Business combinations
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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.

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Business combinations

Business Combinations

Chapter 1


Learning objective 1

Learning Objective 1

Memahami motivasi ekonomi yang mendasari

penggabungan bisnis.


Business combinations1

Business Combinations

Penggabungan bisnis terjadi manakala ada dua atau lebih usaha terpisah yang bergabungmenjadi satu entitas akuntansi tunggal


Alasan penggabungan business

Alasan Penggabungan Business

Keunggulan Cost

Resiko yg lebih rendah

Lesedikit operasi yang tertunda

Menghindari pengambil-alihan

Akuisisi intangible assets

Alasan Lain


Tujuan pembelajaran 2

Tujuan Pembelajaran 2

Mempelajari alternatif

bentuk penggabungan usaha,

dari sudut pandang hukum

dan akuntansi


The legal form of business combinations

The Legal Form ofBusiness Combinations

Penggabungan Usaha

Akuisis

Merger

Konsolidasi


The legal form of business combinations1

The Legal Form ofBusiness Combinations

A

B

A

Merger


The legal form of business combinations2

The Legal Form ofBusiness Combinations

A

B

C

Consolidation


The accounting concept of business combinations

The Accounting Concept ofBusiness 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 a kuntansi penggabungan usaha

Konsep AkuntansiPenggabungan Usaha

Manajemen Tunggal


The accounting concept of business combinations1

The Accounting Concept ofBusiness 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

Background on Accounting forBusiness Combinations

Sebagian besar kontroversi berkenaan dengan

ketentuan

Akuntansi requirements for business combinations historically

involved the pooling of interest method.

ARB No. 40introduced an alternative method:

the purchase method.


Background on accounting for business combinations1

Background on Accounting forBusiness 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 combinations2

Background on Accounting forBusiness Combinations

FASB Statement No. 141eliminated 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

Learning Objective 3

Understand alternative

approaches to the financing

of mergers and acquisitions.


Pooling method

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 Method

Purchase accounting requires the recording

of assets acquired and liabilities assumed at

their fair values at the date of combination.


Learning objective 4

Learning Objective 4

Introduce concepts of accounting

for business combinations

emphasizing the purchase method.


Accounting for business combinations under the purchase method

Accounting for Business CombinationsUnder 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 method1

Accounting for Business CombinationsUnder 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 method2

Accounting for Business CombinationsUnder the Purchase Method

Investment in Sunny1,600,000

Common Stock, $10 par1,000,000

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 method3

Accounting for Business CombinationsUnder the Purchase Method

Investment in Sunny80,000

Additional Paid-in Capital40,000

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 method4

Accounting for Business CombinationsUnder 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.

What is goodwill?


Goodwill

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

Learning Objective 5

See how firms make cost

allocations in a purchase

method combination.


Cost allocation in a purchase business combination

Cost Allocation in a PurchaseBusiness 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 combination1

Cost Allocation in a PurchaseBusiness Combination

No value is assigned to goodwill recorded

on the books of an acquired subsidiary.

Why?

Such goodwill is an unidentifiable asset.

Goodwill resulting from the

combination is valued directly.


Recognition and measurement of intangible assets other than goodwill

Recognition and Measurement ofIntangible Assets Other than Goodwill

Separability

criterion

Contractual-

legal criterion

Recognizable intangibles


Contingent consideration in a purchase business combination

Contingent Consideration in aPurchase Business Combination

Contingent consideration that is determinable

at the date of acquisition is recorded as

part of the cost of combination.

Future earnings

level

Security prices


Cost and fair value compared

Cost and Fair Value Compared

Compare

Investment cost

Total fair value of

identifiable assets

less liabilities

With


Cost and fair value compared1

If

Investment cost

>

Net fair value

Identifiable net

assets according

to their fair value

1

Allocate to

2

Goodwill

Cost and Fair Value Compared


Illustration of a purchase combination

Illustration of a PurchaseCombination

Pitt Corporation acquires the net assets of

Seed Company on December 27, 2003.

Pitt

Seed


Illustration of a purchase combination1

Illustration of a PurchaseCombination

Book

Value

Fair

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 combination2

Illustration of a PurchaseCombination

Book

Value

Fair

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 combination3

Illustration of a PurchaseCombination

Goodwill

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


Business combinations

Illustration of a PurchaseCombination

Investment in Seed1,400,000

Cash400,000

Common Stock500,000

Additional Paid-in Capital500,000

To record issuance of 50,000 shares of $10 par

common stock plus $400,000 cash in a purchase

business combination with Seed Company


Business combinations

Illustration of a PurchaseCombination

Debit

Credit

Cash 50

Net receivable140

Inventories250

Land100

Buildings, net500

Equipment, net350

Patents 50

Accounts payable 60

Notes payable 135

Other liabilities 45

Investment in

Seed Company1,400

$1640 – 1,440 = 200

Goodwill200


Business combinations

Illustration of a PurchaseCombination

Negative Goodwill

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


Business combinations

Illustration of a PurchaseCombination

Investment in Seed1,000,000

Common Stock400,000

Additional Paid-in Capital400,000

10% Note Payable200,000

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


Business combinations

Illustration of a PurchaseCombination

Debit

Credit

Cash 50

Net receivable140

Inventories250

Land 80

Buildings, net400

Equipment, net280

Patents 40

Accounts payable 60

Notes payable 135

Other liabilities 45

Investment in

Seed Company1,000


Business combinations

Illustration of a PurchaseCombination

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

purchase price by $200,000.

Amounts assignable to assets are reduced by 20%.


Business combinations

The Goodwill Controversy

Under FASB Statement No. 142, goodwill is no

longer amortized for financial reporting purposes.

– income tax controversies

– international accounting issues


Business combinations

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

Recognizing and MeasuringImpairment Losses

Step One

Compare

Carrying values

Fair values


Cost and fair value compared2

If

Fair value

<

Carrying amount

Measurement of the

impairment loss

Step Two

Cost and Fair Value Compared


Business combinations

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

End of Chapter 1


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