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Business Combinations: Seda Oz, PHD Seda - Oz@Uwaterloo - Ca
Business Combinations: Seda Oz, PHD Seda - Oz@Uwaterloo - Ca
COMBINATIONS
Seda Oz, PhD
seda.oz@uwaterloo.ca
November 14, 2018 Copyright @ 2017 Seda Oz, PhD. All Rights Reserved 1
ROAD MAP
Business Combinations
Reasons
Defensive Tactics
IFRS 10
Forms of Business Combinations
Acquisition Method
Consolidation
Acquisition Differential
Direct Approach
Working paper approach
Other Issues
NO
YES
Joint control? YES Report share
Joint Joint of A, L, RE,
arrangement? operation EXP
NO
NO
Joint Venture
YES Equity
Significant Method
Influence? Associate
NO Non-strategic FVTPL or
Investment FVTOCI
Owning more than 50% of the voting shares usually, but not
always, indicate control.
Control can be present with less than 50% of voting shares if
other factors indicate control:
Ability to elect majority of Board
Special voting arrangements - Irrevocable agreement conveying
voting rights to 1 party
Special operating agreements
Convertible securities (warrants/options/bonds etc.) -Potential
voting rights
One company may own the largest single block of shares of another
company,
X Company owns 40% of Y Company while the other 60% is widely
held and rarely voted with the result that X has no trouble electing
the majority of Y’s directors
X Company could be deemed to have control in this situation as long
as the other shareholders do not actively cooperate against X when
they vote their shares
Company P
1 economic
entity Company S’s
S Co
assets
1 legal entity $
1 economic Company P
entity Invst in S (Parent)
2 legal Company S
entities (Subsidiary)
Non Strategic
Strategic
Investments Investments
Objectives:
Determine the amount of goodwill, if any
Recording journal entries
On the books of the acquirer and the acquiree
Cash $800
Accounts receivable 1,700
Inventories 1,500
Property, plant, and equipment 4,300
Patent 450
Current liabilities (400)
Long-term liabilities (550) 7,800
Goodwill $ 750
Note:
In previous examples, when we were calculating the amount of
goodwill we always used the FVs
When calculating the acquisition differential you start with the
Carrying values
Don’t get confused!
Land $120,000
Liabilities ($1,400,000) $720,000
Allocation:
Land (FV excess) $50,000
Goodwill $30,000
$80,000
$
Current assets
$ 47,000 24,000
Plant assets (net) 74,000 34,000
Goodwill - -
Investment in K Company - -
Acquisition differential
$
$ 121,000 58,000
$
Current liabilities $ 21,400 6,400
Long-term debt 22,000 3,900
Common shares 44,000 24,000
Retained earnings
33,600 23,700
$
$ 121,000 58,000
Current assets
$ 47,000 $ 24,000
Plant assets (net) 74,000 34,000
Goodwill - -
Investment in K Company - - 1 59,200
Acquisition differential
$ 121,000 $ 58,000
$ 121,000 $ 58,000
Total
Current assets
$ 47,000 $ 24,000
Plant assets (net) 74,000 34,000
Goodwill - -
Investment in K Company - - 1 59,200 2 59,200
Acquisition differential 2 11,500
$ 121,000 $ 58,000
$ 121,000 $ 58,000
Total
Current assets
$ 47,000 $ 24,000 3 $ 7,800
Plant assets (net) 74,000 34,000 3 $ 5,000
Goodwill - - 3 15,000
Investment in K Company - - 1 59,200 2 59,200
Acquisition differential 2 11,500 3 11,500
$ 121,000 $ 58,000
$ 121,000 $ 58,000
Total $ 138,400 $ 138,400
Current assets
$ 47,000 $ 24,000 3 $ 7,800 $ 63,200
Plant assets (net) 74,000 34,000 3 $ 5,000 113,000
Goodwill - - 3 15,000 15,000
Investment in K Company - - 1 59,200 2 59,200 0
Acquisition differential 2 11,500 3 11,500