1 INTRODUCTION TO BUSINESS COMBINATIONS AND THE CONCEPTUAL FRAMEWORK 1 Learning Objectives 1 Planning M&A in a Changing Environment and Under Changing Accounting Requirements 4 Nature of the Combination 5 Business Combinations: Why? Why Not? 7 Business Combinations: Historical Perspective 10 Terminology and Types of Combinations 14 Takeover Premiums 17 Avoiding the Pitfalls before the Deal 18 Determining Price and Method of Payment in Business Combinations 20 Alternative Concepts of Consolidated Financial Statements 25 FASB's Conceptual Framework 29 FASB Codification (Source of GAAP) 36 Summary 41 Appendix: Evaluating Firm Performance 42 Questions 49 Analyzing Financial Statements 49 Exercises 51 ASC (Accounting Standards Codification) Exercises 53 2 ACCOUNTING FOR BUSINESS COMBINATIONS 54 Learning Objectives 54 Historical Perspective on Business Combinations 54 Pro Forma Statements and Disclosure Requirement 63 Explanation and Illustration of Acquisition Accounting 65 Contingent Consideration in an Acquisition 70 Leveraged Buyouts 75 IFRS versus U.S. GAAP 76 Summary 77 Appendix A: Deferred Taxes in Business Combinations 79 Questions 81 Analyzing Financial Statements 82 Exercises 84 ASC Exercises 90 Problems 91 3 CONSOLIDATED FINANCIAL STATEMENTS-DATE OF ACQUISITION 96 Learning Objectives 96 Definitions of Subsidiary and Control 98 Requirements for the Inclusion of Subsidiaries in the Consolidated Financial Statements 102 Reasons for Subsidiary Companies 103 Consolidated Financial Statements 103 Investments at the Date of Acquisition 105 Consolidated Balance Sheets: The Use of Workpapers 106 A Comprehensive Illustration-More than One Subsidiary Company 123 Limitations of Consolidated Statements 125 Summary 128 Appendix A: Deferred Taxes on the Date of Acquisition 129 Accounting for Uncertain Tax Positions 130 Appendix B: Consolidation of Variable Interest Entities 132 Questions 134 Analyzing Financial Statements 135 Exercises 136 ASC Exercises 141 Problems 142 4 CONSOLIDATED FINANCIAL STATEMENTS AFTER ACQUISITION 149 Learning Objectives 149 Accounting for Investments by the Cost, Partial Equity, and Complete Equity Methods 150 Consolidated Statements after Acquisition-Cost Method 158 Recording Investments in Subsidiaries-Equity Method (Partial or Complete) 170 Elimination of Intercompany Revenue and Expense Items 180 Interim Acquisitions of Subsidiary Stock 182 Consolidated Statement of Cash Flows 194 Illustration of Preparation of a Consolidated Statement of Cash Flows-Year of Acquisition 197 Compare U.S. GAAP and IFRS Regarding Equity Method 201 Summary 202 Appendix A: Alternative Workpaper Format 203 Appendix B: Deferred Tax Consequences When Affiliates File Separate Income Tax Returns-Undistributed Income 205 Consolidated Tax Returns-Affiliated Companies (80% or More Ownership Levels) 206 Separate Tax Returns-Deferred Tax Consequences Arising Because of Undistributed Subsidiary Income 206 The Cost Method-Separate Tax Returns 207 Undistributed Income Is Expected to Be Realized When the Subsidiary Is Sold 209 The Partial and Complete Equity Methods-Separate Tax Returns 209 Questions 211 Analyzing Financial Statements 212 Exercises 214 ASC Exercises 220 Problems 221 5 ALLOCATION AND DEPRECIATION OF DIFFERENCES BETWEEN IMPLIED AND BOOK VALUES 234 Learning Objectives 234 Allocation of the Difference Between Implied and Book Values to Assets and Liabilities of Subsidiary-Acquisition Date 236 Effect of Allocation and Depreciation of Differences Between Implied and Book Values on Consolidated Net Income-Year Subsequent to Acquisition 243 Consolidated Statements Workpaper-Investment Recorded Using the Cost Method 248 Cost Method Analysis of Controlling and Noncontrolling Interests in Consolidated Net Income and Retained Earnings 257 Consolidated Statements Workpaper-Investment Recorded Using Partial Equity Method 259 Partial Equity Method Analysis of Controlling and Noncontrolling Interests in Consolidated Net Income and Retain