Accounting for Mergers and Acquisitions

Summaries

Two Methods:

1)      Purchase

2)      Pooling (No longer used in  US GAAP and IAS)

Purchasing Method:

1)      Assume target company’s liabilities and assets

2)      If purchase price > tangible asset – liability (all at fair market values), the excess is attributed into the identifiable intangible assets. Tangible assets are then depreciated and intangible assets are amortized at the remaining life. (Same for proportionate consolidation method)

3)      Remaining excess will be goodwill. Use impairment or written down instead of depreciation or amortization.

4)      Operating results are included in the income statement from the date of acquisition (but that before is not restated)

5)      Equity does not combine. The purchase amount is added to the paid-in-capital of the acquirer.

Pooling of interest method:

1)      just combine the accounting book values (FMV plays no role)

2)      restate the previous result

3)      actual price paid is suppressed in balance sheet and income statement

Only all-equity transaction can use pooling method

*** In Purchase method, assets are written up to market values (so larger depreciation after merger)

Effect with purchase methods:

1) Higher Assets (written up)

2) Lower Net Income (more depreciation)

3) Higher Equity (Book value replaced by purchase price)

Paid in Capital: Capital contributed by investor on top of the par value of the stock