CHAPTER 2 CONSOLIDATION OF FINANCIAL INFORMATION

Major changes occurred for financial reporting for business combinations beginning in 2009. These changes are documented in FASB ASC Topic 0!" #Business Combinations$ and Topic %0" #Consolidation.$ These standards re&uire the ac&uisition method 'hich emphasi(es ac&uisition)date fair *alues for recording all combinations. +n this chapter" 'e first pro*ide co*erage of e,pansion through corporate ta-eo*ers and an o*er*ie' of the consolidation process. Then 'e present the ac&uisition method of accounting for business combinations follo'ed b. limited co*erage of the purchase method and pooling of interests pro*ided in the Appendi, to this chapter.

Chapter Outline
+. Business combinations and the consolidation process A. A business combination is the formation of a single economic entit." an e*ent that occurs 'hene*er one compan. gains control o*er another B. Business combinations can be created in se*eral different 'a.s %. Statutor. merger/onl. one of the original companies remains in business as a legall. incorporated enterprise. a. Assets and liabilities can be ac&uired 'ith the seller then dissol*ing itself as a corporation. b. All of the capital stoc- of a compan. can be ac&uired 'ith the assets and liabilities then transferred to the bu.er follo'ed b. the seller0s dissolution. 2. Statutor. consolidation/assets or capital stoc- of t'o or more companies are transferred to a ne'l. formed corporation 1. Ac&uisition b. one compan. of a controlling interest in the *oting stoc- of a second. 2issolution does not ta-e place3 both parties retain their separate legal incorporation. C. Financial information from the members of a business combination must be consolidated into a single set of financial statements representing the entire economic entit.. %. +f the ac&uired compan. is legall. dissol*ed" a permanent consolidation is produced on the date of ac&uisition b. entering all account balances into the financial records of the sur*i*ing compan.. 2. +f separate incorporation is maintained" consolidation is periodicall. simulated 'hene*er financial statements are to be prepared. This process is carried out through the use of 'or-sheets and consolidation entries. Consolidation 'or-sheet entries are used to adjust and eliminate subsidiar. compan. accounts. 4ntr. #S$ eliminates the e&uit. accounts of the subsidiar.. 4ntr. #A$ allocates e,ess pa.ment amounts to identifiable assets and liabilities based on the fair *alue of the subsidiar. accounts. 5Consolidation journal entries are ne*er recorded in the boo-s of either compan." the. are 'or-sheet entries onl..6

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++.

+++.

The Ac&uisition Method A. The ac&uisition method replaced the purchase method. For combinations resulting in complete o'nership" it is distinguished b. four characteristics. %. All assets ac&uired and liabilities assumed in the combination are recogni(ed and measured at their indi*idual fair *alues 5'ith fe' e,ceptions6. 2. The fair *alue of the consideration transferred pro*ides a starting point for *aluing and recording a business combination. a. The consideration transferred includes cash" securities" and contingent performance obligations. b. 2irect combination costs are e,pensed as incurred. c. Stoc- issuance costs are recorded as a reduction in paid)in capital. d. The fair *alue of an. noncontrolling interest also adds to the *aluation of the ac&uired firm and is co*ered beginning in Chapter 7 of the te,t. 1. An. e,cess of the fair *alue of the consideration transferred o*er the net amount assigned to the indi*idual assets ac&uired and liabilities assumed is recogni(ed b. the ac&uirer as good'ill. 7. An. e,cess of the net amount assigned to the indi*idual assets ac&uired and liabilities assumed o*er the fair *alue of the consideration transferred is recogni(ed b. the ac&uirer as a #gain on bargain purchase.$ B. +n)process research and de*elopment ac&uired in a business combination is recogni(ed as an asset at its ac&uisition)date fair *alue. Con*ergence bet'een 8.S. 9AA: and +AS A. +F;S 1 < nearl. identical to 8.S. 9AA: because of joint efforts B. +F;S %0 < Consolidated Finanical Statements and +F;S %2 < 2isclosure of +nterests in =ther 4ntities both become effecti*e in 20%1. Some differences bet'een these and 9AA:

APPENDIX: The Purchase Meth ! A. The purchase method 'as applicable for business combinations occurring for fiscal .ears beginning prior to 2ecember %!" 200 . +t 'as distinguished b. three characteristics. %. =ne compan. 'as clearl. in a dominant role as the purchasing part. 2. A bargained e,change transaction too- place to obtain control o*er the second compan.. 1. A historical cost figure 'as determined based on the ac&uisition price paid. a. The cost of the ac&uisition included an. direct combination costs. b. Stoc- issuance costs 'ere recorded as a reduction in paid)in capital and are not considered to be a component of the ac&uisition price. B. :urchase method procedures %. The assets and liabilities ac&uired 'ere measured b. the bu.er at fair *alue as of the date of ac&uisition. 2. An. portion of the pa.ment made in e,cess of the fair *alue of these assets and liabilities 'as attributed to an intangible asset commonl. referred to as good'ill. 1. +f the price paid 'as belo' the fair *alue of the assets and liabilities" the accounts of the ac&uired compan. 'ere still measured at fair *alue e,cept that
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the *alues of certain noncurrent assets 'ere reduced in total b. the e,cess cost. +f these *alues 'ere not great enough to absorb the entire reduction" an e,traordinar. gain 'as recogni(ed. The P lin" # Interest Meth ! 5prohibited for combinations after June 2002 6 A. A pooling of interests 'as formed b. the uniting of the o'nership interests of t'o companies through the e,change of e&uit. securities. The characteristics of a pooling are fundamentall. different from either the purchase or ac&uisition methods. %. >either part. 'as trul. *ie'ed as an ac&uiring compan.. 2. :recise cost figures stemming from the e,change of securities 'ere difficult to ascertain. 1. The transaction affected the stoc-holders rather than the companies. B. :ooling of interests accounting %. Because of the nature of a pooling" determination of an ac&uisition price 'as not rele*ant. a. Since no ac&uisition price 'as computed" all direct costs of creating the combination 'ere e,pensed immediatel.. b. +n addition" ne' good'ill arising from the combination 'as ne*er recogni(ed in a pooling of interests. Similarl." no *aluation adjustments 'ere recorded for an. of the assets or liabilities combined. 2. The boo- *alues of the t'o companies 'ere simpl. brought together to produce a set of consolidated financial records. A pooling 'as *ie'ed as affecting the o'ners rather than the t'o companies. 1. The results of operations reported b. both parties 'ere combined on a retroacti*e basis as if the companies had al'a.s been together. 7. Contro*ers. historicall. surrounded the pooling of interests method. a. An. cost figures indicated b. the e,change transaction that created the combination 'ere ignored. b. +ncome balances pre*iousl. reported 'ere altered since operations 'ere combined on a retroacti*e basis. c. ;eported net income 'as usuall. higher in subse&uent .ears than in a purchase since no good'ill or *aluation adjustments 'ere recogni(ed 'hich re&uire amorti(ation.

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Ans$ers t %uesti ns
%. A business combination is the process of forming a single economic entit. b. the uniting of t'o or more organi(ations under common o'nership. The term also refers to the entit. that results from this process. 5%6 A statutor. merger is created 'hene*er t'o or more companies come together to form a business combination and onl. one remains in e,istence as an identifiable entit.. This arrangement is often instituted b. the ac&uisition of substantiall. all of an enterprise0s assets. 526 A statutor. merger can also be produced b. the ac&uisition of a compan.0s capital stoc-. This transaction is labeled a statutor. merger if the ac&uired compan. transfers its assets and liabilities to the bu.er and then legall. dissol*es as a corporation. 516 A statutor. consolidation results 'hen t'o or more companies transfer all of their assets or capital stoc- to a ne'l. formed corporation. The original companies are being #consolidated$ into the ne' entit.. 576 A business combination is also formed 'hene*er one compan. gains control o*er another through the ac&uisition of outstanding *oting stoc-. Both companies retain their separate legal identities although the common o'nership indicates that onl. a single economic entit. e,ists. Consolidated financial statements represent accounting information gathered from t'o or more separate companies. This data" although accumulated indi*iduall. b. the organi(ations" is brought together 5or consolidated6 to describe the single economic entit. created b. the business combination. Companies that form a business combination 'ill often retain their separate legal identities as 'ell as their indi*idual accounting s.stems. +n such cases" internal financial data continues to be accumulated b. each organi(ation. Separate financial reports ma. be re&uired for outside shareholders 5a noncontrolling interest6" the go*ernment" debt holders" etc. This information ma. also be utili(ed in corporate e*aluations and other decision ma-ing. ?o'e*er" the business combination must periodicall. produce consolidated financial statements encompassing all of the companies 'ithin the single economic entit.. The purpose of a 'or-sheet is to organi(e and structure this process. The 'or-sheet allo's for a simulated consolidation to be carried out on a regular" periodic basis 'ithout affecting the financial records of the *arious component companies. Se*eral situations can occur in 'hich the fair *alue of the !0"000 shares being issued might be difficult to ascertain. These e,amples include@ The shares ma. be ne'l. issued 5if Aones has just been created6 so that no accurate *alue has .et been established3 Aones ma. be a closel. held corporation so that no fair *alue is a*ailable for its shares3 The number of ne'l. issued shares 5especiall. if the amount is large in comparison to the &uantit. of pre*iousl. outstanding shares6 ma. cause the price of the stoc- to fluctuate 'idel. so that no accurate fair *alue can be determined during a reasonable period of time3 Aones0 stoc- ma. ha*e historicall. e,perienced drastic s'ings in price. Thus" a &uoted figure at an. specific point in time ma. not be an ade&uate or representati*e *alue for long)term accounting purposes. For combinations resulting in complete o'nership" the ac&uisition method allocates the fair *alue of the consideration transferred to the separatel. recogni(ed assets ac&uired and liabilities assumed based on their indi*idual fair *alues.

