Business Combinations & Consolidations

Business or asset?

Screen test: substantially all fair value in one asset (or similar group) → asset acquisition (no goodwill, costs capitalized).

Acquisition method

• Assets and liabilities at fair value; separately recognize intangibles that are contractual-legal or separable.
• Acquisition costs → expense. Stock issue costs → reduce additional paid-in capital (APIC).
• Contingent consideration at fair value; liability → remeasure through earnings; equity → no remeasurement.

Goodwill

Consideration + fair value of noncontrolling interest (NCI) + previously held interest − fair value of net assets. Negative → reassess, then gain to the acquirer.

Measurement period: up to 1 year; adjust goodwill prospectively.

Consolidation

• Eliminate investment vs subsidiary equity, intercompany balances, sales, dividends, and unrealized profit.
• Unrealized inventory profit = markup × % still held.
• NCI: in equity, separate from parent. Ownership changes without loss of control → equity transactions.
• Include 100% of the subsidiary's assets and liabilities.

Exam traps

• Under US rules, NCI is measured at fair value at acquisition, so goodwill includes the NCI's share. Measuring NCI at its share of net assets is not allowed.
• Eliminate the full intercompany sale, even if some goods are still held; only the unrealized profit depends on how much remains.
• Upstream unrealized profit (subsidiary sells to parent) is shared with NCI; downstream profit (parent sells to subsidiary) is charged entirely to the parent.
• Step acquisition: a previously held interest is remeasured to fair value at the acquisition date, with the gain or loss in net income.