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Slide 2-1
Chapter Two
Consolidation of Financial Information
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-2
Why do Firms Combine? Vertical Verticalintegration. integration. Cost Costsavings. savings. Quick Quickaccess accessto tonew new
markets. markets. Economies Economiesof ofscale. scale. More Moreattractive attractive financing financingopportunities. opportunities. Diversification Diversification of of business businessrisk. risk.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-3
The Consolidation Process The The consolidation consolidation of of financial financial information information into into aa single single set set of of statements statements becomes becomes necessary necessary whenever whenever aa single single economic economic entity entity isis created created by by the the business business combination combination of of two two or or more more companies. companies. -- --ARB ARB No. No. 51 51 Why Consolidated Statements? They are presumed to be more meaningful
that separate statements. They are considered necessary for a fair presentation. McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-4
Business Combinations AAbusiness business combination combination occurs occurs when when an an enterprise enterprise acquires acquires net net assets assets that that constitute constitute aa business business or or equity equity interests interests of of one one or or more moreother other enterprises enterprises and and obtains obtains control control over over that that enterprise enterprise or or enterprises. enterprises. -- -- SFAS SFAS No. No. 141 141
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-5
Business Combinations
Exh. 2-2
Continue McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-6
Business Combinations – Cont.
McGraw-Hill/Irwin
Exh. 2-2
© The McGraw-Hill Companies, Inc.
Slide 2-7
Consolidation of Financial Information
Parent
Subsidiary
The parent does not Consolidated The Sub still prepares prepare separate financial statements separate financial financial statements are prepared. statements McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-8
GAAP ing Methods
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-9
Purchase Method – SFAS 141 Used
when when there is a change in ownership that IfIf the theacquisition acquisitionis is results in control of made by issuing made by issuing one enterprise by stock, stock, the thecost costof of another enterprise. the theacquisition acquisitionis is equal The appropriate equalto tothe the MARKET MARKETVALUE VALUEof of valuation basis for the stock issued. the stock issued. any purchase transaction is “cost”. McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-10
Purchase Method Situations Dissolution Dissolution of of the the
acquired acquired company: company: Cost Cost == FMV FMV Cost Cost >> FMV FMV Cost Cost << FMV FMV
Separate Separate
incorporation incorporation is is maintained. maintained.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-11
Purchase Method - Dissolution Cost = FMV
Ignore the Equity and Nominal s of the acquired company. Determine FMV of the acquired company’s assets and liabilities. Prepare a journal entry to recognize cost of the acquisition incorporate the FMV of acquired
company’s assets and liabilities into acquiring company’s books.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-12
Purchase Method - Dissolution Cost = FMV On 1/1/04, Large acquired 100% of Tiny for $300,000 cash.
Prepare the entry to record Large’s purchase. McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-13
Purchase Method - Dissolution Cost = FMV Tiny’s fair market value was $300,000 which is equal to the price paid by Large. Record the purchased assets at their market value.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-14
Purchase Method - Dissolution Cost > FMV
At date of acquisition: Acquired company should
prepare a Balance Sheet as of the date of acquisition. Acquired company’s income prior to acquisition is irrelevant to the acquiring company.
McGraw-Hill/Irwin
FMV of acquired company’s assets and liabilities is added to acquiring company’s books. Difference between Cost and FMV is allocated to identifiable intangible assets and to goodwill.
Note: Note:Goodwill Goodwill should shouldbe beviewed viewed as asaaresidual residual amount amount remaining remainingafter after all allother other identifiable identifiableand and separable separable intangible intangibleassets assets have havebeen been identified. identified.
© The McGraw-Hill Companies, Inc.
Slide 2-15
Purchase Method - Dissolution Cost > FMV On 1/1/04, Huge acquires 100% of Small for $250,000 cash.
