Healthcare Mergers & Acquisitions Accounting Flashcards

A health system completes an acquisition mid-year on April 1. Under ASC 805, how is the acquired entity's revenue included in the consolidated income statement for the fiscal year ending December 31?

Answer: Only revenue from April 1 through December 31 (9 months) is included

Under the acquisition method, only post-acquisition revenues (from the acquisition date forward) are included in the acquirer's consolidated income statement.

ASC 805 requires pro forma revenue and earnings disclosures for a material acquisition. What period must these pro formas cover?

Answer: The current year and the comparative prior year, as if the acquisition had occurred at the start of the earliest period presented

ASC 805-10-50 requires pro forma revenue and net income disclosures for the current year and the prior comparative year, assuming the acquisition occurred at the start of the earliest period.

When a healthcare acquirer pays $5M for a drug rehabilitation center and allocates $1M to licenses, $1M to patient records, and $1M to equipment, with a purchase price exceeding net assets, what happens to the remaining excess?

Answer: It is recognized as goodwill

After all identifiable assets and liabilities are measured at fair value, any remaining excess of purchase price over net fair value is recorded as goodwill.

A healthcare acquirer recognizes a deferred tax liability in purchase accounting related to the fair value step-up of a building. This occurs because:

Answer: In a stock deal, the book basis exceeds the tax basis after the step-up, creating a temporary difference

In a stock acquisition, the book basis of assets is stepped up to fair value while the tax basis remains unchanged, creating a taxable temporary difference and a deferred tax liability.

Under ASC 805, which of the following acquired items in a healthcare M&A transaction would most likely be classified as an in-process research and development (IPR&D) asset?

Answer: A drug formulation that completed Phase II trials but has not yet received FDA approval

IPR&D assets under ASC 805 are research and development projects that have not yet reached technological feasibility or regulatory approval at the acquisition date.

A healthcare company acquires a rival and promises additional payments if revenue targets are met in years 1–3 post-close. At the end of year 1, the targets appear unlikely to be met. Under ASC 805, the acquirer should:

Answer: Recognize a gain equal to the fair value decrease in the contingent consideration liability

Post-acquisition changes in the fair value of contingent consideration classified as a liability are recognized in earnings, not as goodwill adjustments.

Which SEC regulation requires publicly traded healthcare acquirers to file audited financial statements of a 'significant' acquired business?

Answer: Regulation S-X, Rule 3-05

SEC Regulation S-X, Rule 3-05 requires registrants to file audited historical financial statements of a significant acquired business within 75 days of the acquisition's completion.