Business Combinations

Chapter 1
 Learning Objective 1

Memahami motivasi ekonomi yang

mendasari
penggabungan bisnis.
 Business Combinations

Penggabungan bisnis terjadi manakala ada

dua atau lebih usaha terpisah yang
bergabungmenjadi satu entitas akuntansi
tunggal
Alasan Penggabungan Business
Keunggulan Cost
Resiko yg lebih rendah
Lesedikit operasi yang tertunda
Menghindari pengambil-alihan
Akuisisi intangible assets
Alasan Lain
 Tujuan Pembelajaran 2

Mempelajari alternatif
bentuk penggabungan usaha,
dari sudut pandang hukum
dan akuntansi
 The Legal Form of
Business Combinations

Penggabungan Usaha

Akuisis

Merger Konsolidasi
 The Legal Form of
Business Combinations

A B

A
Merger
 The Legal Form of
Business Combinations

A B

C
Consolidation
The Accounting Concept of
Business Combinations

Konsep yang menekankan pada penciptaan entitas

Tunggal dan kebebasan dari
Perusahaan-perusahaan yang bergabung
sebelum penyatuan
Pembubaran entitas legal menjadi tidak
Penting menurut konsep akuntansi.
 Konsep Akuntansi
Penggabungan Usaha

Manajemen Tunggal
 The Accounting Concept of
Business Combinations

Satu atau lebih perusahaan menjadi aak perusahaan

Satu perusahaan menyerahkan aset bersih
kepada perusahaan lain
Tiap-tiap perusahaan menyerahkan aset bersihnya
Kepada perusahaan baru yang dibentuk
 Background on Accounting for
Business Combinations

Sebagian besar kontroversi berkenaan dengan

ketentuan
untansi requirements for business combinations historica
ARBinvolved
No. 40 the pooling an
introduced of alternative
interest method.
method:
the purchase method.
 Background on Accounting for
Business Combinations

Until 2001, accounting requirements for business

combinations were found in APB Opinion No. 16.
APB No. 16 recognized both the pooling
and purchase methods.
Background on Accounting for
Business Combinations

FASB Statement No. 141 eliminated the

pooling of interest method for transactions
initiated after June 30, 2001.
Combinations initiated after this date
must use the purchase method.
Prior combinations will be grandfathered.
 Learning Objective 3

Understand alternative
approaches to the financing
of mergers and acquisitions.
 Pooling Method

Pooling uses historical book values to record

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.
 Purchase Method

Purchase accounting requires the recording

of assets acquired and liabilities assumed at
their fair values at the date of combination.
 Learning Objective 4

Introduce concepts of accounting

for business combinations
emphasizing the purchase method.
 Accounting for Business
Combinations
Under the Purchase Method

Poppy Corporation issues 100,000 shares of

$10 par common stock for the net assets of
Sunny Corporation in a purchase combination
on July 1, 2003.

The market price of Poppy is $16 per share

 Accounting for Business
Combinations
Under the Purchase Method
Additional direct costs:

SEC fees $ 5,000

Accounting fees $10,000
Printing and issuing $25,000
Finder and consulting $80,000

How is the issuance recorded?

 Accounting for Business
Combinations
Under the Purchase Method
Investment in Sunny 1,600,000
Common Stock, $10 par 1,000,000
Additional Paid-in Capital 600,000
To record issuance of 100,000 shares of $10 par
common stock with a market value of $16 per share
in a purchase business combination with Sunny.

How are the additional direct costs recorded?

 Accounting for Business
Combinations
Under the Purchase Method
Investment in Sunny 80,000
Additional Paid-in Capital 40,000
Cash (other assets) 120,000
To record additional direct costs of combining
with Sunny: $80,000 finder’s and consultants’
fees and $40,000 for registering and issuing
equity securities.
 Accounting for Business
Combinations
Under the Purchase Method
The total cost to Poppy of acquiring
Sunny is $1,680,000.