Small has no identifiable, separable intangible assets. McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-16
Purchase Method - Dissolution Cost > FMV
Goodwill will be recorded as an intangible asset on Huge’s books, but will not be amortized. McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-17
Purchase Method - Dissolution Cost > FMV Prepare Large’s journal entry for this acquisition. to record the $33,000 of Goodwill.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-18
Purchase Method - Dissolution Cost < FMV When
FMV exceeds cost, we have a Bargain Purchase. Current assets and liabilities should be consolidated at their FMV. Non-current assets should be recorded at a value between FMV and BV. i.e. each non-current asset’s
(including in-process R&D) FMV should be reduced by a proportionate share of the excess of FMV over cost.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-19
Purchase Method - Dissolution Cost < FMV In In the the event event that that the the difference difference is is substantial substantial enough enough to to eliminate eliminate all all the the non-current non-current asset asset balances balances of of the the acquired acquired company company .. .. .. .. .. .. The The remainder remainder is is to to be be reported reported as as an an extraordinary extraordinary gain gain (SFAS (SFAS 141) 141)
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-20
Let’s see what happens when the acquired company is not dissolved.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-21
Purchase Method No Dissolution The Theacquired acquired company company
continues continuesas as aaseparate separate entity. entity. The Theacquisition acquisitionshows showsup upon onthe the
Parent’s Parent’sbooks booksin inthe theInvestment Investment in inSubsidiary Subsidiary. .
Separate Separaterecords recordsfor foreach each
company companyare arestill stillmaintained. maintained. The Theadjusted adjusted balances balancesfor forthe the Parent Parent and and the theSubsidiary Subsidiaryare are consolidated consolidated using using aa worksheet. worksheet.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-22
Steps for Consolidation 1. 1. Record Record the thefinancial financial information informationfor for both bothParent Parentand andSub Sub on on the theworksheet. worksheet. 2. 2. Remove Removethe theInvestment Investment in in Sub Sub balance. balance. 3. 3. Remove Remove the theSub’s Sub’sequity equity balances. balances. 4. 4. Adjust Adjustthe the Sub’s Sub’snet netassets assets to to FMV. FMV. 5. 5. Allocate Allocateany anyexcess excessof of cost costover overBV BVto to identifiable, identifiable,separable separableintangible intangibleassets assets or or goodwill. goodwill. 6. 6. Combine Combineall all balances. balances.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-23
No Dissolution Example On 1/1/05, Huge acquires 100% of Small for $250,000 cash.
Small holds a trademark that is valued at $25,000. McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-24
1. 1. Record Record the the balances balancesfor for each eachcompany company in inthe the worksheet. worksheet.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-25
2. 2. Remove Removethe the investment investment from from the the worksheet. worksheet.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-26
3. 3. Remove Remove the the subsidiary’s subsidiary’s equity equity balances. balances. Let’s Let’slook lookat at the the computation computation of of Goodwill. Goodwill.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-27
Goodwill Computation for Huge’s Acquisition of Small
Weuse usethese thesenumbers numbers We forsteps steps#4 #4 &. #5. for
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-28
4. 4. Adjust Adjustthe the subsidiary’s subsidiary’s balances balancesto to FMV. FMV.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-29
5. 5. Record Record the the trademark trademarkand and the theGoodwill. Goodwill.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-30
McGraw-Hill/Irwin
6. 6. Add Addthe thebalances balances across acrossthe thepage. page.
© The McGraw-Hill Companies, Inc.
Slide 2-31
Purchase Price Allocations Additional Issues Consolidation ConsolidationCosts Costs Legal LegalFees, Fees,Direct DirectCosts Costs of ofCombination Combination Increase Increasethe theInvestment Investmentin in
Subsidiary Subsidiary. .
Stock StockIssuance IssuanceCosts Costs Broker BrokerFees, Fees,Registration Registration Fees, Fees,etc. etc. Decrease Decreasethe theParent’s Parent’s
Paid-In Paid-InCapital Capital. .
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-32
Purchase Price Allocations Additional Issues, SFAS No. 141 Intangibles Intangibles
Current Current and and noncurrent noncurrent assets assets
that that lack lack physical physicalsubstance. substance. Do Donot not include includefinancial financial instruments. instruments. When When should should an an Intangible Intangible
be be recognized? recognized?
Does Doesitit arise arisefrom fromcontractual contractual
or orother otherlegal legal rights? rights? Can Canititbe besold soldor or otherwise otherwise separated separatedfrom fromthe theacquired acquired enterprise? enterprise? McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-33
Purchase Price Allocations Additional Issues, SFAS No. 141
Exh. 2-7
Intangible Asset Examples Customer CustomerBase Base Trademarked TrademarkedBrand Brand Names Names Customer CustomerRoutes Routes Effective EffectiveAdvertising Advertising Programs Programs Covenants Covenants Rights Rights(broadcasting, (broadcasting, development, development,use, use, etc.) etc.)
