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Transcript of Chap 1 Accounting
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McGraw-Hill/Irwin 2008 The McGraw-Hill Companies, Inc. All rights resere!.
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Intercorporate Acquisitions and Investments in Other Entities
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Intercorporate Acquisitions and
Investments in Other EntitiesThis chapter provides an overview of complex
organizational arrangements or structures!"
# $omplex organization structures often result fromcomplex %usiness strategies such as&
# Extending operations into foreign countries"
# Initiating new product lines"
# 'eparating activities that fall under regulator(controls"
# )educing taxes %( separating certain t(pes ofoperations"
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Intercorporate Acquisitions and
Investments in Other Entities# 'everal accounting transactions ma( %e required
to initiate a complex organization structure"
# There is a need to anal(ze multiple transactions formultiple companies simultaneousl(+not ,ust onetransaction for one compan("
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Intercorporate Acquisitions and
Investments in Other Entities The accounting procedures in this chapter
are driven %( such questions as&
# .id the compan( acquire the common stoc/ ofanother compan( or the assets of anothercompan( 0
# as the compan( dissolved i"e" liquidated! ordid the compan( continue to exist0
# as a new compan( formed0
# as there a change in ownership control0
# Is the acquired compan( wholl(-owned0
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3orms of 4usiness $om%inations
# There are three primar( forms of %usinesscom%inations&
# 'tatutor( 5erger
#'tatutor( $onsolidation
# 'toc/ Acquisition
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'tatutor( 5erger
# A statutor( merger occurs when one compan(acquires another compan( and the assets and
lia%ilities of the acquired compan( are transferred tothe acquiring compan("
# In a statutor( merger7 the acquired compan( is
liquidated and the acquiring compan( continues toexist"
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'tatutor( $onsolidation
# A statutor( consolidation occurs when a newcompan( is formed to acquire the assets and
lia%ilities of two com%ining compan("
# In a statutor( consolidation7 the com%iningcompanies are dissolved and the new compan( is
the onl( surviving entit("
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'toc/ Acquisition
# A stoc/ acquisition occurs when one compan(acquires a ma,orit( of the common stoc/ of another
compan( and the acquired compan( is notliquidated"
# In a stoc/ acquisition7 %oth companies continue to
operate as separate %ut related corporations i"e"7affiliated corporations!"
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'toc/ Acquisition&;arent-'u%sidiar( )elationship
# A su%sidiar( is a corporation that is controlledthrough common stoc/ ownership! %( anothercorporation7 that is7 the parent corporation"
# $ontrolling Interest& The parent owns ama,orit( of the common stoc/ of thesu%sidiar("
# holl(-Owned 'u%sidiar(& The parent ownsall of the common stoc/ of the su%sidiar("
#
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5ethods of Effecting 4usiness $om%inations
# 4usiness com%inations can %e either friendl( orunfriendl("
? 3riendl( com%inations involve %oth managementteams and recommend approval %( thestoc/holders
? @nfriendl( com%inations are /nown as hostile
ta/eovers= where the acquiring compan( ma/es adirect tender offer to the stoc/holders"
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Baluation of 4usiness Entities
# Assessing the overall value of a compan( oftenincludes&
# Baluation of Individual Assets and Cia%ilities
# Baluation of ;otential Earnings
# Baluation of $onsideration Exchanged
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Baluation of Individual
Assets and Cia%ilities
# The value of a compan(=s individual assets is
usuall( determined %( appraisal"# $urrent lia%ilities are often viewed as having fair
values equal to their %oo/ values %ecause the( will%e paid at face amount within a short time"
# Cong-term lia%ilities must %e valued %ased oncurrent interest rates if different from the effectiverates at the issue dates of the lia%ilities"
# Tax aspects must also %e considered"
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Baluation of ;otential Earnings
# '(nerg( occurs when assets operated together have avalue that exceeds the sum of their individual values"
# This Dvalue ma/es it desira%le to operate assets,ointl( rather than sell them individuall("
# ;ossi%le approaches to measuring the value of acompan(=s future earnings include&
# 5ultiples of current earnings"
# ;resent value of anticipated future newcash flows generated %( the compan("
# 'ophisticated financial models"
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Baluation of $onsideration Exchanged
# hen one compan( acquires another7 a value must%e placed on the consideration given in theexchange"
# Cittle difficult( is encountered when cash is used inan acquisition7 %ut valuation ma( %e more difficultwhen securities are exchange7 particularl( illiquid orprivatel( held securities or securities with unusualfeatures e"g"7 converti%le or calla%le securities!"
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;urchase 5ethod $urrent
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;ooling 5ethod Fot $urrent
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$hapter 1 Important Terms
? $ost of Investment ;urchase ;rice!
?
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$ost of Investment ;urchase ;rice!
