This chapter provides an overview of merger activity with only brief mention of the accounting methods. Thus, it is largely unaffected by the recent FASB changes, with the following exceptions:
At the bottom of page 10, there is a reference to Figure 1-1. Please note the following addendum:
As indicated in the Figure, the third or accounting choice will no longer be relevant for acquisitions made after June 30, 2001, due to the FASB’s recent decision to prohibit the pooling of interests method. As italicized in Figure 1, the three choices available in prior years were independent of each other with one exception. Historically, in a pooling of interests, the middle column (what’s given up) had to be stock. Prior to FASB’s decision to eliminate the pooling of interests method, companies often went to great lengths to quality for the pooling method. Given the method’s historic popularity, including its use in many large and widely publicized deals, and the fact that the FASB rule change is not retroactive with regard to pooling, we provide a more in-depth description of the pooling method in Chapter 11 for those who are interested. In addition, we include a brief summary of that method and a comparison of the pooling and purchase methods in Chapter 2.
Figure 1-1
|What is Acquired: |What is given up: |How is it accounted for: |
| | | |
|Net Assets of S Company |1. Cash | |
|(Assets and Liabilities) | |Purchase Method |
| |2. Debt | |
| | | |
| |3. Stock | |
| | | |
| |4. Combination of above | |
| | | |
| | |Pooling of Interests Method |
|Common Stock of S Company | |(no longer allowed) |
| | | |
On page 17, an illustration is found beginning near the bottom of the page. Although this illustration is technically correct during the transition period from the old rules requiring the amortization of goodwill to the new rules prohibiting it, one may prefer to avoid the issue of goodwill amortization altogether in the classroom at this stage. If so, the illustration should be modified as follows:
Estimating Goodwill and Potential Offering Price
Wanna Buy Company is considering acquiring Hot Stuff Inc. and is wondering how much it should offer. Wanna Buy makes the following computations and assumptions to help in the decision.
a. Hot Stuff’s identifiable assets have a total fair value of $7,000,000. Hot Stuff has liabilities totaling $3,200,000. The assets include patents and copyrights, with a fair value approximating book value, buildings with a fair