McGraw-Hill/Irwin
Databases Databases Technological Technologicalknowknowhow how Patents Patents&&Copyrights Copyrights Strong Stronglabor laborrelations relations Assembled, Assembled,trained trained workforce workforce Favorable Favorablegovernment government relations relations
© The McGraw-Hill Companies, Inc.
Slide 2-34
Purchase Price Allocations Additional Issues, SFAS No. 141 In-Process In-Process R&D R&D Should Shouldbe beexpensed expensedimmediately immediately upon uponacquisition, acquisition,unless unlessthere there are arealternative alternativefuture futureuses. uses. •• Dr. Dr.R&D R&DExpense Expense
•• Cr. Cr.Investment Investmentin inInvestee Investee ItItcould couldalso alsobe bewritten-off written-offvia via consolidation consolidationentries entries
IPR&D IPR&Dthat thathas hasreached reached
technological technologicalfeasibility, feasibility,can can be be “capitalized”. “capitalized”. Determination Determinationof offair fairvalue valueis is
critical. critical.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-35
Unconsolidated Subsidiaries W h e n c a n a P a r e n t e x c lu d e a 5 0 % o w n e d s u b s id ia r y fr o m c o n s o lid a tio n ?
W h e n c o n tro l d o e s n o t a c t u a ll y r e s t w i t h th e 5 0 % o w n e rs.
SFAS N o. 94 McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-36
Pooling of Interests Historically, Historically,many many business business combinations combinations have have been been ed ed for for as as “Pooling “Pooling of of Interests.” Interests.” In In its its SFAS SFAS 141, 141, “Business “Business Combinations”, Combinations”, the the FASB FASB states states that that all all business business combinations combinations should should be be ed ed for for using using the the ““Purchase Method Purchase Method”. Method”. Method
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-37
Pooling of Interests According Accordingto toSFAS SFASNo. No.141, 141,the the purchase purchasemethod method is isto tobe be applied appliedprospectively. prospectively. Past Past poolings poolingsof ofinterests interests are are left left intact intact by bySFAS SFASNo. No.141. 141. Therefore, Therefore,itit is isimportant importantto to understand understandhow how to to for forPAST PASTpoolings. poolings.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-38
Historical Review of Pooling of Interests. Read the book for details! In Inaapooling, pooling,one one company companyobtained obtained essentially essentially“all” “all”of ofthe the other othercompany’s company’s stock. stock. The Thetransaction transaction involved involvedthe the exchange exchangeof ofcommon common stock. stock. No Noexchange exchange of of cash cashwas wasallowed. allowed.
McGraw-Hill/Irwin
The ownership interests of two, or more, companies were combined into one new company. No single company was dominant. Precise cost figures were difficult to obtain. To use pooling of interests, 12 strict criteria had to be met.
© The McGraw-Hill Companies, Inc.
Slide 2-39
Historical Review of Pooling of Interests
The TheBook Book Values Valuesof ofthe thetwo two combining combiningcompanies companies were were ed. ed. No NoGoodwill Goodwillwas was recorded. recorded.
Revenues Revenuesand andexpenses expenseswere were combined combinedretroactively retroactivelyfor for the the two two companies. companies. This Thiscreated created superior superiorearnings, earnings,hence henceits its preference. preference.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-40
Historical Review of Pooling of Interests IfIf both both companies companies
continued continued to to exist, exist, an an Investment Investment in in Sub Sub was was recorded recorded on on one one company’s company’s books books (usually (usually the the larger). larger). No No Goodwill Goodwill was was recorded. recorded. Both Both companies companies were were combined combined at at BV. BV. McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-41
Historical Review of Pooling of Interests Prior PriorPeriod PeriodAdjustments Adjustmentswere were
made madeto to for for differences differences in in the the ways ways the thetwo two companies companiesed edfor for income. income. A Ajournal journalentry entrywas wasrecorded recorded to torecognize recognizethe the Investment Investmentin in Subsidiary. Subsidiary. The TheBV’s BV’sfor for both both companies companies were wereentered enteredon onaa consolidation consolidationworksheet. worksheet.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-42
Continued ing for Pooling of Interests The
Investment in Sub must be eliminated. Also eliminate the Sub’s
Equity s to prevent double-counting. They have already been included in the original Investment in Sub entry. Add
together the BV’s of the remaining s.
