Business Combinations

1668 words 7 pages
Business Combinations
Assignment 1
Brenda Roper
Professor Robert Neely
ACC 401
July 24, 2013

Page 1 The business combination method I selected is the acquisition method. Business combinations have implemented the newly created accounting treatment called the “acquisition method.” The major changes in the acquisition method involve variations to fair value measurement, goodwill recognition, and non-controlling interests. Under this method, the parent company reported the net assets of the acquired company at the price that it was paid for. This price included any cash payment, the fair market value of any shares issued, and the present value of any promises to pay cash in the future. A key aspect of the purchase
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Unlike the purchase method, any direct acquisition costs are excluded from the purchase price. Transaction costs associated with the purchase reduces the amount of consideration given and thus reduces fair value as well. The proposal is a significant departure from the purchase method. Goodwill under the acquisition method differs from the purchase method because it is computed as the difference between the fair value of the business and the sum of both the net
Page 4 assets acquired and liabilities assumed. This means that the full fair value of goodwill would be recognized, rather than only the proportion attributable to the acquirer. It is being treated like other assets to maintain consistency. A key difference from the purchase method is that goodwill under the acquisition method will also recognize the portion attributable to the non-controlling interests. Finally, impairment of goodwill will continue to be tested on an annual basis. Although the acquisition method has strengths in achieving appropriate accounting treatment for consolidation, it also has raised concerns. A major criticism of the acquisition method is the requirement to use fair value measurement. Consideration for 100 percent is straight forward and strongly supported. However, the fair value measurements in less than 100 percent acquisitions may lack guidance in determining appropriate fair


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