CFC Merger & Acquisition Accounting 4 — Questions and Answers
Question 1: In a carve-out transaction, how are general corporate overhead costs historically shared between the parent and the carved-out entity typically presented in the carve-out financial statements?
- Excluded entirely since the entity was never legally liable
- Allocated to the carved-out entity based on a reasonable allocation methodology (Correct answer)
- Recorded as equity contributions from the parent
- Presented only in supplemental schedules, not on the face of statements
Correct answer: Allocated to the carved-out entity based on a reasonable allocation methodology
Carve-out financial statements require allocation of shared costs using a reasonable method (e.g., headcount, revenue) to present a standalone view of the entity's results.
Question 2: Under the purchase price allocation (PPA) in a business combination, which of the following intangible assets is most likely to qualify for separate recognition from goodwill?
- Employee morale and workforce synergies
- Trade name with ongoing commercial use (Correct answer)
- Expected cost savings from eliminating duplicate functions
- Management team expertise
Correct answer: Trade name with ongoing commercial use
A trade name meets the separability or contractual-legal criterion for recognition as a separate intangible asset apart from goodwill.
Question 3: How does the recognition of a deferred tax liability on a fair value step-up of an acquired depreciable asset affect the goodwill calculation?
- It reduces goodwill by the amount of the deferred tax liability
- It increases goodwill by the amount of the deferred tax liability (Correct answer)
- It has no impact on the goodwill calculation
- It reduces the fair value of the acquired asset and increases goodwill by the same amount
Correct answer: It increases goodwill by the amount of the deferred tax liability
A deferred tax liability recognized on the fair value step-up reduces the net fair value of identifiable assets, which increases the residual goodwill.
Question 4: An acquirer issues $50M in stock as consideration for a target. Between the announcement date and the closing date, the acquirer's stock price drops 10%. For purchase price accounting purposes, consideration transferred is measured at:
- The stock price on the announcement date
- The stock price on the acquisition (closing) date (Correct answer)
- The average stock price between announcement and closing
- The higher of the announcement date or closing date price
Correct answer: The stock price on the acquisition (closing) date
Under ASC 805, equity instruments issued as consideration are measured at fair value on the acquisition date (closing date), not the announcement date.
Question 5: Which approach is used to determine the fair value of a customer list intangible asset in a purchase price allocation?
- Cost approach — replacement cost to recreate the customer list
- Market approach — comparable customer list sale transactions
- Income approach — multi-period excess earnings method (MPEEM) (Correct answer)
- Net asset value approach
Correct answer: Income approach — multi-period excess earnings method (MPEEM)
Customer relationships are most commonly valued using the multi-period excess earnings method (MPEEM) under the income approach, which isolates cash flows attributable to the customer list.
Question 6: In a leveraged buyout (LBO), which of the following best describes the typical push-down accounting treatment under US GAAP?
- Push-down accounting is mandatory whenever an acquisition occurs
- Push-down accounting is optional for the acquired entity and permitted when a change-of-control event occurs (Correct answer)
- Push-down accounting is prohibited under ASC 805
- Push-down accounting only applies to public companies
Correct answer: Push-down accounting is optional for the acquired entity and permitted when a change-of-control event occurs
ASC 805-50 allows (but does not require) an acquired entity to elect push-down accounting — recording the new basis from the acquisition in the acquired entity's standalone financial statements — upon a change-of-control event.
Question 7: When a company acquires a subsidiary and there is a noncontrolling interest, where is the NCI presented on the consolidated balance sheet?
- As a liability between long-term debt and equity
- As a separate component within consolidated stockholders' equity (Correct answer)
- As a mezzanine item between liabilities and equity
- Offset against goodwill arising from the acquisition
Correct answer: As a separate component within consolidated stockholders' equity
ASC 810 requires NCI to be presented as a separate component of consolidated stockholders' equity, not as a liability or mezzanine item.
CFC Merger & Acquisition Accounting 4
In a carve-out transaction, how are general corporate overhead costs historically shared between the parent and the carved-out entity typically presented in the carve-out financial statements?