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Business Combinations Overview
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Business Combinations Overview
Business Combinations Overview
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1
Question
What is the significance of accounting for business combinations?
Answer
Accounting for business combinations is one of the most significant and interesting topics of accounting theory and practice. It involves financial transactions of immeasurable magnitudes, affecting the destiny of entire companies.
2
Question
What are the two types of business combinations based on the nature of the transaction?
Answer
A business combination may be friendly or unfriendly (hostile takeovers).
3
Question
What defines a friendly business combination?
Answer
In a friendly combination, the board of directors of the potential combining companies negotiates mutually agreeable terms of a proposed combination, which is then submitted to the stockholders for approval.
4
Question
How does an unfriendly (hostile) business combination occur?
Answer
An unfriendly combination occurs when the board of directors of a company targeted for acquisition resists the combination, leading to a formal tender offer from the acquiring firm directly to individual shareholders.
5
Question
What is a 'Poison Pill' tactic?
Answer
A Poison Pill is an amendment of the articles of incorporation or by-laws to make it more difficult to obtain stockholder approval for a takeover.
6
Question
What is a 'Greenmail'?
Answer
Greenmail is an acquisition of common stock presently owned by the prospective acquirer company at a price substantially lower than the prospective acquirer's cost, with the stock placed in the treasury or retired.
7
Question
Define 'White Knight' or 'White Squire'.
Answer
A White Knight or White Squire is a candidate sought to be the acquirer in a friendly takeover, encouraging a third company more acceptable to the target company.
8
Question
What does the 'Pac-man Defense' entail?
Answer
The Pac-man Defense involves attempting an unfriendly takeover of the would-be acquiring company.
9
Question
What does 'Selling the Crown Jewels' mean in a defensive tactic?
Answer
It refers to the sale of valuable assets to others to make the firm less attractive to the would-be acquirer.
10
Question
What is a 'Shark Repellant'?
Answer
A Shark Repellant is an acquisition of substantial amounts of outstanding common stock for the treasury or for retirement, or the incurring of substantial long-term debt in exchange for outstanding common stock.
11
Question
What are Leveraged Buyouts?
Answer
Leveraged Buyouts occur when management desires to own the business and arranges to buy out the stockholders using the company's assets to finance the deal.
12
Question
What is 'The Mudslinging Defense'?
Answer
The Mudslinging Defense is when the acquiring company offers stock instead of cash, and the prospective acquiree company's management tries to convince stockholders that the stock would be a poor investment.
13
Question
List one reason for a business combination related to cash advantage.
Answer
It is commonly less expensive for a firm to obtain needed amenities through combination rather than through development.
14
Question
Explain the reason for lower risk in business combinations.
Answer
The acquisition of reputable product lines and markets is usually less risky than developing new products and markets.
15
Question
What does avoidance of takeovers mean in the context of business combinations?
Answer
Many companies combine to evade being acquired themselves, especially smaller companies which adopt aggressive strategies to defend against takeover attempts.
16
Question
What is horizontal integration?
Answer
Horizontal Integration is a type of combination involving companies within the same industry that have previously been competitors.
17
Question
Describe vertical integration.
Answer
Vertical Integration occurs between two companies involved in the same industry but at different levels, typically involving a company and its suppliers or customers.
18
Question
What is a conglomerate combination?
Answer
A Conglomerate Combination involves companies in unrelated industries having little market similarities, aimed at entering new markets or industries.
19
Question
List two legal forms of effecting business combinations.
Answer
1. Acquisition of Net Assets, where the acquiring company takes over the assets and liabilities of the acquired company. 2. Acquisition of Common Stock, which keeps the books of the acquired company intact while consolidating financial statements.
20
Question
What is a statutory merger?
Answer
A statutory merger is when the acquiring company survives while the acquired company ceases to exist as a separate legal entity.
21
Question
Define statutory consolidation.
Answer
Statutory consolidation results in a new corporation being formed to acquire two or more other corporations, which then cease to exist as separate legal entities.
22
Question
What does PFRS 3 define as a business combination?
Answer
PFRS 3 defines a business combination as a transaction in which an acquirer obtains control of one or more businesses.
23
Question
List the three elements that a business must involve according to PFRS 3.
Answer
1. Inputs - economic resources that contribute to outputs. 2. Process - systems or rules that convert inputs into outputs. 3. Output - the result of applying inputs and processes.
24
Question
What is the acquisition method?
Answer
The acquisition method approaches business combinations from the perspective of the acquirer, identifying and reporting all assets and liabilities at their fair values.
25
Question
What are the five steps in the acquisition method for accounting for a business combination?
Answer
1. Identify the acquirer. 2. Determine the acquisition date. 3. Calculate the fair value of the purchase consideration transferred. 4. Recognize and measure the identifiable assets and liabilities of the business. 5. Recognize and measure either goodwill or a gain from a bargain purchase.
26
Question
How is the acquisition date defined by PFRS 3?
Answer
The acquisition date is the date on which the acquirer obtains control of the acquiree.
27
Question
What is the significance of calculating the fair value of the consideration transferred?
Answer
The consideration transferred is measured at fair value at the acquisition date and includes cash, non-monetary assets, and equity interest issued by the acquirer.
28
Question
What needs to be determined by an acquirer when it issues its own shares as consideration?
Answer
The fair value of those shares at the acquisition date.
29
Question
How is the fair value of shares determined for listed entities?
Answer
Reference is made to the quoted prices of the shares.
30
Question
What is the best measurement for the fair value of liabilities undertaken by an acquirer?
Answer
The present values of expected future cash outflows.