THE END OF CHAPTER 2 McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Chapter Two
Consolidation of Financial Information
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-2
Why do Firms Combine? Vertical Verticalintegration. integration. Cost Costsavings. savings. Quick Quickaccess accessto tonew new
markets. markets. Economies Economiesof ofscale. scale. More Moreattractive attractive financing financingopportunities. opportunities. Diversification Diversification of of business businessrisk. risk.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-3
The Consolidation Process The The consolidation consolidation of of financial financial information information into into aa single single set set of of statements statements becomes becomes necessary necessary whenever whenever aa single single economic economic entity entity isis created created by by the the business business combination combination of of two two or or more more companies. companies. -- --ARB ARB No. No. 51 51 Why Consolidated Statements? They are presumed to be more meaningful
that separate statements. They are considered necessary for a fair presentation. McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-4
Business Combinations AAbusiness business combination combination occurs occurs when when an an enterprise enterprise acquires acquires net net assets assets that that constitute constitute aa business business or or equity equity interests interests of of one one or or more moreother other enterprises enterprises and and obtains obtains control control over over that that enterprise enterprise or or enterprises. enterprises. -- -- SFAS SFAS No. No. 141 141
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-5
Business Combinations
Exh. 2-2
Continue McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-6
Business Combinations – Cont.
McGraw-Hill/Irwin
Exh. 2-2
© The McGraw-Hill Companies, Inc.
Slide 2-7
Consolidation of Financial Information
Parent
Subsidiary
The parent does not Consolidated The Sub still prepares prepare separate financial statements separate financial financial statements are prepared. statements McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-8
GAAP ing Methods
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-9
Purchase Method – SFAS 141 Used
when when there is a change in ownership that IfIf the theacquisition acquisitionis is results in control of made by issuing made by issuing one enterprise by stock, stock, the thecost costof of another enterprise. the theacquisition acquisitionis is equal The appropriate equalto tothe the MARKET MARKETVALUE VALUEof of valuation basis for the stock issued. the stock issued. any purchase transaction is “cost”. McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-10
Purchase Method Situations Dissolution Dissolution of of the the
acquired acquired company: company: Cost Cost == FMV FMV Cost Cost >> FMV FMV Cost Cost << FMV FMV
Separate Separate
incorporation incorporation is is maintained. maintained.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-11
Purchase Method - Dissolution Cost = FMV
Ignore the Equity and Nominal s of the acquired company. Determine FMV of the acquired company’s assets and liabilities. Prepare a journal entry to recognize cost of the acquisition incorporate the FMV of acquired
company’s assets and liabilities into acquiring company’s books.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-12
Purchase Method - Dissolution Cost = FMV On 1/1/04, Large acquired 100% of Tiny for $300,000 cash.
Prepare the entry to record Large’s purchase. McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-13
Purchase Method - Dissolution Cost = FMV Tiny’s fair market value was $300,000 which is equal to the price paid by Large. Record the purchased assets at their market value.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-14
Purchase Method - Dissolution Cost > FMV
At date of acquisition: Acquired company should
prepare a Balance Sheet as of the date of acquisition. Acquired company’s income prior to acquisition is irrelevant to the acquiring company.
McGraw-Hill/Irwin
FMV of acquired company’s assets and liabilities is added to acquiring company’s books. Difference between Cost and FMV is allocated to identifiable intangible assets and to goodwill.
Note: Note:Goodwill Goodwill should shouldbe beviewed viewed as asaaresidual residual amount amount remaining remainingafter after all allother other identifiable identifiableand and separable separable intangible intangibleassets assets have havebeen been identified. identified.
© The McGraw-Hill Companies, Inc.
Slide 2-15
Purchase Method - Dissolution Cost > FMV On 1/1/04, Huge acquires 100% of Small for $250,000 cash.