2.

1.

7.

!.

B.

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C.

9.

%0.

%%.

The re*enues and e,penses 5both current and past6 of the parent are included 'ithin reported figures. ?o'e*er" the re*enues and e,penses of the subsidiar. are consolidated from the date of the ac&uisition for'ard 'ithin the 'or-sheet consolidation process. The operations of the subsidiar. are onl. applicable to the business combination if earned subse&uent to its creation. Morgan0s additional ac&uisition *alue ma. be attributed to man. factors@ e,pected s.nergies bet'een Morgan0s and Aennings0 assets" fa*orable earnings projections" competiti*e bidding to ac&uire Aennings" etc. +n general ho'e*er" an. amount paid b. the parent compan. in e,cess of the fair *alues of the subsidiar.0s net assets ac&uired is reported as good'ill. +n the *ast majorit. of cases the assets ac&uired and liabilities assumed in a business combination are recorded at their fair *alues. +f the fair *alue of the consideration transferred 5including an. contingent consideration6 is less than the total net fair *alue assigned to the assets ac&uired and liabilities assumed" then an ordinar. gain on bargain purchase is recogni(ed for the difference. Shares issued are recorded at fair *alue as if the stoc- had been sold and the mone. obtained used to ac&uire the subsidiar.. The Common Stoc- account is recorded at the par *alue of these shares 'ith an. e,cess amount attributed to additional paid)in capital. The direct combination costs of D9 "000 are allocated to e,pense in the period in 'hich the. occur. Stoc- issue costs of D!B"000 are treated as a reduction of A:+C.

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Ans$ers t Pr &le's () 2) +) ,) -) .) /) 0) 1) D * D A * A A * C 60227222 6(-27222 (,27222 +227222 2227222 3(+272225 .027222 6(227222 6(-7222 227222 .27222 61-7222 6,227222 6127222 2-27222 2-7222 ,-7222 3.272225 +-27222 6 /27222 6 127222 2-27222 2-7222 ,-7222 /27222 6,027222

(2) * C nsi!erati n trans#erre! 3#air 4alue5 Cash Acc unts recei4a&le S #t$are Research an! !e4el p'ent asset Lia&ilities Fair 4alue # net identifiable assets ac8uire! 9 !$ill (() C Le"al an! acc untin" #ees acc unts pa:a&le C ntin"ent lia&ililit: D n 4an;s lia&ilities assu'e! Lia&ilities assu'e! r incurre! (2) D C nsi!erati n trans#erre! 3#air 4alue5 Current assets *uil!in" an! e8uip'ent <npatente! techn l ": Research an! !e4el p'ent asset Lia&ilities Fair 4alue # net identifiable assets ac8uire! 9 !$ill Current assets *uil!in" an! e8uip'ent <npatente! techn l ": Research an! !e4el p'ent asset 9 !$ill T tal assets

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(+) C =alue # shares issue! 3-(7222 > 6+5))))))))))))))))))))))))))))))))))))))) 6(-+7222 Par 4alue # shares issue! 3-(7222 > 6(5))))))))))))))))))))))))))))))))) -(7222 A!!iti nal pai!?in capital 3ne$ shares5 )))))))))))))))))))))))))))))))))) 6(227222 A!!iti nal pai!?in capital 3e@istin" shares5 ))))))))))))))))))))))))))) 127222 C ns li!ate! a!!iti nal pai!?in capital 3#air 4alue5))))))))))))))) 6(127222 At the ac8uisiti n !ate7 the parent 'aAes n chan"e t retaine! earnin"s) (,) * C nsi!erati n trans#erre! 3#air 4alue5))))))))))))))))))))))))))) * A 4alue # su&si!iar: 3assets 'inus lia&ilities5)))) Fair 4alue in e@cess # & A 4alue)))))))))))))))))))))))))))) All cati n # e@cess #air 4er & A 4alue i!enti#ie! $ith speci#ic acc unts: In4ent r:))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) Patente! techn l ":))))))))))))))))))))))))))))))))))))))))))))))))))) *uil!in"s an! e8uip'ent))))))))))))))))))))))))))))))))))))))))))) L n"?ter' lia&ilities)))))))))))))))))))))))))))))))))))))))))))))))))))) 9 !$ill))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) (-) D Hill patente! techn l ":)))))))))))))))))))))))))))))))))))))))))))))))) L rin" patente! techn l ": 3#air 4alue5))))))))))))))))))))))) Ac8uisiti n?!ate c ns li!ate! &alance sheet 4alue))) 6,227222 3+2272225 (227222 +27222 227222 2-7222 (27222 6(-7222 62+27222 2227222 6,+27222

(.) a) An intan"i&le asset ac8uire! in a &usiness c '&inati n is rec "niBe! as an asset apart #r ' " !$ill i# it arises #r ' c ntractual r ther le"al ri"hts 3re"ar!less # $hether th se ri"hts are trans#era&le r separa&le #r ' the ac8uire! enterprise r #r ' ther ri"hts an! &li"ati ns5) I# an intan"i&le asset ! es n t arise #r ' c ntractual r ther le"al ri"hts7 it shall &e rec "niBe! as an asset apart #r ' " !$ill nl: i# it is separa&le7 that is7 it is capa&le # &ein" separate! r !i4i!e! #r ' the ac8uire! enterprise an! s l!7 trans#erre!7 license!7 rente!7 r e@chan"e! 3re"ar!less # $hether there is an intent t ! s 5) An intan"i&le asset that cann t &e s l!7 trans#erre!7 license!7 rente!7 r e@chan"e! in!i4i!uall: is c nsi!ere! separa&le i# it can &e s l!7 trans#erre!7 license!7 rente!7 r e@chan"e! $ith a relate! c ntract7 asset7 r lia&ilit:) &)

Tra!e'arAsCusuall: 'eet & th the separa&ilit: an! le"alDc ntractual criteria) Cust 'er listCusuall: 'eets the separa&ilit: criteri n) C p:ri"hts n artistic 'aterialsCusuall: 'eet & th the separa&ilit: an! le"alDc ntractual criteria) A"ree'ents t recei4e r :alties n lease! intellectual pr pert:Cusuall: 'eet the le"alDc ntractual criteri n) <npatente! techn l ":C'a: 'eet the separa&ilit: criteri n i# capa&le # &ein" s l! e4en i# in c nEuncti n $ith a relate! c ntract7 asset7 r lia&ilit:)

(/) 3(2 'inutes5 3F urnal entries t rec r! a 'er"erCac8uire! c 'pan: !iss l4e!5
McGr a w - Hill/Ir w i n Hoyle, Scha efe r, o!pni", Ad v a n c e d Acc o u n t i n g , 11#e The McGraw- Hill Comp a ni e s, Inc., 2013 2- -

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In4ent r: Lan! *uil!in"s Cust 'er Relati nships 9 !$ill Acc unts Pa:a&le C '' n St cA A!!iti nal Pai!?In Capital Cash Pr #essi nal Ser4ices E@pense Cash A!!iti nal Pai!?In Capital Cash

.227222 1127222 272227222 0227222 .127222 027222 ,27222 1.27222 ,72227222 ,27222 ,27222 2-7222 2-7222

(0) 3(2 'inutes5 3F urnal entries t rec r! a &ar"ain purchaseCac8uire! c 'pan: !iss l4e!5 In4ent r: Lan! *uil!in"s Cust 'er Relati nships Acc unts Pa:a&le Cash 9ain n *ar"ain Purchase Pr #essi nal Ser4ices E@pense Cash .227222 1127222 272227222 0227222 027222 ,72227222 ((27222 ,27222 ,27222

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(1) 3(- Minutes5 3C ns li!ate! &alances5 In ac8uisiti ns7 the #air 4alues # the su&si!iar:Gs assets an! lia&ilities are c ns li!ate! 3there are a li'ite! nu'&er # e@cepti ns5) 9 !$ill is rep rte! at 60272227 the a' unt that the 6/.27222 c nsi!erati n trans#erre! e@cee!s the 6.027222 #air 4alue # S l;s net assets ac8uire!) In4ent r: H 6./27222 3Pa!reGs & A 4alue plus S lGs #air 4alue5 Lan! H 6/(27222 3Pa!reGs & A 4alue plus S lGs #air 4alue5 *uil!in"s an! e8uip'ent H 61+27222 3Pa!reGs & A 4alue plus S lGs #air 4alue5 Franchise a"ree'ents H 6,,27222 3Pa!reGs & A 4alue plus S lGs #air 4alue5 9 !$ill H 6027222 3calculate! a& 4e5 Re4enues H 61.27222 3 nl: parent c 'pan: perati nal #i"ures are rep rte! at !ate # ac8uisiti n5 A!!iti nal pai!?in capital H 62.-7222 3Pa!reGs & A 4alue a!Euste! # r st cA issue less st cA issuance c sts5 E@penses H 61,27222 3 nl: parent c 'pan: perati nal #i"ures plus ac8uisiti n?relate! c sts are rep rte! at !ate # ac8uisiti n5 Retaine! earnin"s7 (D( H 6+127222 3Pa!reGs & A 4alue5

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22) 322 'inutes5 F urnal entries # r a 'er"er usin" alternati4e 4alues) a. Acquisition date fair values: Cash pai! C ntin"ent per# r'ance lia&ilit: C nsi!erati n trans#erre! Fair 4alues # net assets ac8uire! 9ain n &ar"ain purchase 6/227222 +-7222 6/+-7222 /-27222 6 (-7222

Recei4a&les 127222 In4ent r: /-7222 C p:ri"hts ,027222 Patente! Techn l ": /227222 Research an! De4el p'ent Asset 2227222 Current lia&ilities (.27222 L n"?Ter' Lia&ilities .+-7222 Cash /227222 C ntin"ent Per# r'ance Lia&ilit: +-7222 9ain n *ar"ain Purchase (-7222 Pr #essi nal Ser4ices E@pense Cash b. Acquisition date fair values: Cash pai! C ntin"ent per# r'ance lia&ilit: C nsi!erati n trans#er Fair 4alues # net assets ac8uire! 9 !$ill 60227222 +-7222 60+-7222 /-27222 6 0-7222 (227222 (227222

Recei4a&les 127222 In4ent r: /-7222 C p:ri"hts ,027222 Patente! Techn l ": /227222 Research an! De4el p'ent Asset 2227222 9 !$ill 0-7222 Current Lia&ilities (.27222 L n"?Ter' Lia&ilities .+-7222 Cash 0227222 C ntin"ent Per# r'ance Lia&ilit: +-7222 Pr #essi nal Ser4ices E@pense Cash (227222 (227222

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The McGraw- Hill Comp a ni e s, Inc., 2013 2- 10

2013 $y McGraw-Hill %&!ca'ion. This is proprie'ary ma'erial solely for a!'hori(e& ins'r!c'or !se. )o' a!'hori(e& for sale or &is'ri$!'ion in any manner. This &oc!men' may no' $e copie&, scanne&, &!plica'e&, forwar&e&, &is'ri$!'e&, or pos'e& on a we$si'e, in whole or par'.

