5
Mergers-Notes – 2/26/03
A. Examples – Cost of acquisition < book value
1. Consolidation a discount purchase: Cost of acquisition < book value
a. 100% ownership example
b. Purchase by common stock and cash
Investment in S (including fees necessary to acquire the sub)
Cash
Common stock - P
Additional Paid-in Capital - P
c. Discount is the cost less than book value
i) Goodwill is excess of fair value of accounts – book value of accounts
ii) Negative goodwill if fair value < book value
iii) Negative goodwill is allocated to assets& liabilities of sub
iv) Reduces their values
(1) Assign to noncurrent assets first
(2) Leave current assets and liabilities at fair value
d. The allocation
i) Get fair value of assets to be adjusted
ii) Determine amount of negative goodwill to be subtracted from fair value adjustment
iii) Allocate discount in accord with fair values
iv) Subtract allocation from fair values
e. First step of consolidation is addition – puts assets & liabilities of S into consolidation
f. Elimination entries
i) Removal of book value of investment
Common stock – S
APIC – S
Retained earnings – S
Investment in S (investment discount still remains)
ii) Removal of rest of investment
Investment in S (eliminates investment discount)
Purchase Discount – P
iii) Allocation of purchase discount
Adjust Current Assets (S) to Fair
Adjust LT Assets (S) toward Fair
Purchase Discount (leftover discount)
Adjust Liabilities to Fair (S)
Adjust Other LT Assets (S) toward Fair
g. Result
i) Old assets & liabilities of P at book
ii) Acquired current assets and liabilities at fair value
iii) Acquired LT assets toward fair value
2. Consolidation a discount purchase: Cost of acquisition < book value
a. n% ownership example
b. Purchase by common stock and cash
Investment in S (including fees necessary to acquire the sub)
Cash
Common stock - P
Additional Paid-in Capital - P
c. Discount is amount less than book value
i) Discount calculated as
Cost of acquisition – n%(book value of S’s net assets)
(1) Discount attaches only to acquired interest
(2) Leaves minority interest at old book value
(3) Minority interest is not revalued – not part of deal
ii) Discount is allocated to assets& liabilities of sub
iii) Brings them to fair value if possible
iv) Goodwill is excess of fair valu of accts – book valu of accts
v) Negative goodwill if fair value < book value
vi) Negative goodwill is allocated to assets& liabilities of sub
vii) Reduces their values
(1) Assign to noncurrent assets first
(2) Leave current assets and liabilities at fair value
d. The allocation
i) Get fair value of assets to be adjusted
ii) Adjust assets/liabilities toward fair value per ownership %
iii) Determine amount of negative goodwill to be subtracted from fair value adjustment
iv) Allocate discount in accord with fair values
v) Subtract allocation from adjustments toward fair values
e. Elimination entries
i) Removal of book value of investment
Common stock – S
APIC – S
Retained earnings – S
Investment in S (investment discount still remains)
ii) Removal of rest of investment
Investment in S (eliminates investment discount)
Purchase Discount - P
iii) Allocation of purchase discount
Adjust Current Assets (S) to Fair
Adjust LT Assets (S) toward Fair
Purchase Discount (leftover discount)
Adjust Liabilities to Fair (S)
Adjust Other LT Assets (S) toward Fair
f. Result
i) Old assets & liabilities of P at book
ii) Acquired assets and liabilities adjusted toward fair
iii) No goodwill
g. Minority ownership position is recognized
i) Not revalued to fair
ii) No need to pay minority off & buy out position
iii) Not a liability
iv) A second permanent source of equity
v) A permanent partner & drain on profits
B. Pooling
1. SFAS 141 – No longer allowed
2. Considered a combination of equals
3. Not considered a purchase
4. Treated as though companies were always combined
5. No fair value adjustment
6. Cost of acquisition = book value
7. No purchase premiums or discounts
8. No goodwill
9. Book value usually < Cost of acquisition (at fair value)
10. Asset values usually less than through purchase
a. Acquisition entry
Investment in S (at book)
CS – P (par)
APIC – P (plug so that Investment = book value)
RE – P (equals RE in S)
b. Elimination entry
CS – S
APIC – S
RE - S
Investment in S (at book)
11. Partial pooling (n%)
Investment in S (at n% of book)
CS – P (par)
APIC – P (plug so that Investment = book value)
RE – P (equals n% RE in S)
a. Elimination entry
CS – S
APIC – S
RE - S
Investment in S (at n% of book)
Minority Interest in S ((1-n)% of book)
C. Additional Issues
1. Dividends of subsidiary unpaid at combination date
a. Reduces investment in sub
b. Entry
Dividends receivable
Investment in S
c. Compensated for by reduced sub’s owners’ equity
2. Treasury stock held by subsidiary
a. P’s % position based on outstanding shares at acquisition
b. Treasury stock meaningless for P
c. Removed on consolidation
d. Called constructive retirement
e. Possible entry
i) Retirement in excess of issue price
CS-P
APIC-P
RE P
TS-P
ii) Retirement below issue price
CS-P
APIC-P
TS-P
APIC-from retirement of TS
3. Goodwill previously recorded by subsidiary
a. Has a zero fair value
b. Reduces fair value of assets
c. Cost of acquisition does not change
d. Leads to increase in goodwill associated with this consolidation
e. Possible entry
i) Exchange of goodwill
Goodwill – P
Goodwill – S
ii) Decrease purchase discount
Assets
Goodwill - S
4. Parent and subsidiary with different fiscal years
a. Difference is <= three months (one quarter)
i) Use straight consolidation
ii) Report material events in consolidated statements or notes
b. Difference is greater than three months
c. Must prepare new sub statements for consolidation
d. Company can change fiscal year for sub