AKUNTANSI KEUANGAN

LANJUTAN I
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Dosen: Molina, SE., M.Si., Ak., CA

2
Accounting for Business
Combinations

Advanced Accounting, Fifth Edition

Perspective on Business Combinations

Goodwill Impairment Test

FASB ASC paragraph 350-20-35 requires impairment be
tested annually.
All goodwill must be assigned to a reporting unit.
Impairment should be tested in a two-step process.
Step 1: Does potential impairment exist?

Step 2: What is the amount of goodwill impairment?

LO 3 Goodwill impairment assessment.

Perspective on
Business
Combinations

LO 3
Perspective on Business Combinations
E2-10: On January 1, 2010, Porsche Company acquired the net
assets of Saab Company for $450,000 cash. The fair value of
Saab’s identifiable net assets was $375,000 on this date.
Porsche Company decided to measure goodwill impairment using
the present value of future cash flows to estimate the fair
value of the reporting unit (Saab). The information for these
subsequent years is as follows:

Present Value Carry Value Fair Value

of Future of SAAB's of SAAB's
Year Cash Flows Net Assets * Net Assets
2011 $ 400,000 $ 330,000 $ 340,000
2012 $ 400,000 $ 320,000 $ 345,000
2013 $ 350,000 $ 300,000 $ 325,000

* Not including goodwill

LO 3 Goodwill impairment assessment.
Perspective on Business Combinations
E2-10: On January 1, 2010, the acquisition date, what was
the amount of goodwill acquired, if any?

Acquisition price $450,000

Fair value of identifiable net assets 375,000
Recorded value of Goodwill $ 75,000

LO 3 Goodwill impairment assessment.

Perspective on Business Combinations
E2-10: Part A&B: For each year determine the amount of
goodwill impairment, if any, and prepare the journal entry
needed each year to record the goodwill impairment (if any).

Step 1 - 2011
Fair value of reporting unit $400,000
Carrying value of unit:
Carrying value of identifiable net assets 330,000
Carrying value of goodwill 75,000
Total carrying value of unit 405,000
Excess of carrying value over fair value $ 5,000

Excess of carrying value over fair value means step 2 is required.

LO 3 Goodwill impairment assessment.
Perspective on Business Combinations
E2-10: Part A&B (continued)

Step 2 - 2011
Fair value of reporting unit $400,000
Fair value of identifiable net assets 340,000
Implied value of goodwill 60,000
Carrying value of goodwill 75,000
Impairment loss $ 15,000

Journal Impairment loss 15,000

Entry Goodwill 15,000

LO 3 Goodwill impairment assessment.

Perspective on Business Combinations
E2-10: Part A&B (continued)

Step 1 - 2012
Fair value of reporting unit $400,000
Carrying value of unit:
Carrying value of identifiable net assets 320,000
Carrying value of goodwill 60,000 *
Total carrying value of unit 380,000
Excess of fair value over carrying value $ 20,000

Excess of fair value over carrying value means step 2 is not required.
* $75,000 (original goodwill) – $15,000 (prior year impairment)
LO 3 Goodwill impairment assessment.
Perspective on Business Combinations
E2-10: Part A&B (continued)

Step 1 - 2013
Fair value of reporting unit $350,000
Carrying value of unit:
Carrying value of identifiable net assets 300,000
Carrying value of goodwill 60,000 *
Total carrying value of unit 360,000
Excess of carrying value over fair value $ 10,000

Excess of carrying value over fair value means step 2 is required.

* $75,000 (original goodwill) – $15,000 (prior year impairment)
LO 3 Goodwill impairment assessment.
Perspective on Business Combinations
E2-10: Part A&B (continued)

Step 2 - 2013
Fair value of reporting unit $350,000
Fair value of identifiable net assets 325,000
Implied value of goodwill 25,000
Carrying value of goodwill 60,000
Impairment loss $ 35,000

Journal Impairment loss 35,000

Entry Goodwill 35,000

LO 3 Goodwill impairment assessment.

Perspective on Business Combinations

Other Intangible Assets

Acquired intangible assets other than goodwill:

Limited useful life

 Should be amortized over its useful economic life.
 Should be reviewed for impairment.

Indefinite life
 Should not be amortized.
 Should be tested annually (minimum) for impairment.

LO 3 Goodwill impairment assessment.

Perspective on Business Combinations

Acquisition Costs—an Illustration

Suppose that SMC Company acquires 100% of the net assets of Bee
Company (net book value of $100,000) by issuing shares of common
stock with a fair value of $120,000. With respect to the merger,
SMC incurred $1,500 of accounting and consulting costs and $3,000
of stock issue costs. SMC maintains a mergers department that
incurred a monthly cost of $2,000. Prepare the journal entry to
record these direct and indirect costs.

Professional Fees Expense (Direct) 1,500

Merger Department Expense (Indirect) 2,000
Other Contributed Capital (Security Issue Costs) 3,000
Cash 6,500

LO 4 Reporting acquisition expenses.

Explanation and Illustration of Acquisition Accounting

Four steps in the accounting for a business

combination:

1. Identify the acquirer.

2. Determine the acquisition date.

3. Measure the fair value of the acquiree.

4. Measure and recognize the assets acquired and

liabilities assumed.

LO 6 Valuation of acquired assets and liabilities assumed.

