Question

BARDEEN ELECTRIC: FASB ASC AND IFRS RESEARCH CASE

On October 18, 2017, Armstrong Auto Corporation ("Armstrong") announced its plan to acquire 80 percent of the outstanding 500,000 shares of Bardeen Electric Corporation’s ("Bardeen") common stock in a business combination following regulatory approval. Armstrong will account for the transaction in accordance with ASC 805, “Business Combinations.”

On December 1, 2017, Armstrong purchased an 80 percent controlling interest in Bardeen’s outstanding voting shares. On this date, Armstrong paid $40 million in cash and issued one million shares of Armstrong common stock to the selling shareholders of Bardeen. Armstrong’s share price was $26 on the announcement date and $24 on the acquisition date.

Bardeen’s remaining 100,000 shares of common stock had been purchased for $3,000,000 by a small number of original investors. These shares have never been actively traded. Using other valuation techniques (comparable firms, discounted cash flow analysis, etc.), Armstrong estimated the fair value of Bardeen’s noncontrolling shares at $16,500,000.

The parties agreed that Armstrong would issue to the selling shareholders an additional one million shares contingent upon the achievement of certain performance goals during the first 24 months following the acquisition. The acquisition-date fair value of the contingent stock issue was estimated at $8 million.

Bardeen has a research and development (R&D) project underway to develop a superconductive electrical/magnetic application. Total costs incurred to date on the project equal $4,400,000. However, Armstrong estimates that the technology has a fair value of $11 million. Armstrong considers this R&D as in-process because it has not yet reached technological feasibility and additional R&D is needed to bring the project to completion. No assets have been recorded in Bardeen’s financial records for the R&D costs to date.

Bardeen’s other assets and liabilities (at fair values) include the following:

Cash	$ 425,000
Accounts receivable	788,000
Land	3,487,000
Building	16,300,000
Machinery	39,000,000
Patents	7,000,000
Accounts payable	(1,500,000)

Page 210Neither the receivables nor payables involve Armstrong.

Answer the following questions citing relevant support from the ASC and IFRS.

1. What is the total consideration transferred by Armstrong to acquire its 80 percent controlling interest in Bardeen?

2. What values should Armstrong assign to identifiable intangible assets as part of the acquisition accounting?

3. What is the acquisition-date value assigned to the 20 percent noncontrolling interest? What are the potential noncontrolling interest valuation alternatives available under IFRS?

4. Under U.S. GAAP, what amount should Armstrong recognize as goodwill from the Bardeen acquisition? What alternative goodwill valuations are allowed under IFRS?

Answer 1

Requirement 1:

Under FASB ASC 805 Business combinations, companies are required to recognize all identifiable assets, liabilities and non-controlling interest. This method requires the use of acquisition method where fair value is used for measuring the assets acquired and liabilities assumed.

Compute total consideration paid according to ASC 805-30-30-7 and ASC 805-30-25-5 as follows:

Particulars	Amount
Cash	$40,000,000
Common stock issued ($24 × 1,000,000)	$24,000,000
Contingent common stock	$8,000,000
Total purchase consideration paid	$72,000,000

Requirement 2:

Compute net fair value of identifiable assets acquired according to ASC 805-20-30-1 as follows:

Particulars	Amount
Cash	$425,000
Accounts receivable	$788,000
Land	$3,487,000
Building	$16,300,000
Machinery	$39,000,000
Patents	$7,000,000
Research and development assets	$11,000,000
Accounts payable	($1,500,000)
Net fair value of identifiable assets acquired	$76,500,000

Requirement 3:

U.S. GAAP requires that the share of noncontrolling interest in the subsidiary be measured at fair value. The parent company has estimated the fair value of noncontrolling interest at $16,500,0000 using the other valuation techniques like discounted cash flow analysis as those shares are not commonly traded. There are two valuation alternatives under IFRS for measuring the share of noncontrolling interest in a subsidiary. Under the first alternative, it is calculated as a share of net fair value of identifiable asset of a subsidiary and the second alternative is similar to the above U.S GAAP valuation measure.      

Requirement 4:

Compute the amount of goodwill that parent company will recognize according to ASC 805-30-30-1 as follows:

Particulars	Amount
Total purchase consideration paid	$72,000,000
Add: Noncontrolling interest shares fair value	$16,500,000
Total value of subsidiary	$88,500,000
Less: Net fair value identifiable assets acquired	$76,500,000
Goodwill	$12,000,000

Compute the amount of goodwill that parent company will recognize under IFRS 3 In 8 as follows:

Particulars	Amount
Total purchase consideration paid	$72,000,000
Add: Noncontrolling interest value assigned**	$15,300,000
Total value of subsidiary	$87,300,000
Less: Net fair value identifiable assets acquired	$76,500,000
Goodwill	$10,800,000

            ** $15,300,000 ($76,500,000 × 20%)