# The value of the consideration given to the ownersof the acquired compan( normall( constitutes the
largest part of the total cost"
# There are three t(pes of other costs that ma( %eincurred in effecting a %usiness com%ination&
# .irect costs
# $osts of issuing securities
# Indirect and general costs
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;urchase ;rice--.irect $osts
# All direct costs associated with purchasing anothercompan( are capitalized as part of the total cost of
the acquired compan("# Examples&
# 3inders= fees
#Accounting fees
# Cegal fees
#Appraisal fees
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;urchase ;rice--$osts of Issuing 'ecurities
# $osts incurred in issuing equit( securities inconnection with the purchase of a compan( should%e treated as a reduction in Additional-;aid-In$apital" Examples include& Cisting feesH Audit andlegal fees related to the registrationH and7 4ro/ers=commissions"
# $osts incurred in issuing %onds pa(a%le inconnection with the purchase of a compan( should%e accounted for as %ond issue costs and amortizedover the term of the %onds"
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;urchase ;rice--Indirect and
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Example of $alculating
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IMPLIED GOODWILL AL!LA"IO#
$!%&$ E$"IMA"ED A##!AL EA'#I#G$ ()*+,---
LE$$. #O'MAL /O' I#D!$"'0 2*,---
*3*,---
P'E$E#" 4AL!E /A"O' +516-+*
78 0EA'$, 19, O'DI#A'0 A##!I"0:
IMPLIED GOODWILL (1,*1+,)+2
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'u%sequent Accounting for
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4argain ;urchase ;rice
a"/"a" Fegative
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Additional Thoughts
# The selling compan( would have recorded aD
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Example& $om%ination Effectedthrough ;urchase of Fet Assets
# ;oint acquires the all of the common stoc/ of 'harpissuing the shareholders of 'harp 1>7>>> shares of 1>par common stoc/" The shares have a total mar/etvalue of 6>>7>>>"
# 'harp continues to operate as a separate entit( after the%usiness com%ination transaction"
# ;oint incurs >7>>> in legal and appraisal fees and27>>> in stoc/ issuance costs"
# 35B of net assets are 1>7>>> 4ro/en down as follows&AK) L& Inv 8L& ;;E 2>L ;atent 9>L&Cia% 11>L!
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Example& $om%ination Effectedthrough ;urchase of Fet Assets $ont=d"!
Entries )ecorded 4( Acquiring $ompan( ;oint!
.eferred 5erger $osts >7>>>
.eferred stoc/ Issue $osts 27>>>
$ash 67>>>
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Example& $om%ination Effectedthrough ;urchase of Fet Assets $ont=d"!
# Entries 'ecorded %= Acquirin; ompan= 7Point:5
ash and 'eceivables (+,--- >
Inventor= 8,--- >Land, %uildin;s and Equipment +*-,--- >Patent )-,--- >Good
ommon $toc@ 1--,--- Additional PaidIn apital +8,--- DeBerred Mer;er osts +-,--- ?? DeBerred $toc@ Issue osts *,--- ??? $ee next slide5 ??$ee previous t /air Mar@et 4alue
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Example& $om%ination Effectedthrough ;urchase of Fet Assets $ont=d"!
# $alculation of >7>>>
;C@'& Other acquisition costs >7>>>
Total purchase price 6>7>>>
# CE''&
4oo/ value of net assets 1>7>>>
# .ifferential 1*>7>>>
In this case the differential all relates to goodwill since 4B M 3B for all the assets"
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Example& $om%ination Effectedthrough ;urchase of Fet Assets $ont=d"!
Entries )ecorded 4( Acquired $ompan( 'harp!"
Investment in ;oint 'toc/ 6>>7>>>$urrent Cia%ilities 1>>7>>>
Accumulated .epreciation 1>7>>>
$ash and )eceiva%les 7>>>
Inventor( 67>>> Cand >7>>>
4uildings and Equipment >>7>>>
>7>>>
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Example& $om%ination Effectedthrough ;urchase of 'toc/
# ;oint acquires the all of the common stoc/ of 'harpissuing the shareholders of 'harp 1>7>>> shares of 1>par common stoc/" The shares have a total mar/etvalue of 6>>7>>>"
# 'harp continues to operate as a separate entit( after the%usiness com%ination transaction"
# ;oint incurs >7>>> in legal and appraisal fees and27>>> in stoc/ issuance costs"
# 35B of net assets are 1>7>>> 4ro/en down as follows&AK) L& Inv 8L& ;;E 2>L ;atent 9>L&Cia% 11>L!
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Example& $om%ination Effectedthrough ;urchase of 'toc/
# Entries )ecorded 4( Acquiring $ompan(
;oint!
.eferred 5erger $osts >7>>>
.eferred 'toc/ Issue $osts 27>>>
$ash 67>>>
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Example& $om%ination Effectedthrough ;urchase of 'toc/ $ont=d"!
# Entries )ecorded 4( Acquiring $ompan( ;oint!
Investment in 'harp 'toc/ 6>7>>> N $ommon 'toc/ 1>>7>>>
Additional ;aid-In $apital 87>>>
.eferred 5erger $osts >7>>>.eferred 'toc/ Issue $osts 27>>>
6>7>>> M 6>>7>>> 3air Balue >7>>> 5erger $osts
87>>> M >N1>7>>> shares! - 27>>> 'toc/ Issue $osts
1>>7>>> M 1> par N1>7>>> shares!
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3inancial )eporting'u%sequent to a ;urchase
# hen a com%ination occurs during a fiscal (ear7income earned %( the acquired compan( prior to the
com%ination is not reported in the income statementof the com%ined entit("
# If the com%ined entit( reports comparative financialstatements that include statements for periods
%efore the com%ination7 those statements includeonl( the activities and financial statements of theacquiring compan( and not those of the acquiredcompan("
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.isclosure )equirementsa"/"a" Fotes to the 3inancial 'tatements!
# A num%er of disclosures are required to provide financialstatement readers with information a%out the com%ination&
# A description of the acquired entit("
# The percentage voting interests acquired"
# The primar( reason for the acquisition"
# A description of the factors that contri%utedto the recognition of goodwill"
# $ontingent pa(ments7 options7 or commitments"
# ;urchased research and development assets acquiredand written off"