Explanation and Illustration of Acquisition Accounting

Value of Assets and Liabilities Acquired

 Identifiable assets acquired (including intangibles other
than goodwill) and liabilities assumed should be recorded at
their fair values at the date of acquisition.
 Any excess of total cost over the sum of amounts assigned
to identifiable assets and liabilities is recorded as goodwill.
 Under current GAAP, in-process R&D is measured and
recorded at fair value as an asset on the acquisition date.

LO 6 Valuation of acquired assets and liabilities assumed.

Explanation and Illustration of Acquisition Accounting

E2-1: Preston Company acquired the assets (except for cash) and
assumed the liabilities of Saville Company. Immediately prior to the
acquisition, Saville Company’s balance sheet was as follows:

Any
Goodwill?

LO 6 Valuation of acquired assets and liabilities assumed.

Explanation and Illustration of Acquisition Accounting

E2-1: Preston Company acquired the assets (except for cash) and
assumed the liabilities of Saville Company. Immediately prior to the
acquisition, Saville Company’s balance sheet was as follows:

Fair value
of assets,
without cash
$1,824,000

LO 6 Valuation of acquired assets and liabilities assumed.

Explanation and Illustration of Acquisition Accounting

E2-1: A. Prepare the journal entry on the books of Preston

Co. to record the purchase of the assets and assumption of
the liabilities of Saville Co. if the amount paid was
$1,560,000 in cash.

Calculation of Goodwill
Fair value of assets, without cash $1,824,000
Fair value of liabilities 594,000
Fair value of net assets 1,230,000
Price paid 1,560,000
Goodwill $ 330,000

LO 6 Valuation of acquired assets and liabilities assumed.

Explanation and Illustration of Acquisition Accounting

E2-1: A. Prepare the journal entry on the books of Preston

Co. to record the purchase of the assets and assumption of
the liabilities of Saville Co. if the amount paid was
$1,560,000 in cash.

Receivables 228,000
Inventory 396,000
Plant and equipment 540,000
Land 660,000
Goodwill 330,000
Liabilities 594,000
Cash 1,560,000

LO 6 Valuation of acquired assets and liabilities assumed.

Explanation and Illustration of Acquisition Accounting

Bargain Acquisition Illustration

When the price paid to acquire another firm is lower than the
fair value of identifiable net assets (assets minus liabilities),
the acquisition is referred to as a bargain.
Any previously recorded goodwill on the seller’s books is
eliminated (and no new goodwill recorded).

A gain is reflected in current earnings of the acquiree to the

extent that the fair value of net assets exceeds the
consideration paid.

LO 6 Valuation of acquired assets and liabilities assumed.

Explanation and Illustration of Acquisition Accounting

E2-1: B. Repeat the requirement in (A) assuming that the

amount paid was $990,000.

Calculation of Goodwill or Bargain Purchase

Fair value of assets, without cash $1,824,000
Fair value of liabilities 594,000
Fair value of net assets 1,230,000
Price paid 990,000
Bargain purchase $ 240,000

LO 6 Valuation of acquired assets and liabilities assumed.

Explanation and Illustration of Acquisition Accounting

E2-1: B. Repeat the requirement in (A) assuming that the

amount paid was $990,000.

Receivables 228,000
Inventory 396,000
Plant and equipment 540,000
Land 660,000
Liabilities 594,000
Cash 990,000
Gain on acquisition (ordinary) 240,000

LO 6 Valuation of acquired assets and liabilities assumed.

Contingent Consideration in an Acquisition

Illustration: P Company acquired all the net assets of S

Company in exchange for P Company’s common stock. P Company
also agreed to pay an additional $150,000 to the former
stockholders of S Company if the average post-combination
earnings over the next two years equaled or exceeded
$800,000. Assume that goodwill was recorded in the original
acquisition transaction. To complete the recording of the
acquisition, P Company will make the following entry:

Goodwill 150,000
Liability for Contingent Consideration 150,000

LO 7 Contingent consideration and valuation of assets.

Contingent Consideration in an Acquisition

Illustration: Assuming that the target is met, P Company will

make the following entry:

Liability for Contingent Consideration 150,000

Cash 150,000

On the other hand, assume that the target is not met. The
adjustment will flow through the income statement
in the subsequent period, as follows:

Liability for Contingent Consideration 150,000

Income from Change in Estimate 150,000

LO 7 Contingent consideration and valuation of assets.

Contingent Consideration in an Acquisition

Illustration: P Company acquired all the net assets of S

Company in exchange for P Company’s common stock. P Company
also agreed to issue additional shares of common stock to the
former stockholders of S Company if the average post-
combination earnings over the next two years equalled or
exceeded $800,000. Assume that the contingency is expected
to be met, and goodwill was recorded in the original acquisition
transaction. Based on the information available at the
acquisition date, the additional 10,000 shares (par value of $1
per share) expected to be issued are valued at $150,000. To
complete the recording of the acquisition, P Company will make
the following entry:
Goodwill 150,000
Paid-in-Capital for Contingent Consideration 150,000
LO 7 Contingent consideration and valuation of assets.
Contingent Consideration in an Acquisition

Illustration: Assuming that the target is met, but the stock

price has increased from $15 per share to $18 per share at
the time of issuance, P Company will not adjust the original
amount recorded as equity. Thus, P Company will make the
following entry

Paid-in-Capital for Contingent Consideration 150,000

Common Stock ($1 par) 10,000
Paid-in-Capital in Excess of Par 140,000

LO 7 Contingent consideration and valuation of assets.