Question

In February 2015, Arctic Cat Inc., acquired the assets and liabilities of MotorFist, LLC, a privately owned company based in Idaho Falls, Idaho, in exchance for $9.118 million in cash and contingent consideration. Referring to Arctic Cats's 2015 annual 10-K report, answer the following questions regarding the MotorFist acquisition. 1. Why did Arctic Cat acquire MotorFist? 2. How was the cosideration transferred allocated between cash paid and the contingent consideration? 3. Provide a schedule showing Arctic Cat's allocations of the consideration transferred to the identifiable assets acquired and liabilities assumed with the remainder going to goodwill.

Answer 1

1.A business combination is the union of the small business units into one. The new combined unit is also known as business combination.This is done for various purposes. A business combination generally increases the efficiency and productivity while reducing the costs.

Asset is an entity is owned by the company, which can be converted into cash by the company.For eg:Buildings,cash,Euipment, accounts receivables, shares, insurance policies etc. In any manufacturing business,these are the elements of the assets.

Stockholder Equity is the equity owned by the individuals when they own the shares or stock of the other company.

Goodwill is the kind of intangigle asset.It arises when one comapany acquires another one for a premium means they pay extra than the market value of the company.

Companies now a day are more innovative and investing heavily in favour of the intellectual property and in order to maintain a goodwill in the market. Though that doesnt qualify as something that can be mentioned in the balance sheet but they are generating the sales and the revenues for the company, So, they should be mentioned in the balance sheet of the company

2&3.When an acquirer buys another company, the acquirer must record the event under the acquisition method.

This approach mandates a series of steps to record the acquisitions, which are:

1. Measure any tangible assets and liabilities that were acquired
2. Measure any intangible assets and liabilities that were acquired
3. Measure the amount of any noncontrolling interest in the acquired business
4. Measure the amount of consideration paid to the seller
5. Measure any goodwill or gain on the transaction

We will deal with each of these steps below.

• Measure tangible assets and liabilities. Measure tangible assets and liabilities at their fair market values as of the acquisition date, which is the date when the acquirer gains control over the acquiree. There are a few exceptions, such as lease and insurance contracts, which are measured as of their inception dates. However, most assets and liabilities should be measured as of the acquisition date. This fair value analysis is frequently done by a third-party valuation firm.
• Measure intangible assets and liabilities. Measure intangible assets and liabilities at their fair market values as of the acquisition date, which is the date when the acquirer gains control over the acquiree. This tends to be a more difficult task for the acquirer than the measurement of tangible assets and liabilities, since the acquiree may not have recorded many of these items on its balance sheet. Once measured and recorded as part of the acquisition transaction, intangible assets must be amortized over their useful economic lives. If the life span of an intangible asset is considered to be indefinite, do not amortize it until such time as a useful economic life can be determined.
• Measure noncontrolling interest. Measure and record the noncontrolling interest in the acquiree at its fair value on the acquisition date. The fair value can be derived from the market price of the stock of the acquiree, if an active market for it exists. This amount is likely to be less per share than the price the acquirer paid to buy the business, since there is no control premium associated with the noncontrolling interest.
• Measure consideration paid. There are many types of consideration that may be paid to the seller, including cash, debt, stock, a contingent earnout, and other types of assets. No matter what type of consideration is paid, it is measured at its fair value as of the acquisition date. The following calculation is used to ascertain the total amount of consideration paid:

+ Fair value of assets paid to seller
+ Fair value of acquirer equity awards that replace existing acquiree awards
- Fair value of liabilities incurred by the seller
= Total consideration paid

The acquirer should include in this consideration calculation the amount of any future payment obligations, such as earnouts. If events occur after the acquisition date, such as the completion of a target under an earnout arrangement, its accounting recognition varies depending on the type of consideration paid. If the contingent payment is in equity, there is no remeasurement of the consideration paid, and any change in the amount of equity issued is noted within the equity section of the balance sheet. If the contingent payment involves an asset or liability, it is remeasured at each subsequent reporting date until the contingent event has been settled, with changes being reported in net income.

• Measure goodwill or bargain purchase gain. After all of the preceding steps have been completed, the acquirer must back into the amount of any goodwill or gain on a bargain purchase by using the following calculation:

Consideration paid + Noncontrolling interest – Identifiable assets acquired
+ Identifiable liabilities acquired

A somewhat different approach is used when nonprofit entities are involved. When a nonprofit acquirer gains control of an acquiree whose fair value is greater than the consideration paid for it, the acquirer is said to have received an inherent contribution.