IN YOUR OWN WORDS!!!! Assume that, as part of recording a business combination,
ID: 2567760 • Letter: I
Question
IN YOUR OWN WORDS!!!!
Assume that, as part of recording a business combination, you were given the task of assigning fair values to the acquired identifiable net assets. The investee’s Balance Sheets reports cash, accounts receivable, inventories, PPE, accounts payable, accruals, and long-term debt. Requirements: Describe the various approaches available to you to value these assets and liabilities. Describe the approach you would use to determine if a portion of the purchase price should be assigned to the Goodwill asset? Describe the approach you would use to value any additional assets acquired, including assets not recognized on the investee’s books (e.g. patents, new technology).
Explanation / Answer
1. A company that makes an acquisition must adjust its financial statements to reflect the inclusion of the acquired assets and liabilities at their fair values. Fair value is generally the market value of the assets and liabilites on the reporting date. For many items (such as cash assets, accounts receivable, and accounts payable) the determination of fair value is usually straight forward because the values recorded on the seller’s financial statements often reflect the items’ values. Therefore, follwing approach can be look forward while recording the items at fair value:
a. Cash, accounts receivable, inventories, PPE, accounts payable, accruals, and long-term debt can be recorded at the value at which they are reflected in the subsidiary company standalone balance sheet to the extent they are recorded at item's fetchable value.
b. Second approach can be this that the parent company record all the item's at the book value of subsidiary company adjusted by any of the provisions & intercompany transactions between both the companies. For Example: parent company can assume a provision for doubtful debts (say 5%) on accounts receivable of subsidiary company as they assume that 5% debtors will not pay the debts. or accounts payable reflect certain purchases made from parent company by subsidiary company and therefore the same is not required to be consolidated in financial statements.
2. Goodwill is the excess price paid by the company for acquiring the assets and liabilities of the other company. If Goodwill is required to be booked in the books of the parent company, then it should book all the assets and liabilities on the carrying amounts of subsidiary i.e amounts at which assets and liabilities are recorded in the financials of subsdiary company. Since the price is usually paid on the basis of fair market value of the assets and liabilities, any excess of Fair Value over the carrying amount(or book value) will be recorded as goodwill in the books of parent company. Goodwill is a kind of intangiible asset and will be amortized in the books of investor company.
3. If any additional asset including any intangible asset (like patent , new technology) is acquired in the course of acquisition and the same are not recorded in the financials of investee company, then such acquisition should be accounted for on the basis of fair value approach in the books of the investor company. Since the book value or carrying amounts are not available, no goodwill will be recorded due to acquisition of such assets.