Question

Financial reporting for mergers

In June 2001, the Financial Accounting Standards Board (FASB) eliminated the use of pooling for merger accounting. Since then, all mergers are handled as purchases for accounting purposes.

Consider this case:

Company A buys Company B for $30, when the net asset value of Company B’s assets is $50.

Which of the following statements best describes the effect of the merger on the merged company’s consolidated balance sheet?

Company B’s assets will be written up to reflect the purchase price relative to net asset value.

Company B’s liabilities will be deducted from Company A’s liabilities in the consolidated balance sheet.

Company B’s common equity will be written down to reflect the purchase price relative to net asset value.

Company B’s assets will be written down to reflect the purchase price relative to net asset value.

When reporting merger transactions, the asset values acquired are often reappraised, and the change in value is reported in the financial statements. An increase in asset value will lead to   depreciation charges. This will lead to   in earnings per share.

Suppose the fair market value of goodwill declines during the reporting year. Which of the following statements is true about the treatment of goodwill for financial reporting purposes?

The amount of the decline will be charged to the earnings in the income statement.

The amount of the decline will not be charged to the earnings in the income statement.

Identify whether the following statements are true or false: The company with a larger market value in a merger is always the acquirer, and the company with a smaller market value in a merger is the target. The merger is expected to create synergistic benefits for only the target company.

true

false

Answer 1

Part A.

Option D. Company B’s assets will be written down to reflect the purchase price relative to net asset value.

Explanation:

As company A had purchased Company B for less than the Net assets value, the Compony B's assets will written down to match the purchase price paid by Company A.

Part B.

Option A.The amount of the decline will be charged to the earnings in the income statement.

Explanation:

The company will charge any decline in the FMV of the goodwill occured during the year to Income Statement.

Part C.

Option B. False

Explanation:

The company will smaller market value can also be the acquirer if it has sufficient resources to do so.

In such case, the company with larger market value can also be the target.

Merger will create synergies to both target & acquirer company.