2() 322 Minutes5 3Deter'ine selecte! c ns li!ate! &alances5 <n!er the ac8uisiti n 'eth !7 the shares issue! &: Iisc nsin are rec r!e! at #air 4alue usin" the # ll $in" E urnal entr:: In4est'ent in *a!"er 34alue # !e&t an! shares issue!5) 1227222 C '' n St cA 3par 4alue5))))))))))))))))))))))))))))))))))))))))))))) (-27222 A!!iti nal Pai!?In Capital 3e@cess 4er par 4alue5))))) ,-27222 Lia&ilities)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) +227222 The pa:'ent t the &r Aer is acc unte! # r as an e@pense) The st cA issue c st is a re!ucti n in a!!iti nal pai!?in capital) Pr #essi nal Ser4ices E@pense))))))))))))))))))))))))))))))))))))))))))) A!!iti nal Pai!?In Capital)))))))))))))))))))))))))))))))))))))))))))))))))))) Cash )))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) Allocation of Acquisition-Date Excess Fair Value: C nsi!erati n trans#erre! 3#air 4alue5 # r *a!"er St cA * A =alue # *a!"er7 .D+2))))))))))))))))))))))))))))))))))))))))))))))))) Fair =alue in E@cess # * A =alue)))))))))))))))))))))))))))))) E@cess #air 4alue 3un!er4alue! e8uip'ent5)))))))))))))))))))))) E@cess #air 4alue 3 4er4alue! patente! techn l ":5))))))) 9 !$ill))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) 61227222 //27222 6(+27222 (227222 32272225 6 -27222 +27222 ,27222 /27222

CONSOLIDATED *ALANCES: Net inc 'e 3a!Euste! # r pr #essi nal ser4ices e@pense) The #i"ures earne! &: the su&si!iar: pri r t the taAe 4er are n t inclu!e!5)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) 6 2(27222 Retaine! earnin"s7 (D( 3the #i"ures earne! &: the su&si!iar: pri r t the taAe 4er are n t inclu!e!5)))))))))))))))))))))))))))))))))))) 0227222 Patente! techn l ": 3the parentGs & A 4alue plus the #air 4alue # the su&si!iar:5))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) (7(027222 9 !$ill 3c 'pute! a& 4e5)))))))))))))))))))))))))))))))))))))))))))))))))))))) -27222 Lia&ilities 3the parentGs & A 4alue plus the #air 4alue # the su&si!iar:Gs !e&t plus the !e&t issue! &: the parent in ac8uirin" the su&si!iar:5)))))))))))))))))))))))))))))))))))))))))))))))))))))) (72(27222 C '' n st cA 3the parentGs & A 4alue a#ter rec r!in" the ne$l:?issue! shares5)))))))))))))))))))))))))))))))))))))))))))))))))))))))))) -(27222 A!!iti nal Pai!?in Capital 3the parentGs & A 4alue a#ter rec r!in" the t$ entries a& 4e5)))))))))))))))))))))))))))))))))))) .027222

McGr a w - Hill/Ir w i n Hoyle, Scha efe r, o!pni", Ad v a n c e d Acc o u n t i n g , 11#e

The McGraw- Hill Comp a ni e s, Inc., 2013 2- 11

2013 $y McGraw-Hill %&!ca'ion. This is proprie'ary ma'erial solely for a!'hori(e& ins'r!c'or !se. )o' a!'hori(e& for sale or &is'ri$!'ion in any manner. This &oc!men' may no' $e copie&, scanne&, &!plica'e&, forwar&e&, &is'ri$!'e&, or pos'e& on a we$si'e, in whole or par'.

22) 322 'inutes5 3Preparati n # a c ns li!ate! &alance sheet5J PINNACLE COMPANK AND CONSOLIDATED S<*SIDIARK STRATA I rAsheet # r a C ns li!ate! *alance Sheet Fanuar: (7 22(+
Cash Acc unts recei4a&le In4ent r: In4est'ent in Strata Pinnacle ,++7222 (72(27222 (72+-7222 +72227222 Strata (227222 20+7222 +-27222 2 (70,-7222 +72227222 2 -7.227222 C ns li!ate! ---7222 (7,1+7222 (7-0-7222 3S5 27.227222 3A5 .227222 2 3A5 +227222 /7/(/7222 3A5 (227222 271227222 3A5 ,227222 /-27222 (-72227222 3./-72225 3-7+2-72225 3+722272225 2 3.72227222 5 +7+227222 A!Eust) L Eli')

*uil!in"s 3net5 -7-/27222 Licensin" a"ree'ents 2 9 !$ill +-27222 T tal assets (272227222

Acc unts pa:a&le 3+2272225 3+/-72225 L n"?ter' !e&t 327/2272225 327.2-72225 C '' n st cA 3+722272225 3(722272225 3S5 (72227222 A!!iti nal pai!?in cap) 2 3-2272225 3S5 -227222 Retaine! earnin"s 3.72227222 5 3(7(227222 5 3S5 (7(227222 T tal lia&) L e8uities 3(272227222 5 3-7.227222 5 +7+227222 3(-72227222 5

JAlth u"h this s luti n uses a $ rAsheet t c 'pute the c ns li!ate! a' unts7 the pr &le' ! es n t re8uire it)

2+) 3-2 Minutes5 3Deter'ine c ns li!ate! &alances # r a &ar"ain purchase)5 a) Marshall;s ac8uisiti n # TucAer represents a &ar"ain purchase &ecause the #air 4alue # the net assets ac8uire! e@cee!s the #air 4alue # the c nsi!erati n trans#erre! as # ll $s: Fair 4alue # net assets ac8uire! 6-(-7222 Fair 4alue # c nsi!erati n trans#erre! ,227222 9ain n &ar"ain purchase 6((-7222 In a &ar"ain purchase7 the ac8uisiti n is rec r!e! at the #air 4alue # the net assets ac8uire! instea! # the #air 4alue # the c nsi!erati n trans#erre! 3an e@cepti n t the "eneral rule5) Pri r t preparin" a c ns li!ati n $ rAsheet7 Marshall rec r!s the three transacti ns that ccurre! t create the &usiness c '&inati n) In4est'ent in TucAer)))))))))))))))))))))))))))))))))))))))))))))))) -(-7222 L n"?ter' Lia&ilities)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) 2227222 C '' n St cA 3par 4alue5)))))))))))))))))))))))))))))))))))))))))))))))))))))) 227222 A!!iti nal Pai!?In Capital)))))))))))))))))))))))))))))))))))))))))))))))))))))))) (027222 9ain n *ar"ain Purchase))))))))))))))))))))))))))))))))))))))))))))))))))))))) ((-7222 3T rec r! lia&ilities an! st cA issue! # r TucAer ac8uisiti n #air 4alue5

McGr a w - Hill/Ir w i n Hoyle, Scha efe r, o!pni", Ad v a n c e d Acc o u n t i n g , 11#e

The McGraw- Hill Comp a ni e s, Inc., 2013 2- 12

2013 $y McGraw-Hill %&!ca'ion. This is proprie'ary ma'erial solely for a!'hori(e& ins'r!c'or !se. )o' a!'hori(e& for sale or &is'ri$!'ion in any manner. This &oc!men' may no' $e copie&, scanne&, &!plica'e&, forwar&e&, &is'ri$!'e&, or pos'e& on a we$si'e, in whole or par'.

