Accounting Treatment

Topics: Balance sheet, Generally Accepted Accounting Principles, Asset Pages: 19 (6355 words) Published: May 19, 2009
Accounting treatment (USGAAP)
A company can acquire another company in two ways:
By purchasing the net assets.
By purchasing the common stock of another company.
Regardless of the method of acquisition direct costs, costs of issuing securities and indirect costs are treated: Direct costs: the acquiring company capitalizes direct costs paid to outside parties as part of the total acquisition cost. Costs of issuing securities: these costs reduce the issuing price of the stock. Indirect and general costs: the acquiring company expenses these costs as they are incurred. 1.Purchase of Net Assets

1.Treatment to the acquiring company:
When purchasing the net assets the acquiring company records in its books the receipt of the net assets and the disbursement of cash, the creation of a liability or the issuance of stock as a form of payment for the transfer. 1.

1.Treatment to the acquired company:
The acquired company records in its books the elimination of its net assets and the receipt of cash, receivables or investment in the acquiring company (if what was received from the transfer included common stock from the purchasing company). If the acquired company is liquidated then the company needs an additional entry to distribute the remaining assets to its shareholders. 1.Purchase of common stock

1.Treatment to the purchasing company
When the purchasing company acquires the subsidiary through the purchase of its common stock, it records in its books the investment in the acquired company and the disbursement of the payment for the stock acquired. 1.

1.Treatment to the acquired company:
The acquired company records in its books the receipt of the payment from the acquiring company and the issuance of stock. FASB 141 Disclosure Requirements FASB 141 requires disclosures in the notes of the financial statements when business combinations occur. Such disclosures are: The name and description of the acquired entity and the percentage of the voting equity interest acquired. The primary reasons for acquisition and descriptions of factors that contributed to recognition of goodwill. The period for which results of operations of acquired entity are included in the income statement of the combining entity. The cost of the acquired entity and if it applies the number of shares of equity interest issued, the value assigned to those interests and the basis for determining that value. Any contingent payments, options or commitments. The purchase and development assets acquired and written off. [edit] Reporting intercorporate interest — investments in common stock 1. 20% ownership or less:

When a company purchases 20% or less of the outstanding common stock, the purchasing company’s influence over the acquired company is not significant. (APB 18 specifies conditions where ownership is less than 20% but there is significant influence). The purchasing company uses the cost method to account for this type of investment. Under the cost method, the investment is recorded at cost at the time of purchase. The company does not need any entries to adjust this account balance unless the investment is considered impaired or there are liquidating dividends, both of which reduce the investment account. Liquidating dividends: Liquidating dividends occur when there is an excess of dividends declared over earnings of the acquired company since the date of acquisition. Regular dividends are recorded as dividend income whenever they are declared. Impairment loss: An impairment loss occurs when there is a decline in the value of the investment other than temporary. 2. 20% to 50% ownership — associate company

When the amount of stock purchased is between 20% and 50% of the common stock outstanding, the purchasing company’s influence over the acquired company is often significant. The deciding factor, however, is significant influence. If other factors exist that reduce the influence or if significant influence is gained at an ownership of...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Essay on Accounting Text Cases
  • Creative Accounting and Earnings Management Essay
  • water treatment Essay
  • Water Treatment Essay
  • Treatment of Tb Essay
  • Essay about Sewage Treatment Plant
  • Wastewater Treatment Essay
  • Treatment for Depression Essay

Become a StudyMode Member

Sign Up - It's Free