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Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 01 Intercorporate Acquisitions and Investments in Other.

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Presentation on theme: "Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 01 Intercorporate Acquisitions and Investments in Other."— Presentation transcript:

1 Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 01 Intercorporate Acquisitions and Investments in Other Entities

2 1-2 Learning Objective 1 Understand and explain different methods of business expansion, types of organizational structures, and types of acquisitions. Understand and explain different methods of business expansion, types of organizational structures, and types of acquisitions.

3 1-3 Business Expansion Most business enterprise seek to expand over time Why ? and How ? Why ? Size often allows economies of scale New earning potential Earnings stability through diversification Management rewards for bigger company size Prestige associated with company size

4 1-4 Business Expansion Most business enterprise seek to expand over time Why ? and How ? How? By one of two Approaches  Internal expansion Expansion of its existing product line New product development  External expansion By combining with or Acquiring other companies Either approach may lead to a change in organizational structure

5 1-5 Internal Expansion Through new subsidiary, or other entity such as :  Partnership,  joint venture  special entities ( Note : assets transferred to the new) P S Stock $ Internal Expansion Business Expansion And organization Structure.

6 1-6  A spin-off Occurs when the ownership of a newly created or existing subsidiary is distributed to the parent’s stockholders without the stockholders surrendering any of their stock in the parent company  A split-off Occurs when the subsidiary’s shares are exchanged for shares of the parent, thereby leading to a reduction in the outstanding shares of the parent company And organization Structure. Business Expansion

7 1-7 P S Stock Sub Shareholders $ External Expansion Business Expansion And organization Structure. External Expansion Entry into new product areas or geographic regions by acquiring or combining with other companies.

8 1-8 Business Expansion And organization Structure. External Expansion A business combination occurs when “... an acquirer obtains control of one or more businesses.” The concept of control relates to the ability to direct policies and management.

9 1-9 Organizational Structure and Reporting  Merger A business combination in which the acquired company’s assets and liabilities are combined with those of the acquiring company results in no additional organizational components. Financial reporting is based on the original organizational structure.

10 1-10 Organizational Structure and Reporting  Controlling ownership A business combination in which the acquired company remains as a separate legal entity with a majority of its common stock owned by the purchasing company leads to a parent–subsidiary relationship. Accounting standards normally require consolidated financial statements.

11 1-11 Organizational Structure and Reporting  Noncontrolling ownership The purchase of a less-than-majority interest in another corporation does not usually result in a business combination or controlling situation.  Other beneficial interest One company may have a beneficial interest in another entity even without a direct ownership interest. The beneficial interest may be defined by the agreement establishing the entity or by an operating or financing agreement.

12 1-12

13 1-13 Learning Objective 2 Make calculations and prepare journal entries for the creation and purchase of a business entity. Make calculations and prepare journal entries for the creation and purchase of a business entity.

14 1-14 Creating Business Entities

15 1-15 Creating Business Entities

16 1-16 Creating Business Entities

17 1-17

18 1-18 Creating Business Entities  Recognition of fair values of the assets transferred in excess of their carrying values on the books of the transferring company is not appropriate in the absence of an arm’s- length transaction.  No gains or losses are recognized on the transfer by the transferring company.

19 1-19 Creating Business Entities  If the value of an asset transferred to a newly created entity has been impaired prior to the transfer and its fair value is less than the carrying value on the transferring company’s books, the transferring company should recognize an impairment loss and transfer the asset to the new entity at the lower fair value.

20 1-20 Learning Objective 3 Understand and explain the differences between different forms of business combinations. Understand and explain the differences between different forms of business combinations.

21 1-21 Forms of Business Combinations  A statutory merger The acquired company’s assets and liabilities are transferred to the acquiring company, and the acquired company is dissolved, or liquidated The operations of the previously separate companies are carried on in a single legal entity  A statutory consolidation Both combining companies are dissolved and the assets and liabilities of both companies are transferred to a newly created corporation

22 1-22  A stock acquisition One company acquires the voting shares of another company and the two companies continue to operate as separate, but related, legal entities. The acquiring company accounts for its ownership interest in the other company as an investment. Parent–subsidiary relationship For general-purpose financial reporting, a parent company and its subsidiaries present consolidated financial statements that appear largely as if the companies had actually merged into one. Forms of Business Combinations

23 1-23 AA Company BB Company AA Company (a) Statutory Merger AA Company BB Company CC Company AA Company BB Company AA Company BB Company (b) Statutory Consolidation (c) Stock Acquisition Forms of Business Combinations

24 1-24 Determining the Type of Business Combination AA Company invests in BB Company Acquires net assets Acquires stock Record as statutory merger or statutory consolidation Acquired company liquidated? Record as stock acquisition and operate as subsidiary Yes No AA Company invests in BB Company Acquires net assets Record as statutory merger or statutory consolidation Acquired company liquidated? Record as stock acquisition and operate as subsidiary Peaceful Merger Hostile Takeover

25 1-25 Learning Objective 4 Make calculations and prepare journal entries for different types of business combinations through the acquisition of stock or assets. Make calculations and prepare journal entries for different types of business combinations through the acquisition of stock or assets.

26 1-26 Accounting for Business Combination

27 1-27 Accounting for Business Combination

28 1-28 Accounting for Business Combination

29 1-29 Accounting for Business Combination

30 1-30 Accounting for Business Combination

31 1-31 Accounting for Business Combination

32 1-32 Accounting for Business Combination

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