Merger & Acquisition Accounting Flashcards
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Read the first 7 Merger & Acquisition Accounting flashcards as text
Under the acquisition method, how is noncontrolling interest (NCI) measured at the acquisition date under US GAAP?
Answer: Either at fair value or at the NCI's proportionate share of net identifiable assets
US GAAP (ASC 805) allows entities to elect to measure NCI either at full fair value or at the NCI's proportionate share of identifiable net assets; IFRS 3 provides a similar option.
Company A acquires Company B for $10M. Company B's identifiable net assets have a fair value of $7M. The NCI is measured at fair value of $3M. What amount of goodwill is recognized?
Answer: $6M
Goodwill = Total consideration ($10M) + NCI fair value ($3M) − Fair value of net assets ($7M) = $6M under the full goodwill method.
How is goodwill tested for impairment under US GAAP after the FASB's simplification update (ASU 2017-04)?
Answer: Single step: compare reporting unit fair value to carrying amount; impairment equals the excess of carrying amount over fair value
ASU 2017-04 eliminated Step 2 of the goodwill impairment test; impairment is now the amount by which a reporting unit's carrying value exceeds its fair value.
In an M&A transaction, an in-process research and development (IPR&D) asset is acquired. Under ASC 805, how should it be recorded?
Answer: Capitalized as an indefinite-lived intangible until the project is completed or abandoned
IPR&D acquired in a business combination is recognized as an indefinite-lived intangible asset and subsequently tested for impairment until the project is completed or abandoned.
A company completes a merger structured as a pooling-of-interests. Under current US GAAP, how is this transaction recorded?
Answer: The acquisition method must be used; pooling-of-interests is no longer permitted
SFAS 141(R), now codified in ASC 805, eliminated the pooling-of-interests method; all business combinations must use the acquisition method.
Which financial statement line item reflects the amortization of a customer relationship intangible recognized in a business combination?
Answer: Operating expense (amortization of intangible assets)
Amortization of acquired intangible assets such as customer relationships is typically recorded as an operating expense on the income statement.
What is the primary distinction between a 'reverse merger' and a standard business combination for accounting purposes?
Answer: In a reverse merger, the legal acquiree is identified as the accounting acquirer
In a reverse merger, the legal subsidiary (acquiree) may be identified as the accounting acquirer based on control indicators, so the financial statements reflect the acquiree's historical results.