HAC Healthcare Mergers & Acquisitions Accounting 2 — Questions and Answers
Question 1: Under ASC 805, how should contingent consideration (earn-outs) be classified at the acquisition date in a healthcare M&A transaction?
- Recognized only when the contingency is resolved
- Measured at fair value and recorded as part of the purchase price (Correct answer)
- Expensed immediately as a transaction cost
- Deferred until the earn-out period ends
Correct answer: Measured at fair value and recorded as part of the purchase price
ASC 805 requires contingent consideration to be measured at fair value on the acquisition date and included in the total purchase price consideration.
Question 2: A hospital acquires a physician group and assigns $4 million to a non-compete agreement. Under ASC 805, how is this intangible amortized?
- Over its estimated useful life using the straight-line method (Correct answer)
- As a lump sum in the year of acquisition
- Only if the agreement exceeds 5 years in duration
- It is never amortized; it is tested for impairment annually
Correct answer: Over its estimated useful life using the straight-line method
Finite-lived intangible assets such as non-compete agreements are amortized on a straight-line basis over their estimated useful lives.
Question 3: Which of the following best describes the 'measurement period' in a healthcare acquisition under ASC 805?
- The period during which the acquiree's historical financials are audited
- Up to one year after the acquisition date to finalize provisional purchase price allocations (Correct answer)
- The fiscal year in which the transaction closes
- The period used to calculate trailing EBITDA for valuation
Correct answer: Up to one year after the acquisition date to finalize provisional purchase price allocations
The measurement period allows the acquirer up to 12 months post-acquisition to obtain information needed to finalize the purchase price allocation.
Question 4: In a healthcare merger, the acquirer identifies a Certificate of Need (CON) as an acquired intangible asset. How should it be classified?
- As goodwill, since it cannot be sold separately
- As a finite-lived intangible if the CON has an expiration date (Correct answer)
- As a liability due to ongoing regulatory requirements
- As property, plant, and equipment
Correct answer: As a finite-lived intangible if the CON has an expiration date
A CON with an expiration or renewal date is classified as a finite-lived intangible and amortized over its remaining useful life.
Question 5: When a healthcare organization acquires a rival clinic and the fair value of net assets exceeds the purchase price, the result is:
- Additional goodwill recognized on the balance sheet
- A bargain purchase gain recorded in earnings (Correct answer)
- An immediate write-down of acquired assets
- Deferred revenue equal to the excess amount
Correct answer: A bargain purchase gain recorded in earnings
When fair value of net identifiable assets exceeds purchase price, ASC 805 requires recognition of a bargain purchase gain in the income statement.
Question 6: In healthcare M&A, which valuation approach is most commonly used to value a medical practice's patient relationships intangible?
- Cost approach based on replacement cost
- Income approach using the multi-period excess earnings method (Correct answer)
- Market approach using comparable public company multiples
- Asset approach based on net book value
Correct answer: Income approach using the multi-period excess earnings method
The multi-period excess earnings method (MPEEM) isolates cash flows attributable to customer/patient relationships after charging for contributory assets.
Question 7: Post-acquisition, a hospital discovers that the acquired entity had an unrecorded malpractice liability that existed at the acquisition date. During the measurement period, this should be:
- Expensed in the current period as a loss contingency
- Recorded as an adjustment to goodwill retrospectively to the acquisition date (Correct answer)
- Disclosed only; no financial statement adjustment is required
- Treated as a post-acquisition liability with no effect on purchase accounting
Correct answer: Recorded as an adjustment to goodwill retrospectively to the acquisition date
Pre-existing liabilities discovered during the measurement period are adjusted retrospectively by revising the purchase price allocation and adjusting goodwill.
HAC Healthcare Mergers & Acquisitions Accounting 2
Under ASC 805, how should contingent consideration (earn-outs) be classified at the acquisition date in a healthcare M&A transaction?