Free «Acquisition Analysis» Essay Sample

Acquisition is the takeover of a subsidiary company or firm by a parent company. Many companies sought to Acquisition of other companies as a strategy to be able to exploit and venture into new markets where product value has been established. To protect the minor companies or the subsidiary firms from exploitation, various rules and regulations have been defined by various accounting bodies such as Generally Accepted Accounting practices (GAAP) and Financial Accounting Standards Board (FASB). It thus follows that most of the acquisitions are guided mainly by the FASB standards.

For every acquisition that takes place, the books of accounts are to be prepared according to the standards of accounting as offered by the FASB, Accounting Standards Codification. The following are the requirements of the standards acquisition process:

Recording Cost of Equipment

All costs of the newly acquired inventorial equipment are to be established by the responsible accountant. The conditions of the various items of purchase should also be recorded against each item of value. The cost of most items is based on the invoice price.

Accounting for capitalized lease

The basis for the capitalized lease purchases are placed on the procedures set in accounting manual, accounting and reporting for leases and installment.

Accounting for late costs

Additional costs are incurred subsequent to the recording of initial acquisition costs for items inventorial equipment. These cost are added to the initial items cost, thus have an overall impact on the final costs of the firm to be acquired. 

Reconciling Cost of Equipment

For all items of inventorial equipment, the recorded costs are reconciled on the monthly basis as the paid amounts being reflected in the general ledger. Costs of the acquired equipment are listed and reconciled to the expenditures reported in the general ledger.

There are various evaluation methods used in preparing a valuation and a statement before the acquisition. The firm may use the pooling or the purchase accounting methods to come up with the value of the subsidiary firm (Wood 34). The difference between the two methods is that pooling do not recognize goodwill during the transaction, while on the other hand, purchasing does. In purchase accounting the carry value and the fair value are used to determine the goodwill; if fair value is greater than carry value, then the difference is goodwill. However, if the carry value is greater than the fair value, gain is recognized. The fair value is the price to be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (FASB).

According to FASB’s statements, goodwill is an asset representing the future economical benefits gained through acquired assets that are not individually identified. In evaluation of the Queen Ann Corporation, the carry value and the fair value of the net assets are as follows:

Assert Book Value Fair Value
Building 360000 480000
Patent A 250000 270000
Patent B 150000 150000
Trademark 80000 115000
Notes Payables (400000) (380000)
Net Assets 440000 635000

The goodwill therefore is 635000-440000=195000

According to FASB 205, before acquisition, the subsidiary is required to present the financial statements which include the financial condition, the income statement, the equity statement, statement of cash flows and the corresponding notes explaining each of the financial statements presented. The balance sheet (Financial Statement) is the core to evaluation of the amounts and values of the business.

The Queen Anne Corporation has been acquired by the Ballard Corporation fully, hence the assets and liabilities of Queen Anne’s Corporation are all transferred to Ballard Corporation. The full transfer is on the 100% acquisition. According to the FASB’s statement 164, the guidelines are provided to differentiate a merger from an acquisition. The statement also provides the accounting requirements and the disclosures to be taken into account. According to GAAP, all acquisition costs to be expensed when incurred.

The following is the entry of the acquisitions at 1st January 20X2

Buildings 480000    
Patents 420000    
Trademark 115000    
Goodwill 195000    
    Notes Payable 380000
    Ballards Common Stock 440000
    AIPC Options 320000
    Misc. Payables 230000
Expenses 235000    
    Misc. Payables 75000
  1445000   1445000

The assets and liabilities should be analyzed by the purchasing company to ensure transparency so as to avoid future conflicts after acquisition (Wood 49). The valuations may be carried out after or before acquisition as should be agreed upon by the firms entering into agreement. The Queen Anne Corporation asset evaluation as carried out by the Certified Valuation Specialists is as follows:

Notes:

The Acquisition cost would include the following costs:

  1. Finder’s or brokers fee: The amount of money paid to the person who brought the parent and subsidiary to terms of how they opt to carry out their duties.
  2. Advisory fee: The fee used to gain information on the best alternatives among the projected or potential subsidiaries.
  3. Legal fees: The monetary expense incurred in ensuring the protocols of acquisition are followed and the governing body is notified of the process, and change of documents.
  4. Accounting fees: It is the total fee incurred in generating the various financial statements before and after acquisition to ensure transparency.
  5. Valuation fees: They are the costs incurred in determining the current cost of the assets and liabilities before acquisition. They may be incurred in the process of comparing the value of the assets with the standards costs or according to other firms.
  6. Administrative, consulting and other fees.
patent A a/c
Date Particulars Amt Date Particulars Amt
1/01/20X2 bal b/d 270000 1 February 20X2 cash 245000
    31 Dec 20X2 bal c/d 25000
  270000   270000

