Describe U.S. GAAP and IFRS requirements in accounting for the business combination

Answer 1

THE PURCHASE TRANSACTION

In a business combination, one corporation either

1 . Acquires the assets and assumes the liabilities of another corporation, or
2 . Acquires all, or a majority, of another corporation's common shares and thereby acquires
a controlling interest in the net assets of the other corporation.

In both cases, U.S. GAAP and IFRS require firms to account for the business combination
using the acquisition, or purchase, method. The acquisition method views a business
combination as conceptually identical to the purchase of any single asset (for example, inventory or a machine). Application of the acquisition method involves two steps:

1 . Measure the identifiable tangible and intangible assets and liabilities of the acquired
company at their fair values. In some cases the acquired firm did not recognize identifiable
assets or liabilities in its accounting records. For example, the acquired company
may own patents and trademarks not recorded on its balance sheet. The acquirer would
recognize those assets at their fair values.

2 . The acquirer compares the fair value of the cash, common stock, or other consideration
given with the fair value of the identifiable assets less liabilities acquired. The excess of
the fair value of the consideration over the fair value of the acquired firm's identifiable
assets net of identifiable liabilities is goodwill. If the fair value of the identifiable assets less
liabilities exceeds the fair value of the consideration, the excess is a gain from a bargain
purchase, which the purchaser immediately includes in net income.