Accounting for Business Combination | Advanced Accounting | CPA Exam FAR

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Those lectures covers business combinations in a business acquisition/combination, pro forma financial statements and how to value asset including goodwill.

Goodwill Impairment

Acquisition Expenses in Business Combination

Acquisition Accounting| Business Combination

Contingent Consideration in a Business Acquisition

Describe the changes in the accounting for business combinations approved by the FASB in 2007, and the reasons for those changes. Under FASB ASC 805, the fair values of all assets and liabilities on the acquisition date are reflected in the financial statements, even if control is obtained with less than 100% ownership and even if control is achieved in stages rather than all at once. The scope includes business combinations involving only mutual entities, those achieved by contract alone, and the initial consolidation of variable interest entities (VIEs). SFAS No. 160 [ASC 810–10–45–15 and 16] establishes standards for the reporting of the noncontrolling interest when the acquirer obtains control without purchasing 100% of the acquiree.

Describe the two major changes in the accounting for business combinations approved by the FASB in 2001, as well as the reasons for those changes. Of the two methods of accounting historically used in the United States—purchase (now called acquisition) and pooling of interests—pooling is now prohibited. The goodwill often recorded under the acquisition method is no longer amortized but instead is reviewed periodically for impairment. The standard setters believe that virtually all business combinations are Discuss the goodwill impairment test, including its frequency, the steps laid out in the standard, and some of the implementation problems. At least once a year, qualitative factors are considered initially to assess the likelihood of goodwill impairment. If indicated, goodwill impairment for each report- ing unit is tested in a two-step process at least. In the first step, the fair value of a reporting unit is compared to its carrying amount (goodwill included) at the date of the periodic review. If the fair value at the review date is less than the carrying amount, then the second step is necessary. In the second step, the carry- ing value of the goodwill is compared to its implied fair value. Determining the fair value of the unit may prove difficult in cases where there are no quoted market prices.

Explain how acquisition expenses are reported. Acquisition- related costs are excluded from the measurement of the consideration paid. Current GAAP requires that both direct and indirect costs be expensed and that the cost of issuing securities be excluded from the consideration and accounted for separately.

Describe the use of pro forma statements in business combinations. Pro forma statements are prepared to show the effect of planned or contemplated transactions on the financial statements. Pro forma statements serve: (1) to provide information in the planning stages of the combination and (2) to disclose relevant information subsequent to the combination.

Describe the valuation of assets, including goodwill, and liabilities acquired in a business combination accounted for by the acquisition method. Assets and liabilities acquired are recorded at their fair values. Any excess of cost over the fair value of net assets acquired is recorded as goodwill.