2+) (continued) Pr #essi nal Ser4ices E@pense)))))))))))))))))))))))))) Cash )))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) 3t rec r! pa:'ent # pr #essi nal #ees5 A!!iti nal Pai!?In Capital)))))))))))))))))))))))))))))))))))) Cash )))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) 3T rec r! pa:'ent # st cA issuance c sts5 +27222 +27222 (27222 (27222

MarshallGs trial &alance is a!Euste! # r these transacti ns 3as sh $n in the $ rAsheet that # ll $s5) Ne@t7 the #air # the 6,227222 in4est'ent is all cate!: C nsi!erati n trans#erre! at #air 4alue)))))))))))))))))))))))))))))))))))) 6,227222 * A 4alue 3assets 'inus lia&ilities r t tal st cAh l!ersG e8uit:5))))))))))))))))))))))))))))))))))))))))))))))))))) ,.27222 * A 4alue in e@cess # c nsi!erati n trans#erre! ))))))))) 3.272225 All cati n t speci#ic acc unts &ase! n #air 4alue: In4ent r:))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) -7222 Lan! ))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) 227222 *uil!in"s))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) +27222 --7222 9ain n &ar"ain purchase 3e@cess net asset #air 4alue 4er c nsi!erati n trans#erre!5)))))))))))))))))))))))))))))))))))))))))) 63((-72225 CONSOLIDATED TOTALS Cash H 6+07222) A!! the t$ & A 4alues less ac8uisiti n an! st cA issue c sts Recei4a&les H 6+.27222) A!! the t$ & A 4alues) In4ent r: H 6-2-7222) A!! the t$ & A 4alues plus the #air 4alue a!Eust'ent Lan! H 6,227222) A!! the t$ & A 4alues plus the #air 4alue a!Eust'ent) *uil!in"s H 6./27222) A!! the t$ & A 4alues plus the #air 4alue a!Eust'ent) E8uip'ent H 62(27222) A!! the t$ & A 4alues) T tal assets H 627(0+7222) Su''ati n # the a& 4e in!i4i!ual #i"ures) Acc unts pa:a&le H 6(127222) A!! the t$ & A 4alues) L n"?ter' lia&ilities H 60+27222) A!! the t$ & A 4alues plus the !e&t incurre! &: the parent in ac8uirin" the su&si!iar:) C '' n st cA H 6(+27222)The parentGs & A 4alue a#ter st cA issue t ac8uire the su&si!iar:) A!!iti nal pai!?in capital H 6-207222)The parentGs & A 4alue a#ter the st cA issue t ac8uire the su&si!iar: less the st cA issue c sts) Retaine! earnin"s H 6-2-7222) Parent c 'pan: &alance less 6+27222 in pr #essi nal ser4ices e@pense plus 6((-7222 "ain n &ar"ain purchase) T tal lia&ilities an! e8uit: H 627(0+7222) Su''ati n # the a& 4e #i"ures)

McGr a w - Hill/Ir w i n Hoyle, Scha efe r, o!pni", Ad v a n c e d Acc o u n t i n g , 11#e

The McGraw- Hill Comp a ni e s, Inc., 2013 2- 13

2013 $y McGraw-Hill %&!ca'ion. This is proprie'ary ma'erial solely for a!'hori(e& ins'r!c'or !se. )o' a!'hori(e& for sale or &is'ri$!'ion in any manner. This &oc!men' may no' $e copie&, scanne&, &!plica'e&, forwar&e&, &is'ri$!'e&, or pos'e& on a we$si'e, in whole or par'.

2+) (continued) &)

MARSHALL COMPANK AND CONSOLIDATED S<*SIDIARK I rAsheet Fanuar: (7 22(+ Marshall !o"#an$% (07222 2/27222 +.27222 2227222 ,227222 (.27222 -(-7222 (71,+7222 3(-272225 3.+272225 3(+272225 3-2072225 3 -2-72225 3(71,+72225 Tuc er !o"#an$ 227222 127222 (,27222 (027222 2227222 -27222 !onsolidation Entries !onsolidated Debit !redit Totals +07222 +.27222 3A5 -7222 -2-7222 3A5 227222 ,227222 3A5 +27222 ./27222 2(27222 3S5 ,.27222 3A5 --7222 ?2? 27(0+7222

Accounts Cash))))))))))))))))))))))))))))))))))))))))))))) Recei4a&les )))))))))))))))))))))))))))))))) In4ent r: ))))))))))))))))))))))))))))))))))))) Lan! )))))))))))))))))))))))))))))))))))))))))))) *uil!in"s 3net5 )))))))))))))))))))))))))))) E8uip'ent 3net5 ))))))))))))))))))))))))) In4est'ent in TucAer ))))))))))))))))) T tal assets )))))))))))))))))))))))))))))))) Acc unts pa:a&le))))))))))))))))))))))) L n"?ter' lia&ilities )))))))))))))))))) C '' n st cA ))))))))))))))))))))))))))) A!!iti nal pai!?in capital )))))))))) Retaine! earnin"s7 (D(D(+ ))))))))) T tal lia&) an! $ners; e8uit:)))

/227222

3,272225 3(1272225 322272225 30+272225 3(2272225 3S5 (227222 3(+272225 ?2? 3-2072225 3+,272225 3S5 +,27222 3-2-72225 3/2272225 -(-7222 -(-7222327(0+72225

MarshallGs acc unts ha4e &een a!Euste! # r ac8uisiti n entries 3see part a)5)

McGr a w - Hill/Ir w i n Hoyle, Scha efe r, o!pni", Ad v a n c e d Acc o u n t i n g , 11#e

The McGraw- Hill Comp a ni e s, Inc., 2013 2- 1*

2013 $y McGraw-Hill %&!ca'ion. This is proprie'ary ma'erial solely for a!'hori(e& ins'r!c'or !se. )o' a!'hori(e& for sale or &is'ri$!'ion in any manner. This &oc!men' may no' $e copie&, scanne&, &!plica'e&, forwar&e&, &is'ri$!'e&, or pos'e& on a we$si'e, in whole or par'.

2,) 3Prepare a c ns li!ate! &alance sheet5 C nsi!erati n trans#erre! at #air 4alue)))))))))))))) * A 4alue))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) E@cess #air 4er & A 4alue)))))))))))))))))))))))))))))))) All cati n # e@cess #air 4alue t speci#ic assets an! lia&ilities: t c 'puter s #t$are))))))))))))))))))))))))))))))))))))) t e8uip'ent)))))))))))))))))))))))))))))))))))))))))))))))))))) t client c ntracts))))))))))))))))))))))))))))))))))))))))))) t in?pr cess research an! !e4el p'ent ) ) ) t n tes pa:a&le)))))))))))))))))))))))))))))))))))))))))))))) 9 !$ill)))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) Pratt Cash Recei4a&les In4ent r: In4est'ent in Spi!er +.7222 ((.7222 (,27222 ,1-7222 Spi!er (07222 -27222 127222 ?2? De&it 6,1-7222 2.-7222 2+27222 6-27222 3(272225 (227222 ,27222 3-72225

(/-7222 6 --7222 C ns li!ate! -,7222 (.07222 2+27222

Cre!it

3S5 2.-7222 3A5 2+27222

?2? 2027222 /2-7222 ++07222 (227222 ,27222 --7222 (71127222 3((+72225 3-/-72225 3+0272225 3(/272225 3/-272225

C 'puter s #t$are 2(27222 *uil!in"s 3net5 -1-7222 E8uip'ent 3net5 +207222 Client c ntracts ?2? Research an! !e4l p'ent asset ?2? 9 !$ill ?2? T tal assets (71227222 Acc unts pa:a&le N tes pa:a&le C '' n st cA A!!iti nal pai!?in capital Retaine! earnin"s T tal lia&ilities an! e8uities 30072225 3-(272225 3+0272225 3(/272225 3/-272225 3(712272225

227222 3A5 -27222 (+27222 ,27222 3A5 (27222 ?2? 3A5 (227222 ?2? 3A5 ,27222 ?2? 3A5 --7222 +-27222 32-72225 3.272225 3A5 -7222 3(2272225 3S5(227222 32-72225 3S5 2-7222 3(,272225 3S5(,27222 3+-272225 -(27222

-(27222 3(711272225

2013 $y McGraw-Hill %&!ca'ion. This is proprie'ary ma'erial solely for a!'hori(e& ins'r!c'or !se. )o' a!'hori(e& for sale or &is'ri$!'ion in any manner. This &oc!men' may no' $e copie&, scanne&, &!plica'e&, forwar&e&, &is'ri$!'e&, or pos'e& on a we$si'e, in whole or par'.

2,) (continued)

Pratt C 'pan: an! Su&si!iar: C ns li!ate! *alance Sheet Dece'&er +(7 22(+ Assets &iabilities and '(ners) Equit$ Cash 6 -,7222 Acc unts pa:a&le 6 ((+7222 Recei4a&les (.07222 N tes pa:a&le -/-7222 In4ent r: 2+27222 C 'puter s #t$are 2027222 *uil!in"s 3net5 /2-7222 E8uip'ent 3net5 ++07222 Client c ntracts (227222 Research an! C '' n st cA +027222 !e4el p'ent asset ,27222 A!!iti nal pai! in capital (/27222 9 !$ill --7222 6(71127222 Retaine! earnin"s /-27222

T tal assets

T tal lia&ilities an! e8uities 6(71127222

2-) 3(- 'inutes5 3Ac8uisiti n 'eth ! entries # r a 'er"er5 Case (: Fair 4alue # c nsi!erati n trans#erre! Fair 4alue # net i!enti#ia&le assets E@cess t " !$ill Case ( E urnal entr: n Allert n;s & Current Assets *uil!in" Lan! Tra!e'arA 9 !$ill Lia&ilities Cash .27222 -27222 227222 +27222 2-7222 ,27222 (,-7222 6(,-7222 (227222 62-7222 As:

Case 2: *ar"ain Purchase un!er ac8uisiti n 'eth ! Fair 4alue # c nsi!erati n trans#erre! Fair 4alue # net i!enti#ia&le assets 9ain n &ar"ain purchase Case 2 E urnal entr: n Allert n;s & Current Assets *uil!in" Lan! Tra!e'arA 9ain n *ar"ain Purchase Lia&ilities
McGr a w - Hill/Ir w i n Hoyle, Scha efe r, o!pni", Ad v a n c e d Acc o u n t i n g , 11#e

6((27222 (227222 6 (27222 As: .27222 -27222 227222 +27222 (27222 ,27222
The McGraw- Hill Comp a ni e s, Inc., 2013 2- 1,

2013 $y McGraw-Hill %&!ca'ion. This is proprie'ary ma'erial solely for a!'hori(e& ins'r!c'or !se. )o' a!'hori(e& for sale or &is'ri$!'ion in any manner. This &oc!men' may no' $e copie&, scanne&, &!plica'e&, forwar&e&, &is'ri$!'e&, or pos'e& on a we$si'e, in whole or par'.

