Analysis of FASB Exposure Drafts for Business Combinations by Impact on Chapters 1 - 5 Fundamentals of Advanced Accounting 1 st Edition Fischer, Taylor,

Analysis of FASB Exposure Drafts for Business

Combinationsby Impact on Chapters 1 - 5

Fundamentals of Advanced Accounting 1st Edition

Fischer, Taylor, and Cheng

SASPECIALAPPENDIX

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


• 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


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


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


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


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


Basic Purchase: Example

•Johnson Inc. to be acquired by Acquisitions, Inc.•Johnson Inc. financial information at date of acquisition:

Total assets 460,000Total liabilities 125,000Common stock 10,000APIC 140,000RE 185,000 Total net assets 335,000


1. Calculate the market value of net identifiable assets:

• At fair value, net assets = $703,2882. 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


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)

Goodwill 96,712

Expense acquisition costs $35,000


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 $500,000Total fair value of net assets acquired (703,288)Gain on purchase of business (203,288)

Expense acquisition costs $35,000


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


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.


Value Analysis – 80% Purchase$420,000 Price Continued

Value Analysis

Parent Price (80%)

NCI Value (20%)

Company Value

Company fair value 420,000 105,000 525,000

Fair value of net assets

Excludes goodwill

292,000 73,000 365,000

Goodwill 128,000 32,000 160,000

Gain n/a n/a n/a


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


Price is $420,000: D&D Schedule

Company Value

Parent Price (80%)

NCI Value(20%)

Fair value of company 525,000 420,000 105,000

Book value 200,000 160,000 40,000

Excess of fair value 325,000 260,000 65,000

Inventory 5,000 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.

Land 30,000

Building 100,000

Equipment 20,000

Copyright 50,000

Goodwill 120,000

Total adjustments 325,000


Price is $420,000: Eliminations

Dr Cr

Investment in Sub EL 256,000D 260,000

Inventory D 5,000

Land D 30,000

Building D 100,000

Equipment D 20,000

Copyright D 50,000

Goodwill D 120,000

Common stock – Sub EL 8,000

APIC EL 72,000

RE – Sub EL 80,000 NCI 105,000


Value Analysis – 80% PurchaseWith 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



Gain On Purchase: Value Analysis$250,000 Price

Value Analysis

Parent Price (80%)

NCI Value (20%)

Company Value

Company fair value 250,000 73,000 323,000

Fair value of net assets 292,000 73,000 365,000

Goodwill n/a n/a n/a

Gain 42,000 No gain for NCI


Value Analysis – 80% PurchaseGain on Purchase: $250,000 Price Continued



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


Price is $250,000: D&D Schedule Gain on Purchase

Company Value

Parent Price 80%)

NCI Value (20%)

Fair value of company 353,000 250,000 73,000

Total equity in book value 200,000 160,000 40,000

Excess fair value 123,000 90,000 33,000

Inventory 5,000 There 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.

Land 30,000

Building 100,000

Equipment 50,000

Copyright 20,000

Goodwill (40,000)

Gain on purchase (42,000)



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


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)



•Paulos Inc. paid $720,000 for 80% interest of Carlos Company.






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


Add Amortization Data to Prior D&D$720,000 Price

Company Value

Parent Price (80%)

NCI Value (20%) Life

Annual Amort.

Fair value of sub 900,000 720,000 180,000

Total equity in B.V. 500,000 400,000 100,000

Excess of fair value 400,000 320,000 80,000

Inventory 5,000 Year 1 only

Land 50,000 n/a

Building 200,000 2010,000

Equipment (20,000) 5 (4,000)

Patent 25,000 102,500

Goodwill 126,760 n/a

Discount on BP 13,240 4 3,310



Chapter 4

• Chapter 4 already eliminates 100% of intercompany profits regardless of parent’s interest.

• None of the existing procedures are changed.


Chapter 5

• The FASB exposure drafts do not impact this chapter.

Documents

Analysis of FASB Exposure Drafts for Business Combinations by Impact on Chapters 1 - 5 Fundamentals of Advanced Accounting 1 st Edition Fischer, Taylor,