Question

Imagine you are the chief financial officer (CFO) of a corporation with plans to complete the acquisition of a key subsidiary during the current year. Your chief executive officer (CEO) has requested a presentation to the Board of Directors describing the methods available to account for the acquisition internally and the best method for the company during the acquisition year. Please assess the value of each method identified in your presentation to the Board and support your recommendation with examples. Compare the key differences between the U.S. GAAP and IFRS positions on both intangible research and development costs and tangible depreciable assets. Indicate the key benefits and drawbacks to financial statement users of each method (U.S. GAAP and IFRS). Next, determine the method that provides the most relevant information to financial statement users. Provide support for your rationale.

Answer 1

SOLUTIONS:

The purchase of one company by another entity is called as acquisition or takeover.

Cash deal:

The cash deal consists of the direct cash from the buyer or bank loan. In the case of larger buying company than the selling company, the cash deal is generally occurs.

Earn out:

Under the earns out if 2 companies on either at the end of an acquisition do not reach at an agreement regarding the company's financial success in future. It is negotiable. Times to earns generally falls between 3 to 5 years. No upfront price.

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Partially equity and partially cash:

This method will be good in the organization is purchasing it's subsidiary company that is much smaller than the purchasing company.

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Term l.oans:

When the buyer is not getting enough funds from the banks term loans can be used to raise funds. The term loans are paid to a seller over the perios of time, usually it is 5 years to 7 years. The price is generally fixed and the interest rate is h=over the bank loans.