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Example: Poppy Corp. (3 of 3)

Example: Poppy Corp. (3 of 3)

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Business Combinations

4: Cost Allocations Using the
Acquisition Method
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Identify the Net Assets Acquired
Identify:
1. Tangible assets acquired,
2. Intangible assets acquired, and
3. Liabilities assumed
Include:
• Identifiable intangibles resulting from legal
or contractual rights, or separable from the
entity
• Research and development in process
• Contractual contingencies
• Some noncontractual contingencies
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Assign Fair Values to Net Assets
Use fair values determined, in preferential order,
by:
1. Established market prices
2. Present value of estimated future cash
flows, discounted based on observable
measures
3. Other internally derived estimations

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Exceptions to Fair Value Rule
• Deferred tax assets and liabilities [FASB
Statement No. 109 and FIN No. 48]
• Pensions and other benefits [FASB Statement No.
158]
• Operating and capital leases [FASB Statement
No. 13 and FIN. No. 21]
• Goodwill on the books of the acquired firm is
assigned no value.

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Goodwill
The excess of
• The sum of:
– Fair value of the consideration transferred,
– Fair value of any noncontrolling interest in
the acquiree, and
– Fair value of any previously held interest in
acquiree,
• Over the net assets acquired.

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Contingent Consideration
• If the fair value of contingent consideration is
determinable at the acquisition date, it is
included in the cost of the combination.
• If the fair value of the contingent consideration is
not determinable at that date, it is recognized
when the contingency is resolved.
• Types of consideration contingencies:
– Future earnings levels
– Future security prices
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Recording Contingent Consideration
• Contingencies based on future earnings increase
the cost of the investment.
• Contingencies based on future security prices do
not change the cost of the investment.
Additional consideration distributed is recorded
at its fair value with an offsetting write-down of
the equity or debt securities issued.

In some cases the contingency may involve a
return of consideration.
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Example – Pitt Co. Data
Pitt Co. acquires the net assets of Seed Co. in a
combination consummated on 12/27/2008. The
assets and liabilities of Seed Co. on this date, at
their book values and fair values, are as follows
(in thousands):

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Cash
Net receivables
Inventory
Land
Buildings, net
Equipment, net
Patents
Total assets
Accounts payable
Notes payable
Other liabilities
Total liabilities
Net assets

Book Val.
$ 50
150
200
50
300
250
0
$1,000
$ 60
150
40
$ 250
$ 750

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Fair Val.
$ 50
140
250
100
500
350
50
$1,440
$ 60
135
45
$ 240
$1,200
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