Small has no identifiable, separable intangible assets. McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-16
Purchase Method - Dissolution Cost > FMV
Goodwill will be recorded as an intangible asset on Huge’s books, but will not be amortized. McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-17
Purchase Method - Dissolution Cost > FMV Prepare Large’s journal entry for this acquisition. to record the $33,000 of Goodwill.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-18
Purchase Method - Dissolution Cost < FMV When
FMV exceeds cost, we have a Bargain Purchase. Current assets and liabilities should be consolidated at their FMV. Non-current assets should be recorded at a value between FMV and BV. i.e. each non-current asset’s
(including in-process R&D) FMV should be reduced by a proportionate share of the excess of FMV over cost.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-19
Purchase Method - Dissolution Cost < FMV In In the the event event that that the the difference difference is is substantial substantial enough enough to to eliminate eliminate all all the the non-current non-current asset asset balances balances of of the the acquired acquired company company .. .. .. .. .. .. The The remainder remainder is is to to be be reported reported as as an an extraordinary extraordinary gain gain (SFAS (SFAS 141) 141)
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-20
Let’s see what happens when the acquired company is not dissolved.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-21
Purchase Method No Dissolution The Theacquired acquired company company
continues continuesas as aaseparate separate entity. entity. The Theacquisition acquisitionshows showsup upon onthe the
Parent’s Parent’sbooks booksin inthe theInvestment Investment in inSubsidiary Subsidiary. .
Separate Separaterecords recordsfor foreach each
company companyare arestill stillmaintained. maintained. The Theadjusted adjusted balances balancesfor forthe the Parent Parent and and the theSubsidiary Subsidiaryare are consolidated consolidated using using aa worksheet. worksheet.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-22
Steps for Consolidation 1. 1. Record Record the thefinancial financial information informationfor for both bothParent Parentand andSub Sub on on the theworksheet. worksheet. 2. 2. Remove Removethe theInvestment Investment in in Sub Sub balance. balance. 3. 3. Remove Remove the theSub’s Sub’sequity equity balances. balances. 4. 4. Adjust Adjustthe the Sub’s Sub’snet netassets assets to to FMV. FMV. 5. 5. Allocate Allocateany anyexcess excessof of cost costover overBV BVto to identifiable, identifiable,separable separableintangible intangibleassets assets or or goodwill. goodwill. 6. 6. Combine Combineall all balances. balances.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-23
No Dissolution Example On 1/1/05, Huge acquires 100% of Small for $250,000 cash.
Small holds a trademark that is valued at $25,000. McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-24
1. 1. Record Record the the balances balancesfor for each eachcompany company in inthe the worksheet. worksheet.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-25
2. 2. Remove Removethe the investment investment from from the the worksheet. worksheet.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-26
3. 3. Remove Remove the the subsidiary’s subsidiary’s equity equity balances. balances. Let’s Let’slook lookat at the the computation computation of of Goodwill. Goodwill.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-27
Goodwill Computation for Huge’s Acquisition of Small
Weuse usethese thesenumbers numbers We forsteps steps#4 #4 &. #5. for
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-28
4. 4. Adjust Adjustthe the subsidiary’s subsidiary’s balances balancesto to FMV. FMV.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-29
5. 5. Record Record the the trademark trademarkand and the theGoodwill. Goodwill.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-30
McGraw-Hill/Irwin
6. 6. Add Addthe thebalances balances across acrossthe thepage. page.
© The McGraw-Hill Companies, Inc.
Slide 2-31
Purchase Price Allocations Additional Issues Consolidation ConsolidationCosts Costs Legal LegalFees, Fees,Direct DirectCosts Costs of ofCombination Combination Increase Increasethe theInvestment Investmentin in
Subsidiary Subsidiary. .
Stock StockIssuance IssuanceCosts Costs Broker BrokerFees, Fees,Registration Registration Fees, Fees,etc. etc. Decrease Decreasethe theParent’s Parent’s
Paid-In Paid-InCapital Capital. .
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-32
Purchase Price Allocations Additional Issues, SFAS No. 141 Intangibles Intangibles
Current Current and and noncurrent noncurrent assets assets
that that lack lack physical physicalsubstance. substance. Do Donot not include includefinancial financial instruments. instruments. When When should should an an Intangible Intangible
be be recognized? recognized?
Does Doesitit arise arisefrom fromcontractual contractual
or orother otherlegal legal rights? rights? Can Canititbe besold soldor or otherwise otherwise separated separatedfrom fromthe theacquired acquired enterprise? enterprise? McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-33
Purchase Price Allocations Additional Issues, SFAS No. 141
Exh. 2-7
Intangible Asset Examples Customer CustomerBase Base Trademarked TrademarkedBrand Brand Names Names Customer CustomerRoutes Routes Effective EffectiveAdvertising Advertising Programs Programs Covenants Covenants Rights Rights(broadcasting, (broadcasting, development, development,use, use, etc.) etc.)
