the Acuisition ,ethod because the new standard
prohibited use pooling method. +FRS also consistent with *AA/ and reuires
to use the purchase methods. Accounting &or business combination was
a major joint project between FAS) 7 +AS).
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FASB Statement No. 141 eliminated the pooling o& interest method
&or transactions initiated a&ter :une ;4% 6441. Combinations initiateda&ter this date must use the purchase method. /rior combinations will b
grand&athered.
/ooling uses historical boo" values to record combinations rather than
recogniing &air values o& net assets at the transaction date.
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Acuisitions ,ethod reuires the recording
o& assets acuired and liabilities assumed at
their &air values at the date o& combination.
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$he Acuisitions ,ethod reuires<e '(pense the direct cost to business combination= accounting % legal
Consulting and &inders &ees> .
Registration and other issuance cost o& euity securities +ssued
in combination as a reduction o& additional paid +n capital.
<e e(pense indirect costs such as management Salaries% deprecation
and rent% <e also e(pense indirect costs incurred to close duplicate Facilities.
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/oppy Corporation issues 144%444 shares o& ?14 par common stoc"
&or the net assets o& Sunny Corporation in a purchase Combination on
:uly 1% 644;. $he mar"et price o& /oppy is ?1@ per share.Additional direct costs8
SEC Registration fees $ 5,000 RedPInCapit
SEC A!!o"nting fees $ 10,000 RedPInCapita
SEC Printing and iss"ing $ #5,000 RedPInCapita Finder and consulting ? 4%444 +nvestment '(p.
How is the issuance recordedB
/oppy Corporation issues 144%444 shares o& ?14 par common stoc"
&or the net assets o& Sunny Corporation in a purchase Combination on
:uly 1% 644;. $he mar"et price o& /oppy is ?1@ per share.
Additional direct costs8
SEC Registration fees $ 5,000 RedPInCapi
SEC A!!o"nting fees $ 10,000 RedPInCapita
SEC Printing and iss"ing $ #5,000 RedPInCapita Finder and consulting ? 4%444 +nvestment '(p.
How is the issuance recordedB
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+nvestment in Sunny 1%@44%444
Common Stoc"% ?14 par 1%444%444
Additional /aid-in Capital @44%444
$o record issuance o& 144%444 shares o& ?14 par
common stoc" with a mar"et value o& ?1@ per share
in a purchase business combination with Sunny.
+nvestment in Sunny 1%@44%444
Common Stoc"% ?14 par 1%444%444
Additional /aid-in Capital @44%444
$o record issuance o& 144%444 shares o& ?14 par
common stoc" with a mar"et value o& ?1@ per share
in a purchase business combination with Sunny.
How are the additional direct costs recorded? How are the additional direct costs recorded?
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+nvestment '(pense ? 4%444
Additional /aid-in Capital ? 4%444
Cash =other assets> ? 164%444$o record additional direct costs o& combining
with Sunny8 ?4%444 &inderDs and consultantsD
&ees and ?4%444 &or registering and issuing
euity securities.
+nvestment '(pense ? 4%444
Additional /aid-in Capital ? 4%444
Cash =other assets> ? 164%444$o record additional direct costs o& combining
with Sunny8 ?4%444 &inderDs and consultantsD
&ees and ?4%444 &or registering and issuing
euity securities.
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The total cost to Poppy of acquiring
Sunny is $1,680,000.The total cost to Poppy of acquiring
Sunny is $1,680,000.
$his is the amount entered into the
investment in the Sunny account.$his is the amount entered into the
investment in the Sunny account.
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*oodwill is an intangible asset that arises
when the purchase price to acuire a
subsidiary company is greater thanthe sum o& the mar"et value o& the
subsidiaryDs assets minus liabilities.
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etermine the fair alues o& all identi&iable tangible and
intangible assets Acuired 7 lia!ilities assumed.
FASB Statement No. 141 provides guidelines &or assigning
amounts to speci&ic categories o& assets and liabilities.
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"o alue is assigned to good#ill recorded
on the !oos of an acquired su!sidiary.
Such goodwill is an unidenti&iable asset.
*oodwill resulting &rom the
combination is valued directly.
