Matakuliah
Tahun
: Akuntansi Keuangan Lanjutan I
: 2010
BUSINESS COMBINATION
Pertemuan 11-12
Types of Business Combinations
Business combinations unite previously separate
business entities.
• Horizontal integration – same business lines and
markets
• Vertical integration – operations in different, but
successive stages of production or distribution, or
both
• Conglomeration – unrelated and diverse products or
services
Bina Nusantara University
3
Reasons for Combinations
•
•
•
•
•
•
Cost advantage
Lower risk
Fewer operating delays
Avoidance of takeovers
Acquisition of intangible assets
Other: business and other tax advantages, personal
reasons
Bina Nusantara University
4
Potential Prohibitions/ Obstacles
• Antitrust
– Federal Trade Commission prohibited Staples’ acquisition of
Office Depot
• Regulation
– Federal Reserve Board
– Department of Transportation
– Federal Communications Commission
• Some states have antitrust exemption laws to protect
hospitals
Bina Nusantara University
5
Legal Form of Combination
• Merger
– Occurs when one corporation takes over all the operations of
another business entity and that other entity is dissolved.
• Consolidation
– Occurs when a new corporation is formed to take over the
assets and operations of two or more separate business
entities and dissolves the previously separate entities.
Bina Nusantara University
6
Mergers: A + B = A
1) Company A purchases the assets of Company B for
cash, other assets, or Company A debt/equity
securities. Company B is dissolved; Company A
survives with Company B’s assets and liabilities.
2) Company A purchases Company B stock from its
shareholders for cash, other assets, or Company A
debt/equity securities. Company B is dissolved.
Company A survives with Company B’s assets and
liabilities.
Bina Nusantara University
7
Consolidations: E + F = “D”
1) Company D is formed and acquires the assets of
Companies E and F by issuing Company D stock.
Companies E and F are dissolved. Company D
survives, with the assets and liabilities of both
dissolved firms.
2) Company D is formed acquires Company E and F
stock from their respective shareholders by issuing
Company D stock. Companies E and F are
dissolved. Company D survives with the assets and
liabilities of both firms.
Bina Nusantara University
8
Keeping the terms straight
In the general business sense, mergers and consolidations are
business combinations and may or may not involve the
dissolution of the acquired firm(s).
In Chapter 1, mergers and consolidations will involve only 100%
acquisitions with the dissolution of the acquired firm(s). These
assumptions will be relaxed in later chapters.
“Consolidation” is also an accounting term used to describe the
process of preparing consolidated financial statements for a
parent and its subsidiaries.
Bina Nusantara University
9
Evolution of Accounting Standards
for Business Combinations
“A business combination is a transaction or other event
in which an acquirer obtains control of one or more
businesses. Transactions sometimes referred to as
‘true mergers’ or ‘mergers of equals’ also are
business combinations…” [FASB Statement No. 141,
para. 3.e.]
A parent – subsidiary relationship is formed when:
– Less than 100% of the firm is acquired, or
– The acquired firm is not dissolved.
Bina Nusantara University
10
Evolution of Accounting Standards
for Business Combinations
• Since the 1950s both the pooling-of-interests method and
the purchase method of accounting for business
combinations were acceptable. [ARB 40, APB Opinion
16]
• Combinations initiated after June 30, 2001, use the
purchase method. [FASB Statement No. 141]
• Firms should use the acquisition method for business
combinations occurring in fiscal periods beginning after
December 15, 2008 [FASB Statement No. 141R]
Bina Nusantara University
11
Evolution of Accounting Standards
for Business Combinations
• Most major economies prohibit the use of the pooling
method.
• The International Accounting Standards Board
specifically prohibits the pooling method and requires
the acquisition method. [IFRS 3]
Bina Nusantara University
12
Recording Guidelines
• Record assets acquired and liabilities assumed using
the fair value principle.
• If equity securities are issued by the acquirer, charge
registration and issue costs against the fair value of
the securities issued, usually a reduction in additional
paid-in-capital.
• Charge other direct combination costs (e.g., legal
fees, finders’ fees) and indirect combination costs
(e.g., management salaries) to expense.
Bina Nusantara University
13
Recording Guidelines – Cont’d
• When the acquiring firm transfers its assets other than
cash as part of the combination, any gain or loss on the
disposal of those assets is recorded in current income.
• The excess of cash, other assets and equity securities
transferred over the fair value of the net assets
(A
– L) acquired is recorded as goodwill.
• If the net assets acquired exceeds the cash, other assets
and equity securities transferred, a gain on the bargain
purchase is recorded in current income.
Bina Nusantara University
14
Example
Poppy Corp. pays cash for $80,000 in finder’s fees and
consulting fees and for $40,000 to register and issue its
common stock. (in thousands)
Investment expense
Additional paid-in-capital
Cash
80
40
120
Sunny Corp. is assumed to have been dissolved. So,
Poppy Corp. will allocate the investment’s cost to the
fair value of the identifiable assets acquired and
liabilities assumed. Excess cost is goodwill.
Bina Nusantara University
15
Example
Receivables
XXX
Inventories
XXX
Plant assets
XXX
Goodwill
XXX
Accounts payable
XXX
Notes payable
XXX
Investment in Sunny Corp.
Bina Nusantara University
1,600
16
Identify the Net Assets Acquired
Identify:
1.
2.
3.