Cash

((27222

McGr a w - Hill/Ir w i n Hoyle, Scha efe r, o!pni", Ad v a n c e d Acc o u n t i n g , 11#e

The McGraw- Hill Comp a ni e s, Inc., 2013 2- 1-

2013 $y McGraw-Hill %&!ca'ion. This is proprie'ary ma'erial solely for a!'hori(e& ins'r!c'or !se. )o' a!'hori(e& for sale or &is'ri$!'ion in any manner. This &oc!men' may no' $e copie&, scanne&, &!plica'e&, forwar&e&, &is'ri$!'e&, or pos'e& on a we$si'e, in whole or par'.

Pr &le' 2-) 3c ntinue!5 In a &ar"ain purchase7 the ac8uisiti n 'eth ! e'pl :s the #air 4alue # the net i!enti#ia&le assets ac8uire! as the &asis # r rec r!in" the ac8uisiti n) *ecause this &asis e@cee!s the a' unt pai!7 Allert n rec "niBes a "ain n &ar"ain purchase) This is an e@cepti n t the "eneral rule # usin" the #air 4alue # the c nsi!erati n trans#erre! as the &asis # r rec r!in" the c '&inati n) 2.) 32- 'inutes5 3C '&inati n entriesCac8uire! entit: !iss l4e!5 Cash c nsi!erati n trans#erre! C ntin"ent per# r'ance &li"ati n C nsi!erati n trans#erre! 3#air 4alue5 Fair 4alue # net i!enti#ia&le assets 9 !$ill *ournal entries: Recei4a&les 027222 In4ent r: /27222 *uil!in"s ((-7222 E8uip'ent 2-7222 Cust 'er List 227222 Research an! De4el p'ent Asset +27222 9 !$ill ++7222 Current Lia&ilities L n"?Ter' Lia&ilities C ntin"ent Per# r'ance Lia&ilit: Cash Pr #essi nal Ser4ices E@pense Cash (27222 (27222 6+227222 (-7222 +(-7222 2027222 6 ++7222

(27222 -27222 (-7222 +227222

McGr a w - Hill/Ir w i n Hoyle, Scha efe r, o!pni", Ad v a n c e d Acc o u n t i n g , 11#e

The McGraw- Hill Comp a ni e s, Inc., 2013 2- 1.

2013 $y McGraw-Hill %&!ca'ion. This is proprie'ary ma'erial solely for a!'hori(e& ins'r!c'or !se. )o' a!'hori(e& for sale or &is'ri$!'ion in any manner. This &oc!men' may no' $e copie&, scanne&, &!plica'e&, forwar&e&, &is'ri$!'e&, or pos'e& on a we$si'e, in whole or par'.

2/) 3+2 Minutes5 3O4er4ie$ # the steps in appl:in" the ac8uisiti n 'eth ! $hen shares ha4e &een issue! t create a c '&inati n) Part h) inclu!es a &ar"ain purchase)5 a) The #air 4alue # the c nsi!erati n inclu!es Fair 4alue # st cA issue! 6(7-227222 C ntin"ent per# r'ance &li"ati n +27222 Fair 4alue # c nsi!erati n trans#erre! 6(7-+27222 &) St cA issue c sts re!uce a!!iti nal pai!?in capital) c) In a &usiness c '&inati n7 !irect ac8uisiti n c sts 3such as #ees pai! t in4est'ent &anAs # r arran"in" the transacti n5 as e@penses) !) The par 4alue # the 227222 shares issue! is rec r!e! as an increase # 6227222 in the C '' n St cA acc unt) The 6/, #air 4alue in e@cess # par 4alue 36/- M 6(5 is an increase t a!!iti nal pai!?in capital # 6(7,027222 36/, > 227222 shares5) e) Fair 4alue # c nsi!erati n trans#erre! 3a& 4e5 Recei4a&les 6 027222 Patente! techn l ": /227222 Cust 'er relati nships -227222 In?pr cess research an! !e4el p'ent +227222 Lia&ilities 3,2272225 9 !$ill 6(7-+27222

(7(027222 6 +-27222

#) Re4enues an! e@penses # the su&si!iar: #r ' the peri ! pri r t the c '&inati n are 'itte! #r ' the c ns li!ate! t tals) Onl: the perati nal #i"ures # r the su&si!iar: a#ter the purchase are applica&le t the &usiness c '&inati n) The pre4i us $ners earne! an: pre4i us pr #its) ") The su&si!iar:;s C '' n St cA an! A!!iti nal Pai!?in Capital acc unts ha4e n i'pact n the c ns li!ate! t tals) h) The #air 4alue # the c nsi!erati n trans#erre! is n $ 6(72+27222) This a' unt in!icates a &ar"ain purchase calculate! as # ll $s: Fair 4alue # c nsi!erati n trans#erre! Recei4a&les Patente! techn l ": Cust 'er relati nships Research an! !e4el p'ent asset Lia&ilities 9ain n &ar"ain purchase 6(72+27222 6 027222 /227222 -227222 +227222 3,2272225

(7(027222 6 (-27222

The 4alues # Sa#eData;s assets an! lia&ilities $ ul! &e rec r!e! at #air 4alue7 &ut there $ ul! &e n " !$ill rec "niBe! an! a "ain n &ar"ain purchase $ ul! &e rep rte!)
McGr a w - Hill/Ir w i n Hoyle, Scha efe r, o!pni", Ad v a n c e d Acc o u n t i n g , 11#e The McGraw- Hill Comp a ni e s, Inc., 2013 2- 1/

2013 $y McGraw-Hill %&!ca'ion. This is proprie'ary ma'erial solely for a!'hori(e& ins'r!c'or !se. )o' a!'hori(e& for sale or &is'ri$!'ion in any manner. This &oc!men' may no' $e copie&, scanne&, &!plica'e&, forwar&e&, &is'ri$!'e&, or pos'e& on a we$si'e, in whole or par'.

20) 3-2 Minutes5 3Prepare &alance sheet # r a statut r: 'er"er usin" the ac8uisiti n 'eth !) Als 7 use $ rAsheet t !eri4e c ns li!ate! t tals)5 a) In acc untin" # r the c '&inati n # Ne$Tune an! On?the?9 7 the #air 4alue # the ac8uisiti n is all cate! t each i!enti#ia&le asset an! lia&ilit: ac8uire! $ith an: re'ainin" e@cess attri&ute! t " !$ill) Fair 4alue # c nsi!erati n trans#erre! 3shares issue!5 6/-27222 Fair 4alue # net assets ac8uire!: Cash 6 217222 Recei4a&les .+7222 Tra!e'arAs 22-7222 Rec r! 'usic catal " (027222 In?pr cess research an! !e4el p'ent 2227222 E8uip'ent (2-7222 Acc unts pa:a&le 3+,72225 N tes pa:a&le 3,-72225 /2+7222 9 !$ill 6 2/7222 F urnal entries &: Ne$Tune t rec r! c '&inati n $ith On?the?9 : Cash 217222 Recei4a&les .+7222 Tra!e'arAs 22-7222 Rec r! Music Catal " (027222 Research an! De4el p'ent Asset 2227222 E8uip'ent (2-7222 9 !$ill 2/7222 Acc unts Pa:a&le N tes Pa:a&le C '' n St cA 3Ne$Tune par 4alue5 A!!iti nal Pai!?In Capital 3T rec r! 'er"er $ith On?the?9 at #air 4alue5 A!!iti nal Pai!?In Capital Cash 3St cA issue c sts incurre!5 2-7222 2-7222

+,7222 ,-7222 .27222 .127222

McGr a w - Hill/Ir w i n Hoyle, Scha efe r, o!pni", Ad v a n c e d Acc o u n t i n g , 11#e

The McGraw- Hill Comp a ni e s, Inc., 2013 2- 20

2013 $y McGraw-Hill %&!ca'ion. This is proprie'ary ma'erial solely for a!'hori(e& ins'r!c'or !se. )o' a!'hori(e& for sale or &is'ri$!'ion in any manner. This &oc!men' may no' $e copie&, scanne&, &!plica'e&, forwar&e&, &is'ri$!'e&, or pos'e& on a we$si'e, in whole or par'.

+roble" ,- (continued): +ost-!o"bination .alance /heet: Assets Cash Recei4a&les Tra!e'arAs Rec r! 'usic catal " Research an! !e4el p'ent asset E8uip'ent 9 !$ill T tal 6 .,7222 2(+7222 .2-7222 (72227222 Lia&ilities an! O$ners; E8uit: Acc unts pa:a&le 6 (,,7222 N tes pa:a&le ,(-7222

2227222 ,2-7222 2/7222 627-/,7222

C '' n st cA A!!iti nal pai!?in capital Retaine! earnin"s T tal

,.27222 .1-7222 0.27222 627-/,7222

&) *ecause On?the?9 c ntinues as a separate le"al entit:7 Ne$Tune #irst rec r!s the ac8uisiti n as an in4est'ent in the shares # On?the?9 ) F urnal entries: In4est'ent in On?the?9 C '' n St cA 3Ne$Tune7 Inc)7 par 4alue5 A!!iti nal Pai!?In Capital 3T rec r! ac8uisiti n # On?the?9 Gs shares5 /-27222 .27222 .127222

A!!iti nal Pai!?In Capital 2-7222 Cash 2-7222 3St cA issue c sts incurre!5 Ne@t7 Ne$Tune;s acc unts are a!Euste! # r the entries a& 4e t #acilitate the $ rAsheet preparati n # the c ns li!ate! #inancial state'ents)

McGr a w - Hill/Ir w i n Hoyle, Scha efe r, o!pni", Ad v a n c e d Acc o u n t i n g , 11#e

The McGraw- Hill Comp a ni e s, Inc., 2013 2- 21

2013 $y McGraw-Hill %&!ca'ion. This is proprie'ary ma'erial solely for a!'hori(e& ins'r!c'or !se. )o' a!'hori(e& for sale or &is'ri$!'ion in any manner. This &oc!men' may no' $e copie&, scanne&, &!plica'e&, forwar&e&, &is'ri$!'e&, or pos'e& on a we$si'e, in whole or par'.