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Recogniable intangibles
Separability
criterion
Contractual-
legal criterion
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Investment cost
Total air value o
identiiable assets
less liabilities
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+nvestment cost Net &air value%
*oodwill
6
+denti&iable net
assets according
to their &air value
1
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!itt Cor"oration ac#uires the net assets o Seed Com"an$ on %ecember &'( &))*. seed is dissolved
/itt Seed
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)oo" 9alue
AssetsCash 34 ? 34
Net receivables 134 14+nventories 644 634!and 34 144
)uildings% net ;44 344'uipment% net 634 ;34
/atents 34$otal assets ?1%444 ?1%4
Fair 9alue
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)oo" 9alue
!iabilities
Accounts payable ? @4 ? @4 Notes payable 134 1;3
0ther liabilities 4 3
$otal liabilities ?634 ? 64
Net assets ? E34 ?1%644
Fair 9alue
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/itt pays ?44%444 cash and issues 34%444
shares o& /itt Corporation ?14 par common
stoc" with a mar"et value o& ?64 per share.
34%444 & ?14 ?344%444
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+nvestment in Seed 1%44%444
Cash 44%444
Common Stoc" 344%444Additional /aid-in Capital 344%444
$o record issuance o& 34%444 shares o& ?14 par
common stoc" plus ?44%444 cash in a purchase business combination with Seed Company
+llustration o& a /urchase
Combination
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Illustration o a !urchase Combination
Cash 34 Net receivable 14
+nventories 634!and 144)uildings% net 344'uipment% net ;34/atents 34
Accounts payable @4 Notes payable 1;3
0ther liabilities 3+nvestment in Seed Company 1%44
?1@4 G 1%4 644
*oodwill 644
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'llustration of a Purchase Co(!ination
/itt issues 4%444 shares o& its ?14 par common
stoc" with a mar"et value o& ?64 per share andalso gives a 14% &ive-year note payable &or
?644%444 &or the net assets o& Seed Company.
4%444 & ?14 ?44%444
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+nvestment in Seed 1%444%444
Common Stoc" 44%444
Additional /aid-in Capital 44%44414 Note /ayable 644%444
$o record issuance o& 4%444 shares o& ?14 par
common stoc" plus ?644%444% 14 note in a purchase business combination with Seed Company
Illustration o a !urchase Combination
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+llustration o& a /urchase
Combination
Cash 34 Net receivable 14
+nventories 634!and 144)uildings% net )04'uipment% net ;34/atents 34
Accounts payable @4 Notes payable 1;3
0ther liabilities 3+nvestment in Seed Company 1%444*ain &rom bargain purchase 644
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'llustration of a Purchase Co(!ination
?1%644%444 &air value is greater than ?1%444%444
purchase price by ?644%444.
Amounts assignable to assets are reduced by 64.
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The +oodwill Controvers$
,nder FASB Statement No. 14& ( -oodwill is nolon-er amortied or inancial re"ortin- "ur"oses.
in!ome ta% !ontro&ersies internationa a!!o"nting iss"es
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$he *oodwill Controversy
5nder FASB Statements No. 141 and No. 14#%
the FAS) reuires that &irms periodically assess
goodwill &or impairment o& its value.
An impairment occurs when the recorded value
o& goodwill is less than its &air value.
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Carr$in- values
Co(pare
Fair values
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Fair value Carrying amount*
,easurement o& the
impairment loss
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Amortiation versus
Nonamortiation
Firms must amortie intangible assets with
a &inite use&ul li&e over that li&e.
Firms will not amortie intangible assets with an
inde&inite use&ul li&e that cannot be estimated.
2-39
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Consolidation of nancial information is required whenone organization gains control of another.
If dissolution occurs, this consolidation is carried out atthe date of acquisition and a single set of accountingrecords is maintained.
If separate identities are maintained, consolidation is aperiodic “worksheet” process not involving journal entries.eparate accounting records are maintained.
!he acquisition method is "##$ %eginning in &''(.
)egac* e+ects for the purchase method for com%inationsoccurring through &''- and the pooling method through/01'0&''& remain in su%sequent *ear2s nancial reports.
C # C 3
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Compan* # Compan* 3
Assets Book Value Fair Value
Cash$
190,000$25,000
$25,000
Account Receivable $130,000
$5,000
$0,000
!"ui#ent$
1%0,000$&0,000
$&2,000
'nventor($
100,000$0,000
$5,000
)ool * +achiner( $&0,000 $10,000 $30,000
!otal #ssets 4 //',''' 4 5-',''' 4 &'&,'''
Account a(able
$
210,000
$
30,000
$
20,000
Ca#ital$
350,000$
120,000
A--itional ai- 'nCa#ital
$.5,000
$20,000
$ $