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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



© Pearson Education, Inc. publishing as Prentice



Fair Val.

$ 50

140

250

100

500

350

50

$1,440

$ 60

135

45

$ 240

$1,200

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