Business CombinationsBusiness Combinations
Chapter 1
Learning Objective 1
Understand the economic
Business Combinations
two or more separate businesses join
into a single accounting entity.
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Reasons for Business Combinations
Learning Objective 2
accounting perspectives.
The Legal Form of
The Legal Form of
The Legal Form of
The Accounting Concept of
combining companies before their union.
Dissolution of the legal entity is not
necessary within the accounting concept.
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The Accounting Concept of
The Accounting Concept of
One company transfers its net assets to another.
Each company transfers its net assets
to a newly formed corporation.
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Background on Accounting for
requirements for business combinations historically
involved the pooling of interest method.
ARB No. 40 introduced an alternative method:
the purchase method.
Background on Accounting for
combinations were found in APB Opinion No. 16.
APB No. 16 recognized both the pooling
and purchase methods.
Background on Accounting for
initiated after June 30, 2001.
Combinations initiated after this date
must use the purchase method.
Prior combinations will be grandfathered.
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Learning Objective 3
Pooling Method
combinations rather than recognizing fair
values of net assets at the transaction date.
Most of the detailed issues related to poolings
concern the original recording of the combination.
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Purchase Method
of assets acquired and liabilities assumed at
their fair values at the date of combination.
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Learning Objective 4
Accounting for Business Combinations
Under the Purchase Method
$10 par common stock for the net assets of
Sunny Corporation in a purchase combination
on July 1, 2003.
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Accounting for Business Combinations
Under the Purchase Method
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Accounting for Business Combinations
Under the Purchase Method
Investment in Sunny 1,600,000
Additional Paid-in Capital 600,000
common stock with a market value of $16 per share
in a purchase business combination with Sunny.
How are the additional direct costs recorded?
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Accounting for Business Combinations
Under the Purchase Method
Investment in Sunny 80,000
Additional Paid-in Capital 40,000
Cash (other assets) 120,000
equity securities.
Accounting for Business Combinations
Under the Purchase Method
Sunny is $1,680,000.
investment in the Sunny account.
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Goodwill
subsidiary company is greater than
the sum of the market value of the
subsidiary’s assets minus liabilities.
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Learning Objective 5
allocations in a purchase
Cost Allocation in a Purchase
Business Combination
tangible and intangible assets acquired
and liabilities assumed.
of assets and liabilities.
Cost Allocation in a Purchase
Business Combination
Such goodwill is an unidentifiable asset.
Goodwill resulting from the
combination is valued directly.
Recognition and Measurement of
Recognizable intangibles
Contingent Consideration in a
at the date of acquisition is recorded as
part of the cost of combination.
Future earnings
Cost and Fair Value Compared
Investment cost
Cost and Fair Value Compared
Investment cost
Illustration of a Purchase
Seed Company on December 27, 2003.
Pitt
Seed
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Illustration of a Purchase
Illustration of a Purchase
Illustration of a Purchase
stock with a market value of $20 per share.
50,000 × $10 = $500,000
Investment in Seed 1,400,000
common stock plus $400,000 cash in a purchase
business combination with Seed Company
Illustration of a Purchase
Illustration of a Purchase
Illustration of a Purchase
stock with a market value of $20 per share and
also gives a 10%, five-year note payable for
$200,000 for the net assets of Seed Company.
40,000 × $10 = $400,000
Investment in Seed 1,000,000
common stock plus $200,000, 10% note in a
purchase business combination with Seed Company
Illustration of a Purchase
Illustration of a Purchase
Illustration of a Purchase
purchase price by $200,000.
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The Goodwill Controversy
longer amortized for financial reporting purposes.
– income tax controversies
– international accounting issues
The Goodwill Controversy
the FASB requires that firms periodically assess
goodwill for impairment of its value.
An impairment occurs when the recorded value
of goodwill is less than its fair value.
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Recognizing and Measuring
Cost and Fair Value Compared
Fair value
Carrying amount
Amortization versus
a finite useful life over that life.
Firms will not amortize intangible assets with an
indefinite useful life that cannot be estimated.
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End of Chapter 1