20) 3c ntinue!5 &)

NEIT<NE7 INC)7 AND ON?THE?9O CO) C ns li!ati n I rAsheet Fanuar: (7 22(+ !onsolidation Entries !onsolidated Accounts 0e(Tune1 2nc. 'n-the-3o !o. Debit !redit Totals Cash +-7222 217222 .,7222 Recei4a&les (-27222 .-7222 3A5 27222 2(+7222 In4est'ent in On?the?9 /-27222 ?2? 3S5 2/27222 3A5 ,027222 ?2? Tra!e'arAs ,227222 1-7222 3A5 (+27222 .2-7222 Rec r! 'usic catal " 0,27222 .27222 3A5 (227222 (72227222 Research an! !e4el p'ent asset ?2? ?2? 3A5 2227222 2227222 E8uip'ent +227222 (2-7222 ,2-7222 9 !$ill ?2? ?2? 3A5 2/7222 2/7222 T tals 27,1-7222 +-,7222 27-/,7222 Acc unts pa:a&le ((27222 +,7222 (,,7222 N tes pa:a&le +/27222 -27222 3A5 -7222 ,(-7222 C '' n st cA ,.27222 -27222 3S5 -27222 ,.27222 A!!iti nal pai!?in capital .1-7222 +27222 3S5 +27222 .1-7222 Retaine! earnin"s 0.27222 (1272223S5 (127222 0.27222 T tals 27,1-7222 +-,7222 /-27222 /-27222 27-/,7222

0ote: The acc unts # Ne$Tune ha4e alrea!: &een a!Euste! # r the #irst three E urnal entries in!icate! in the ans$er t Part &) t rec r! the ac8uisiti n #air 4alue an! the st cA issuance c sts) The c ns li!ati n entries are !esi"ne! t : Eli'inate the st cAh l!ers; e8uit: acc unts # the su&si!iar: 3S5 Rec r! all su&si!iar: assets an! lia&ilities at #air 4alue 3A5 Rec "niBe the " !$ill in!icate! &: the ac8uisiti n #air 4alue 3A5 Eli'inate the In4est'ent in On?the?9 acc unt 3S7 A5 c) The c ns li!ate! &alance sheets in parts a) an! &) a& 4e are i!entical) The #inancial rep rtin" c nse8uences # r a (22N st cA ac8uisiti n 4s) a 'er"er are the sa'e) The ec n 'ic su&stances # the t$ # r's # the transacti n are i!entical an!7 there# re7 s are the resultin" #inancial state'ents) The !i##erence is in the E urnal entr: t rec r! the ac8uisiti n in the parent c 'pan: & As)

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21) 3,2 'inutes5 3Prepare a c ns li!ate! &alance sheet usin" the ac8uisiti n 'eth !5) a) F urnal entries t rec r! the ac8uisiti n n Paci#ica;s rec r!s) In4est'ent in Se"ur s (72.27-22 C '' n St cA 3-27222 > 6-5 2-27222 A!!iti nal Pai!?In Capital 3-27222 > 6(-5 /-27222 C ntin"ent Per# r'ance O&li"ati n .27-22 The c ntin"ent c nsi!erati n is c 'pute! as: 6(+27222 pa:'ent > -2N pr &a&ilit: > 2)1.(-+0 present 4alue #act r Pr #essi nal Ser4ices E@pense Cash A!!iti nal Pai!?In Capital Cash &) an! c)
Paci#ica
Re4enues E@penses Net inc 'e Retaine! earnin"s7 (D( Net inc 'e Di4i!en!s pai! Retaine! earnin"s7 (2D+( Cash Recei4a&les an! in4ent r: Pr pert:7 plant an! e8uip'ent In4est'ent in Se"ur s Research an! !e4el p'ent asset 9 !$ill Tra!e'arAs T tal assets Lia&ilities C ntin"ent per# r'ance &li"ati n C '' n st cA A!!iti nal pai!?in capital Retaine! earnin"s T tal lia&ilities an! e8uities 3(722272225 0127222 3+(272225 31-272225 3+(272225 127222 3(7(/272225 0.7222 /-27222 (7,227222 (72.27-22 0-7222 (127222 ,-27222

(-7222 (-7222 17222 17222

C ns li!ate! *alance Sheet 3(722272225 0127222 3+(272225 31-272225 3+(272225 127222 3(7(/272225 (/(7222 1+27222 272227222 2 (227222 //7-22 -227222 +7//07-22 3.0272225 3.27-225 3.-272225 3(72(.72225 3(7(/272225 3+7//07-225

Se"ur s

C ns li!ati n Entries

3A5 (27222 3A5(-27222 3S5 /2-7222 3A5 +-/7-22 3A5(227222 3A5 //7-22 3A5 ,27222

+227222 +7-107-22 3-2272225 3.27-225 3.-272225 3(72(.72225 3(7(/272225 3+7-107-225

(.27222 00-7222 3(0272225 322272225 3/272225 3,+-72225 300-72225

3S5 2227222 3S5 /27222 3S5 ,+-7222 (72/27-22

(72/27-22

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Ans$ers t Appen!i@ Pr &le's 45. 32- 'inutes5 F urnal entries # r a 'er"er usin" le"ac: purchase 'eth !) Als c 'pare t ac8uisiti n 'eth !) a. +urchase Method 6. Purchase price 3inclu!in" ac8uisiti n c sts5 6.+-7222 Fair 4alues # net assets ac8uire! -2-7222 9 !$ill 6((27222 *ournal entr$: Current Assets E8uip'ent Tra!e'arA 9 !$ill Lia&ilities Cash ,. Acquisition date fair values: Purchase price 3inclu!in" ac8uisiti n c sts5 6,-27222 Fair 4alues # net assets ac8uire! -2-7222 *ar"ain purchase 36 /-72225 Allocation of bar7ain #urchase to lon7-ter" assets acquired:
Fair 4alue Pr p) T tal re!ucti n Asset re!ucti n

027222 (027222 +227222 ((27222 --7222 .+-7222

E8uip'ent Tra!e'arA *ournal entr$:

6(027222 +227222 6-227222

+.N @ 6/-7222 H .,N @ /-7222 H

62/7222 ,07222 6/-7222

Current Assets E8uip'ent 36(027222 M 62/72225 Tra!e'arA 36+227222 M 6,072225 Lia&ilities Cash

027222 (-+7222 2/27222 --7222 ,-27222

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+2) c ntinue! b. Acquisition Method 6. C nsi!erati n trans#erre! Fair 4alues # net assets ac8uire! 9 !$ill *ournal entr$: Current Assets E8uip'ent Tra!e'arA 9 !$ill Lia&ilities Cash Pr #essi nal Ser4ices E@pense Cash ,. C nsi!erati n trans#erre! Fair 4alues # net assets ac8uire! 9ain n &ar"ain purchase *ournal entr$: Current Assets E8uip'ent Tra!e'arA Lia&ilities 9ain n *ar"ain Purchase Cash Pr #essi nal Ser4ices E@pense Cash 027222 (027222 +227222 --7222 (227222 ,2-7222 2-7222 2-7222 027222 (027222 +227222 0-7222 --7222 .(27222 2-7222 2-7222 6,2-7222 -2-7222 36(2272225 6 .(27222 -2-7222 6 0-7222

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+() 32- 'inutes5 3P a)

lin" 4s) purchase in4 l4in" an unrec r!e! intan"i&le5 Purchase P lin" 6 .-27222 6 .227222 /-27222 ,-27222 (72227222 1227222 (7-227222 ?2? .227222 ?2? 6,7-227222 6(71-27222

In4ent r: Lan! *uil!in"s <npatente! techn l ": 9 !$ill T tal

&) Pre?ac8uisiti n re4enues an! e@penses $ere e@clu!e! #r ' c ns li!ate! results un!er the purchase 'eth !7 &ut $ere inclu!e! un!er the p lin" 'eth !) c) P lin"s7 in ' st cases7 pr !uce hi"her rates # return n assets than purchase acc untin" &ecause the !en 'inat r t:picall: is 'uch l $er) In the case # the S$i'$ear ac8uisiti n p lin" pr !uce! an incre'ent t t tal assets # 6(71-27222 c 'pare! t 6,7-227222 un!er purchase acc untin") Future EPS un!er p lin"s $ere als hi"her &ecause # l $er #uture !epreciati n an! a' rtiBati n # the s'aller asset &ase) Mana"ers $h se c 'pensati n c ntracts in4 l4e! acc untin" per# r'ance 'easures clearl: ha! incenti4es t use p lin" # interest acc untin" $hene4er p ssi&le)

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Chapter 2 De4el p K ur SAills

