Question

Copyright 2009 Deloitte Development LLC All Rights Reserved.

Case 11-7

Food for Thought

Allfoods Corp. (Allfoods) is a calendar year-end company. On February 1, 2009, Allfoods announced that it was acquiring 80 percent of the outstanding common stock of Baked Beans Corp. (Baked Beans) in a business combination. On the acquisition date, Allfoods paid $40 million in cash and issued two million shares of Allfoods common stock to the selling shareholders of Baked Beans. All of the outstanding stock options granted to employees of Baked Beans will be replaced with Allfoods stock options as required by the merger agreement. Allfoods is accounting for the transaction in accordance with ASC 805, Business Combinations.

1. Determining Consideration Transferred

On August 1, 2009, Allfoods acquired Baked Beans. The Allfoods share price was $30 on the announcement date and $35 on the acquisition date. The parties agreed that Allfoods would issue the selling shareholders an additional one million shares if Baked Beans revenues for the 12-month period after the acquisition were at least $150 million. The fair value of the contingent consideration was determined to be $20 million as of the acquisition date. The value of the replacement stock option awards attributable to precombination services is $5 million, and the portion that relates to postcombination services is $7 million. Allfoods incurred $4 million of acquisition related costs.

2. Fair Value of Assets Acquired and Liabilities Assumed

Baked Beans owns a manufacturing facility in Chino, California. The facility is comprised of land, two buildings, and machinery. There are no other significant assets located at this facility. The land could be rezoned into a residential subdivision for a nominal fee and management has determined that the fair value of the underlying land as residential property would be $30 million, after considering costs necessary to prepare it for use as residential lots (i.e., demolition costs of the building, net of the fair value of scrap from the building and nonmovable equipment). The movable equipment (i.e., equipment that could be sold separately) could be sold at auction for $2 million. The Chino manufacturing facility (as acquired) is estimated to be worth $36 million. Management determined that the individual fair value of the land being used for industrial purposes is $21 million and that the fair value of the buildings and machinery as currently being used (for industrial purposes) is $7 million.

3. Valuation of Intangible Assets

The in-process research and development (IPR&D), which is proprietary food freezing technology submitted for Food and Drug Administration (FDA) approval, has a fair value of $15 million. The company considers its R&D to be in-process because it has not yet obtained FDA approval and additional R&D may be required. Allfoods management has determined that the fair value of the Baked Beans trademark is $3 million, using a market participants’ viewpoint. Management has also determined that it will not use the trademark because it intends to distribute the Baked Beans products under the Allfoods trademark. Management has also determined that it will not sell the trademark because it

Case 11-7: Food for Thought Page 2 Copyright 2009 Deloitte Development LLC All Rights Reserved. believes that this could potentially result in new participants entering the market, thus reducing its market share. No amounts were recorded in the balance sheet of Baked Beans for the research and development costs related to their proprietary freezing technology. The trademark has a carrying value of $2 million in Baked Beans financial statements related to costs that it incurred in purchasing the trademark.

Required:

 What is the total consideration transferred by Allfoods in the acquisition of Baked Beans?

 On what premise should management record the land and buildings, i.e., the "in-use" or "in-exchange" premise?

 What fair values should be recorded for the intangible assets as part of the acquisition accounting?

Please indicate what FASB code is used.

Answer 1

Ques 1
ASC 805-10-55-2:
Paragraph 805-10-25-1 requires an entity to determine whether a transaction or event is a business combination. In a business combination, an acquirer might obtain control of an acquiree in a variety of ways, including any of the following:
a. By transferring cash, cash equivalents, or other assets (including net assets that constitute a business)
b. By incurring liabilities
c. By issuing equity interests
d. By providing more than one type of consideration
e. Without transferring consideration, including by contract alone (see paragraph 805-10-25-11).
ASC 805-20-30-1:The acquirer shall measure the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at their acquisition-date fair values.
ASC 805-10-25-23:
Acquisition-related costs are costs the acquirer incurs to effect a business combination. Those costs include finder’s fees; advisory, legal, accounting, valuation, and other professional or consulting fees; general administrative costs, including the costs of maintaining an internal acquisitions department; and costs of registering and issuing debt and equity securities. The acquirer shall account for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception. The costs to issue debt or equity securities shall be recognized in accordance with other applicable GAAP.
ASC 805-30-25-5:
The consideration the acquirer transfers in exchange for the acquiree includes any asset or liability resulting from a contingent consideration arrangement. The acquirer shall recognize the acquisition-date fair value of contingent consideration as part of the consideration transferred in exchange for the acquiree.
ASC 805-30-30-11:
The portion of the fair-value-based measure of the replacement award that is part of the consideration transferred in exchange for the acquiree equals the portion of the acquiree award that is attributable to precombination service.
ASC 805-30-30-12:
The acquirer shall attribute a portion of a replacement award to postcombination service if it requires postcombination service, regardless of whether employees had rendered all of the service required in exchange for their acquiree awards before the acquisition date
ASC 805-30-30-13:
the portion that is attributed to postcombination service, which the acquirer recognizes as compensation cost in its postcombination financial statements.

According to the listed codification, Total consideration transferred=
$40,000,000+$70,000,000(2,000,000 shares*$35)+5,000,000+20,000,000
= $135,000,000

Ques 2:
ASC 820-10-35-3 A fair value measurement assumes that the asset or liability is exchanged in an orderly transaction between market participants to sell the asset or transfer the liability at the measurement date under current market conditions.
ASC 820-10-35-9:
A reporting entity shall measure the fair value of an asset or a liability using the assumptions that market participants would use in pricing the asset or liability, assuming that market participants act in their economic best interest. In developing those assumptions, a reporting entity need not identify specific market participants. Rather, the reporting entity shall identify characteristics that distinguish market participants generally, considering factors specific to all of the following:
a.The asset or liability
b.The principal (or most advantageous) market for the asset or liability
c.Market participants with whom the reporting entity would enter into a transaction in that market.

The most advantageous market for the asset would be for the land to be used with the in-use premise. Which would value the land at $36 million.  

Ques 3:
ASC 730-10-15-4(F):
Research and development assets acquired in a business combination or an acquisition by a not-for-profit entity. If tangible and intangible assets acquired in that manner are used in research and development activities, they are recognized and measured at fair value in accordance with Subtopic 805-20, regardless of whether they have an alternative future use. After recognition, tangible assets acquired in a business combination or an acquisition by a not-for-profit entity that are used in research and development activities are accounted for in accordance with their nature. After recognition, intangible assets acquired in a business combination or an acquisition by a not-for-profit entity that are used in research and development activities are accounted for in accordance with Topic 350.

ASC 820-10-35-9:
A reporting entity shall measure the fair value of an asset or a liability using the assumptions that market participants would use in pricing the asset or liability, assuming that market participants act in their economic best interest.

R&D should be recorded at 15 million and Trademark should be recorded at 3 million.

Intangible assets would be valued at $18 million.