Assignment 1
Brenda Roper
Professor Robert Neely
ACC 401
July 24, 2013
Page 1 The business combination method I selected is the acquisition method. Business combinations have implemented the newly created accounting treatment called the “acquisition method.” The major changes in the acquisition method involve variations to fair value measurement, goodwill recognition, and non-controlling interests. Under this method, the parent company reported the net assets of the acquired company at the price that it was paid for. This price included any cash payment, the fair market value of any shares issued, and the present value of any promises to pay cash in the future. A key aspect of the purchase method is that the parent consolidates the book value of all the subsidiary’s assets and liabilities and then the fair value, broken down between NBV and FMV increments, of the subsidiary's assets and liabilities are added to the parent's own assets and liabilities. The parent and the subsidiary prepare their own separate financial statements since they are two separate legal entities. The parent also prepares consolidated financial statements by combining the separate financial statements of both the parent and the subsidiary. Any inter-company transactions between the two are eliminated in the consolidated financial statements since the parent and the subsidiary is considered as one economic unit. Under a consolidated entity, the same results are produced regardless of how the transaction is legally structured as both the parent and the subsidiary are exposed to the same consequences and rewards. The investment in a subsidiary should be valued at the most reliable value. For example, either at the fair value of consideration given or the fair value of consideration received. The purchase price is often different than the book value because balance sheet values do not necessarily equal market value. The
References: Badawi, Ibrahim M., & Dorata, Nina T. (2007, October). Business combinations: convergence and fair value. Entreprenur.com. Article retrieved November 19, 2008 from http://www.entrepreneur.com/tradejournals/article/170374838.html Financial Accounting Standards Board. “Business Combinations: Applying the acquisition method.” Board Meeting Handout. (2006, December 19). Retrieved November 20, 2008 from http://www.fasb.org/board_handouts/12-19-06.pdf International Accounting Standards Board. “Business Combinations Phase II.” Project summary and feedback statement. (2008, January 2008). Retrieved November 20, 2008 from http://www.iasb.org/NR/rdonlyres/FB09D3C0-D7CA-478C-881C-704495F8A6CC/0/Business_Combinations_JN2008.pdf Shortridge, R.T., & Smith, P.A. (2007, April). Understanding Consolidation: A Comparison of the Proprietary, Parent, Entity, and IASB Views. The CPA Journal. Article retrieved November 20, 2008 from http://www.nysscpa.org/cpajournal/2007/407/infocus/p23.htm