CONSIDERATION OR COMPENSATION CASE 3esti'ate! ti'e ,2 'inutes5 Acc r!in" t FAS* ASC 302-?(2?--?2-5: I# it is n t clear $hether an arran"e'ent # r pa:'ents t e'pl :ees r sellin" shareh l!ers is part # the e@chan"e # r the ac8uiree r is a transacti n separate #r ' the &usiness c '&inati n7 the ac8uirer sh ul! c nsi!er the # ll $in" in!icat rs: a) C ntinuin" e'pl :'ent) The ter's # c ntinuin" e'pl :'ent &: the sellin" shareh l!ers $h &ec 'e Ae: e'pl :ees 'a: &e an in!icat r # the su&stance # a c ntin"ent c nsi!erati n arran"e'ent) The rele4ant ter's # c ntinuin" e'pl :'ent 'a: &e inclu!e! in an e'pl :'ent a"ree'ent7 ac8uisiti n a"ree'ent7 r s 'e ther ! cu'ent) A c ntin"ent c nsi!erati n arran"e'ent in $hich the pa:'ents are aut 'aticall: # r#eite! i# e'pl :'ent ter'inates is c 'pensati n # r p stc '&inati n ser4ices) Arran"e'ents in $hich the c ntin"ent pa:'ents are n t a##ecte! &: e'pl :'ent ter'inati n 'a: in!icate that the c ntin"ent pa:'ents are a!!iti nal c nsi!erati n rather than c 'pensati n) &) Durati n # c ntinuin" e'pl :'ent) I# the peri ! # re8uire! e'pl :'ent c inci!es $ith r is l n"er than the c ntin"ent pa:'ent peri !7 that #act 'a: in!icate that the c ntin"ent pa:'ents are7 in su&stance7 c 'pensati n) c) Le4el # c 'pensati n) Situati ns in $hich e'pl :ee c 'pensati n ther than the c ntin"ent pa:'ents is at a reas na&le le4el in c 'paris n t that # ther Ae: e'pl :ees in the c '&ine! entit: 'a: in!icate that the c ntin"ent pa:'ents are a!!iti nal c nsi!erati n rather than c 'pensati n) !) Incre'ental pa:'ents t e'pl :ees) I# sellin" shareh l!ers $h ! n t &ec 'e e'pl :ees recei4e l $er c ntin"ent pa:'ents n a per?share &asis than the sellin" shareh l!ers $h &ec 'e e'pl :ees # the c '&ine! entit:7 that #act 'a: in!icate that the incre'ental a' unt # c ntin"ent pa:'ents t the sellin" shareh l!ers $h &ec 'e e'pl :ees is c 'pensati n) e) Nu'&er # shares $ne!) The relati4e nu'&er # shares $ne! &: the sellin" shareh l!ers $h re'ain as Ae: e'pl :ees 'a: &e an in!icat r # the su&stance # the c ntin"ent c nsi!erati n arran"e'ent) F r e@a'ple7 i# the sellin" shareh l!ers $h $ne! su&stantiall: all # the shares in the ac8uiree c ntinue as Ae: e'pl :ees7 that #act 'a: in!icate that the arran"e'ent is7 in su&stance7 a pr #it?sharin" arran"e'ent inten!e! t pr 4i!e c 'pensati n # r p stc '&inati n ser4ices) Alternati4el:7 i# sellin" shareh l!ers $h c ntinue as Ae: e'pl :ees $ne! nl: a s'all nu'&er # shares # the ac8uiree an! all sellin" shareh l!ers recei4e the sa'e a' unt # c ntin"ent c nsi!erati n n a per?share &asis7 that #act 'a: in!icate that the c ntin"ent pa:'ents are a!!iti nal c nsi!erati n) The preac8uisiti n $nership interests hel! &: parties relate! t sellin" shareh l!ers $h c ntinue as Ae: e'pl :ees7 such as #a'il: 'e'&ers7 als sh ul! &e c nsi!ere!) #) LinAa"e t the 4aluati n) I# the initial c nsi!erati n trans#erre! at the ac8uisiti n !ate is &ase! n the l $ en! # a ran"e esta&lishe! in the 4aluati n # the ac8uiree an! the c ntin"ent # r'ula relates t that 4aluati n appr ach7 that #act 'a: su""est that the c ntin"ent pa:'ents are a!!iti nal c nsi!erati n) Alternati4el:7 i# the c ntin"ent pa:'ent # r'ula is c nsistent $ith pri r pr #it?

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sharin" arran"e'ents7 that #act 'a: su""est that the su&stance # the arran"e'ent is t pr 4i!e c 'pensati n) ") F r'ula # r !eter'inin" c nsi!erati n) The # r'ula use! t !eter'ine the c ntin"ent pa:'ent 'a: &e help#ul in assessin" the su&stance # the arran"e'ent) F r e@a'ple7 i# a c ntin"ent pa:'ent is !eter'ine! n the &asis # a 'ultiple # earnin"s7 that 'i"ht su""est that the &li"ati n is c ntin"ent c nsi!erati n in the &usiness c '&inati n an! that the # r'ula is inten!e! t esta&lish r 4eri#: the #air 4alue # the ac8uiree) In c ntrast7 a c ntin"ent pa:'ent that is a speci#ie! percenta"e # earnin"s 'i"ht su""est that the &li"ati n t e'pl :ees is a pr #it?sharin" arran"e'ent t c 'pensate e'pl :ees # r ser4ices ren!ere!) Su""este! ans$er: N te: This case $as !esi"ne! t ha4e c n#lictin" in!icat rs acr ss the 4ari us criteria i!enti#ie! in the FAS* ASC # r !eter'inin" the issue # c 'pensati n 4s) c nsi!erati n) Thus7 the s luti n is su&Eect t alternati4e e@planati ns an! stu!ent can &e enc ura"e! t use their $n Eu!"'ent an! interpretati ns in supp rtin" their ans$ers) In the auth r;s Eu!"'ent7 the 60 'illi n c ntin"ent pa:'ent 3#air 4alue H 6, 'illi n5 is c ntin"ent c nsi!erati n t &e inclu!e! in the 4erall #air 4alue Na4iN $ rec r!s # r its ac8uisiti n # Tra##icE:e) This c ntin"enc: is n t !epen!ent n c ntinuin" e'pl :'ent 3criteria a)57 an! uses a # r'ula &ase! n a c 'p nent # earnin"s 3criteria ")5) E4en th u"h the # ur # r'er $ners # Tra##icE:e $ne! (22N # the shares 3criteria e)57 $hich su""ests the 60 'illi n is c 'pensati n7 the 4erall #act pattern in!icates c nsi!erati n &ecause n ser4ices are re8uire! # r the pa:'ent) The pr #it?sharin" c 'p nent # the e'pl :'ent c ntract appears t &e c 'pensati n) Criteria ") speci#icall: i!enti#ies pr #it?sharin" arran"e'ents as in!icati4e # c 'pensati n # r ser4ices ren!ere!) Criteria a) als applies "i4en that the e'pl :ees $ ul! &e una&le t participate in pr #it?sharin" i# the: ter'inate e'pl :'ent) Alth u"h the e'pl :ees recei4e n n?pr #it sharin" c 'pensati n si'ilar t ther e'pl :ees 3criteria c)57 the 4erall pattern # e4i!ence su""ests that an: pa:'ents 'a!e un!er the pr #it?sharin" arran"e'ent sh ul! &e rec "niBe! as c 'pensati n e@pense $hen incurre! an! n t c ntin"ent c nsi!erati n # r the ac8uisiti n)

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ASC RESEARCH CASECDEFENSI=E INTAN9I*LE ASSET 3+- MIN<TES5 a) The ASC 9l ssar: !e#ines a !e#ensi4e intan"i&le asset as OAn ac8uire! intan"i&le asset in a situati n in $hich an entit: ! es n t inten! t acti4el: use the asset &ut inten!s t h l! 3l cA up5 the asset t pre4ent thers #r ' &tainin" access t the asset)P ASC 022?(2?+-?(2D als &ser4es that T pr tect its c 'petiti4e p siti n7 r # r ther reas ns7 a rep rtin" entit: 'a: inten! n t t use an ac8uire! n n#inancial asset acti4el:7 r it 'a: inten! n t t use the asset acc r!in" t its hi"hest an! &est use) F r e@a'ple7 that 'i"ht &e the case # r an ac8uire! intan"i&le asset that the rep rtin" entit: plans t use !e#ensi4el: &: pre4entin" thers #r ' usin" it) Ne4ertheless7 the rep rtin" entit: shall 'easure the #air 4alue # a n n#inancial asset assu'in" its hi"hest an! &est use &: 'arAet participants) Acc r!in" t ASC +-2?+2?2-?- a !e#ensi4e intan"i&le asset sh ul! &e acc unte! # r as a separate unit # acc untin" 3i)e)7 an asset separate #r ' ther assets # the ac8uirer5) It sh ul! n t &e inclu!e! as part # the c st # an entit:Gs e@istin" intan"i&le asset3s5 presu'a&l: &ecause the !e#ensi4e intan"i&le asset is separatel: i!enti#ia&le) &) The i!enti#ia&le assets ac8uire! in a &usiness c '&inati n sh ul! &e 'easure! at their ac8uisiti n?!ate #air 4alues 3ASC 02-?22?+2?(5) c) A #air 4alue 'easure'ent assu'es the hi"hest an! &est use # an asset &: 'arAet participants) Hi"hest an! &est use is !eter'ine! &ase! n the use # the asset &: 'arAet participants7 e4en i# the inten!e! use # the asset &: the rep rtin" entit: is !i##erent 3ASC 022?(2?+-?(25) I'p rtantl:7 hi"hest an! &est use pr 4i!es 'a@i'u' 4alue t 'arAet participants) The hi"hest an! &est use # the asset esta&lishes the 4aluati n pre'ise use! t 'easure the #air 4alue # the assetCin this case an in?e@chan"e pre'ise 'a@i'iBes the 4alue # the asset at 62 'illi n) !) A !e#ensi4e intan"i&le asset shall &e assi"ne! a use#ul li#e that re#lects the entit:Gs c nsu'pti n # the e@pecte! &ene#its relate! t that asset) The &ene#it a rep rtin" entit: recei4es #r ' h l!in" a !e#ensi4e intan"i&le asset is the !irect an! in!irect cash #l $s resultin" #r ' the entit: pre4entin" thers #r ' realiBin" an: 4alue #r ' the intan"i&le asset 3!e#ensi4el: r ther$ise5) An entit: shall !eter'ine a !e#ensi4e intan"i&le assetGs use#ul li#e7 that is7 the peri ! 4er $hich an entit: c nsu'es the e@pecte! &ene#its # the asset7 &: esti'atin" the peri ! 4er $hich the !e#ensi4e intan"i&le asset $ill !i'inish in #air 4alue) The peri ! 4er $hich a !e#ensi4e intan"i&le asset !i'inishes in #air 4alue is a pr @: # r the peri ! 4er $hich the rep rtin" entit: e@pects a !e#ensi4e intan"i&le asset t c ntri&ute !irectl: r in!irectl: t the #uture cash #l $s # the entit:) 3ASC +-2?+2?+-A5 It $ ul! &e rare # r a !e#ensi4e intan"i&le asset t ha4e an in!e#inite li#e &ecause the #air 4alue # the !e#ensi4e intan"i&le asset $ill "enerall: !i'inish 4er ti'e as a result # a lacA # 'arAet e@p sure r as a result # c 'petiti4e r ther #act rs) A!!iti nall:7 i# an ac8uire! intan"i&le asset 'eets the !e#initi n # a !e#ensi4e intan"i&le asset7 it shall n t &e c nsi!ere! i''e!iatel: a&an! ne!) 3ASC +-2?+2?+-*5