 

TradeMark a/c

Date Particulars Amt Date Particulars Amt
1/01/20X2 bal b/d 115000 31 Dec 20X2 w/o 115000
  270000   270000
       
Buildings a/c
Date Particulars Amt Date Particulars Amt
1/01/20X2 bal b/d 480000 31 Dec 20X2 Revaluation a/c 10000
1 November 20X2 Revaluation a/c 30000 31 Dec 20X2 bal c/d 500000
  510000   510000
       

The Journal Entries are as shown below: 

Entry Journal
Date Ref: Particulars Dr. Cr.
1 Jan 20X2   Finder Account 28000  
                 Cash   28000
    Pension plan 40000  
               Cash   40000
    Stock issue 2000  
            Cash   2000
    Common stock purchase 165000  
            Cash   165000
1 Feb 20X2   Cash 245000  
              Patent A   245000
    w/o a/c 115000  
               TradeMark   115000
    Goodwill 106000  
             Skills   106000
    Goodwill 45000  
            Domestic Relationships   45000

The valuations at purchase are as follows:

Buildings 480000    
Patents 420000    
Trademark 115000    
Goodwill 195000    
    Notes Payable 380000
    Ballards Common Stock 440000
    AIPC Options 320000
    Misc. Payables 140000
Expenses 70000    
    Misc. Payables 75000
  1280000   1280000

The balance sheet is as follows:

Ballard Corporation  
Balance Sheet  
As at 31 Dec 20X2  
Buildings 480000    
Patents 420000    
Trademark 115000    
Goodwill 195000    
Cash   245000    
    Notes Payable 380000
    Ballards Common Stock 340000
    Queen Anne Common Stock 100000
    AIPC Options 320000
    Payables 125000
    Net profit 190000
  1455000   1455000

The various components of codification defined include presentation, assets, liabilities, Equity, Revenue, Expenses, and Broad transactions.

The presentation of the accounting reports under Financial Accounting Standards Board from FASB 205 to 280 regulate the presentation of the financial statements, balance sheet, statement of shareholder equity, comprehensive Income, Income statement, Statement of Cash Flows, Notes to financial statements, Accounting changes and errors corrections, changing prices, earnings per share, interim report, limited liability entities, personal financial statements, risks and uncertainties, and segment Reporting. The principles give scope and exception of the various components and their utilizations.

According to FASB 205, the entities within which presentation of the financial statement is allowed include both business and non-profit entities. There are various groups within the financial statements; Assets, liabilities, equity, and others. From the Queen Anne’s balances sheet, the asset groups include buildings, patents, and trademarks while the liabilities are the notes payable. The equity of the corporation is the common stock owned by Queen Anne Corp. The explained three components comprise the balance sheet. The change in equity during transactions is recorded in the comprehensive income. The net income from the comprehensive income is transferred to the balance sheet and contributes to equity. FASB 205 explains the various relationships and requirements for evaluation. Such as the evaluation of the assets and the liabilities from the Queen Ann balance sheet.

The guidelines of balance sheet provide the offsetting of various contracts and actions as thereof. The guidelines provide means of grouping the various items into the core groups; assets, liabilities, equity. From the evaluation of the Queen Anne acquisition, the calculated goodwill, trademark, patents and relationships are categorized as assets according to the FASB 210. The AIPC calculated is categorized as equity (FASB 205). Improved skills are an advantage to the company which increased over time in the company; hence it is added to the goodwill according to the notes provided. That is, any additional skill the company may have acquired is considered an added value and must be in the goodwill.

FASB 305 to 360 provides guidelines to differentiating the assets according to liquidity and ease of transferability from one person to another. According to the guidelines, the cash and cash equivalents are the most liquid assets. The receivables which are the debtors are the second most liquid assets. Then the investments are grouped into two categories, that is; Debt and Equity securities as one and the Equity method and Joint ventures as the other. The inventory, the deferred costs, intangibles such as goodwill, then the property, plant and equipment are the least equivalent. The guidelines provide the acquisition, depreciation and amortization of the various assets as considered appropriate.

There are different categories of the debts including asset retirement and environmental obligations such as the payments to be given to the employees who will be terminated. The exit or disposal cost obligations, deferred revenue, commitments such as the yearly amounts payable to Queen Anne by Ballard through the years 20X2 to 20X4. The contingencies, guarantees, and creditors’ debt are considered as debts and not equity as may be perceived by others. The guidelines provide that to settle liability a firm is required to transfer assets to creditor or obtain unconditional release. More guidelines to extinguishment of the liabilities are given for both the functional and non functional liabilities. The requirements of transfer of liabilities from one entity to another are described in FASB 405.