Tangible assets acquired,
Intangible assets acquired, and
Liabilities assumed
Include:
•
•
•
•
Identifiable intangibles resulting from legal or contractual
rights, or separable from the entity
Research and development in process
Contractual contingencies
Some noncontractual contingencies
Bina Nusantara University
17
Assign Fair Values to Net Assets
Use fair values determined, in preferential order, by:
1.
2.
3.
Established market prices
Present value of estimated future cash flows, discounted
based on observable measures
Other internally derived estimations
Bina Nusantara University
18
Exceptions to Fair Value Rule
• Deferred tax assets and liabilities [FASB Statement
No. 109 and FIN No. 48]
• Pensions and other benefits [FASB Statement No.
158]
• Operating and capital leases [FASB Statement No.
13 and FIN. No. 21]
• Goodwill on the books of the acquired firm is assigned
no value.
Bina Nusantara University
19
Goodwill
The excess of
• The sum of:
– Fair value of the consideration transferred,
– Fair value of any noncontrolling interest in the acquiree, and
– Fair value of any previously held interest in acquiree,
• Over the net assets acquired.
Bina Nusantara University
20
Contingent Consideration
• If the fair value of contingent consideration is
determinable at the acquisition date, it is included in
the cost of the combination.
• If the fair value of the contingent consideration is not
determinable at that date, it is recognized when the
contingency is resolved.
• Types of consideration contingencies:
– Future earnings levels
– Future security prices
Bina Nusantara University
21
Example – Pitt Co. Data
Pitt Co. acquires the net assets of Seed Co. in a
combination consummated on 12/27/2008. The
assets and liabilities of Seed Co. on this date, at their
book values and fair values, are as follows (in
thousands):
Bina Nusantara University
22
Cash
Net receivables
Inventory
Land
Buildings, net
Equipment, net
Patents
Total assets
Accounts payable
Notes payable
Other liabilities
Bina Nusantara
University
Total
liabilities
Book Val.
$ 50
150
200
50
300
250
0
$1,000
$ 60
150
40
$ 250
Fair Val.
$ 50
140
250
100
500
350
50
$1,440
$ 60
135
45
$ 240
23
Acquisition with Goodwill
Pitt Co. pays $400,000 cash and issues 50,000 shares
of Pitt Co. $10 par common stock with a market value
of $20 per share for the net assets of Seed Co.
Total consideration at fair value (in thousands):
$400 + (50 shares x $20)
$1,400
Fair value of net assets acquired:
$1,200
Goodwill
$ 200
Bina Nusantara University
24
Entries with Goodwill
The entry to record the acquisition of the net assets:
Investment in Seed Co.
1,400
Cash
400
Common stock, $10 par
500
Additional paid-in-capital
500
The entry to record Seed’s assets directly on Pitt’s
books:
Bina Nusantara University
25
Cash
50
Net receivables
140
Inventories
250
Land
100
Buildings
500
Equipment
350
Patents
50
Goodwill
200
Accounts payable
60
Notes payable
135
Other liabilities
45
Investment in Seed Co.
Bina Nusantara University
1,400
26
Acquisition with Bargain Purchase
Pitt Co. issues 40,000 shares of its $10 par common
stock with a market value of $20 per share, and it also
gives a 10%, five-year note payable for $200,000 for
the net assets of Seed Co.
Fair value of net assets acquired (in thousands):
$1,200
Total consideration at fair value:
(40 shares x $20) + $200
$1,000
Gain from bargain purchase
$ 200
Bina Nusantara University
27
Entries with Bargain Purchase
The entry to record the acquisition of the net assets:
Investment in Seed Co.
10% Note payable
1,000
Common stock, $10 par
Additional paid-in-capital
200
400
400
The entry to record Seed’s assets directly on Pitt’s
books:
Bina Nusantara University
28
Cash
50
Net receivables
140
Inventories
250
Land
100
Buildings
500
Equipment
350
Patents
Accounts payable
50
60
Notes payable
135
Other liabilities
45
Investment in Seed Co.
Gain from bargain purchase
Bina Nusantara University
1,000
200
29
Goodwill Controversies
• Capitalized goodwill is the purchase price not
assigned to identifiable assets and liabilities.
– Errors in valuing assets and liabilities affect the amount of
goodwill recorded.
• Historically goodwill in most industrialized countries
was capitalized and amortized.
• Current IASB standards, like U.S. GAAP
– Capitalize goodwill,
– Do not amortize it, and
– Test it for impairment.
Bina Nusantara University
30
Impairments
• Firms must test annually for the impairment of
goodwill at the business unit reporting level.
– If the unit’s book value exceeds its fair value, additional tests
must be performed to determine the impairment of goodwill
and/or other assets.
• More frequent testing for goodwill impairment may be
needed (e.g., loss of key personnel, unanticipated
competition, goodwill impairment of subsidiary).
Bina Nusantara University
31
Business Combination Disclosures
• FASB Statement No. 141R and 142 prescribe
disclosures for business combinations and intangible
assets. This includes, but is not limited to:
–
–
–
–
Reason for combination,
Allocation of purchase price among assets and liabilities,
Pro-forma results of operations, and
Goodwill or gain from bargain purchase.
Bina Nusantara University
32
Sarbanes-Oxley Act of 2002
• Establishes the PCAOB
• Requires
–
–
–
–
Greater independence of auditors and clients
Greater independence of corporate boards
Independent audits of internal controls
Increased disclosures of off-balance sheet arrangements and
obligations
– More types of disclosures on Form 8-K
• SEC enforces SOX and rules of the PCAOB
Bina Nusantara University
33