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RESEARCH CASECA**OTT;S AC%<ISITION OF SOL=AK PHARMACE<TICALS 32- Minutes5 () Fr ' A&& tt;s 22(2 (2?Q rep rt 3N te (257 OThe ac8uisiti n # S l4a: Phar'aceuticals pr 4i!es A&& tt $ith a lar"e an! c 'ple'entar: p rt# li # phar'aceutical pr !ucts an! e@pan!s A&& ttGs presence in Ae: "l &al e'er"in" 'arAets)P 2) A&& tt acc unte! # r its Fe&ruar: (-7 22(2 ac8uisiti n # S l4a: Phar'aceuticals usin" the ac8uisiti n 'eth !) Acc r!in"l: A&& tt rec r!e! the ac8uisiti n at 6.), &illi n) +) Fr ' A&& tt;s (2D+(D(2 (2?Q rep rt 3! llars in 'illi ns5 Cash c nsi!erati n: C nsi!erati n trans#erre! 3inclu!in" 62)+ c ntin"ent c nsi!erati n5 6.), Ac8uire! intan"i&le assets7 n n?!e!ucti&le 6 ,)( Ac8uire! in?pr cess research an! !e4el p'ent 2)Ac8uire! net tan"i&le assets 2)/ De#erre! inc 'e ta@es rec r!e! at ac8uisiti n 3()(5 T tal #air 4alue # net i!enti#ia&le assets ,)2 9 !$ill 62)2 A&& tt !eter'ine! these all cati ns &: esti'atin" #air 4alues # r each # the assets ac8uire! an! the lia&ilities assu'e!) ,) As sh $n in the part 2) Sche!ule a& 4e7 A&& tt inclu!e! 621- 'illi n # #air 4alue c ntin"ent c nsi!erati n in its c nsi!erati n trans#erre! -) Ac8uire! in?pr cess research an! !e4el p'ent is acc unte! # r as an intan"i&le asset $ith an in!e#inite li#e) .) A&& tt all cate! current :ear e@penses appr @i'atel: 6+1- 'illi n # ac8uisiti n relate! e@penses7 pre?ta@ l sses7 inte"rati n an! restructurin" e@penses)

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FAS* CODIFICATION RESEARCH CASE: THE DOI CHEMICAL COMPANK;S AC%<IRED CONTIN9ENCIES 3Esti'ate! Ti'e: (h ur5 () Di! D $ Che'ical rec "niBe an: ac8uire! c ntin"encies # r its ac8uisiti n # R h' an! HaasR I# it !i!7 h $ $ere the: 'easure!R I# n t7 $h: n tR S luti n: D $ Che'ical rec "niBe! certain c ntin"ent en4ir n'ental lia&ilities # 6(-1 'illi n an! a lia&ilit: # 6(0- 'illi n relate! t R h' an! Haas Pensi n Plan 'atters7 $hich $ere 4alue! in acc r!ance $ith SFAS N ) -7 OAcc untin" # r C ntin"encies)P 2) <n!er $hat circu'stances sh ul! a #ir' rec "niBe an asset ac8uire! r a lia&ilit: assu'e! in a &usiness c '&inati n that arises #r ' a c ntin"enc:R S luti n: Acc r!in" t FAS* ASC7 an asset ac8uire! r a lia&ilit: assu'e! in a &usiness c '&inati n that arises #r ' a c ntin"enc: nee!s t &e rec "niBe! i# the ac8uisiti n?!ate #air 4alue is !eter'ina&le r i# the c ntin"enc: is & th pr &a&le an! esti'a&le at the ac8uisiti n !ate) FAS* ASC: An ac8uirer shall rec "niBe at #air 4alue7 at the ac8uisiti n !ate7 an asset ac8uire! r a lia&ilit: assu'e! in a &usiness c '&inati n that arises #r ' a c ntin"enc: i# the ac8uisiti n?!ate #air 4alue # that asset r lia&ilit: can &e !eter'ine! !urin" the 'easure'ent peri !) FAS* ASC 02-?22?2-?(17 02-?22?+2?1) I# the ac8uisiti n?!ate #air 4alue # an asset ac8uire! r a lia&ilit: assu'e! in a &usiness c '&inati n that arises #r ' a c ntin"enc: cann t &e !eter'ine! !urin" the 'easure'ent peri !7 an asset r a lia&ilit: shall &e rec "niBe! at the ac8uisiti n !ate i# & th # the # ll $in" criteria are 'et: a) In# r'ati n a4aila&le &e# re the en! # the 'easure'ent peri ! in!icates that it is pr &a&le that an asset e@iste! r that a lia&ilit: ha! &een incurre! at the ac8uisiti n !ate) &) The a' unt # the asset r lia&ilit: can &e reas na&l: esti'ate!) 3FAS* ASC 02-?22?2-?227 02-?22?+2?2+7 02-?22?2-?22A5 I# neither the criteri n in para"raph / n r the criteria in para"raph 0 are 'et at the ac8uisiti n !ate usin" in# r'ati n that is a4aila&le !urin" the 'easure'ent peri ! a& ut #acts an! circu'stances that e@iste! as # the ac8uisiti n !ate7 the ac8uirer shall n t rec "niBe an asset r lia&ilit: as # the ac8uisiti n !ateS) 3FAS* ASC 02-?22?2-?22*5 +) H $ sh ul! D $ Che'ical acc unt # r its ac8uire! c ntin"encies in peri !s a#ter the ac8uisiti n !ateR S luti n: In peri !s a#ter the ac8uisiti n !ate7 D $ Che'ical sh ul! !e4el p a s:ste'atic an! rati nal &asis # r su&se8uentl: 'easurin" an! acc untin" # r these c ntin"encies) An ac8uirer shall !e4el p a s:ste'atic an! rati nal &asis # r su&se8uentl: 'easurin" an! acc untin" # r assets an! lia&ilities arisin" #r ' c ntin"encies !epen!in" n their nature) 3FAS* ASC 02-?22?+-?+5 ,) Ihat is the !iscl sure re8uire'ent # r D $ Che'ical;s ac8uire! c ntin"enciesR S luti n: D $ Che'ical sh ul! !iscl se the a' unts rec "niBe! at the ac8uisiti n
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!ate an! the 'easure'ent &asis applie!7 an! als the nature # the c ntin"encies) An ac8uirer shall !iscl se in# r'ati n that ena&les users # its #inancial state'ents t e4aluate the nature an! #inancial e##ects # a &usiness c '&inati n that ccurs either !urin" the current rep rtin" peri ! r a#ter the rep rtin" peri ! &ut &e# re the #inancial state'ents are issue!) F r each &usiness c '&inati n that ccurs !urin" the rep rtin" peri !7 an ac8uirer shall !iscl se the # ll $in" in the # tn te that !escri&es the &usiness c '&inati n: F r assets an! lia&ilities arisin" #r ' c ntin"encies rec "niBe! at the ac8uisiti n !ate: 3(5 The a' unts rec "niBe! at the ac8uisiti n !ate an! the 'easure'ent &asis applie!Cusuall: #air 4alue) 325 The nature # the c ntin"encies) An ac8uirer 'a: a""re"ate !iscl sures # r assets r lia&ilities arisin" #r ' c ntin"encies that are si'ilar in nature) 3FAS* ASC 02-?22?-2?(5 -) Ihat are s 'e p tential c ncerns $ith auth ritati4e acc untin" literature # r ac8uire! c ntin"enciesR S luti n: There is c ncern that these stan!ar!s 'a: n t &e perati nal: The FAS* ASC ! es n t pr 4i!e "ui!ance n h $ t 'aAe the !eter'inati n assess'ent # the ac8uisiti n !ate #air 4alue # an asset ac8uire! r a lia&ilit: assu'e! in a &usiness c '&inati n that arises #r ' a c ntin"enc:) In a!!iti n7 the FAS* ASC ! es n t prescri&e in !etail h $ an asset r a lia&ilit: arisin" #r ' a c ntin"enc: initiall: rec "niBe! at #air 4alue in a &usiness c '&inati n $ ul! &e 'easure! su&se8uent t its initial rec "niti n) 3I!eas e@tracte! #r ' FSP FAS (,(3R5?( !issent &: T ' Lins'eier5)

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