Question

Competency

Evaluate the reasons business combinations occur and the accounting implications of such transactions.

Scenario

CM Corporation (CMC) was founded six years ago by Phil Connor and Eric Martin. The company designs, installs, and services security systems for high-tech companies. The founders, who describe themselves as "entrepreneurial geeks," met in a computer lab when they were teenagers and found they had common interests in working on security systems for critical industries. CMC hired you as a junior accountant this year.

Lately, Connor and Martin have been working with "radio frequency identification" (RFID) technology. They have developed a detailed system designed to track inventory items using RFID tags embedded invisibly in products. This technology has numerous inventory applications in multiple industries.

One of the most basic applications is tracking manufacturing components; if tagged components "go walking" (if employees attempt to take them), companies can easily track and find them. Connor and Martin have sold their system to several high-tech companies in the area. These companies have a number of government contracts that require extensive security systems to protect sensitive data from infiltration by terrorists and others. To date, CMC's cash flow from sales and services has adequately funded its operations.

CMC expects much growth potential for its products. As a result, they are considering going public and expanding internationally in the near future.

Instructions

Connor and Martin are contemplating acquiring Adverse Systems, a smaller security system manufacturer who is in the market to sell due to financial hardships. It is important for CMC to analyze the internal and external factors that could possibly affect the company's future performance after acquiring another company. SWOT is a comprehensive audit and competitive analysis that analyzes the Strengths, Weaknesses, Opportunities and Threats facing an organization. CMC has asked you to be a part of the company's acquisition planning process to identify strategies, financial and operational goals. They have requested that you outline the internal and external factors that are relative to the acquisition and report the results using a SWOT analysis. CMC and Martin have the option of recognizing goodwill or making a bargain purchase.

Prepare a PowerPoint presentation of a SWOT analysis comparing goodwill and bargain purchase.

Presentation Mechanics should be as follows:

Prepare a 5-8 slide PowerPoint presentation, including slide notes.

Summarize the strengths, weaknesses, opportunities, and threats for CMC under each purchase option.

Explain the advantages and disadvantages of each option under both US GAAP and IFRS standards.

Explain how either the “goodwill recognition” or “bargain purchase” can impact an acquisition.

Use the FASB Codification and IFRS to address all technical accounting issues presented in the requirements, being certain to reference the applicable sections of the Codification and IFRS in your presentation. You will need to register for the basic service at these sites. It is free.

All sources used to support your responses should be properly documented. You should have other credible sources in addition to the Codification and IFRS.

I have submitted the assignment and this is the feed back that I got ''You had many strong points in your submission.However, the submission was missing "notes" to help you explain the slides, and while you listed key points of IFRS and GAAP, they were never compared with each other which was needed to determine a strengths and weaknesses comparison. When discussing strengths and weaknesses, refer often to the Rubric. The manner in which Goodwill or a Bargain Purchase transaction could impact an acquisition was also not discussed in significant detail.''

Answer 1

SWOT Analysis
Bargain Purchase	Goodwill	Bargain Purchase	Goodwill
Strenght		Weaknesses
CMC can generate gain from the bargain purchase	Goodwill can be capitalized and related benefits such as attracting customers, reputation and etc.	Tax related issues on gain	The actual worth of goodwill is not known, there is a possibility for over payment.
Less cash outflow than goodwill (Financial hardship of small supplier can be capitalized)	The existing cash flow can be capitalized	Acquiree management will be reluctant to support	High cash outflow
Bargain Purchase	Goodwill	Bargain Purchase	Goodwill
Opportunities		Threats
Ability to fully control the small supplier	Possibility of attracting clients of small suppliers	If there is a bargain purchase, there is a risk that certain assets have not been identified and accounted for.	Fnancial hardships of small supplier to be born by CMC
The gained cashflow can be used for future operation.	The acquiree management support for future growth & Synergy related advantages.	Possible future cashflow burden for CMC	The bad reputation of this supplier has to be born by by CMC
Advantages & Disavantages of GAAP & IFRS
Bargain Purchase	Goodwill	Bargain Purchase	Goodwill
Advantages-GAAP		Advantages-IFRS
According to US GAAP, bargain purchase gains are recorded in the income statement as an acquisition-date gain.	Impairment on goodwill analysis is done in goodwill calculation, which will ensure the accuracy and worth of goodwill	Determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination	All of the assets and liabilities of the acquiree are fully remeasured in accordance with the requirements of IFRS 3 (generally at fair value).
		The acquirer discloses information that enables users to evaluate the nature and financial effects of the acquisition.	Goodwill is an asset representing the future economic benefits
Bargain Purchase	Goodwill	Bargain Purchase	Goodwill
Disadvantages-GAAP		Disadvantages-IFRS
If there is a bargain purchase, there is a risk that certain assets have not been identified and accounted for.	Difficult and heavy work is needed in order to ascertain the goodwill.	The resulting gain is a bargain purchase in profit or loss, which may arise in circumstances such as a forced seller acting under compulsion.	Often a purchaser will pay more to acquire a subsidiary than the fair value of the net assets
Effect of Goodwill & Bargain Purchase
Effect of Goodwill
Goodwill is recognized when the purchase price of the target company is higher than the networth of it. Goodwill is recorded as an intangible asset on the acquiring company's balance sheet under the long-term assets account.
Goodwill on a company's balance sheet represents value that the company gained when it acquired another business but that it can't assign to any particular asset of that business. Goodwill doesn't always affect a company's net income, but if that goodwill becomes "impaired," the effect can be substantial
Effect of Bargain Purchase
A bargain purchase involves assets acquired for less than fair market value, Current accounting rules for business combinations require the acquirer to record the difference between fair value of the acquired net assets and the purchase price as a gain on its income statement due to negative goodwill (NG).
NG implies a bargain purchase and the acquirer immediately records an extraordinary gain on its income statement.