Solution manual for advanced accounting 6th edition by jeter download

Assets acquired via issued shares are recorded at fair values of the stock given or the assets received whichever is more clearly evident.. Goodwill GW is recorded as any excess of total

SOLUTION MANUAL FOR ADVANCED

ACCOUNTING 6TH EDITION BY JETER

Chapter 2 – Accounting For Business Combinations

Link download full: http://testbankair.com/download/solution-manual-for-advanced-accounting-6th-edition-by-jeter/

COMBINATIONS: BACKGROUND

A Accounting standards now mandate the use of the acquisition

(purchase) method for accounting for mergers & acquisitions Until 2001, companies had a choice, albeit strictly regulated, between these two methods: 1) the pooling of interests

method (this method was grandfathered into the Codification), and 2) Acquisition (Purchase) method

REQUIREMENT

A Pro forma statements have historically served two functions in

relation to business combinations:

1 To provide information in the planning stages of

the combination, and

combination Note: This aspect was particularly important prior to the elimination of the pooling method, as a means

of enabling users to compare mergers despite the dissimilarity on the face of the principal statements between those accounted for under purchase and pooling

mergers, to indicate any calculations which are computed ―as if‖ alternative rules or standards had been applied For example, a firm may disclose in its press releases that earnings excluding certain one-time charges reflect a more positive trend than the GAAP-reported EPS However, the SEC has recently cracked down on the extent to which these types of pro forma

1

calculations may be presented, and the details that should be included in such announcements

C The notes to the statements contain useful

information to facilitate comparison between periods

2.3 EXPLANATION AND ILLUSTRATION OF ACQUISITION

ACCOUNTING

A If cash is used, payment equals cost; if debt securities are

used, present value of future payments represents cost

B Assets acquired via issued shares are recorded at fair values of

the stock given or the assets received whichever is more clearly evident

C If stock is actively traded, market price is a better

estimate of fair value than appraisal values

D Goodwill (GW) is recorded as any excess of total cost over the

sum of amounts assigned to identifiable assets and liabilities

and, under SFAS No 142 [ASC 350] is no longer amortized

E Goodwill must be tested for impairment at a level referred

to as a reporting unit – generally a level lower than that of the entire entity If the implied fair value of the reporting unit’s goodwill is less than its carrying amount, goodwill is considered impaired See Flowchart on the next page

F Goodwill impairment losses should be aggregated and

presented as a separate line item in the operating section of the income statement

G Bargain acquisition—when the net amount of fair values of

identifiable assets less liabilities exceeds the total cost of the

acquired company—a gain is recognized in the period of the acquisition under current GAAP

stock is credited for the par value of the shares issued, with the remainder credited to other contributed capital Individual assets acquired and liabilities assumed are recorded at their fair values Plant assets and other long-lived assets are recorded at their fair values unless a bargain has occurred, in which case their values are reduced below fair value to the extent of the

bargain When the cost exceeds the fair value of identifiable net assets, any excess of cost over the fair value is recorded

as goodwill

Combinations: deferred tax assets and/or liabilities must be recognized for differences between the assigned values and tax bases of the assets and liabilities acquired Such differences are likely when the combination is tax-free to the sellers

2.4 THE MEASUREMENT PERIOD (AND

MEASUREMENT PERIOD ADJUSTMENTS)

A The measurement period is the period after the acquisition date during which the acquirer may adjust the provisional amounts recognized for a business combination

B During the measurement period, the acquirer is required to retrospectively adjust the provisional amounts at the

acquisition date to reflect new information obtained about facts and circumstances that existed at the acquisition date

C The Measurement period shall not exceed one year from the acquisition date

2.5 CONTINGENT CONSIDERATION IN AN ACQUISITION

acquisition from parent to subsidiary, generally dependent of some measure of performance

but it may create conflicts upon implementation because of measures which are out of the control of certain managers after the merger, as well as creating possible incentives for

manipulation of earnings numbers (and may lead to decisions which are short-term rather than long-term focused)