McGraw-Hill/Irwin
Databases Databases Technological Technologicalknowknowhow how Patents Patents&&Copyrights Copyrights Strong Stronglabor laborrelations relations Assembled, Assembled,trained trained workforce workforce Favorable Favorablegovernment government relations relations
© The McGraw-Hill Companies, Inc.
Slide 2-34
Purchase Price Allocations Additional Issues, SFAS No. 141 In-Process In-Process R&D R&D Should Shouldbe beexpensed expensedimmediately immediately upon uponacquisition, acquisition,unless unlessthere there are arealternative alternativefuture futureuses. uses. •• Dr. Dr.R&D R&DExpense Expense
•• Cr. Cr.Investment Investmentin inInvestee Investee ItItcould couldalso alsobe bewritten-off written-offvia via consolidation consolidationentries entries
IPR&D IPR&Dthat thathas hasreached reached
technological technologicalfeasibility, feasibility,can can be be “capitalized”. “capitalized”. Determination Determinationof offair fairvalue valueis is
critical. critical.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-35
Unconsolidated Subsidiaries W h e n c a n a P a r e n t e x c lu d e a 5 0 % o w n e d s u b s id ia r y fr o m c o n s o lid a tio n ?
W h e n c o n tro l d o e s n o t a c t u a ll y r e s t w i t h th e 5 0 % o w n e rs.
SFAS N o. 94 McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-36
Pooling of Interests Historically, Historically,many many business business combinations combinations have have been been ed ed for for as as “Pooling “Pooling of of Interests.” Interests.” In In its its SFAS SFAS 141, 141, “Business “Business Combinations”, Combinations”, the the FASB FASB states states that that all all business business combinations combinations should should be be ed ed for for using using the the ““Purchase Method Purchase Method”. Method”. Method
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-37
Pooling of Interests According Accordingto toSFAS SFASNo. No.141, 141,the the purchase purchasemethod method is isto tobe be applied appliedprospectively. prospectively. Past Past poolings poolingsof ofinterests interests are are left left intact intact by bySFAS SFASNo. No.141. 141. Therefore, Therefore,itit is isimportant importantto to understand understandhow how to to for forPAST PASTpoolings. poolings.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-38
Historical Review of Pooling of Interests. Read the book for details! In Inaapooling, pooling,one one company companyobtained obtained essentially essentially“all” “all”of ofthe the other othercompany’s company’s stock. stock. The Thetransaction transaction involved involvedthe the exchange exchangeof ofcommon common stock. stock. No Noexchange exchange of of cash cashwas wasallowed. allowed.
McGraw-Hill/Irwin
The ownership interests of two, or more, companies were combined into one new company. No single company was dominant. Precise cost figures were difficult to obtain. To use pooling of interests, 12 strict criteria had to be met.
© The McGraw-Hill Companies, Inc.
Slide 2-39
Historical Review of Pooling of Interests
The TheBook Book Values Valuesof ofthe thetwo two combining combiningcompanies companies were were ed. ed. No NoGoodwill Goodwillwas was recorded. recorded.
Revenues Revenuesand andexpenses expenseswere were combined combinedretroactively retroactivelyfor for the the two two companies. companies. This Thiscreated created superior superiorearnings, earnings,hence henceits its preference. preference.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-40
Historical Review of Pooling of Interests IfIf both both companies companies
continued continued to to exist, exist, an an Investment Investment in in Sub Sub was was recorded recorded on on one one company’s company’s books books (usually (usually the the larger). larger). No No Goodwill Goodwill was was recorded. recorded. Both Both companies companies were were combined combined at at BV. BV. McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-41
Historical Review of Pooling of Interests Prior PriorPeriod PeriodAdjustments Adjustmentswere were
made madeto to for for differences differences in in the the ways ways the thetwo two companies companiesed edfor for income. income. A Ajournal journalentry entrywas wasrecorded recorded to torecognize recognizethe the Investment Investmentin in Subsidiary. Subsidiary. The TheBV’s BV’sfor for both both companies companies were wereentered enteredon onaa consolidation consolidationworksheet. worksheet.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
Slide 2-42
Continued ing for Pooling of Interests The
Investment in Sub must be eliminated. Also eliminate the Sub’s
Equity s to prevent double-counting. They have already been included in the original Investment in Sub entry. Add
together the BV’s of the remaining s.
THE END OF CHAPTER 2 McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc.
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