ACCOUNTING FOR COMBINATIONS AS ACQUISITIONS GAAP requires that all business combinations initiated after December 15, 2008, be accounted for as acquisitions .[4] The acquisition method follows the same GAAP for recording a business combination as we follow in recording the purchase of other assets and the incurrence of liabilities. We record the combination using the fair value principle. In other words, we measure the cost to the purchasing entity of acquiring another company in a business combination by the amount of cash disbursed or by the fair value of other assets distributed or securities issued.
We expense the direct costs of a business combination (such as accounting, legal, consulting, and finders’ fees) other than those for the registration or issuance of equity securities. We charge registration and issuance costs of equity securities issued in a combination against the fair value of securities issued, usually as a reduction of additional paid-in capital. We expense indirect costs such as management salaries, depreciation, and rent under the acquisition method. We also expense indirect costs incurred to close duplicate facilities
To illustrate, assume that Pop Corporation issues 100,000 shares of $10 par common stock for the net assets of Son Corporation in a business combination on July 1, 2011. The market price of Pop common stock on this date is $16 per share. Additional direct costs of the business combination consist of Securities and Exchange Commission (SEC) fees of $5,000, accountants’ fees in connection with the SEC registration statement of $10,000, costs for printing and issuing the common stock certificates of $25,000, and finder’s and consultants’ fees of $80,000.
Pop records the issuance of the 100,000 shares on its books as follows (in thousands):
Investment in Son (+A) 1,600
Common stock, $10 par (+SE) 1,000
Additional paid-in capital (+SE) 600
To record issuance of 100,000 shares of $10 par common stock with a market price of $16 per share in a business combination with Son Corporation.
Pop records additional direct costs of the business combination as follows:
Investment expense (E, –SE) 80
Additional paid-in capital (–SE) 40
Cash (or other net assets) (–A) 120
To record additional direct costs of combining with Son Corporation: $80,000 for finder’s and consultants’ fees and $40,000 for registering and issuing equity securities.
We treat registration and issuance costs of $40,000 as a reduction of the fair value of the stock issued and charge these costs to Additional paid-in capital. We expense other direct costs of the business combination ($80,000). The total cost to Pop of acquiring Son is $1,600,000, the amount entered in the Investment in Son account.
We accumulate the total cost incurred in purchasing another company in a single investment account, regardless of whether the other combining company is dissolved or the combining companies continue to operate in a parent–subsidiary relationship. If we dissolve Son Corporation, we record its identifiable net assets on Pop’s books at fair value, and record any excess of investment cost over fair value of net assets as goodwill. In this case, we allocate the balance recorded in the Investment in Son account by means of an entry on Pop’s books. Such an entry might appear as follows:
Receivables (+A) xxxx
Inventories (+A) xxxx
Plant assets (+A) xxxx
Goodwill (+A) xxxx
Accounts payable (+L) xxxx
Notes payable (+L) xxxx
Investment in Son (-A) 1600
To record allocation of the $1,600,000 cost of acquiring Son Corporation to identifiable net assets according to their fair values and to goodwill.
If we dissolve Son Corporation, we formally retire the Son Corporation shares. The former Son shareholders are now shareholders of Pop. If Pop and Son Corporations operate as parent company and subsidiary, Pop will not record the entry to allocate the Investment in Son balance. Instead, Pop will account for its investment in
Refference book : Advanced Accounting 11th Edition
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