HAC Healthcare Mergers & Acquisitions Accounting 3 — Questions and Answers
Question 1: A health system uses pooling of interests to account for a merger. Under current US GAAP, which statement is correct?
- Pooling of interests is permitted for not-for-profit healthcare combinations
- Pooling of interests was eliminated by SFAS 141 and is no longer allowed under US GAAP (Correct answer)
- Pooling is allowed when both entities are of similar size
- Pooling is only permitted for government-owned hospitals
Correct answer: Pooling of interests was eliminated by SFAS 141 and is no longer allowed under US GAAP
SFAS 141 (now ASC 805) eliminated the pooling-of-interests method; all business combinations must use the acquisition method.
Question 2: When allocating the purchase price in a healthcare acquisition, which of the following is NOT a separately identifiable intangible asset under ASC 805?
- Patient relationships
- Trade name of a hospital brand
- Assembled workforce (Correct answer)
- Medicare/Medicaid provider agreements
Correct answer: Assembled workforce
Assembled workforce does not meet the separability or contractual-legal criteria to be recognized as a distinct intangible asset under ASC 805.
Question 3: In a healthcare acquisition structured as an asset purchase (vs. stock purchase), what is the primary tax advantage for the buyer?
- The buyer inherits the target's favorable tax attributes and NOL carryforwards
- The buyer receives a stepped-up tax basis in acquired assets, enabling higher depreciation deductions (Correct answer)
- The transaction avoids all state transfer taxes automatically
- The buyer is not required to perform a purchase price allocation for tax purposes
Correct answer: The buyer receives a stepped-up tax basis in acquired assets, enabling higher depreciation deductions
In an asset purchase, the buyer gets a stepped-up tax basis equal to the purchase price, allowing accelerated depreciation and amortization deductions.
Question 4: A healthcare private equity firm acquires a hospital chain and records $50M of goodwill. Under ASC 350, annual goodwill impairment testing requires:
- Comparing goodwill's book value to its replacement cost
- Comparing the reporting unit's fair value to its carrying amount (Correct answer)
- Amortizing goodwill over 40 years and testing only upon a triggering event
- Re-performing the full purchase price allocation each year
Correct answer: Comparing the reporting unit's fair value to its carrying amount
ASC 350 requires comparing the fair value of the reporting unit to its carrying amount; if fair value is less, impairment is measured as the excess of carrying value over fair value.
Question 5: In a two-step healthcare acquisition where the acquirer previously held a 30% equity interest, ASC 805 requires:
- The prior 30% interest to be ignored in the purchase price calculation
- The prior interest to be remeasured to fair value at the acquisition date, with gain or loss recognized (Correct answer)
- The prior interest to be accounted for as an additional cash payment
- No change to the prior interest's carrying value
Correct answer: The prior interest to be remeasured to fair value at the acquisition date, with gain or loss recognized
When a step acquisition achieves control, the previously held equity interest is remeasured to fair value on the acquisition date and any resulting gain or loss is recognized in income.
Question 6: Which of the following transaction costs must be expensed as incurred in a healthcare M&A deal under ASC 805?
- Debt issuance costs for acquisition financing
- Legal and advisory fees paid to investment bankers (Correct answer)
- Both A and B
- Neither A nor B — both are capitalized as part of purchase price
Correct answer: Legal and advisory fees paid to investment bankers
Under ASC 805, legal, advisory, and due diligence fees are expensed as incurred; debt issuance costs follow ASC 835-30 and are capitalized separately.
Question 7: A health system acquires a behavioral health network and records $8M for a 'Certificate of Public Advantage' (COPA) as an intangible. What is the most appropriate useful life determination?
- Indefinite, because COPAs provide perpetual legal protection from antitrust
- Based on the contractual term or renewal period of the COPA agreement (Correct answer)
- 10 years, the maximum allowed under ASC 350
- Goodwill treatment; no separate intangible is recorded
Correct answer: Based on the contractual term or renewal period of the COPA agreement
The useful life of a regulatory approval like a COPA is based on its contractual term and any renewal provisions, similar to licenses.
HAC Healthcare Mergers & Acquisitions Accounting 3
A health system uses pooling of interests to account for a merger.
Under current US GAAP, which statement is correct?