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)

Neither 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

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Part 1
	Cash		$ 40,000,000
	Shares	Acquisition Date	$ 24,000,000
	Contingency	Acquisition Date	$     8,000,000
	Total Consideration		$ 72,000,000
Part 2
	Cash		$        425,000
	Accounts Receivable		$        788,000
	Land		$     3,487,000
	Building		$ 16,300,000
	Machinery		$ 39,000,000
	Patent		$     7,000,000
	R&D Assets		$ 11,000,000
	Accounts Payable		$   -1,500,000
	Net identifiable Asset Fair Value		$ 76,500,000
Part 3
	Under US GAAP, Acquisition date non controlling interest is measured at it fair value.
	Under IFRS, there are two alternatives:
	1. Measured at its fair value
	2. This uses the Non Controlling interest percentage of the fair value of identifiable net assets.
	In this aleternative, value will be	$76,500,000*20%	$ 15,300,000
Part 4	Goodwill under US GAAP
	Total Consideration		$ 72,000,000
	Acquisition-date Non Controlling Interest Fair Value		$ 16,500,000
			$ 88,500,000
	Net identifiable Asset Fair Value		$ -76,500,000
	Goodwill		$ 12,000,000
	Goodwill under IFRS
	Total Consideration		$ 72,000,000
	Acquisition-date Non Controlling Interest Value-Part 3		$ 15,300,000
			$ 87,300,000
	Net identifiable Asset Fair Value		$ -76,500,000
	Goodwill		$ 10,800,000