Question

Case 18-1 Coffee Co.

Coffee Co. (the “Company”) is a global distributor of organic coffee beans and teas that is registered with the SEC in the United States. The Company’s operations are primarily located in the United States, Canada, and South America. In March 20X8, Coffee Co., looking to refocus efforts to only produce coffee products, entered into an agreement (the “Agreement”) with Nature’s Beverage, a food distributor in the United States looking to expand its international footprint (the “Transaction”). Nature’s Beverage is registered with the SEC in the United States.

Pursuant to the Agreement, Coffee Co. provided a sublicense to Nature’s Beverage for the distribution rights of Coffee Co.’s South American local tea brand, Herbal T, whereby Nature’s Beverage will distribute Herbal T in South America. Under the Agreement, Coffee Co. transferred the existing customer contracts in South America to Nature’s Beverage and an at-market supply contract with the producer of Herbal T. Coffee Co. retained all of its employees and distribution capabilities.

The Transaction closed on March 1, 20X8 (the “Closing”).

Additional Facts:

• Nature’s Beverage incurred certain costs to acquire the sublicense of the distribution rights and a license to use the Herbal T brand. The costs included legal, accounting, and other professional or consulting fees totaling $50,000.

• Nature’s Beverage agreed to transfer to Coffee Co. $3 million for the sublicense of the distribution rights of Herbal T.

• Assume both companies have adopted FASB Accounting Standards Update No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business.

  Required:

  1. Does the acquisition of the sublicense by Nature’s Beverage to distribute Herbal T meet the definition of a business?

  2. How should Nature’s Beverage account for the acquisition, including the treatment of the transaction costs? (Note that the response will be dependent on the response to Question 1.)

Answer 1

a. Yes, acquisition of sublicense by Nature’s Beverage to distribute Herbal T meet the definition of a business.

Business includes an agreement undertaken by a company in order to commence a trading, distribution, service provider, or any other form of activity in order to commence selling of a product or a service.

Nature’s Beverage is a company registered in United States engaged in distributing food products in united states of America. Coffee Co. (the “Company”) is a global distributor of organic coffee beans and teas that is registered with the SEC in the United States. These company's entered into an agreement where Coffee Co. will supply the South American local tea brand in united states named Herbal T to Nature Beverage which in turn will distribute Herbal T in South America. . The above acquisition of sublicense is a valid contract and is undertaken in terms of expanding the business by Nature’s beverage. Investment in the acquisition of distribution rights is done in order to expand the revenues of the company hence, this is a business agreement allowing Nature's Beverage to sell the Herbal T product in different states of South America.

b. Nature’s Beverage incurred certain costs including legal, accounting, and other professional or consulting fees totaling $50,000 to acquire the sublicense of the distribution rights and a license to use the Herbal T brand.

These costs incurred by Nature’s beverage are not expenses and cannot be charged to profit and loss. These costs are in the nature of investment that will give returns to the company over upcoming years. Hence Nature’s beverage is required to capitalize all the expenses in the form of acquisition of distribution rights of Coffee company in its books of accounts. These capitalized costs cannot be amortized in the upcoming years. No tax treatment would be there on such expenses.

As per the financial accounting standards board, the transactions costs are not considered to be in exchange of fair value of assets acquired and therefore shall be expensed.