Consolidation of Financial Information
Major changes have occurred for financial reporting for business combinations beginning in 2009. These changes are documented FASB ASC Topic 805, “Business Combinations” and Topic 810, “Consolidation.” These standards require the acquisition method which emphasizes acquisition-date fair values for recording all combinations.
In this chapter, we first provide coverage of expansion through corporate takeovers and an overview of the consolidation process. Then we present the acquisition method of accounting for business combinations followed by limited coverage of the purchase method and pooling of interests provided in a separate sections.
I.Business combinations and the consolidation process
A.A business combination is the formation of a single economic entity, an event that occurs whenever one company gains control over another B.Business combinations can be created in several different ways 1.Statutory merger—only one of the original companies remains in business as a legally incorporated enterprise. a.Assets and liabilities can be acquired with the seller then dissolving itself as a corporation. b.All of the capital stock of a company can be acquired with the assets and liabilities then transferred to the buyer followed by the seller’s dissolution. 2.Statutory consolidation—assets or capital stock of two or more companies are transferred to a newly formed corporation 3.Acquisition by one company of a controlling interest in the voting stock of a second. Dissolution does not take place; both parties retain their separate legal incorporation. C.Financial information from the members of a business combination must be consolidated into a single set of financial statements representing the entire economic entity. 1.If the acquired company is legally dissolved, a permanent consolidation is produced on the date of acquisition by entering all account balances into the financial records of the surviving company. 2.If separate incorporation is maintained, consolidation is periodically simulated whenever financial statements are to be prepared. This process is carried out through the use of worksheets and consolidation entries.
II.The Acquisition Method
A.The acquisition method replaced the purchase method. For combinations resulting in complete ownership, it is distinguished by four characteristics. 1.All assets acquired and liabilities assumed in the combination are recognized and measured at their individual fair values (with few exceptions). 2.The fair value of the consideration transferred provides a starting point for valuing and recording a business combination. a. The consideration transferred includes cash, securities, and contingent performance obligations. b. Direct combination costs are not considered as part of the fair value of the consideration transferred for the acquired firm and are expensed as incurred. c. Stock issuance costs are recorded as a reduction in paid-in capital and are not considered to be a component of the consideration transferred. d. The fair value of any noncontrolling interest also adds to the valuation of the acquired firm and is covered beginning in Chapter 4 of the text. 3. Any excess of the fair value of the consideration transferred over the net amount assigned to the individual assets acquired and liabilities assumed is recognized by the acquirer as goodwill. 4. Any excess of the net amount assigned to the individual assets acquired and liabilities assumed over the fair value of the consideration transferred is recognized by the acquirer as a “gain on bargain purchase.” B. Current accounting standards require that in-process research and development acquired in a business combination be recognized as an asset at its...