CFC Merger & Acquisition Accounting 2 — Questions and Answers
Question 1: Under ASC 805, how should acquisition-related costs (e.g., advisory and legal fees) be treated by the acquirer?
- Capitalized as part of goodwill
- Expensed as incurred in the period (Correct answer)
- Added to the fair value of net assets acquired
- Deferred and amortized over the useful life of the acquired assets
Correct answer: Expensed as incurred in the period
ASC 805 requires acquisition-related costs to be expensed as incurred, not capitalized into goodwill or the purchase price.
Question 2: A contingent consideration arrangement in a business combination requires the acquirer to pay an additional $5M if revenue targets are met. At acquisition date, this contingency has a fair value of $2M. How is it initially recorded?
- As a contingent liability only if payment is probable
- At $5M as the maximum possible obligation
- At fair value of $2M in the purchase price allocation (Correct answer)
- Disclosed in footnotes only, with no balance sheet impact
Correct answer: At fair value of $2M in the purchase price allocation
ASC 805 requires contingent consideration to be recorded at fair value on the acquisition date as part of the purchase price allocation.
Question 3: What is a 'bargain purchase' in the context of a business combination?
- An acquisition completed below the target's book value
- An acquisition where fair value of net identifiable assets exceeds the purchase price (Correct answer)
- A transaction where the acquirer pays less than the target's market capitalization
- An acquisition structured to minimize goodwill recognition
Correct answer: An acquisition where fair value of net identifiable assets exceeds the purchase price
A bargain purchase occurs when the fair value of net identifiable assets acquired exceeds the total consideration transferred, resulting in a gain rather than goodwill.
Question 4: In a step acquisition, a company holds a 30% equity method investment and later acquires an additional 45% to gain control. How is the previously held 30% interest treated?
- Retained at its historical cost basis
- Remeasured at fair value with any gain or loss recognized in earnings (Correct answer)
- Written off and replaced entirely by the new acquisition cost
- Maintained as a separate investment alongside the controlling interest
Correct answer: Remeasured at fair value with any gain or loss recognized in earnings
ASC 805 requires remeasurement of the previously held equity interest at fair value on the acquisition date, with the resulting gain or loss recognized in earnings.
Question 5: Which of the following best describes the 'measurement period' under ASC 805 for a business combination?
- The fiscal year in which the acquisition closes
- Up to one year after the acquisition date to finalize fair value measurements (Correct answer)
- The period between announcement and closing of the deal
- A 90-day window to record goodwill impairment
Correct answer: Up to one year after the acquisition date to finalize fair value measurements
The measurement period under ASC 805 allows up to one year after the acquisition date to adjust provisional fair value estimates as new information is obtained.
Question 6: In an asset acquisition (as opposed to a business combination), how are transaction costs treated?
- Expensed as incurred
- Capitalized into the cost of the acquired assets (Correct answer)
- Added to goodwill
- Deferred until the assets are sold
Correct answer: Capitalized into the cost of the acquired assets
Unlike a business combination, transaction costs in an asset acquisition are capitalized and allocated to the acquired assets based on relative fair values.
Question 7: When the acquirer and acquiree have a pre-existing relationship that is effectively settled in a business combination, how is the settlement amount treated?
- Added to the purchase price consideration
- Recognized separately from the business combination as a gain or loss (Correct answer)
- Allocated to goodwill in the purchase price allocation
- Ignored if the relationship predates the acquisition by more than one year
Correct answer: Recognized separately from the business combination as a gain or loss
Amounts related to settling pre-existing relationships are recognized separately from the business combination and generally result in a gain or loss in earnings.
CFC Merger & Acquisition Accounting 2
Under ASC 805, how should acquisition-related costs (e.g., advisory and legal fees) be treated by the acquirer?