This is the amount entered into the

investment in the Sunny account.
 Goodwill

Goodwill is an intangible asset that arises

when the purchase price to acquire a
subsidiary company is greater than
the sum of the market value of the
subsidiary’s assets minus liabilities.
 Learning Objective 5

See how firms make cost

allocations in a purchase
method combination.
 Cost Allocation in a Purchase
Business Combination

Determine the fair values of all identifiable

tangible and intangible assets acquired
and liabilities assumed.
FASB Statement No. 141 provides guidelines
for assigning amounts to specific categories
of assets and liabilities.
Cost Allocation in a Purchase
Business Combination

No value is assigned to goodwill recorded

on the books of an acquired subsidiary.

Such goodwill is an unidentifiable asset.

Goodwill resulting from the
combination is valued directly.
Recognition and Measurement of
Intangible Assets Other than
Goodwill

Separability Contractual-
criterion legal criterion

Recognizable intangibles
 Contingent Consideration in a
Purchase Business Combination

Contingent consideration that is determinable

at the date of acquisition is recorded as
part of the cost of combination.

Future earnings
Security prices
level
 Cost and Fair Value Compared

Total fair value of

Investment cost identifiable assets
less liabilities
Cost and Fair Value Compared

Investment cost > Net fair value

1 Identifiable net
assets according
to their fair value
2
Goodwill
 Illustration of a Purchase
Combination

Pitt Corporation acquires the net assets of

Seed Company on December 27, 2003.

Pitt Seed
 Illustration of a Purchase
Combination
Book Fair
Value Value
Assets
Cash $ 50 $ 50
Net receivables 150 140
Inventories 200 250
Land 50 100
Buildings, net 300 500
Equipment, net 250 350
Patents 50
Total assets $1,000 $1,440
 Illustration of a Purchase
Combination
Book Fair
Value Value
Liabilities
Accounts payable $ 60 $ 60
Notes payable 150 135
Other liabilities 40 45
Total liabilities $250 $ 240
Net assets $ 50 $1,200
 Illustration of a Purchase
Combination

Pitt pays $400,000 cash and issues 50,000

shares of Pitt Corporation $10 par common
stock with a market value of $20 per share.
50,000 × $10 = $500,000
 Illustration of a Purchase
Combination

Investment in Seed 1,400,000

Cash 400,000
Common Stock 500,000
Additional Paid-in Capital 500,000
To record issuance of 50,000 shares of $10 par
common stock plus $400,000 cash in a purchase
business combination with Seed Company
 Illustration of a Purchase
Combination

Cash 50 Accounts payable 60

Net receivable 140 Notes payable 135
Inventories 250 Other liabilities 45
Land 100 Investment in
Buildings, net 500 Seed Company 1,400
Equipment, net 350
Patents 50 $1640 – 1,440 = 200

Goodwill 200
 Illustration of a Purchase
Combination

Pitt issues 40,000 shares of its $10 par common

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
 Illustration of a Purchase
Combination

Investment in Seed 1,000,000

Common Stock 400,000
Additional Paid-in Capital 400,000
10% Note Payable 200,000
To record issuance of 40,000 shares of $10 par
common stock plus $200,000, 10% note in a
purchase business combination with Seed Company
 Illustration of a Purchase
Combination

Cash 50 Accounts payable 60

Net receivable 140 Notes payable 135
Inventories 250 Other liabilities 45
Land 80 Investment in
Buildings, net 400 Seed Company 1,000
Equipment, net 280
Patents 40
 Illustration of a Purchase
Combination

$1,200,000 fair value is greater than $1,000,000

purchase price by $200,000.

Amounts assignable to assets are reduced by 20%.

 The Goodwill Controversy

Under FASB Statement No. 142, goodwill is no

longer amortized for financial reporting purposes.

– income tax controversies

– international accounting issues
 The Goodwill Controversy

Under FASB Statements No. 141 and No. 142,

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.
 Recognizing and Measuring
Impairment Losses

Compare

Carrying values Fair values

Cost and Fair Value Compared

Fair value < Carrying amount

Measurement of the
impairment loss
 Amortization versus
Nonamortization

Firms must amortize intangible assets with

a finite useful life over that life.

Firms will not amortize intangible assets with an

indefinite useful life that cannot be estimated.
End of Chapter 1