Equity is the contributed capital for the entity’s growth and transactions. The equity includes the stock dividends, treasury stocks, and equity based payments. Equity may also be referred as the residual interest; the difference between the assets and the liabilities. The instruments; sources of equity or ways to gain equity are outlined and how they are obtained with the properties of each. The securities discussed are the evidence of contribution to the equity.

Most of the entities are involved in carrying out transactions with others which include consolidations, interests, leases, non-monetary transactions, foreign currencies and many others (Carmichael and Lynford 217). In the question, the Ballard Corporation, after acquisition, would generate consolidated statements with regard to the guidelines in consolidation. The guidelines ensure the accounts are maintained as one despite being run differently. The Queen Anne Corporation created a lease which on acquisition would cost the company $75000 on termination. The agreement by Ballard to offer 25% of the Queen Ann operations as interest to Queen Ann is an interest which is a transaction element. Before acquisition, Queen Ann revalued their net assets through the fair evaluation analysis. The relationships; domestic and international created by the subsidiary were a major part in the broad transfers as far as foreign currency matters. FASB 805 to 860 offers the guidelines to follow so as to ensure the transactions thereof are not exploitive during acquisition and to allow for transparency in the firms accounts.

The various elements of the FASB codification, as discussed above, taking into consideration the case analysis, it has been found the standards offer a platform for usage among many different accountants to ensure comparability and a standard through which the financial statements are created and used.

Management Report of Queen Anne Corporation Acquisition

The Ballard Company purchased the Queen Anne Co. According to FASB standards the company fair values of the assets and the liabilities are carried into Ballard’s books of accounts. Taking into account the use of the purchase method, the goodwill is recorded by comparing the carry value and the fair value of the acquisitions as recorded before. The generated balance sheet is used to create a consolidated statement with the Ballard’s statements. Hence, the various assets are joined as well as the liabilities. Revaluation of the assets is done continuously through the first year. Through the revaluations, the buildings increase in value, from a value worth $480000 to $500000 at the closing of the year. The increase in interest rates reduces the notes payable initially from $400,000 to $380,000.

The yearly transactions such as the selling of part of patent A are written in Ballard’s books of Accounts. The sales proceedings are transacted where the cash is debited in cash account while the patent account is credited by the same amount as revealed in the general ledger.

The calculations of the interests payable to Queen Anne as in the agreement during acquisition is taken to the balance sheet as a liability. The net profit from the subsidiary’s income statement is taken to the balance sheet for the concluded financial year. The net profit contributes to equity. It may be used as net profit or as reserved earnings for given companies. The various expenses involved in moving the employees to the Ballard’s headquarters are recorded in the acquisition expense. The termination of employees and the corresponding payments are recorded in the payables of miscellaneous payables. The total assets of the company should match up with the total liabilities and equity. The subsidiary and the shareholders’ equity according to the agreement during purchase, is evaluated to a $340,000 for the Ballard Corporation and the Queen Anne Corporation retaining $100,000.

According to FASB, the consolidated financial statements are the complete complement of statements generated for separate entity and represent the net of assets, liabilities, revenues, and the incurred expenses. According to the agreement as provided the Non controlling Interests from the acquisition would amount to $125,000. The controlling interests are to be given at 25% of the Queen Anne’s Corporation to ensure it ranges from $1 million to $5 million in a period of 3 years.

Conclusion

When acquisition process is initiated within the company, the buyer is expected to perform a comprehensive assessment to establish the true value and worth of the company. The first approach is to investigate the entire relevant issues that are likely to be categorized as risks or opportunities for comprehensive value identification. This calls for a great analysis of various subset issues such as the legal aspects, financial status, environmental factors, and staffing. The logistics involved in the whole process is very complex and needs a comprehensive financial and technical analysis, different from any other form of analysis.

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It therefore follows that market in which the firm to be acquired operates, culture, the staff culture, intellectual property, the available brands, how the risks are managed, assets and liabilities, equity, legal matters and IT are some of the common factors that must be considered in the overall criteria for acquisition.

In the FASB standards, the presentation of financial statements, balance sheet, shareholder information, income statement, balance sheet, statement of cash flow and many more are considered an important aspect of the acquisition process.  When presenting the value, the financial statement carries both business and non-profit entities. They are various groups within the financial statements; Assets, liabilities, equity, and others. The explained components comprise the balance sheet, whose change in equity during transactions is recorded in the comprehensive income. According to FASB 205, the various relationships and requirements for evaluation of assets and the liabilities from the Queen Ann balance sheet is critical in the overall transaction process.

 

 
   

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