C Contingency based on security prices serves to correct some of

the shortcomings of contingency calculations based on earnings (manipulation of numbers, for example), but leads to its own set of problems; for example, market prices fluctuate in response to many economy-wide factors that are almost

completely outside the managers’ control

Illustration 2-4 Deals Reporting the Amount of Contingent Consideration (Earnouts)

Public Acquirers

2010 to 2014

$ Millions Year No of Value Earn-out/Deal

Deals Value

Source: Thomson SDC

Platinum

* partial year 2014

2.6 LEVERAGED BUYOUTS

A Group of employees/management creates a new

company to acquire all the outstanding shares of employer/original company

assets acquired with borrowed funds have actually been purchased and therefore recorded at cost

Illustration 2-5 The Leveraged Buyout Market

(LBO) 2000-2009

No of % of all Year Deals Deals

Source: Mergers and Acquisitions February

2009, 2010, 2011

2.7 IFRS versus U.S GAAP

Illustration 2-7

Comparison of Business Combinations and Consolidations under U.S

GAAP and IFRS1

1 Fair value of contingent 1 IFRS 3R uses the same

consideration recorded at acquisition approach

date, with subsequent adjustments

recognized through earnings if

contingent liability (no adjustment for

equity)

2 Contingent assets and liabilities 2 Under IFRS 3R a contingent assumed (such as warranties) are liability is recognized at the

measured at fair value on the acquisition acquisition date if its fair value date if they can be reasonable estimated can be reliably measured

If not, they are treated according to

SFAS No 5

3 Noncontrolling interest is recorded 3 Noncontrolling interest can be

at fair value and is presented in equity recorded either at fair value or at

the proportionate share of the net assets acquired Also presented in equity

4 Special purpose entities (SPEs) are 4 Special purpose entities (SPEs) consolidated if the most significant are consolidated if controlled activities of the SPE are controlled QSPEs are not addressed

Qualified SPE (QSPEs) are no longer

exempted from consolidation rules

5 Direct acquisition costs (excluding 5 IFRS 3R uses the same

the costs of issuing debt or equity approach

securities) are expenses

6 Goodwill is not amortized, but is 6 Goodwill is not amortized, but tested for impairment using a two-step is tested for impairment using a

7 Negative goodwill in an acquisition 7 IAS 36 uses the same approach

is recorded as an ordinary gain in

income (not extraordinary)

8 Fair value is based on exit prices, i.e 8 Fair value is the amount for

the price that would be received to sell which an asset could be

an asset or paid to transfer a liability in exchanged or a liability settled

an orderly transaction between market between knowledgeable, willing participants at the measurement date parties in an arm’s length

transaction

9 Purchased in-process R&D is 9 Purchased in-process R&D is capitalized with subsequent capitalized with the potential for expenditures expensed The capitalized subsequent expenditures to be portion is then amortized capitalized The capitalized

portion is then amortized

10 Parent and subsidiary accounting 10 Parent and subsidiary

policies do not need to conform accounting policies do need to

conform

11 Restructuring plans are accounted 11 Similar accounting under for separately from the business IFRS 3 and amended IAS 27

combination and generally expensed

(unless conditions in SFAS no 146 are

met)

12 Measurement period ends at the 12 IFRS 3 is similar to U.S

earlier of a) one year from the GAAP

acquisition date, or b) the date when the

acquirer receives needed information to

consummate the acquisition

13 For step acquisitions, all previous 13 IFRS 3 is similar to U.S

ownership interests are adjusted to fair GAAP

value, with any gain or loss recorded in

earnings

14 Reporting dates for the parent and 14 Permits a three-month

subsidiary can be different up to three difference if impractical to prepare months Significant events in that time the subsidiary’s statements on the must be disclosed same date; however, adjustments

are required for significant events

in that period

15 Potential voting rights are generally 15 Potential voting rights are

not considered in determining control considered if currently

exercisable

APPENDIX 2A- Deferred Taxes in Business Combinations

A Motivation for selling firm: structure the deal so that any

gain resulting is tax-free at the time of the combination

B Deferred tax liability (or asset) needs to be recognized by

purchaser when the book value of the assets is used (inherited) for tax purposes, but the fair value is recognized

in the accounting books under purchase accounting rules