Advanced Accounting Case 1
Acquisition of legal subsidiary in bankruptcy
According to the fact of this case, Parent Co. (Parent) wholly owns Poor Son Co. (Poor Son) as a legal subsidiary, and both of them all nonpublic companies. However, in January 2007 Poor Son filed a voluntary bankruptcy under Chapter 11 of the U.S. bankruptcy code because of its inability of meet obligations as they became due. Then, Parent claimed the loss of control of Poor Son and deconsolidated Poor Son from its financial statement. Through the bidding process in May 2009, Poor Son and OtherCo, the winning sponsor, filed a joint plan of reorganization to the bankruptcy court, but the plan was rescinded by OtherCo later due to significant market value shrink of Poor Son. After that, the bankruptcy court reopened the bidding process and recommended Parent’s plan of reorganization in August 2010. Finally, Parent received final confirmation of Poor Son’s plan.
1. Does Parent’s purchase of a legal subsidiary in bankruptcy qualify as a business combination under ASC 805?
According to ASC 805-10-20, the definition of business combination is “a transaction or other event in which an acquirer obtains control of one or more businesses. Transactions sometimes referred to as true mergers or mergers of equals also are business combinations”. Nevertheless, some business activities do not count as business combination. According to ASC 805-10-15-4, the guidance in the Business Combinations Topic does not apply to any of the following: a. The formation of a joint venture b. The acquisition of an asset or a group of assets that does not constitute a business or a nonprofit activity c. A combination between entities, businesses, or nonprofit activities under common control d. An acquisition by a not-for-profit entity for which the acquisition date is before December 15, 2009 or a merger of not-for-profit entities (NFPs) Based on the fact of this case, patently provision a, b, and d above do not fit here. However,
According to the fact of this case, Parent Co. (Parent) wholly owns Poor Son Co. (Poor Son) as a legal subsidiary, and both of them all nonpublic companies. However, in January 2007 Poor Son filed a voluntary bankruptcy under Chapter 11 of the U.S. bankruptcy code because of its inability of meet obligations as they became due. Then, Parent claimed the loss of control of Poor Son and deconsolidated Poor Son from its financial statement. Through the bidding process in May 2009, Poor Son and OtherCo, the winning sponsor, filed a joint plan of reorganization to the bankruptcy court, but the plan was rescinded by OtherCo later due to significant market value shrink of Poor Son. After that, the bankruptcy court reopened the bidding process and recommended Parent’s plan of reorganization in August 2010. Finally, Parent received final confirmation of Poor Son’s plan.
1. Does Parent’s purchase of a legal subsidiary in bankruptcy qualify as a business combination under ASC 805?
According to ASC 805-10-20, the definition of business combination is “a transaction or other event in which an acquirer obtains control of one or more businesses. Transactions sometimes referred to as true mergers or mergers of equals also are business combinations”. Nevertheless, some business activities do not count as business combination. According to ASC 805-10-15-4, the guidance in the Business Combinations Topic does not apply to any of the following: a. The formation of a joint venture b. The acquisition of an asset or a group of assets that does not constitute a business or a nonprofit activity c. A combination between entities, businesses, or nonprofit activities under common control d. An acquisition by a not-for-profit entity for which the acquisition date is before December 15, 2009 or a merger of not-for-profit entities (NFPs) Based on the fact of this case, patently provision a, b, and d above do not fit here. However,